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The External Environmental Analysis Marketing Essay

3083 words (12 pages) Essay in Marketing

5/12/16 Marketing Reference this

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In order to identify and understand the characteristics and choices behind Amazons strategic decisions, it is important to define the macro environment in which it operates. To do so, there are a number of instruments of analysis that can be used, as for example the PESTEL and Porter Five Forces matrixes. However, as the factors of each matrix are inter-related, a cohesive analysis is given below while the singular components can be found in the Appendix in more depth. Amazon was founded in Seattle in 1994 by Jeff Bezos, who is still its current CEO. In 1995 it was first launched on the web as an online bookstore and since then it has internally grown into offering a broader range of products and services, such as media, clothing, home furniture and electronics. The company became publically listed in May 1997, and its common stock is listed on the NASDAQ Global Select Markets under the symbol AMZN (Amazon, 2013). It divides its operations into two sectors, home-based in the US and international, however all business transactions offered to international consumers are done by the individuals countries trademarked Amazon websites (Marketline, 2012). Although it started only selling books, Amazon was the first large-scale company to conquer the online retailing industry. Furthermore, even though our time allows businesses to evolve into e-commerce firms a lot quicker than before, making the industry highly competitive, still holds a leading position with 20% market share which together with one of its direct competitors 16%, EBay, accounts for 36% of the entire online retailing industry (Business Wire, 2011). According to Forresters Inc, the annual growth rate for online retail within the US in the last 5 years has been 10%. While in 2009, the retail market growth rate for the year was 2%. This shows that the online retail industry is still growing and by 2014, should be making an estimated $248.7Bn. It has also been forecasted that online shoppers in the US will spend $327Bn in 2016, and that in the same year online retail should account for 9% of total retail sales, which is up 2% from 2012 (Internet Retailer, 2012). While in the US $155Bn worth of goods were bought through online portals in 2009, a large portion of physical retail sales were made because of online research. In this modern era, social networks, seller feedback ratings and online reviews impact any type of retail through customer involvement (AOL Inc, 2010). It is estimated that $917Bn worth of retails sales in 2009, were web influenced, it is also estimated that by 2014, 53% or physical retail purchases will be web influenced which amount to approximately $1.4Bn of in store sales (Forrester, 2010).

From a macro-environmental point of view on the industry, as a business which operates from an online platform, Amazon has to face both regular laws and specific designed ones for the online retailing sector, such as cyber security and copyright laws (Freeman, 2012). In addition some of the legal advantages of its non physical being could come less as governments try to regulate tax on sales coming from outside the United States, as Obama’s recent proposal (Forbes, 2012). International trade laws such as those against commerce with like Iraq, Iran, North Korea, Cuba, Myanmar, Sudan and Syria influence the company’s operations in these countries and its foreign expansion. Antitrust issues also threaten companies that have significant market shares in their industries like Amazon (Financial Times, 2011). The online retailing industry continues to be affected by the general global economic situation as well, however there has been an increase in people’s spending over the years 2010/2011 in the e-commerce platforms and this might be because of the attractiveness of the industry for customers but also competitors (Ghadami, etal, 2010). Amazon’s financial reporting currency is the U.S Dollar for all its home based and international operations, therefore changes in foreign exchange rates significantly affects its reported results and consolidated trends (Amazon, 2011a). On the social aspect, Amazon is highly influenced by seasonality of customer demand, as in some period of the year it increases on a higher level than others and therefore capacity needs to be constantly controlled in order to avoid over and under capacity of its products. In addition, extraordinary circumstances which occasionally have an impact on the online based industries, such as power failure, earthquakes and so on, also might be cause of higher costs for the company in certain moments (Amazon, 2011a). Besides that, in the US there are about 80 million baby-boomers, who spend close to 50% of all Consumer Packaged Goods and control 70% of the disposable income in the US. Thus, with 78% of North America using the internet – there are extensive opportunities for Amazon in the US (Digital Agenda, 2012). Trends in e-commerce affect Amazon, not only international expansion of its competitors might make it necessary for it to equally grow in the same areas, but also innovation requires a constant renewal or development of its products and services to maintain its competitive advantage (Amazon, 2011a). However, in the process of innovating, the online industry’s impact on the natural environment might increase from its already generated high level of greenhouse gas, which is about 2% of global CO2 emissions (Revealed, 2009). Therefore it is important business within it, like Amazon, adopts measures to improve its productions processes (NY Times, 2010).

However, because the influence the macro-environmental factors described above have on this industry still renders it more attractive than others and, the nature itself of the market of being positioned online allowing a broader number of customers and geographical areas to be reached, a greater number of businesses are interested in expanding or entering the industry. Therefore, although as previously stated, Amazon and EBay together hold 36% of the market share for the online retailing industry, the company still faces a very high level of competitiveness from substitutes for its very broad and varied selection of products and services offered (Businesswire, 2011). In the book sector, they not only face competition from established brands such as Barnes and Noble and physical bookshops and libraries (, 2013), but also since the launch of the IPad from Apple and the Nexus of Google, what was one of its keys competitive products, the Kindle, has had to deal with a higher threat of alternatives in the eBook selling sector (Forbes, 2012). Their media segment competes with retailers who have created their own online platforms, such as Best Buy and Virgin. In addition people have shown an increasing preference for downloading their entertainment directly to their mobile devices, a service in which Amazon further competes with Apple, but also with music streaming companies as Spotify and Dezeer, in a market where neither Apple nor Amazon has a presence (Budden and Cookson, 2013). The remained sectors of the business such as kitchen appliances, electronics and clothing, all face similar competition from companies like EBay, Wal-Mart and Debenhams. Other services as the Prime Instant Video has had to deal with the presence in the U.S market of better consolidated brands like Netflix, as well as the recently entrance in the Cloud services has amount for only 3% of its Esales in 2013 due to high competitive market leaders as Salesforce (Fu, 2013). Besides, the threat of entrance from new competitors in the industry is also medium-high. As Amazon has a history of almost twenty years in the online retailing industry, it would be very difficult for a start-up company to create a consolidated enough position to gain economies of scale in order to compete with it (Bouchard, 2008); however, a higher threat can be the expansion of already-existent industry leaders (Amazon, 2012). Therefore, although Amazon’s business strategy has managed to establish and maintain a position of market leader through customer satisfaction and technological innovation, the level of rivalry among competitors remains still very high (Businesswire, 2011). In addition to competition, Amazon faces both high levels of bargaining power of customers and suppliers. In fact, because the threat of substitute goods for Amazon is high, so is the bargaining power of its customers, as they could easily switch to any other of its competitors for their purchases. (Amazon, 2012). At the same time, although Amazon’s products could be supplied from numerous different companies globally, it does not produce anything itself, if the relations with suppliers should fail, it would be extremely difficult for the company to meet demand and therefore maintain its CEO’s philosophy of “offering everything to everyone” as well as its competitive advantage in pricing and customers’ satisfaction (Amazon, 2013).

All these factors analyzed above help in the process of identifying the strategic group in which Amazon operates. In fact, through the data gathered, the company can be mapped against its competitors as being in the group of online retailers which operates on a global geographical segment, offering a broad range of products. Some examples of direct competitors it faces within this group are EBay and Wal-mart as they both operate with a wide range of products worldwide. Although Apple and Google by offering a narrower selection of products and services on a global geographical scope, still classify as indirect competitors. A graph, constructed on models given in Strategic Management by Robert Grant, can be found in the Appendix which further illustrates examples of firms within the industry.

Internal Environmental Analysis

The analysis conducted until now has underlined the external condition of the industry in which the company positions itself. However, an internal analysis of the financial state of Amazon and the sustainability of its competitive advantage is necessary to have a complete evaluation of its business strategy. The use of some ratios will aid in the analysis of Amazon’s internal financial performance. For example, Amazon’s growth of revenue from 2007-2012, was unstable going from 38.5% in 2007 to 27.90% in the next two consecutive years to increase again to 40.60% in 2011 and decline back to 27% in 2012 (Wall Street Journal, 2013). This instability was mainly caused by the 2008 economic recession and the return to an attractive level to improvements in its operations and investments (Amazon, 2011) Amazon invested $818M in Research & Development in 2007 and has constantly increased its level every year reaching 4.56 billion in 2012 (Morningstar, 2013). Investment in R&D is essential for Amazon as it operates in an environment with constant advancements in technology (Merrill Lynch, 2012). The net profit margin ratio shows the net profit out of the revenue of the company (Grant, 2010). Amazon had a steady rise from 3.20% in 2007 to 3.70% in 2009, but a decline to -0.06 % in 2012, possibly influenced by the decrease in revenue growth as well as an increase in selling and administrative expenses (Morningstar, 2013).

It is furthermore necessary to gain an objective view of Amazon’s financial position to compare the same ratios used above to its main competitors in the industry. By doing so it is found for example that Ebay has the highest GP Ratio, while Amazon has the lowest (Forbes, 2013b). Since neither of them manufactures goods, this shows that EBay’s operational efficiency is higher than Amazon’s. Apple’s pre-tax profit margin of 31.4% is higher than Amazon’s only 2.6% (Forbes, 2013d). This could indicate that Amazon needs to improve its selling and administrative operations in order to increase its profit. Other competitors, such as Google and EBay, also have margin of approximately 30% (Forbes, 2013e). Generally, the higher the net profit is the better, as it helps creating a better corporate image and building trust in the management. (Investopedia, 2012). Analysis shows that Google holds the highest margin with 24.4%, Apple just behind with 23.4% while Amazon has a low 1.8% margin (Forbes, 2013e).

In the financial situation described above the company appears to be in a relatively worse condition than some of its main competitors like EBay, Apple and Google. However, this is could be because of the investment initiatives in fulfillment capacity, digital media and Amazon web services (Merill Lynch, 2012). In fact, all these factors together with the company’s resources and capabilities are consequence to the company’s strategic decisions, which on different sustainability levels influence Amazon’s business performance as a whole. In order to identify which resources of the company are sources of sustainable competitive advantage, it is helpful to think of them under the criteria of Barney’s ¼ˆ1991¼‰VRIN framework. An example of a valuable core competence of the company would be its partnerships and alliances with other firms, like agreements with websites such as Yahoo and to create a way for customers to easily transit and find information from these search engines to Amazon (Internet News, 1998). A resource which has proved to be a rare advantage of the company is its outstanding customer services. Amazon has managed to recreate the personal experience between retailers and customers, although not having the physical characteristic of ordinary shops, through a process of detailed attention to consumers’ preferences and problems which has resulted in the company having the highest customer valuation in the industry (CSI, 2012). An example of one of its costly to imitate strategy is Amazon’s ability to attract skilled high-level staff from other top recognizable firms to work for them. This is an intangible core competency. An example of this is that in 1997, a former Wal-Mart Vice President, Richard Dalzell, became Amazon’s Chief Information Officer (Internet Retailer, 1997). His expertise in logistics, supply chain systems and all other management systems was an added resource to the company. Throughout the years Amazon has kept recruiting from outside Amazon (IT-jobs, 2012). The company has also proven to have a very valuable non-substitutable core competence in its innovative processes. They have invented new technologies and features that help customer ease of use online and create new methods of tracking customer needs and preferences (Business Week, 2010). Amazon was also the first to create personal recommendations based on search and buying history. An example of how successful the innovation of their ‘one click process’ was that in 1999 Barnes & Noble’s was sued for copying their patented 1-click payment framework (CNN, 1999).

These resources have given Amazon through the years the possibility to develop a strong advantage over its competitors, through the creation and monitored implementation of strategies centered on innovation, product diversification, competitive pricing and ease of use (1-click order process). In between those strategies some have a higher than others level of sustainability, which express the company’s capability in carrying them out successfully.

For example, Amazon, as mentioned above, has always been a leader in innovative technology, starting out as simply an online book retailer to expand into one of the world’s most diversified companies in terms of products and services offered. The company is constantly investing billions in development and research of new technologies, such as the Elastic Computing Cloud (EC2), AWS and business into business services (New York Times, 2012). By doing so, their sustainability in the area of technological has become increased, amplifying their technological strength, capacity and growth in the industry. Amazon’s strategic use of horizontal integration has been successfully implemented within the firm. In order to obtain a position of market leader, Amazon has entered into many business alliances that operate in different industries (Publishers Weekly, 2012). In fact, since it first went public in 1997, the company has partnered up, taken over, entered a joint venture or signed a contract with over 20 different firms (Xtimeline, 2013). Through these deals with other online retailers, publishers, media providers etc, Amazon is in control of the rights of the entire operations, which then creates an entire infrastructure within the company. This type of integration has proven to be highly sustainable for Amazon, as it represents both a possibility of growth and establishment for the company. Amazon has also an aggressive approach to expansion. Since realising the potential of online retailing the firm has relentlessly driven home its first-mover advantage (Sydney Morning Herald, 2011). The firm’s opportunistic approach to expansion has been very important to the success of their company. This sort of aggressive management method could be beneficial to the company in the future as the online retail industry continues to boom. Moreover, Amazon has always prided themselves on the level of care and personal service that they provide their customers (Amazon, 2013). In 2011, Amazon was ranked first in the customer’s choice awards, sponsored by American Express (NRF Foundation, 2011). Customer care, reputation and good service is a huge factor of concern in the online retail industry, because of its high threat of substitutes products from its competitors. The level of customer care that Amazon has developed throughout the years is highly sustainable because of its constant level of excellence in the service with which it has established brand loyalty among its customers.

One of Amazon’s main competitive advantages is their product diversification because by offering its customers all they need in one single retailer, it diminishes their need of using other stores for their purchases (Computer Weekly, 2000). However, this is only a partially sustainable strategy for Amazon, as each time the company diversifies into a new industry it faces competition from established brands as well as complications for distribution and storage channels (Grant, RM, 2009). Another example of partially sustainable strategy for Amazon is given by its vertical integration strategy. Through AWS, Amazon has become a major player in the cloud hosting system, storing and delivering pages for many of the online biggest companies straight to Amazon’s computers (Techcrunch, 2012). With the development of the Kindle and Amazon Silk, its web browser for the Fire edition, it has acquired two benefits: speed and personalization. In fact, the Silk browser offers faster navigation, which nowadays is of great importance due to the increase in Internet usage (ZDnet, 2012). With personalization, Amazon can keep track of users’ behavior, predicting their preferences based on usage patterns. Access to this type of data enables the firms’ recommendations system to be more precise, helping customers discover new products they are likely to buy (Seeking Alpha, 2012). However, although this creates a competitive advantage for Amazon over other computer manufactures, which still haven’t got similar services, it is only a partially sustainable strategy as on the other hand it competes with firms like Apple that offers rapidly innovating hardware and software.

One of Amazon’s main competitive advantages during the development of the online retail industry was the lack of tax legislation on online retail sales, allowing Amazon to offer lower prices than their physical counterparts (Daily Finance, 2012). However due to changing government regulations in the industry, this might soon become a non-sustainable strategy for the company as it will no longer be an option of aid for its competitive pricing scheme.

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