Challenges Faced by Amazon, SWOT Analysis, Porters Five Forces, and BCG Matrix - Case Study Example

Business Analysis Information for Business Executive summary Purely online stores rely solely on the internet for their distribution purposes. However, marketing is done using various marketing channels including the traditional ones such as print. Amazon.com is one of the best established online companies in the world. The company’s business model has proved strong and resilient in the tough economic times as well. The growth of the company has also been supported by increased use and acceptance of the internet and online shopping. With marked potential of the online market, the company diversified its product portfolio to include general merchandise such as electronics, toys, jewellery and fashion items. Its success opened ways for other e-retailers to compete for the growing online market. Despite increased competition, Amazon has continued to grow. The company’s aim is to provide best buying experience on the internet. It is clear from the company’s share price performance in the last ten years that the company has been extremely successful. Amazon.com is obsessed with customers and is a customer centric organization. Amazon is one of the most successful online website with a growing number of daily visitors (appendix A). Table of Contents Executive summary 1 Table of Contents 2 References 3 Appendices 3 Introduction 3 Industry overview 3 Amazon overview 3 Amazon products 5 Challenges faced by Amazon 5 SWOT analysis 5 Strengths 5 Weaknesses 6 Opportunities 6 Threats 7 Porter’s five forces 8 Bargaining power of supplier 8 Bargaining power of buyers 8 Threat of new entrants 8 Threat of substitution 9 Competitive Rivalry 9 BCG matrix 9 Financial information 10 Recommendations 12 Conclusions 13 References Appendices Introduction Amazom.com is a perfect example of the impact of the internet revolution and how such developments have changed the business scene. As a virtual company, it marks the influence of the internet and the impact it has on conventional business strategies mode and theories (Reading 2004). This report will analyze Amazon business model and macro factors affecting the company’s future. The report addresses Amazon through its two recognized SBU’s North America (domestic) and international market. The SWOT analysis will evaluate Amazon strengths, weaknesses, opportunities and threats. The porter’s five forces analysis will give insight into online retailing industry and Amazon competitive advantage over its rivals. This report will look at Amazon’s product portfolio and its market share in each category. The report has given recommendation to improve Amazon’s performance in the future. Industry overview Internet access has been growing steadily over the past 15 years and continues to grow in the future as well (Heinemann & Schwarzl 2010). This is a booming industry. There are little barriers to entry therefore fiercely competitive industry. The industry provides alternative to the physical retailing industry which gives customers more choice because they can look for more suppliers supplying the same service. The online companies do not have to pay huge rent for the prime location but they have other technology cost. Amazon overview Amazon.com is an American based online retail company. Founded by Jeff Bezos in 1994, the company was established as an online bookstore in July 1995 in Washington (Mennen 2006; Annual report 2009). The company was reincorporated again in 1996 in the state of Delaware. The company got listed on May 15 1997 on NASDAQ stock exchange under the symbol ‘AMZN’ (Amazon Annual Report 2009). Amazon.com is the market leader in the e-commerce business. In a span of five years after the listing, the company’s revenue had grown from “$147.8 million to over $ 3.93 billion with sales registering a 26% growth in fiscal year 2001” (Mennen 5; Cummings & Worley, 332). However, investors did not gain a lot as the firm ploughed back the profits in developing a number of warehouses and distribution centres across the country (McGrath & MacMillan 2009). Today the company has become a multinational company successfully operating in many countries such as Japan, UK and Germany (Annual report 2009). The company measures its success on the basis of the value it creates for its shareholders. The company believes in investing on its employees and benefiting from their talent. The company rewards its employees though shares rather than cash to motivate them to work in the best interest of shareholders. Amazon offers world largest selection of the products making it the leading online shopping site throughout the world (Regan 2008). Amazon is one of the top brands in online retailing industry. The company had an early mover advantage in the industry as one of the pioneer online retailers (Mennen 2006). Originally, the firm was a simple online low price bookstore before expanding to include CDs and DVDs in 1998. The company’s business model is to generate large amount of sales with a low margin profit which necessitated a change in strategy (Annual report 2009). In 1999, the firm engaged in networking as a growth strategy. Non-Amazon products such as used books and individual auctions of different products were placed under tabs in the company’s website and were not allowed to mix with the firm’s products. Such tabs were the ‘auctions’ tab and the ‘zShop’ tab (Cummings & Worley 2009). This strategy was later reviewed to allow small business placed under tabs to place their products in the Amazon’s most visited sites at a fee. Another program, merchants@amazon.com, allowed larger partner retailers such as Office Depot, Circuit City and Borders Books to access Amazon’s customers for a service fee and commission while Amazon retained inventory ownership and controlled prices. Another business arrangement with firms such as Drugstore allowed Amazon users to be transferred to other websites with Amazon receiving a commission based on the number of visitors transferred (Cummings & Worley 2009). In the recent past, the firm has entered the manufacturing industry through its Kindle brand an electronic reading device (Kaye & Quinn 2010). Amazon products Amazon prime offer two day shipping with no minimum purchase for a flat annual fee. This program brings continuous cash to the business. Amazon drives 68% of its sales by selling goods directly to the customers. The other 32% of the sales are derived from third parties selling on amazon.com (Annual report 2009). Amazon offers other services like Amazon enterprise solution and Amazon web services to its clients. The latest addition has been the Kindle Brand which is an electronic reading device. Challenges faced by Amazon Apple iPads is the biggest challenge for the Amazon profitability because Amazon largest selling product kindle is not competitive against apple’s iPad. Kindle is the best selling product on Amazon website (Kaye & Quinn 2010). Amazon business makes it vulnerable to lawsuit by other technology companies that Amazon is taking advantage of someone else technology. The lawsuit wastes significant financial resources and valuable management time. Amazon brand can be damage in other countries where Amazon’s domain name is not registered (Berkeley n.d.). SWOT analysis A SWOT analysis captures both the internal and external environments in this case for Amazon. It provides details of the company strengths, weaknesses, opportunities and threats that face it. Strengths Amazon is a global brand with high brand recognition amongst internet users High focus on research and development as shown by constant evaluation of the business model Customer centric vision Wide and diversified product portfolio Strong logistics and dedicated workforce Summary: The Company’s business model has undergone changes of the years to adapt to changes in the macroenvironment (Reading 2004). The company diversification in to different geographical market and products gives it stability. Amazon is the leader in the technology website requires being successful. Product diversification gives company safety. Amazon had first mover advantage in the online retailing business. Amazon is a widely known brand throughout the world so which gives it advantage over the new startups (Mennen 2006). Amazon has large product selection. Amazon derives 50% of sales which are not stocked by conventional bookstores. It has very less inventory risk and capital risk because only 1% of the sales are stock in the inventory (Annual report 2009). When Amazon is compare to normal retailers whose input cost such as rent, utilities generally rise over the time whereas Amazon cost decreases over time due to technology advancement. Amazon has very good management team and strong infrastructure throughout the world (Dave 2008). Weaknesses No physical presence in the market Low cash flows Poor performance in China and other regions with low internet penetration Low profit margins Summary: The firm competes on pricing which means low profit margin. The distribution of the product in different geographical parts is an extremely tough business. The company free delivery strategy sometime brings profit margin lower to the company. Free shipping strategy makes it vulnerable to high oil prices (Chakar 2010). The company doesn't offer websites in many different languages. As company is trying to diversify into number of businesses, it potentially can damage the Amazon brand. As the business relies on technology the system require continuous maintenance which is very costly. Product diversification not related to books will risk brand image as the online retailer of books in the mind of customer. Opportunities Growth in movie and music downloads Social networking Increased consumer spending in emerging economies Growth in e-commerce Expansion through acquisitions Increased acceptance of e-reading Expansion in internet penetration and use in developing countries Summary: The company can use its brand to sell products of other retailers as well. The Amazon can build partnership with universities and colleges and offer their resources to people interested in these resources (Chakar 2010). The company can sell its technology to other industries and benefits from it. The company can expand into high growth economies like India, Taiwan, Brazil, Russia, and China. Amazon’s best selling product kindle currently its only dedicated e-reader but company can enhance kindle with functions like web browsing games to reach to a wider market (Kaye & Quinn 2010). Threats Reliance on vendors Cyber crime Competition Patent infringement Inventory Summary: In order to meet the delivery time, Amazon has to stock important inventory which could be risky due to the fact demand of the product can change. Some consumers are still apprehensive in online shopping and are wary of giving out details in fear of cyber crime. It is very easy to set up internet business so company faces threat of new entrants (Chakar 2010). The products the Amazon sells tend to be bought as gifts during Christmas holiday’s period which bring seasonal risk to the company. As company large portion comes from e-books sale this revenue can decline from e-book piracy as it is relatively easy to make copies of online books. Porter’s five forces Porter’s five forces analysis is one of the many analytical tools that is used in accessing the attractiveness of various industries hence it captures competition for a particular firm in a given industry. Bargaining power of supplier Majority of the products and services supplied by publishers and other business partners to Amazon are available elsewhere. Globally, there are thousands of publishing houses hence a wide selection of suppliers. This denies the suppliers considerable power over Amazon. Suppliers of specialized products such as the Harry Porter books, which are from an exclusive publisher, have high bargaining power over the firm (Simmonds, n.d.). Other publishers such as Blackwell sell directly to consumers thereby making the use of a third party secondary hence giving them higher bargaining power. Some large players such as McGraw Hill dominate certain areas of publishing thus giving them high bargaining power. Increased ease in global shipping denies suppliers considerable bargaining power. Bargaining power of buyers Amazon’s customers are located all over the world where they are exposed to numerous online and in-store bookshops and stores, who are also served with increased efficiency and ease in global shipping. As such, they have a wider variety of choice hence high bargaining power over Amazon (Simmonds n.d.). Furthermore, buyers are easily convinced to rent books and DVD’s, which is cheaper instead of buying. Threat of new entrants Amazon is an established e-tailer that has won consumer loyalty and trust over the years through quality service. In the process it has gained financial muscle and made important partnerships and alliances with other businesses. This makes it hard for new entrants in the market to compete against it. Again, the firm enjoy the benefits of economics of scale by buying in bulk which allows it to sell at very low prices that new entrants cannot afford (Mennen 2006). The greatest threat on new entrants lies in established internet based firms such as Google and MSN taking to e-tailing. These companies have demonstrated efficiency and gained customer loyalty (Simmonds n.d.). Additionally, establishing online outlets is growing cheaper by the day paving way for small players. Threat of substitution Amazon faces high substitution threats from physical stores which are able to offer the ‘hear’, ‘touch’ and ‘feel’ factors to clients but Amazon cannot. Another major substitution threat pertains to growing popularity in renting books as opposed to buying. Bookrenters.com and Textbookflix.com are the leaders in this category. Amazon’s international clients can be easily enticed to buy from local retailers as a sign of patriotism to their country (Simmonds n.d.). Competitive Rivalry Fueled by the ease in starting online business, large numbers of online book retailers are emerging hence Amazon faces the risk losing their talent and clients to new competitors. Increased popularity of the internet and search engines (e.g. Google) in product searching introduces consumers to competing online retailers through results given and sharing of key words (Simmonds n.d.). The company faces major threat from online giant like eBay, Facebook, yahoo who have capability to start online bookstores and take away market share from Amazon. Again, the company’s e-reader, Kindle was criticised as lacking originality and an imitation of Apple’s iPad (Kaye & Quinn 2010). BCG matrix The figure below represents the business units of Amazon The North America market is the star as shown in the above diagram. North America is the largest market for Amazon by volume and value. This market has been experiencing growth powered by a broadening product portfolio in the firm and increased consumer confidence. The firm has been investing heavily in R&D as aforementioned. Again, investor confidence in the firm is high as shown by the performance of the stock share at NASDAQ which traded at US$166.73 as of 14th March 2011 (Yahoo Finance 2011). The international market falls under the question marks. This market has been experiencing growth though market share remains low. The high growth rate can be attributed to the introduction offers and launching efforts of the firm in the new markets. However, the market share remains relatively low owing to competition from existing physical stores and book and DVD renting facilities (Berkley n.d.). Financial information The Amazon stock price has been rising steadily over the last five years indicating good financial performance and investor confidence in Amazon. The company has been one of the best performing stock on the NASDAQ with over 400% appreciation in the last five years (Yahoo Finance 2011). The company cash flow from its operating activities has been increasing steadily and the company cash flow situation has been improving steadily. The company interest expense is steadily declining which conveys that company is decreasing its debt (Annual Report 2009). Between 2005 and 2006, the company registered a drop in net income following strategic investments in technology and marketing by an extra $662 million as well as increasing the marketing budget by an extra $65 million (Simmonds n.d.). This could have contributed to the extended down turn of profits as profits dropped from a high of 8.5% in 2004 to a very low 1.4 % in 2006. As a result, dividends per share dropped from 0.46 cents per share in 2006 compared to 0.81 cents per share in 2005. Amazon chose to forego higher dividends to reinvest a portion of the profits back into the company (Simmonds n.d.; Annual report 2009). Year Net profit margin (%) Interest coverage Debt/equity (%) Return on equity (%) Book value/share Return on assets (%) 2007 3.2 8.5 1.07 39.8 $ 2.88 7.3 2006 1.8 5.0 2.89 44.1 $ 1.04 4.4 2005 3.9 4.7 6.02 135.4 $ 0.59 9.0 2004 8.5 4.1 -8.18 -259.0 $ -0.55 18.1 2003 0.7 2.1 -1.88 -3.4 $ -3.49 -7.5 2002 -3.8 0.4 -1.69 11.1 $ -3.86 -34.0 2001 -17.8 -3.0 -1.51 38.7 $ -3.86 -34.0 2000 -15.1 -6.6 -2.22 145.9 $ -2.71 -66.1 1999 -43.9 -7.2 5.56 -270.4 $0.77 -29.2 1998 -20.4 -4.1 2.52 -89.8 $ 0.44 -19.2 Source Simmonds (n.d.) p. 22 The gearing ratio (debt/equity) as shown by Simmonds (n.d.), shows negative figures between 2000 and 2004 and a high of 6.02 in 2005. However, the ratio has registered a slight decline in 2007. A high profit margin indicates that more funds can be sourced from loans as financial institutions will have more confidence in the firm as it demonstrates ability to meet interest payments. Recommendations Amazon should invest heavily in technology which will make it different from smaller IT companies. As a company committed to research and development, Amazon should setup its software development centre in cheaper countries like India and Philippines and take advantage of cheap talent pool available in these countries. These countries are being more recognized as world technology hubs that combine efficiency with low labor cost (Heinemann & Schwarzl 2010). Amazon should continue to invest in new IT technology so that it remains ahead of its peers and should patent its technology so that it can make money by selling this technology no one can replicate it. Amazon should continue to reward it employees on the basis of share ownership so that their personal interest are aligned with the companies goals. Amazon should come out with new innovative products like e-book reader. The company could also benefit by forming alliances with other technology companies like apple where apple can provide the hardware components and Amazon can use its expertise to sell those new products online. Heinemann and Schwarzl (2010) warn that the high technological developments may soon proof technology based companies obsolete. The company should invest in more horizontal and vertical integration. The company’s past success is heavily dependent of partnerships with competitors (Annual report 2009). Acquiring these firms would ensure better profit margins and integration of processes hence increased performance in the long run. Again, the company should create its website in many different languages. Amazon.com should maintain its lead by hiring best talent paying high salaries so that no other internet company can take away Amazon market share. Amazon should focus on advertising on its website. This can be new revenue stream for the company. Heinemann and Schwarzl (2010) recognize the increase in demand for online advertising by conventional companies. Amazon should decrease the price of the kindle to enable it to compete well with the iPad. Kaye & Quinn (2010) say that with the increased use of mobile phones more so those using Google’s android system, the Kindle might be irrelevant in the market if the prices are not revised downward. Conclusions Amazon is an excellent company with a very bright future. It has exploited the internet to create a money minting business platform. The company, as is for all e-tailers, benefits from advance payments by making it less capital intensive. The critical success factors for Amazon include fast, reliable, easy to use website and prompt shipping. The company is set to benefit from bankruptcy of one of its major competitor Borders. Amazon’s Kindle accessed books are typically cheaper than printed version therefore Amazon has great future. Amazon’s edge over competitors like borders is that website runs 24 hours whereas physical stores can be operated limited hours. The success of Amazon does not come from the simple idea of online store; its success comes from understanding the e-commerce industry. We completely agree that amazon.com has achieved tremendous growth but it faces many challenges in the ever changing internet environment. The company should focus on its core business rather than new ventures. References Amazon.com, Annual Report 2009, Accessed 14 March 2011 from, < http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual>. Berkeley (n.d.) Amazon.com. Accessed 14 March 2011 from, Chakar, R.2010. 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