Overview
Amazon.com came into existence in 1995 as an online retailer of books taking advantage of the exponential growth of the Internet (Govindarajan and Warren 2016). The meteoric rise of the Internet as a major business tool and a platform for many daily activities drove the company to start selling and later publishing e-books itself. The development of the Kindle e-reader and its debut in 2007 made the company the leading seller of e-books. Today, it has widened its product offerings beyond books and it is the largest online retailer of consumer electronics, household goods, the Internet and media. In 2015, it posted a gross sales turnover of US$107 billion and a profit of US$596 million (Miglani 2016).
External Environment
The near-monopolistic position of Amazon today does not mean that it has no challenges. A scan of the business environment that the company operates gives an overview of the context. This paper employs the PEST analysis to develop an insight of the opportunities and threats confronting the giant in its global operations.
Political Factors
Amazon is a global company with operations in over 100 countries. The political environment in every country of its business needs to be conducive for business to enable the company to retain its current business and to expand to others (Qin 2007). The instability of the Middle East prevents the expansion of Amazon to this region. Extremist Muslim militia control parts of Syria and Iraq, preventing the development of the Internet (Kilmarx and Alexander 2013), the backbone of Amazon’s business. Luckily, internet infrastructure is controlled by the USA and it and majority of the countries have embraced it. The impact of the exit of Britain (Brexit) from the European Union is not yet known at the time of writing this paper. The election of Donald Trump as the President of the US (in November 2016) also introduces some uncertainty in consideration of his campaign call to cut ties with some countries, especially those headed by corrupt regimes. The poor relations between Russia and the US also increase uncertainties as it threatened to degenerate into a world war. On the brighter side, there is relative political stability in the emerging markets of India, China, Singapore, Thailand and Africa in general. These promise opportunities for expansion.
Economic Factors
According to the World Bank (2017), the world economy was subdued in 2016 with little growth in the developed world. The emerging markets and the developing world however continued to show some growth. Commodity exporters were affected by uncertainty in policies that led to minimal growth growing at a meagre 0.3%. Commodity importers showed resilience in macroeconomic policies and posted an average growth rate of 5.6% in the same period. The growth path was however expected to maintain an upward direction in 2017 with an estimated global growth rate of 2.7%. The fiscal policies adopted by the Trump administration in the US will affect world trade, as the country is an economic superpower with investment in all corners of the world. Goldman Sachs (2017) projects that; China will remain the driver of the Asian market in 2017. Europe is still expected to maintain its low growth due to wanting economic institutional and structural weaknesses.
The projected improvement of exporting economies and the quickly expanding appetite of the importing economies of the developing world provide a perfect opportunity for Amazon. The purchase price of goods form the producing exporter is likely to go down with the improved prospects while the same is likely to go up in the consuming importers. Although Amazon has begun producing a lot of its own branded goods, the majority of its business depends on buying in bulk from established manufacturers and selling directly to the consumers.
The major competitors of Amazon are Alibaba (China), Apple, eBay, Facebook, Google, IBM, Microsoft and Wal-Mart among others (Parker 2012). Alibaba is likely to post improvement with the projections of economic growth in China. It will continue giving Amazon stiff competition in penetrating the world’s largest single market bloc. American competing companies face the same economic environment as Amazon. Microsoft, Google and Facebook continue to lead in their areas and Amazon Web Services (Amazon’s internet subsidiary) will have to be innovative to retain its position. The market share of these companies in 2017 will depend on the strategies they adopt in the short term and in the long term. Amazon’s large capital outlay should give it the confidence to compete adequately in its areas of interest.
Socio-cultural Factors
The developed world markets are still recovering from a depressed economy and the prevailing consumer practice of cutting costs will be still at play in 2017 (Li 2017). American and European retail consumers will continue looking for bargain purchases and this trend gives Amazon an opportunity to grow since one of its differentiation is the discount prices. On the other hand, the growing consumerism of the emerging markets offers an opportunity for Amazon to sell more commodities to this segment that desires to possess much more but at affordable prices.
Confidence in online transactions and e-commerce in general is steadily growing in the emerging markets of Africa and Asia (IMF 2016). However, it is still low compared to the developed economies of the West. Consumers in these economies still prefer walking into a physical store to buy their commodities off the shelf. While the low adoption of online trading is a disadvantage to Amazon due to its mainstay of online retailing, it offers an opportunity for the company to expand the presence of its physical stiores in these regions.
Technological Factors
Technology is central to the business model of Amazon (Cohan 2015). The rapid growth of internet penetration in the emerging markets presents expansion opportunities for the global chain to grow its market share. Increased efficiency in IT and the laying of fiber optic cables in many developing economies presents large markets that can now access the internet. The affordability of the smartphones in many markets enables most customers to compare prices of commodities and the discount prices of Amazon can attract more buyers.
On the other hand, quick technological obsolescence presents both an opportunity and a threat to Amazon. The company relies on digital technology to do business and it has invested heavily on infrastructure. Obsolescence of technology can present a big loss for Amazon if it can no longer use the existing platform to do business. However, the rend gives the business an opportunity to develop new technologies to stay ahead of the competition.
Strategies
The historic growth of Amazon to the monolith it is today is attributed to its founder, Jeff Bezos. Described by many as a brilliant individual, he is very economical with information regarding Amazon. His principle is that business information should be shared only where it is unavoidable. Consequently, Amazon’s strategies have only been identified by observers after some close observation.
Growth and Domination
Price Leadership
The primary competing strategy of Amazon is to offer price leadership through cost leadership (Mac 2016). From the beginning, Amazon sold books at discounted prices to attract more buyers online. It made deals with publishers to sell them the books at lower prices and sold them to readers at hugely discounted prices. Over time, the low prices and reliability appealed to more readers and the company grew. When it expanded to other areas of business, it maintained large price discounts for its products, taking advantage of its ability to negotiate for lower purchase prices for its merchandise. The prime membership program today offers huge discounts that few competitors can match, earning Amazon a loyal customer base that is still expanding.
Fast Delivery
The global presence of Amazon enabled it to reduce delivery times for goods. From a high of 48 hours earlier, Amazon reports same day delivery in some markets today (Gregersen 2015). The wide network and warehouses owned by the company enables to store many goods and using its logistics arms, it delivers within the least time possible. In areas such as India where logistics is complicated, Amazon partners with local companies for last mile delivery.
Future of Amazon
The expansion of Amazon into a global company with presence in almost all segments of consumer goods is phenomenal. The expansion strategy has been a success to this date. However, there is still a large market that remains untapped in the emerging markets of Asia and Africa. The company stands to benefit greatly if it maintains this strategy in the next five years. The improvement and development of infrastructure in these markets is a promise for profits for Amazon if it continues to pursue this growth strategy in this market. However, the company now needs to concentrate more on profitability to recoup its investments and to grow its wealth as expansion is finite and saturation will soon occur.
The price leadership of Amazon is likely to attract more customers in the coming future. As the developed world consumers become more cautious of spending due to unpredictable economic cycles, the company will win more premium subscriber customers, increasing its loyal customer base.
The current trend in consumer tastes is that they want their needs met at the click of a button. This trend is not going to change in the next five years or even more. The strategy to minimize delivery times to the least possible will win Amazon more customers that are loyal if it makes it real in all its segments. Although it is impossible to deliver at the click of a button, customers will appreciate fast delivery within hours or minutes.
Recommended Strategies
Profitability
Amazon has achieved its initial goal of achieving a worldwide presence in almost all consumer sectors. The initial concern was to develop a brand that promised reliability at low cost. The massive expansion and unrivalled discounts have achieved this goal. The rise in prime membership is an indication of the growing customer confidence in the company. The firm now needs to concentrate on making profits for the investors. Given that humans have a limited lifespan, it is important that they enjoy the returns of their investments in their lifetimes even they do not exhaust it. It is time Amazon engaged all its machinery to increase profits.
Cost Leadership
The lowering of prices of goods is limited and can only work for a time. As a penetration strategy, price leadership works very well to win customers for new businesses. However, as competition increases and with increasing or stagnant expenses, it becomes impossible to make a profit from this strategy. Amazon should therefore consider pursuing a cost leadership strategy where it should seek to minimize its cost of doing business. According to the 2015 financial report, Amazon’s cost of sales was almost a whopping 70% of total revenue. There is urgent need to reduce these astronomical sales to manageable levels to make profit.
Competitors’ Strategies
Amazon has many competitors due to its wide array of areas of interest. The limited space of this paper will only consider a few of these. The Chinese giant Alibaba is the main competitor of Amazon in the online retail business. Alibaba provides a platform for buyers and sellers to interact and trade through its many websites. It does not charge sellers or buyers to use its sites and instead, sellers pay a fee to rank higher in the website’s search engine. Taobao earns revenue through advertising instead of benefiting from the transactions. The free service that it provides for the businesses makes it more attractive to traders, especially Chinese businesspeople where the company is located. Alibaba has also expanded its business to the fiancé sector, providing asuurance of security and validity to buyers and sellers with its AliPay. To combat the business strategy of Alibaba, Amazon is seeking to plunge into the logistics industry in full force. The strategy is to offer a one-stop platform from which a customer can make an order and wait for the delivery. Amazon eliminates the logistics from the both the sellers and buyers at a small fee.
References
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