Internal and External Analysis of Amazon to Indicate The Future Perspectives of The Company

Introduction

Since the launch of Amazon. com Inc. (Amazon) in 1995, the company has grown at an exponential rate unlike any other of its kind. It earned a total revenue of $16, 000, 000 in its first year of operation and in 2016, earned total revenue of $135, 987, 000. This is a growth of 27% from 2015 in terms of revenue. While the company’s revenue has been steadily climbing, its operating income has not seen the same increase. Amazon did not have profits until 2003, 8 years after it was launched, and in 2016, the operating income ($4, 186, 000) was only 3. 1% of the company’s total revenue ($135, 987, 000). The continual growth in revenues comes from Amazon’s various lines of business which range from books, publishing, music, kitchen, and hardware and software products, to name a few. However, it is unclear as to which business area will translate into profits and result in the future growth of the company. Investors are questioning if the recent profit improvement is an indication of projected future growth or will Amazon be replaced by a competing service/business model.

External Analysis

Political Factors

Amazon should be careful of various government regulations that might impact operations as it considers expanding business and investing in new sectors. As it explores the option of using drones or other aerial vehicles for delivery, there may be laws in place that could prevent the company from achieving this target. Additionally, as a company that operates in a private government-only region in China, there may be government instability that could impact operations. Strict rules and regulations could also prevent it from providing all the services that it would normally provide to customers. For example, Prime Shipping does not mean 2-day-delivery as it does in USA. In China, prime members will receive their products in 5-9 days due to additional processing time through customs channel and limited distribution centers.

Another point of concern for Amazon is the working environment it provides for its employees. While Jeff Bezos has refuted the idea of Amazon encouraging “shockingly callous management practices, ” employees suffering from medical problems or personal issues have been penalized or pushed out. Although Amazon has the Pay to Quit policy, which encourages dissatisfied employees to leave on their own, wrongful terminations such as those aforementioned, could lead to possible lawsuits against the company if compensation wasn’t in accordance to regulations.

Economic Factors

Amazon’s performance is directly linked to economy where the online retail business is being conducted. The developed North American markets provide a stable environment for the company to operate which increases the likelihood of its success. In China however, sinking long-term interest rates have raised concerns regarding an oncoming recession. This could greatly impact Amazon’s operation in the country as it is new to the market and is attempting to capture a significant market share given the strict competition. Amazon can also consider increasing its production and warehousing operations in countries where labour costs are lower. As of 2014, labour cost in India is one of the lowest in the world at $0. 92/hour compared to China where it is $3. 52/hour. Since Amazon is an international company, it is also impacted by the risk of currency exchange. If the U. S. Dollar weakens compared to international locations, Amazon’s operating expenses will be higher and if the U. S. Dollar strengthens, the operating expenses will be lower. In 2016, foreign currency exchange resulted in an expense of $550, 000, 000.

Social Factors

Social trends determine Amazon’s performance as a leading Internet Retailer. Currently, there is an increase in online buying habits. Amazon has capitalized on this trend and has the highest market share in this area. As shown in Exhibit 4d of the case, in 2015 Amazon had the highest market share at 31. 1%, followed by eBay Inc. at only 9. 8%. Along with an increase in online shopping, there is also an increase in usage of cellular devices which makes internet more accessible and as a result, websites such as amazon. com more accessible. This is seem mainly with the millennials which could result in a change of customer demographics for the company. A negative social factor however is the increasing wealth disparity in North America. Due to job outsourcing and varying exchange rates, corporations are able to remain competitive in USA. This has resulted in a 20% factory job loss since 2000. While service jobs have increased, they are not as well paid as factory jobs. This will ultimately impact Amazon’s profits as buyers will have less disposable income.

Technological Factors

Amazon must constantly be on top of the latest technology and technological trends in order to succeed as a business. It has been doing this by launching the Kindle, Fire Tablet, Fire Phone, Echo and more. Customers now look for the best customer service and innovative ways of service when choosing a business to support. This can be achieved by using technology to make this accessible and more efficient. With an increase in cellular device usage, there is an increase in social media usage as well. This is an opportunity for Amazon to capitalize on marketing as a way of reaching the millennial demographic.

Industry Environment

As Amazon operates in various business sectors, it has more competitors to consider. In the online retail industry, it has a strong market share and the 2nd leading company is eBay but it is 21. 3% behind. Threat of substitutes is still strong since a consumer could switch to eBay if they find a product as a lower price. Amazon overcomes this risk by diversifying itself and vertically integrating its products to retain customers. When a customer purchases a Kindle, they spend money later to purchase books and accessories from Amazon as well. This gives Amazon its foothold in the portable player market while allowing opportunity for growth. In this market, there is a strong rivalry among competitors as Apple Inc. has the maximum market share at 32. 9% but Amazon is close behind at 24%. Given the strong financial position of the company, the threat of new entrants is weak as Amazon is an established and trusted brand. This takes time for e-commerce businesses due to risk of fraud. While any business can create a website platform to sell their products, it would be nearly impossible to reach the position in the market that would compete with Amazon. However, in the non-internet retail industry, consumer can easily switch to another business that would provide products at a lower price. This market is led by Wal-Mart Stores Inc. at 11. 8% and Amazon comes in fourth at 2. 9%. Amazon’s main competition in this area currently is Kroger Co and CVS Health Corp as they have a market share of 3. 3% and 3. 4% respectively. Once Amazon surpasses their market holding, it can expand in ways that would enable it to overtake Wal-Mart Stores Inc. Bargaining power of buyers varies across customer segments. When considering Amazon Marketplace, buyers have a high degree of bargaining power as they could easily switch to a competing platform or find a different product to purchase. Amazon’s Prime membership is a way to retain buyers and prevent them from going to competition. Buyers of Amazon Web Services (AWS) have less bargaining power as they would face high costs to switch to an alternate platform. Suppliers have a very low bargaining power. Amazon is established and suppliers will not get the same exposure elsewhere. Amazon also handles shipping and returns at a low commission which will not be available elsewhere. The lack of alternatives to Amazon and its position in the market as an online retailer, give very low bargaining power to suppliers.

Internal Analysis

As mentioned in the introduction, the company has seen tremendous increases in its revenue every year since it was established. However, the operating income as a percent of total revenue is considerable small. For Amazon in 2016, it was 3. 1% whereas for Apple Inc. , a strong competitor, this was 27. 8% (Google Finance). It is increasing its total cash and short term investments by issuing more debt and its investments are producing an increasing negative return.

SWOT

One of Amazon’s biggest strengths is its brand name. Amazon is known globally and as established itself as a strong player in various markets. It has strong distribution channels that allow it to fulfill its Prime Membership shipping criteria. It has its own warehouses where items are stored thereby cutting out a distribution company which allow Amazon to maximize its profits. The website is extremely easy to use and is secure. As it is an e-commerce business, it provides over 500 million unique items to consumers, often at a price lower than physical retailers, from the comfort of their own, 24 hours a day. In terms of associates selling their products on the platform or embedding links to Amazon on their individual websites, the process is easy and has no cost associated with it. After joining the program, they can sell products easily and quickly through Amazon. One weakness that could impact Amazon is employee dissatisfaction. If the working conditions are too harsh and demanding, the company could lose out on key talent that could propel its growth forward. Employees might decide to go to competing companies such as Apple Inc. or Google where employee satisfaction is higher.

Another weakness the company has is its catalogue of items available for free 2-day prime shipping. Out of the 500 million+ items that Amazon has, approximately less than 7% items are eligible for prime according to Exhibit 6 of the case. It is known that prime members shop more from Amazon than non-prime members. By increasing the number of items available for prime shipping, the company could see a significant increase in its sales. Amazon also offers free shipping to non-prime members on orders over $25. While only certain items are eligible for this as well, free shipping causes the company to lose profit margins.

Another weakness for the company is the fact that it operates on a nearly zero margin business. While this has enabled the company to keep its product costs low, it has also prevented it from seeing significant profits. There are several trends in the market that prove to be opportunities for Amazon. With an increase in environmental consciousness and a need to ‘be green’, Amazon can partner with suppliers whose products align with this trend and will provide ‘greener’ products. On a different note, with rapid and constant innovative changes in the technological world, Amazon has the chance to disrupt the market with new devices, like it did with Kindle.

Another opportunity that Amazon can explore is expanding into brick-and-mortar business. As indicated in Exhibit 4a of the case, the market size of store-based retailing was just about $3, 000, 000 million in 2015 whereas non-store retailing, and more specifically internet retailing, was around $270, 000 million. This provides a huge opportunity for Amazon to expand. A huge threat as an online business is the risk of cybercrime and hackers. With a potential system hack, Amazon could compromise the confidentiality of its customer base and lose its credibility. The company could also lose market share if another brand or company was to build a business model similar to Amazon and imitate the website design.

Another threat for the company is the variety of competitors. Not only is Amazon competing with other internet retailers such as eBay, but it is also competing with retailers such as Wal-Mart and CVS Health Corp in the US, and it is also competing with the likes of Apple Inc. , Alphabet (Google), and Samsung across various market types. This could lead to Amazon losing focus in one market to focus on another which would ultimately impact its sales.

Competitive Strategy

Amazon’s main goal is to provide a convenient shopping experience for consumers by having a wide selection of products at prices as low as possible. Cost is its main competitive advantage. This is evident not just in the products available through the Amazon Marketplace, but also in other areas of its business. AWS’s release of Elastic Compute Cloud (EC2) allowed websites to use Amazon’s cloud space as they needed. By following a pay-as-you-go model, EC2 was available at a much lower price than anything else in the market. Additionally, when the Fire Phone did not respond well in the market, Amazon offered the Fire for a minimal cost of $0. 99 on a two-year contract, bundled with free prime membership for a year. While Amazon now has Kindle priced at $79. 99, Kindle Fire is priced at $49. 99 for those who may be looking for a cheaper alternative. This price differentiation has allowed Amazon to grow at the rate it has been growing. However, this same strategy has kept it from seeing higher profits as products have very low margins.

Alternatives/Recommendations

Eliminate Free Shipping

Amazon has over 500, 000, 000 items and only less than 7% are eligible for Prime Shipping, which means free two-day shipping. Out of the other 93%, some are eligible for free shipping on orders over $25. While this encourages sales of over $25, the revenue is not enough to cover the operating expenses and shipping charges. In 2015, shipping costs that the company incurred with $11. 5 billion however it only collected $6. 5 billion in fees from customers. By eliminating free shipping for non-prime members, it will not only cover more of Amazon’s shipping fees, but it will also encourage more shoppers to sign up for Prime Membership. This alternative carries very low cost to implement. However, a huge risk of this is that non-frequent shoppers, who would not sign up for prime, could go to a competing business such as eBay if they find a competing price there. To prevent this, the shipping costs that Amazon implements must be marginal so as to not increase costs for the customer exponentially.

Increase Catalogue of Items Available for Prime Shipping

As mentioned before, only about 7% of Amazon’s total items are available for Prime Shipping. While this still ends up being an astronomical 36million+ items, given the total items, it is a very small number. By increasing the items that are eligible, Prime members will feel that their annual fees is more justified. If there is something that a Prime member is looking to buy and that product is not available for free two-day shipping, it could be a reason for them to not renew their membership and not recommend it to others. Amazon can focus particularly on items for which unit sales are low such as Toys and Games, Health and Personal Care, Kindle Store, and Patio, Lawn, and Garden as these only account for 1% of sales each. However, this alternative has quite a bit of cost associated with it as all warehouses would have to be updated with products that should reach customers in two days. It would also impact the pace at which suppliers have to supply products to Amazon for storage which could lead to a decline in the number of suppliers.

Expand into Brick-and-Mortar Business

Given the opportunity that the disparity in store-based retailing and non-store based retailing provide, Amazon can consider expanding business into store-based retailing. This will allow the company to expand into a different market and gain market share in retail industry. However, this industry has strong competitors such as Wal-Mart Stores Inc. and CVS Health Corp. This might make it difficult to penetrate the market. Currently, one of its main competitive advantages is the wide product selection. With this alternative, Amazon would lose this advantage as it would not be able to stock the same variety of SKUs. It would also lose out on the cost advantage as the company would now have to have a longer channel length with wholesalers and producers. This would be extremely costly to implement as the company would first have to buy space to open its stores as then incur labour costs to set up and get the store running. Warehouses would also have to be increased in number to stock products for both physical stores and online retailing.

Recommendation and Implementation

The alternative of removing free shipping has scored the best. This alternative will have a positive impact on the operating income while having a marginally negative impact on total revenue. To implement this alternative, Amazon has to ensure that it does not have exorbitant shipping costs. It has to implement a marginal cost that will not turn away non-frequent shoppers. This implementation will also encourage more customers to sign up for Prime membership as they will be able to get free two-day shipping whereas without Prime, there would no longer be an option to get free shipping. This will prevent Amazon from seeing a huge disparity in its shipping fees collected from customers and actual shipping costs. This alternative is has the lowest cost to implement out of the three and is also the quickest. While this alternative has a lower long-term benefit, seeing immediate growth will give confidence to investors regarding the company’s financial position. With this approach, the company will have time to think of its next step and further investments. This alternative is low risk as the possible customers this will impact are those that are not Prime Members. This move will encourage more people to join Prime which will ultimately benefit the company. While this is not a move that Amazon would want to advertise, it provides an opportunity for it to advertise its Prime membership. Beside the shipping price on the checkout page, it should show that customer would not pay anything with prime and provide an easy way on the page to sign up for Prime. It should also indicate there that the first month of membership is free and the fees is annual, but not list the fee on that page. The customer should see the benefits of the membership before being shown the price.