PESTLE Analysis of Amazon Strategy

Amazon is one of the important companies that has established a strong brand in the internet sector through the sale of tablets and e-books. The report delves into the external and internal analyses of the industries in which Amazon works, as well as the company’s strengths, strategies, weaknesses, opportunities, key competencies, and threats. Value chain analysis, as well as current and recommended solutions for increasing the company’s profitability, will be thoroughly explored. Since its humble beginnings in 1995, Amazon has grown to become a global leader in the e-commerce industry. Despite the strong brand the company created worldwide and its competitive advantage, cut-throat competition from other industry players implies that Amazon must adopt other more innovative strategies to compete favourably.

External Analysis

PESTLE Analysis

Political

The hurdles that e-business faces currently are not the same as the challenges which traditional businesses faced earlier. Amazon is a leader in the e-retailer sector where numerous factors affect market operations. First, red tape and regulatory issues in some nations of operation can be an enormous task, especially in Asia. Taxes and political issues within countries of operation are a major hindrance for e-businesses as well. American technology firms are in trouble with the European Union (EU) for politically disputable reasons (Morabito 2016. p. 50). Amazon is currently embattled over e-book agreements with publishers and the company is to sign in the EU.

Economic

Economic factors are important in e-business because they influence the market. Better economic circumstances result higher sales and more profits. The global economy has not been so good in recent time largely due to BREXIT vote. Now that the labour market condition is improving and the world economy is coming back to where it was before BREXIT vote, customers’ confidence is being boosted. People’s disposable income has increased which is going to benefit the retail industry, including e-business. However, improved economic conditions may also lead to more competition due to the entrance of new firms in the e-business sector, especially in the tablet market.

Social

Another important factor which impacts e-retail is the cultural and social inclinations in the modern society. In the recent years, online shopping has received a significant boost. What makes it possible is the technology and available gadgets which customers use to place an order from their comfort. Furthermore, the growth in digital technology and increased subscribers have improved e-retail by a greater margin. Millennials like to do most of their things online, including shopping and reading among others. Thus, Amazon can focus on cultural factors in marketing itself in regions of the world where the brand has not yet penetrated by creating a deeper relationship with the customers.

Technological

Technological aspects have become an integral part of any business in the 21st era. Moreover, the innovation is the key to success in the modern business era. However, it is difficult to engage the millennial generation without good customer service and build customer loyalty. In the tablet and e-book market, technology is the key to marketing, customer relationship management, and sales (Roberts 2014, p. 23). Therefore, e-retail business should focus on social media for better customer engagement.

Environmental

On top of the environment, agenda is sustainability; hence, a major concern for businesses worldwide. For this reason, e-retailers also have a responsibility of ensuring the sustainability in the environment for their businesses to flourish (Morabito 2016, p. 17). Kindle tablets manufactured by Amazon to facilitate e-reading should have an energy efficient technology which ensures that power consumed is minimal to help in energy conservation. Also, Amazon should invest heavily in corporate social responsibility.

Legal

In global business, legal compliance is necessary for Amazon to remain compliant with the laws (Hitt, Ireland, and Hoskisson 2017, p. 355). To remain compliant with the legal requirements, Amazon should have a separate team responsible for business issues and challenges. Various nations have different laws which mean legal compliance must be as per each country’s legal demands without any excuse.

Competitive Environment Analysis Using Porter’s Five Forces

Threat of New Entrants

The threat is significant even though there are certain entry barriers to the industry, including the economy of scale and potential retaliation from the existing players in the online retail business. However, potential new firms may use their innovative capabilities and features to gain competitive advantage while offering their services. Considering the tablet market and e-books, there is an already established distribution chain in the form of courier service companies which can facilitate the delivery of tablets to customers’ doors anywhere in the world.

Buyers’ Bargaining Power

The bargaining power is great because of the available alternative firms which offer similar products (tablets) to the kindle. It is worth noting that buyers in Amazon marketplace have a slightly higher bargaining power due to the ability to switch to substitute products and services; hence, they are price sensitive (Roberts 2014, p. 23). The high intensive competition in tablet and e-book market gives buyers the ability to shift to substitute firms. Apple, Samsung, Barnes, and Noble among others are the companies well established in offering tablets at competitive prices (Roberts, 2014, pg.np).

Threat of Substitutes

The threat is substantial because there is a variety of direct and indirect substitute products for those offered by Amazon. The direct substitute for Amazon’s products is numerous: traditional physical stores, websites dedicated to the sale of music (emusic.com), electronics (www.newegg.com), tablets (Apple and Samsung) or e-books and literature (Barnes and Noble Company). The existence of substitute products coupled with low switching costs make substitution a big threat to Amazon.

Suppliers Bargaining Power

The power is relatively smaller because a lot of the products Amazon deals with have many suppliers; hence, the company can negotiate for a better price (Hitt et al. 2017, p. 136). For instance, most of the parts used to make the kindle are outsourced, and the company can liaise with numerous suppliers for better deals.

Rivalry among Existing Industry Firms

The rivalry among the firms operating in the tablet and e-books sector is great. Furthermore, it can be witnessed in the pricing of most products, especially tablets. Thus, each firm wants to outbid one another regarding lower prices, better content, technology, and compatible tablets which can be used for other purposes as well. Despite efforts by Amazon to keep on improving the Kindle Fire, other firms including Apple have been upgrading their product by developing new features to rival Amazon’s kindle (Morabito 2016. P. 156). Barnes and Noble have also been improving the Nook regularly selling it at a discounted price in an attempt to topple Amazon as a leader in the tablet and e-book market.

Internal Analysis

SWOT Analysis

SWOT is a business model which seeks to identify strengths an organisation has as well as weaknesses, opportunities, and threats faced in the market.

Strengths

Market leadership in online retail business with a low-cost structure. Amazon controls more than 43% of online retail sales in the United States as estimated in 2016. The heavy presence in numerous countries gives the company a competitive advantage because it contributes to its long-term growth (Hitt et al. 2017, p. 80).

First mover advantage by Amazon in numerous segments is another strength. Amazon Web Services and Amazon Kindle are the products which propelled the company to where it is today (Bolland 2017, p. 31).

The charismatic and visionary leadership of Jeff Bezos, the founder and CEO of the company. He has been instrumental in implementing Amazon’s vision.

Weaknesses

Low-profit margin due to Amazon’s need to sustain low-cost structure and attain cost leadership over its competitors. As a result, Amazon is vulnerable to changes in the marketplace and external shocks.

Amazon’s scope of operation and revenues are seasonal; hence, impact numerous business practices, especially sales, revenues, and human resource practices.

Lack of focus on a specific product despite Amazon is known globally as an online retailer.

Opportunities

The ever-increasing number of online shoppers who want products delivered at their doors worldwide.

Increased internet coverage meaning people can easily place an online order for any product and get it delivered on time.

Threats

The pricing strategy of Amazon is ineffective compared to its competitors who put the firm at a disadvantage.

E-book piracy is common nowadays; moreover, it has become one of the highest risks for e-book sellers.

Some major bookstores, such as Barnes and Nobles or Borders, are no longer supporting e-book industry which is a threat to Amazon’s business (Morabito 2016, p. 52).

Unreliable distribution and delivery system which sometimes cause customer delays raising concerns among customers who feel dissatisfied is another threat to Amazon.

Core Competency Analysis Table

Competencies are abilities or skills through which resources can be mobilised and employed effectively to run processes in an organisation. Furthermore, core competencies bring about competitive advantage to the company and most of them cannot be easily obtained or imitated by competitors (Morabito 2016, p. 146). Due to the powerful brand which Amazon created in the e-book reader and tablet market, the company has unique resources sustaining the brand at the top.

(Resource-based View Diagram of Amazon 2016)

Threshold capabilities are skills and technical knowledge a firm possesses to develop and compete effectively. Threshold capabilities include both tangible and intangible resources which help in meeting customer needs as well as giving the company a competitive advantage. From the above table, Amazon has been able to maintain good web infrastructure and their business systems are easily interoperable. In terms of intangible resources, the organisation has expertise in management of the existing business infrastructure.

In terms of competency capabilities, Amazon has unique information technology infrastructure, market intelligence, management of information and centralised management system (Hitt et al. 2017). Hence, the combination of such competence capabilities enables Amazon to give customers a unique service experience as well as controlled delivery. Furthermore, Amazon has unique human resources management system with both part-time and full-time employees depending on the market conditions. Furthermore, the strategy helps the firm in effective cost management.

Business Level Strategy

Competitive advantage of any business organisation can be achieved through by adopting three generic strategies: differentiation, cost leadership, and focus. Amazon employs a hybrid business strategy which combines different strategies mentioned above depending on the prevailing market conditions (Hitt et al. 2017, p. 57). The e-book reader market is a key sector that Amazon has focused on. In this market, the company employs a hybrid strategy of focus and cost leadership. The kindle introduced by Amazon gave the company a competitive edge in the e-book reader market. When the product was introduced in 2009, it became a leading tablet in the market (Hitt et al. 2017, p. 221). The innovativeness and heavy advertisement of the kindle was the focus for the new product in the market which gave it attractiveness and a competitive advantage over other tablets.

Despite an opinion that cost differentiation and cost leadership strategies cannot work together, Amazon has managed to sale products in niche markets at reasonable prices (Bolland, 2017, p. 79). However, this became possible due to the huge economies of scale partners of Amazon enjoy. They employ different technology in the kindle but again sale them at lower prices thus making hybrid business strategies quite effective (Morabito 2016, p. 156). Amazon has also been establishing its warehouses in rural areas which are low cost places as compared to industrial estates.

Value Chain Analysis of Amazon

Value chain analysis of an organisation refers to an analytical framework which seeks to identify business activities and processes leading to organisation’s competitive advantage through value creation.

Primary Activities

Amazon Operations

North America is a section in charge of websites which includes www.amazon.mx, www.amazon.ca, and www.amazon.com. In the year 2016, sales in this segment got a boost of 25% increment compared to previous year period.

Amazon Web Services is a category in charge of storage, database, computing, and other technology services to enterprises, start-ups, academic institutions as well as government agencies. The sale of this segment increased by 55% as compared to the previous year.

International section is in charge of internationally-focused websites including www.amazon.cn, www.amazon.com.br, and www.amazon.com.au among others. Sales in this segment increased by 24% in 2016 as compared to the previous year.

Amazon Inbound Logistics

Amazon does not enter into long-term arrangements or contracts with vendors regarding guaranteeing particular payment terms, merchandise availability, and credit limit extension. The cornerstone of the company’s inbound logistics is Fulfilment by Amazon (FBA). Additionally, it extends to firms stocking their inventory in some of the fulfilment centres run by Amazon. As such, Amazon takes full responsibility for customer service, logistics, and product returns. Such kind of arrangement enables Amazon to efficiently manage shipments as per the customer requests (Hitt et al. 2017, p. 138). People who order Kindle Fire online can quickly get it delivered at their door with little hassle. The company uses the logistical arrangements in serving Amazon marketplace. Moreover, because of the high efficiency, other companies have been outsourcing logistics services from Amazon.

Amazon Sales and Marketing

The marketing expenses of Amazon have been increasing consistently for the past 6 years exceeding 7.2 billion dollars in 2016. The company’s message has been consistent promising attractive prices, variety of goods and service, superior customer service as well as fast delivery of products anywhere in the world. Some of the marketing components include media advertising, events, public relations, print advertisement, and direct marketing. Thus, all these components bring out the message in the best way possible creating value through sales.

Amazon Outbound Logistics

More than 109 fulfilment centres in the e-retail sector are owned and run by Amazon using the robotic technology. Stowing, picking, scanning receipts as well as shipping products, robots work at a lower cost and higher density creating more value for the company (Bolland 2017, p. 121).

Current Strategies

Third Party Sellers

The business model by Amazon is designed in such a way that it can accommodate third-party sellers who offer products on the company’s website; hence, their products compete against Amazon’s. One major thing which attracts third-party sellers to sell their products on Amazon’s website is the high volume of traffic where most customers can be found. Most of the products sold by third-party sellers cannot be found on Amazon’s retail division (Bolland 2017, p. 92). Nonetheless, 2 billion items were shipped by third parties in the period of 2016 improving customer experience.

Low-Cost Structure

By virtue that Amazon sales its products online, it does not incur huge costs associated with running physical retail shops. Additionally, online marketplaces give room for selling more units with no increase in marginal costs (Oppitz 2017, p. 245). Thus, order fulfilment times are reduced through investment in additional centres further reducing shipment costs. In turn, the cost and time savings result in discounted prices passed to consumers (Hill et al. 2014, p. 287).

(Sawhney, 2017, p. 467)

The above graph obtained from Amazon case studies indicates the pricing strategy for the kindle since 2007. From the graph, it is evident that Amazon has been reducing the price of the e-readers since they were launched in 2007. In 2007, the e-readers were being sold at $399; however, the price of the same e-readers was $79 in 2012 (Sawhney et al. 2017, p. 467). Nonetheless, this strategy helps counter the competition from other firms offering similar products.

Recommended Strategies

First, Amazon should boost its tablet the Kindle by enhancing input speed and ensuring better video capabilities. Furthermore, Apple among other communication companies decided to enhance their mobile phones and tablets regarding video capabilities as well as input speed. Additionally, enhanced tablets and mobile phones are available to customers at lower prices; hence, they get more value for their money in comparison to Amazon’s kindle. To favorably compete with the competitors in the tablet market, Amazon should enhance its tech ology by improving the video capabilities and input speed of the Kindle.

Second, rigorous and efficient advertisement. Despite there is stiff competition in the e-book industry, Amazon should invest adequately in the advertisement which is one of the most effective ways to counter the competition from rival companies (Hill et al. 2014, p. 71). Presently, Amazon kindle is only relying on few advertisement channels such as old mailing system and emails which people often ignore in the current digital world. Thus, Amazon should adopt modern means of advertisement including television, radio, weekly magazines, regular advertisements on daily newspapers, and social media advertisement to ensure all possible channels of advertisement are maximally utilised (Hitt et al. 2017, p. 67). Through this strategy, the kindle will become more popular; hence, Amazon will gain more customers than their competitors.

Third, the company should have separate product lines with traditional kindle e-readers for purposes of e-reading and the other product line involving the kindle fire which has a modified android operating system (Sawhney et al. 2017, p. 17). Thus, both market segments will be catered for by offering different experiences for customers.

Besides, Amazon should establish links with different universities, colleges, and schools to increase the familiarity of the Kindle brand. Usually, when books are converted to e-readers, publishers get the lion’s share of the profit according to the agreement (Wischenbart 2013, p. 41). To get more profits, Amazon should reduce book conversion agreements and enter into one with focused hardware businesses which gives the company an ability to provide people with the high-quality hardware at the same time enlarging their customer base.

Next, Amazon should curtail e-book prices by all means because it is very cheap as compared to paper books in the market (Burke 2012, np). The company will ensure that the profit margin as a result of book sales increases thus cushioning Amazon from the risk of future market uncertainties. On the other hand, the Kindle’s price should further be reduced for the acquisition of the customer base.

Lastly, Amazon should convince more of overseas publishers to participate in creation of literature content (Burke 2012, np). Currently, the number of publishers engaged by Amazon has significantly dropped implying that there is a limitation in access to the foreign books on the kindle.

Conclusion

Amazon is a popular brand when it comes to tablet market and e-retail despite the firm faces stiff competition from other major brands including Apple and Samsung. The strong brand together with the end-to-end user experience through the kindle fire tablet has given the company a competitive advantage in tablet and e-book markets (Hubbard 2014, p. 54). The most worrying thing about Amazon kindle is the focus on cost leadership which has significantly reduced profit margins considering the low prices charged by Apple and Samsung for tablets. Thus, Amazon is supposed to adopt the recommended strategies of rigorous advertisements, formation of better partnerships with different publishers in the world, establishing links with different universities, colleges, and schools (Wischenbart 2013, p. 51). The recommended strategies will greatly boost Amazon’s business sales as well as revenues for the kindle and e-books.

References

Bolland, E.J., 2017. Comprehensive strategic management. Bingley, United Kingdom: Emerald Group Publishing.

Burke, P.S., 2012. E-publishing with indesign CS6: design and produce digital publications for tablets, ereaders, smartphones, and more. Hoboken, New Jersey, United States: John Wiley & Sons.

Resource-based View Diagram of Amazon, 2016. [Online] Available at: [Accessed 6 Oct. 2017].

Hill, C.W., Jones, G.R., and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. Boston, MA: Cengage Learning.

Hitt, M.A., Ireland, R.D., and Hoskisson, R.E., 2017. Strategic management: competitiveness & globalisation: concepts. Boston, MA: Cengage Learning.

Hubbard, G.E. and Galvin, P., 2014. Strategic Management. Pearson Australia, Melbourne, VIC.

Morabito, V., 2016. The future of digital business innovation: trends and practices. Springer International Publishing.

Oppitz, M., 2017. Inventing the cloud century how cloudiness keeps changing our life, economy and technology. Springer International Publishing.

Roberts, J.R., 2014. Mobile tech report 2014: technology news from 2013 and predictions and insights about 2014. Mindwarm Incorporated.

Sawhney, M., Sawhney, M., Owens, J.R., Owens, J.R., Goodman, P., and Goodman, P., 2017. Kindle Fire: Amazon’s Heated Battle for the Tablet Market. Kellogg School of Management Cases, pp.1-23.

Wischenbart, R., 2013. The global eBook market: current conditions & future projections. O’Reilly Media, Inc.