Amazon Porter’s Five Forces Analysis
Porter’s Five Forces analytical framework developed by Michael Porter (1979)[1] represents five individual forces that shape the overall extent of competition in the industry. The essence of Amazon Porter’s Five Forces is represented in figure below:
Threat of new entrants in Amazon Porter’s Five Forces Analysis
Threat of new entrants into online retail business is significant. The following sets of factors determine the threat of new entrants for Amazon’s industry.
1. Economies of scale. Amazon is the largest internet retailer and internet company by revenue in the world. The e-commerce giant operates more than 175 fulfilment centres worldwide in more than 150 million square feet of space.[2] Although potential new market entrants can copy Amazon business model, they cannot benefit from the economies of scale at the same extent as Amazon. Therefore, economies of scale can be specified as substantial barrier for new entrants.
2. Time of entry. The global market size for online shopping nearly reached USD 4 billion in 2020.[3] It has been estimated that e-commerce sales will surpass USD 740 billion by 2023 in the US alone.[4] Such an increasing popularity of internet shopping naturally attracts new entrants that will attempt to find new niches and competitive advantages. In other words, time of entry is an important factor that increases the threat of new entrants in global e-commerce.
3. Product differentiation. Amazon was able to reach its current position partly because it found an opportunity in online sales in 1994, when other companies didn’t notice or utilise such an opportunities. Likewise, other companies can find new previously unnoticed opportunities in e-retail to threaten the position of established market players such as Amazon, eBay, Alibaba and others. In other words, global e-commerce can be disrupted by start-ups that may find new sustainable sources of competitive advantage.
Bargaining power of buyers in Amazon Porter’s Five Forces Analysis
Bargaining power of Amazon buyers is great in general. The bargaining power of Amazon buyers is formed out of the combination of the following factors:
1. The bargaining power varies across product and services categories. Customers who purchase from Amazon marketplace possess the highest bargaining power because they are able to switch to a competition or substitute products and services and they are price sensitive to a significant extent. Moreover, buyer’s ability to go for substitute website may be great due to highly intensive competition in the marketplace. Similarly, customers of Amazon electronic devices such as Kindle e-readers, Fire tablets, Fire TVs, and Echo have substantial bargaining powers due to the intensity of competition and the absence of switching costs.
Buyers of Amazon Web Services (AWS), on the other hand, have less bargaining power compared to buyers from Amazon Marketplace, due to the presence of switching costs to an alternative service provider. Sellers on Amazon Marketplace as another category of Amazon customers do not yield a substantial bargaining power because of a lack of alternatives to Amazon and the company’s leadership position as a global online retailer.
2. The role of product and service differentiation. The extent and attractiveness of product differentiation for customers affects customer bargaining power. Amazon’s differentiation is based upon the broadest product range of hundreds of millions of products, unparalleled consumer obsession and very competitive pricing.
Particularly, the online retail behemoth offers convenience and online tools for both, buyers and sellers that remain unparalleled in the global e-commerce. In other words, it is not easy for buyers and sellers to find such advantages elsewhere to an extent Amazon offers and this fact diminishes the buyer purchasing power.
3. Price sensitivity of buyers. The retail buyers in general and buyers of companies pursuing cost leadership strategy such as Amazon in particular are highly price sensitive. Price sensitivity aspect of consumer behaviour in retail fuels buyer bargaining power in a way that new retailers that have found even cheaper ways of offering products may take away customers from Amazon.
Amazon.com Inc. Report contains a full analysis of Amazon Porter’s Five Forces Analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Value Chain analysis, Ansoff Matrix and McKinsey 7S Model on Amazon. Moreover, the report contains analyses of Amazon leadership, business strategy, organizational structure and organizational culture. The report also comprises discussions of Amazon marketing strategy, ecosystem and addresses issues of corporate social responsibility.
[1] Porter, M. (1979) “How Competitive Forces Shape Strategy” Harvard Business Review
[2] Why Amazon warehouses are called fulfilment centres (n.d.) Amazon, Available at: https://www.aboutamazon.co.uk/amazon-fulfilment/our-fulfilment-centres/why-amazon-warehouses-are-called-fulfilment-centers
[3] Ouellette, C. (2022) “Online Shopping Statistics You Need to Know in 2022” Optinmonster, Available at: https://optinmonster.com/online-shopping-statistics/
[4] Estay, B. (n.d.) “16 Online Shopping Statistics: How Many People Shop Online?” Big Commerce, Available at: https://www.bigcommerce.com/blog/online-shopping-statistics/#summary