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Essay: Amazon.com analysis including Porter's Five Forces

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  • Amazon.com analysis including Porter's Five Forces
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Executive Summary
This paper will discuss the online books retailer amazon.com in two different aspects, initially we will comment t about amazon.com, followed by how the company has managed its information systems acquisition and /or development in order to obtain better competitive advantage using the two model analysis.
Amazon.com is greatly concerned with customer desires that are why one of its objectives is the personalization of clients’ wishes, therefore offering products that may meet their likeness. Amazon.com is aimed to provide the best buying experience on the Internet.
Michael Porter’s five forces which are: threat of substitute products and services, threat of the entry of new competitors, intensity of competitive, bargaining power of consumer/buyers and bargaining power of suppliers. is a way to analyse and evaluate the current situation of amazon.com.
Porter’s Generic analysis is a simple but nonetheless important and widely-used tool that helps you understand the big picture of the cost leadership, differentiation or market focus on e-commerce for amazon.com.
Thirdly, this document will briefly comment on the performance of amazon.com as well as the main factors affecting the success or otherwise of amazon.com alongside with suggest recommendations.
Introduction
What is amazon.com?
Jeffrey Bezos started Amazon.com in 1994, after recognizing that Internet usage was growing at a rate of 2,300 percent a year. Operating from a 400-square foot office in Seattle, Jeffrey launched Amazon.com on the Internet in July 1995. Amazon.com vision is to use the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible.
By the end of 1996, his firm was one of the most successful Web retailers, with revenues reaching $15.6 million. Almost overnight Amazon.com quickly became the world’s largest e-retail bookstore in the world. Amazon has continued to expand its customer base, and sales revenues have increased every year. The firm’s revenues increased from $15.7 million in 1996 to $2.76 billion in 2000. Today, Amazon.com is the place to find and discover anything you want to buy online. Amazon offers the Earth’s Biggest Selection of products to 29 million people in more than 160 countries across the world making them the leading online shopping site accessed via the World Wide Web.
What is information strategy?
Information system (IS) is the study of complementary networks of hardware and software that people and organizations use to collect, filter, process, create, and distribute data. Information systems have greatly changed the way companies do business. They are able to operate more efficiently with the new technology that has become available and provide better service to their customers. Along with reducing operating costs and increasing efficiencies, some companies have saved large amounts of money and have been able to stay afloat in the ever-changing business environment.
One technology that has caused such a rapid change in the business environment is the Internet. The Internet has allowed the face of businesses to change and reach a large, global customer base. By creating a digital market the Internet has linked buyers and sellers [Laudon & Laudon, 2005, p. 26]. Instead of having physical stores, companies can now provide services and conduct business transactions over the Internet with little expense this is also known as electronic commerce [Laudon & Laudon, 2005].
One of the strength that Amazon possess as an online retailer is that they can manage their information systems i.e. data, information, transaction and logistics processes in an effective manner. Amazon believes in creating investments in their information systems in order to create value and increase profitability. More than that, Amazon has built their information systems not just as an impending technological improvement but as a management solution to business challenges that arise from the radical business environment. The main framework of Amazon’s information systems is developed based on a Service Oriented Architecture (SOA). The system technology has been driven to enable this continuing growth, to be ultra-scalable while maintaining availability and performance. This system provides the level of isolation that allows company to build many software components rapidly and independently. In terms of data, the system encapsulates the information with the business logic that operates on the data, with the only access available is through a published service interface. They have in place, a high availability system and the management scalable enterprise system, focused on making the back-end database scale to hold more items, more customers, and more orders to support international sites.
The benefit for Amazon is that the SOA system could change business models and modes of engineering and delivery from highly custom one-to-one services to a one-to-many (domain specific) or many-to-many service model (framework-centric deployments). It is comprehensively, a fully distributed and decentralized service platform that serves multiple applications.
Amazon.com conceptual framework:
Michael Porter Five Forces Model
Michael Porter five forces are the forces which tells you the right competition within the specific industry these five forces guide you to take right steps and keep you aware of the current market situation. these forces plays an important part in planning of your business Porter five forces are the most commonly business tool used in today’s world and they are:
(http://www.fellner.reinhard.com/images/Cliparts/differ5.gif)
Michael porter’s generic strategies model.
Porter’s (1980) framework states that a firm has to choose whether to target broad or narrow market segments in order for a firm to be successful in business. Based on this reasoning, Porter claims that firms can follow one or more of three generic strategies: cost leadership, differentiation or market focus.
Furthermore, a firm follows a cost leadership strategy when it attempts to become the lowest producer in an industry offering undifferentiated products with the lowest cost at a standard market price. With a differentiation strategy, a firm seeks to differentiate its products/services by providing a better service level to customers and better product quality at a premium price. In addition, firms can compete based on the market focus strategy by concentrating their efforts on a specific niche in the market and offering specialized products for that niche. The company can also make use of cost leadership or differentiation approach concerning the focus strategy. Finally, according to Porter (1980, p. 35), when a firm fails to pursue successfully any of the generic strategies or more than one simultaneously, it is stuck in the middle.
(http://businessplanning.org/files/focus-strategy.png)
Amazon.com: findings/ analysis
The Porter’s five forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful because it helps understanding both the strength of the current competitive position and factors affecting the strategy development. Subsequently, amazon.com will be analyzed under this model:
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 an 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
Rivalry 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’.
([1]’E-Business and E-Commerce Management’, David Chafey,Third Edition
[2] http://www.quickmba.com/strategy/porter.shtml, Retreived on 22 April 2011)
Porter’s Generic strategies
Recommendation
Conclusion

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