Strategic Analysis of Amazon.com - Essay Example

Strategic Analysis of Amazon.com Amazon.com is an on-line retail company established in 1994 by Jeff Bezos and based in Seattle, Washington, U.S.A.The company, ranked 273 last year amongst Fortune 500 companies in America, began as a seller of books through the Internet but has grown into what is essentially a technology and logistics business enterprise, selling services such as Web hosting and supply chain management, and brand new and used products purchased from distributors, manufacturers, and publishers. The company operates seven retail Web sites, two search and navigation sites, and a movie database site (Amazon.com, 2006a). As of December 13, 2006 the company had annual revenues of $9.7 billion, EBITDA of $567 million, net income of $292 million, and some 12,000 employees worldwide. Table 1 shows a summary of how NASDAQ-listed Amazon.com compares with its competitors in the Internet Software and Services such as e-Bay and Barnes and Noble (Yahoo.com, 2006). Strategic Analysis The aim of strategic analysis is to review and evaluate the effectiveness of core organisation business processes from the perspective of top-level management as to provide feedback if corrective action is needed. The idea is to correct the present way things are done and serve an educational purpose as to whether the firm's strategies and operations can be improved (Kondo, 1988, p. 15-16). A paper by Mintzberg et al. (1976) included with the company's 2005 letter to shareholders provides an indication of how Amazon.com goes about making strategic decisions (Amazon.com, 2006b). Amongst the various manners of conducting a strategic analysis, this paper will focus on popular techniques such as SWOT (Ansoff, 1965; Chandler, 1962), PESTEL (Andrews, 1987), and Porter's Five Forces model and Generic Strategies (Porter, 1980 and 1985). SWOT-PESTEL For this first part, we combine the SWOT-PESTEL approach. The SWOT analysis is so-called because of the acronym of four factors required for assessing the organisation's internal (Strengths and Weaknesses) and external (Opportunities and Threats) environments. The PESTEL analysis considers six environmental factors that affect the enterprise and its business: Political, Economic, Social, Technological, Environmental, and Legal. The strengths of Amazon.com are its customer-centred focus, the quality of its technology infrastructure, supply chain management experience, its brand name, and its huge database of global customers. Amongst its major weaknesses are product innovation (it sells for others), technology infrastructure utilisation, and a sagging stock price (down 22.3% in the last year) that opens it to takeover risk from other Internet (e-Bay and Google) or software (Microsoft) giants. The more important opportunities are the growth of on-line shopping and the need to innovate products and services to continue growing sales to generating higher margins and profits. These would address the threat from an increasing number of competitors that are eating into the business activity (on-line shopping) it used to dominate. The following PESTEL factors affect the industry and Amazon.com: Political: American legislation on taxation of on-line transactions threatens to reduce usage and margins. Economic: Slowdown in consumer spending in countries with high Internet penetration would drag down profits and margins. Retail giants (Wal-Mart and Tesco) would compete with Internet service providers. Social: Potential backlash from Internet users and competing brick-and-mortar retail shops that discover the anti-social effects of on-line transactions. Technological: Web 2.0 Internet technology is deemed to have a different set of users and protocols that may attract new upstart dotcoms as competitors. The fast obsolescence of the company's technology needs to be utilised and depreciated quickly. Security concerns of on-line transactions remain. Environmental: Server farms are ugly and consume huge amounts of energy. Legal: The risk of identity theft opens Internet companies to expensive lawsuits; includes the product liability risk. On-line communities as at e-Bay where buyers and sellers vet each other can help increase confidence in on-line shopping. A takeover threat remains a real danger in case a much larger company decides to run after Amazon.com's technology infrastructure (Economist, 2006b). Porter's Five Forces Porter's Five Force (1980) model is a set of analytic techniques to develop strategy by looking at five competitive forces to position an organisation and its activities so that its product or service is different and cannot be imitated by rivals or potential rivals. These five forces are: bargaining power of buyers, bargaining power of suppliers, the threat of substitutes (similar products familiar to the market), intensity of rivalry (competitors better at marketing similar products), and the threat of new entrants. The bargaining power of buyers is the key factor that has contributed to the growth and profitability of Amazon.com in the last twelve years, helped by technology investments made thus far. The firm dominates suppliers by providing a marketing and supply chain platform that helps generate sales. Easy and simple Web access allows non-experienced users to transact business on-line, which means suppliers have an ideal store on the Internet through which they could sell their products or services. Where Amazon.com is most vulnerable is in the threat of substitutes, the intensity of rivalry, and the threat of new entrants. Its competitors such as e-Bay are moving from simply hosting auction sites to selling the same products Amazon.com is selling. Dell and HP (Hewlett-Packard) have the infrastructure to sell on-line and would need little adjustments to join e-Bay in penetrating Amazon.com's market. Moreover, giants Wal-Mart and Tesco are entering the same market after mastering on-line technologies, and smaller publishers-on-demand are competing with the company for small circulation books (Economist, 2006a). Porter (1980) recommends that an organisation must choose one of three generic strategies - over-all cost leadership, differentiation, or focus - so it can compete and achieve sustainable profitability. Given our brief strategic analysis, it is best for Amazon.com to focus on increasing sales to improve its competitive position. Key Strategic Issue: Stay the Course Amazon.com's secret to profitability is economies of scale (Figure 1). It has been profitable only since 2004, but if it continues adding annual turnover of between $1.5 and 2 billion each year, and cutting down on technology spending, it will earn annual profits over $500 million. Sales can grow by adding products such as those from giant retailers Wal-Mart and Tesco, and services such as supply chain management that would allow greater utilisation of its logistics infrastructure (warehouses, IT hardware and software, etc.). What the company has done in recent years of profitability is execute on the vision that has guided it since the beginning: creating a unique experience of convenient on-line shopping for their customers. It has the necessary customer relationship management systems to attract repeat customers who now buy more products through Amazon.com. Sometimes, the best strategy is not to try new things, but to pursue relentlessly and the company's strategic vision. Its sales, margins, profits, and cash flow are right on track. The only problem is a sagging stock price, but CEO Bezos said clearly in his 1997 letter to shareholders that "the fundamental measure ofsuccess will be the shareholder value we create in the long term". Now, nine years later, with a Return on Equity of 289% and operating cash flows of $588 million, its main challenge is whether shareholders are willing to reward management's efforts with a few more years and a greater dose of patience. Bibliography Amazon.com (2006a) Annual report 2005. Seattle: Amazon.com. Amazon.com (2006b) Letter to shareholders 2005. Seattle: Amazon.com. Andrews, K. (1987) The concept of corporate strategy (3rd ed.). Homewood: Irwin. Ansoff, H. I. (1965) Corporate strategy: an analytic approach to business policy for growth and expansion. London: Pelican. Chandler, Jr., A.D. (1962) Strategy and structure. Cambridge MA: MIT Press. Economist (2006a) Click to download. The Economist, 17 August, p. 81-82. Economist (2006b) Lifting the bonnet. The Economist, 5 October, p. 52. Kondo, Y. (1988) Quality in Japan, in Juran, J.M. and Gryna, M. (Eds.), Juran's Quality Control Handbook. London: McGraw-Hill. Mintzberg, H., Raisinghani, D., and Theoret, A. (1976) The structure of "unstructured" decision processes. Administrative Science Quarterly, 21 (2), p. 246-275. Porter, M.E. (1980) Competitive strategy: techniques for analysing industries and competitors. New York: Free Press. Porter, M.E. (1985) Competitive advantage: creating and sustaining superior performance. New York: Free Press. Yahoo.com (2006) Amazon.com Inc. (AMZN): Competitors. Yahoo Finance Website. Updated 13 December 2006. [online]. Available from: [Accessed 13 December 2006]. Table 1: Direct Competitor Comparison AMZN BKS Pvt1 EBAY Industry Market Cap: 15.86B 2.69B N/A 45.49B 309.70M Employees: 12,000 39,000 N/A 11,600 304 Qtrly Rev Growth (yoy): 24.20% 2.80% N/A 31.00% 23.00% Revenue (ttm): 9.70B 5.14B N/A 5.58B 115.95M Gross Margin (ttm): 23.43% 31.13% N/A 80.26% 59.53% EBITDA (ttm): 567.00M 438.84M N/A 2.11B 11.72M Oper Margins (ttm): 3.97% 5.24% N/A 24.28% -3.02% Net Income (ttm): 292.00M 146.78M N/A 1.06B -201.52K EPS (ttm): 0.687 2.115 N/A 0.739 N/A P/E (ttm): 56.04 19.59 N/A 44.15 40.60 PEG (5 yr expected): 3.90 1.32 N/A 1.56 1.39 P/S (ttm): 1.63 0.53 N/A 7.94 2.73 BKS = Barnes & Noble Inc. Pvt1 = Columbia House Company (privately held) EBAY = eBay Inc. Industry = Internet Software & Services [Source: Yahoo.com, 2006] Figure 1: Ten Years of Amazon.com [Source: Economist, 2006a] Read More