I) Introduction:
In this report, we are going to talk about Amazon. Amazon was founded by Jeff Bezos on July 4th1994 and it is now the largest internet store in the world. It grew from just a small book store to something really large. It is very diversified and sells everything from food to video games. It’s a very successful and versatile company.
Amazon is a company that focuses on the costumer. The customer is the center of business and the power is in the hands of customers. Amazon follows the idea of being costumer centric. In fact, Amazon vision and mission statement is ”our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”
“Although the internet’s growth has recently exploded, internet sales were nearly non-existent in the mid 1990s. However, 2000 US sales were $27.3 billion and estimates for spending n the year 2001 exceed $30 billion. Relatedly, total domestic online advertising spending for 1996 was $20 million, increasing dramatically to $6.1 billion in 2000” (department of commerce, 2002). Basically, what we see here is that the growth of consumers purchasing via internet is impressive and that suggest that there is a lot of money to be made. I think it’s safe to assume that the climate for this market is safe and is surely here to stay. The internet is revolutionizing how we shop and we won’t go backwards.
Now, let’s talk about Jeff Bezos: The guy that took a simple idea in a garage and made it one the biggest e retail company in the world. Jeff Bezos (January 12, 1964) is the American founder of Amazon. He graduated from Princeton University in 1986 with degrees in electrical engineering and computer science. He then went to work at Wall Street from 1986 to early 1994. He founded Amazon in late 1994. The company was, at first, a simple online bookstore but became way bigger with time as it expended its retail product to anything you could fine in a supermarket, an electronic store or a home depot. It is the world’s largest online sales company and provider of cloud modern history according to Forbes. He revolutionized shopping, you are not limited to your experience in term of shopping thanks to him.
II) Analysis of internal and external factors that can have an impact on Amazon
What are the strengths of Amazon
The first one would be the brand. Amazon has a strong reputation and branding. It is a fact that amazon is a market leader in e-commerce industry in the US. Due to this great reputation, they can extend their product offerings way more than other competitors. In fact, they went, as said before, from books to kind of everything. There is no limit for this brand. The product range of Amazon is amazingly large. Literally, it’s possible to find even big brands like Bike or Gopro. Net sales of $107 billion and a gross profit of 35 billion dollars which is huge. Starting with its kindle that has been highly successful. By having alliances, Amazon has built a large distribution chain going form the supplier to the final customers. This will lead to cost minimization to the lowest level possible and reduce the final cost of products. Therefore, with this scale economy, Amazon is able to get lower prices than its competitors. Besides the lower prices, Amazon is using a top of the line logistics and distribution systems which makes the company able to actualize better customer fulfillment. This has resulted in Amazon deriving competitive advantage over its rivals.
What are the opportunities of Amazon
By having its own online payment system, Amazon has the opportunity to reassure people over online actual shopping concerns like security and privacy which can block some potential customers of making a purchase. This has another value added because this improves the company’s margins and on $177,87 billions of sales (2017), every percent saved is a huge amount of money.
Moreover, Amazon is promoting its own products. They increase the number of products under its own brand instead of stocking and selling products made by the competitors, at some point, amazon will have a large range of products. Let’s imagine if amazon starts to produce more of its own products like computers, grocery items, clothes, and many other objects, this would mean that amazon will advertise on its homepage for its own product first which will be trusted by the consumers thanks to amazon brand recognition. Amazon has already done that in some categories and it’s just the beginning.
What are the weaknesses of Amazon
E commerce company can sometimes create really bad customer experience. For example, if a customer orders a product from Amazon and it arrives late, in bad shape, or not like the product was described, it’s Amazon that will take the blame for it in term of brand: “I will never order again from this website”. Another weakness that a e-retail company like may have is the fact that the whole scheme relies on cloud computing and internet. If Amazon servers are down even for 5 min, this will generate a huge loss as well as frustration for customers, loss of brand awareness, trust issues for the next purchases and lots of other problems. One of the other weakness Amazon has is the bad publicity it has attracted to itself due to tax avoidance. From Seattle to Luxembourg. They secured a confidential agreement with the country’s tax authorities.
What are the threats of Amazon
Amazon is not protected against threats. A lot of competitors are growing as internet and cloud computing is more and more accessible with time. Local online retailers are one of the biggest threats for Amazon. Those are 100 of small competitors around the world that can affect the big companies market share. Scalable companies are easier to manage and sometimes takes better care of their costumers then big companies. Moreover, in the past months we have seen a lot of cases of exposed costumer data online like credit cards number, personal information and more, coming from Facebook, Google or even the Marriott hotel chain. Those data hacked impose a big treat for Amazon as customers are still new to buying online. This is a new trend that is surely adopted by a lot of people but still needs to be completely democratized and trustworthy. Besides that, Amazon is a very aggressive company and therefore uses aggressive pricing strategies. Because of that, Amazon has had to face lawsuit from publishers and rivals in the retailing industry. This obsessive focus on costs and profit has become a problem because of the competitors being upset with Amazon taking away the business from them.
III) How politics, economic and social environments can affect Amazon
Political analysis for Amazon
What could affect Amazon, politically speaking? Amazon benefits from political stability in a country but could also be harmed by political decisions and international policies. Some countries may interfere with the expected growth of Amazon. The example that comes to my mind is Google in China. Google in China is banned due to governmental decisions arguing that google threatens the community and national market with appropriate content in its databases. As a result, google has lost a potential market share. Although amazon is accessible and serving customers in more than 140 countries, it still has room to grow in countries like China where its growth had been threatened by strict censorship policy. Unfortunately for amazon, China clearly is a huge market with fast growing number of internet users.
On the other hand, other countries around the world do not have any regulation or rules to protect internet users. Due to this issue, in many countries, people are still not friendly with buying something online as they think it’s not safe.
Economic analysis for Amazon:
On September 4th 2018, Amazon became a 1 trillion dollar company. Twice what it was a year before. With remarkable scale come remarkable efficiency. When you ship billions of packages a year, you can buy your own airplanes, start your own shipping company and lower your prices. Brands can either refuse to sell their product on amazon and watch other retailers do it for them or they can embrace it and at least earn some of it. Either way, amazon wins. In theory a big company the size of Adidas has their own website where customers can buy online. However, they still make deals with Amazon in order to keep winning the buy box. Amazon controls 49% of online sales. Economically speaking, this is impressive, but we have to point something: the average grocery stores has a profit margin of about 1% which makes the slightest change in efficiency becoming the difference between succeeding or failing. That is why grocery stores needs a lot of information on what customer want to buy, how, why, when etc. The goal here is to be able to anticipate demand and order products before costumers wants to buy them to have everything ready in stock. My point is that this is where Amazon has the advantage. They know what device you use to browse their website, how long you spent looking at each item and a whole lot more. They don’t have to guess how shoppers behave like grocery stores and supermarkets, they know. Economically, the advantage of having such information is to organize better your business and thus be able to lower the prices. Moreover, if you have access to all of this information, who likes what, why and when, since amazon want to start producing its own line of products, they could benefit from reviews and analyse the market better than almost any existing company. This is the power of big data. They started doing that already with amazon basics. They put those products on the front-page allowing Amazon to increase the sales, manufacture them cheaper, lower the prices and thus sell more again.
About taxes, there have been a huge scandal because Amazon made 5.6 billion dollars of profit and didn’t pay any federal taxes. Usually, Taxes does affect a company’s strategy and operation, but it seems like for Amazon, it mostly affected its reputation other than its bank account. Even though they pay state and local income taxes, it seems like government just didn’t succeed at making them pay those federal taxes. They are powerful because they are rich and that is the sad truth behind that. Amazon did create a lot of jobs on one side but put out more jobs on the other side and they didn’t feel the need to compensate by paying taxes. We are talking here about a trillion dollars company.
The company is so powerful, so big and important that there is an effect called the Amazon Effect. First, let’s remember what inflation is. It indicates the rate of change in price levels compared to the levels during the same period in the previous year. By changing the way people shop, Amazon has created and economic shock effect on economic activity like inflation, jobs or investment. The amazon effect is the name used for the inflation depressing phenomenon. Inflation nowadays can be corelated to 2 trends: big ecommerce presence in the retail market and ecommerce prices getting cheaper. What is happening is that amazon is striving to keep its prices low and it has succeeded since the beginning. Besides inflation that can be affected by Amazon like we just saw, Amazon itself can be affected by other countries currency and exchange rates. 32% of Amazon’s revenues in 2016 came from outside the US therefore this business is subjected to a currency exchange risk of great extent.
Social analysis for amazon:
You’d be surprised to see how Amazon is affecting negatively its customers. Obesity is a really present problem in nowadays society among children and adults. Governments and companies are trying to change nutritional rules to increase the healthiness of the food served in a country and reduce the downsides of fast food and/or bad nutrition. Amazon, on its side, isn’t changing the way we eat but the way we shop and make it so easy for us that it’s possible to shop groceries without leaving the couch and receive them within hours. People don’t have to go outside for food anymore. Online shopping is preferred by younger generation, but this is a new way of shopping for the elderly as well since they have trouble getting out of their homes, it is now easier for them to get food and other utility products shipped.
Economically speaking, people tend to spend more when it’s easier to buy something then when you have to actually dress up go outside and get tired of shopping. Technology is thus helping economy.
IV) Price elasticity, supply and demand:
First, let’s talk about dynamic pricing. Dynamic pricing is a pricing strategy that is used by Amazon for certain products. But what dynamic pricing is all about? It is about flexibility and it’s related to market demand. There are various factors that helps determines what should be the price set: it could be the demand, the time of day or night, the day of the week, prices competitors are charging and so on. A lot of different factors can be used to construct the logic that set dynamic prices but what is really need is data. We’re talking here about big data. It enables computer programs algorithms to turn data into valuable information and make a pricing decision where the goal is to maximize revenue.
This is a very interesting concept as it is partly new. Perhaps the best example of dynamic pricing is Uber. The surge pricing as the price goes up when the demand is high. Back to Amazon: they change and update their prices every 10 minutes and increased their revenues by 27.2% thanks to that strategy. Walmart, on the other side, adopted dynamic pricing as well and changed its prices 50,000 times a month. Using this pricing model, their sales jumped by 30% in 2013.
There are a lot of benefits of using this pricing strategy:
- Improved margins and revenues
- Better understanding of the market
- Personalized prices based on seasons and many other factors
- Demographic pricing
Amazon’s prices will always be competitive and optimized for the e-commerce market. Amazon is always checking the prices of a product X in other websites likes Walmart’s one and will be adjusting the price to put it a little lower than its competitors. Strategically, we can assume that Amazon is training consumers to think that the best deal can only be made on amazon. Once the costumers are “trained” and think that deeply, Amazon can start increase the prices a little bit without being worried of losing customers.
But what is the link between price elasticity and dynamic pricing? By applying dynamic pricing, Amazon is trying to understand price elasticity of demand. The strategy would be to know the category of product that has negative price elasticity and those who are completely inelastic. It’s the understanding of the relationship between price and demand of the product. Basically, negative price elasticity means that it follows the law of demand; as price increases quantity demanded decreases. With this strategy, they will therefore identify products where price is a function of demand and those where it’s not.
To explain better of is this linked to supply and demand: I like a product, the lower its price, the more I demand. This is the law of demand. For a seller, the higher the price, the more I want to sell. That’s the law of supply. Supply and demand are a phenomenon where 2 lines crosses to find the equilibrium point between the 2. This will set the price. Now imagine a world where the supply and demand correlation made the price of products change every single second, this is a world where the price fluctuates up or down in front of you, something that can’t happen in a physical store.
V) Approach about costs
In a nutshell, Amazon’s cost structure relies on the famous virtuous cycle napkin sketch designed by Jeff Bezos. Basically, what Amazon could do is make money from their lower cost structure thus get higher profit and give some of this profit to shareholders via dividends, but they decided to go another way. They decide to pass those profits onto making customers happier and reinvest the surpluses into growth. The main part of those investment goes into their delivery networks which helps lower the unit costs and thus, give cheaper prices.
Virtuous cycle napkin sketch:
References:
- https://www.managementstudyguide.com/swot-analysis-of-amazon.htm
- https://en.wikipedia.org/wiki/Jeff_Bezos
- http://blog.jazva.com/swot-marketplace-amazon-ebay-jet-walmart-overstock
- https://www.statista.com/statistics/266282/annual-net-revenue-of-amazoncom/
- https://www.theguardian.com/technology/2018/apr/25/from-seattle-to-luxembourg-how-tax-schemes-shaped-amazon
- https://businessteacher.org.uk/pestel/amazon.php
- https://www.quora.com/Why-and-How-does-the-price-of-a-product-on-Amazon-vary-so-often
- https://www.investopedia.com/insights/amazon-effect-us-economy/
- https://www.bloomberg.com/opinion/articles/2017-10-16/amazon-might-help-explain-the-inflation-mystery