Week 6&7- Amazon and Porter’s 5 forces

Threat of substitute products and services

The threat of substitutes for Amazon is high. With the exception of its patented technology (such as 1-Click Ordering), there are quite a lot of alternatives to Amazon’s products and services. In addition to physical presence, most companies have an online store as well.

Amazon.com’s products can be purchased all over the internet; they are just spread out among different web sites. A possible substitute for Amazon in UK could be Argos.

Books can be purchased at Barnes and Noble Books, Books-A-million, and Half Price Books. Books are additionally sold at newsstands, drugstores, and discount stores. Books can also be borrowed for free at a community or university library. The music selection Amazon.com offers can be purchased at music and entertainment retailers like Trans World Entertainment or Virgin Megastores as well as consumer electronics retailers like Best Buy. Music can also be purchased at discount retailers. People could also listen to and/or record local radio stations music. DVDs and videos can be bought at large consumer electronic/media retailers like For Your Entertainment  or Best Buy. DVDs and videos are sold at discount retailers and there also is the option that videos and DVDs could be borrowed from the community library. The kitchen products Amazon.com offers could be obtained by going to specialty furniture stores like IKEA. There are a lot of substitutes for purchasing apparel from Amazon.com, as there are many high street retailer locations. Department stores like BHS and Debenhams offer clothing with different price ranges across the country. Toy stores such as Toys’R’Us offer a extensive line of products. Substitutes for Amazon’s web services (or use of its selling platform) are somewhat minimal. Businesses have the option of creating their own web site platform using their own computer programming employees or they have the option of hiring outside web programming/ web design firms.

Overall, there appear to be many substitutes to Amazon.com’s product offerings. Although Amazon’s products can be substituted fairly easy, the physical stores and web sites themselves may not offer the same quality of customer service and convenience to its customers as Amazon.com has done.­

Threat of the entry of new competitors

Threat of new entrants is low. It would be virtually impossible for a new company to reach the magnitude of inventory and status that Amazon.com maintains. When visiting Amazon.com, the number of products and services it offers is mind-blowing. Amazon.com has been in the internet marketplace for about thirteen years now; it would be extremely difficult for a start-up company in the industry to raise enough capital to even compete with Amazon.com on a lower level. Amazon.com has sufficient product and service differentiation to keep customers loyal; the American Customer Satisfaction Index survey conducted for the fourth quarter of 2007, Amazon.com attained a score of 88, which continues to be the highest score for the entire E-Commerce sector (ACSI, 2008). A start-up company in the Internet Services and Retailing industry would need to possess some very extraordinary characteristics. For example, it would have to have a new, patented use of technology that Amazon.com and its direct competitors do not have. This new technology would have to revolutionize the way people shop online and become extremely appealing to the population as a whole. It would also be extremely difficult for a start-up company to gain economies of scale, or cost advantages associated with large-scale production, as the other major players in the industry already have done. Large firms, such as Amazon.com, have the ability to utilize machinery and other technology that requires a large initial investment but increase cost efficiency in the long term. A large initial investment is “outside the reach of smaller firms“, and therefore cannot produce economies of scale. Switching costs for consumers may not be that low because while Amazon.com can afford to offer lower prices with its economies of scale, a start-up may need to charge slightly higher prices in order to get by financially. It is relatively easy now a days to start-up your own e-business, however, for it to compete on the same level of Amazon.com would be virtually unattainable.

Intensity of competitive

Rivarly among competing firms is high. Amazon.com has countless competitors, and since Amazon offers such an extensive selection there are more companies competing with its products and services. Amazon.com’s direct competitors include internet retail web sites such as Barnes and Noble.com and eBay. Amazon’s Marketplace (Amazon Auctions & zShops) directly competes with auction web sites like eBay, Ubid.com, and Yahoo!Auctions; and online store hosting web sites like the ones offered by Internet portal companies such as Yahoo! and MSN. Amazon’s A9 search engine competes with the search engines of Google, Yahoo and Ask.com. Amazon MP3 directly competes with Apple’s iTunes. A new form of competition arose with Google when the company announced their aim to compete head to head with Amazon’s Web Services with their latest service offering, Google App Engine.

Amazon.com indirectly competes with some focused online retailers. For instance, online retailers Newegg (electronics), Columbia House (DVDs/videos) and eToys (toys), compete indirectly with the electronics, DVDs/videos and toys sold on Amazon.com. Some of Amazon.com’s indirect competitors include those companies who have developed online stores after the development of their brick and mortar stores. Despite the fact that they sell many of the same products as Amazon, web sites such as Walmart.com, Kohls.com and Bestbuy.com, are examples of indirect competitors because they are technically not in the same industry. Amazon is first and foremost in the Internet Services and Retailing industry, while a company like Walmart is in the discount and variety stores industry.

The competition should not seriously threaten Amazon.com’s future level of growth and success. Customer service ratings for Amazon are remaining the highest in the industry (i.e. score of 88 on the ACSI survey) and last holiday season (2010) Amazon.com had more visitors or higher web site traffic than its number one competitor, eBay (Compete.com).

Bargaining power of customers/buyers

The bargaining power of buyers is high. Amazon.com’s customers have the option of buying the products and services they desire on the hundreds of thousands of other retail web sites on the internet. If Amazon.com does not offer low enough prices to satisfy the customer then the customer will search the internet until they find that low price. Fortunately, since Amazon.com did not operate retail stores, the company had very little overhead costs and was able to pass these savings along to customers in the form of low prices. On top of low prices, Amazon.com set out to be one of the earth’s most customer-centric company  with its excellent customer service tactics. Over the years, Amazon.com has diligently provided new customer service tactics so the customer is satisfied and does not make purchases elsewhere online.

Bargaining Power of Suppliers

The power of suppliers is medium-high. Suppliers have a medium power in the sense that much of Amazon’s own inventory could be obtained from numerous suppliers across the country or even across the globe. Furthermore, Amazon.com is a large buyer of products as its goal is to “offer everything to everyone”. They decide what specifically goes on their web site and can utilize their influence over smaller suppliers. Suppliers have a higher power given that Amazon.com cannot compete with suppliers. Amazon.com does not run any production plants. Aside from their own inventory, the suppliers of products for Amazon.com include the sellers on the marketplace (Auctions or zShops) and the companies they have web service partnerships with. Amazon’s success depends heavily on the collaboration they have with online sellers and business partnerships like Target, Borders, or Office Depot. Without these two key providers, Amazon would not have the large selection of products it has today and would not follow Bezos’ philosophy of “offering everything to everyone”.

Sources:

[1]”E-Business and E-Commerce Management”, David Chafey,Third Edition

[2] http://www.quickmba.com/strategy/porter.shtml, Retreived on 22 April 2011

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One Response to Week 6&7- Amazon and Porter’s 5 forces

  1. Mete says:

    Great article, exactly what I was looking for.

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