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SWOT Analysis of Amazon (2016)

Published on June 2016 | Categories: Types, Presentations | Downloads: 239 | Comments: 0
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SWOT Amazon

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SWOT ANALYSIS OF AMAZON
STRENGTHS
 Low cost structure
 Largest merchandise
selection
 Huge number of third party
sellers
 Has grown much faster than
the entire U.S. e-commerce
market
 Satisfied customersCustomer Centric
 Strong background and deep
pockets
 Efficient delivery network
 GLOCAL strategy
 Acquisitions
 Collaborations with the Public
sector- Indian postal service

OPPORTUNITIES
 Open more sites in emerging
markets
 Open physical stores
 Introduce more products
under its own brand
 More Acquisitions
 Efforts to improve the IT
services related the ecommerce and supply chain
management

STRENGTHS

WEAKNESSES
Shrinking margins
High Debt
Product flops
Zero margin business
models
 Free Shipping-Increasing
costs
 No Offline presence
 Late entry in emerging
markets China & India





THREATS
 Low entry barriers of the
industry
 Local competition
 Lawsuits from publishers
and rivals
 Identity theft and hacking
 Government regulations
 Threat to Kindle – free
ebooks



Being the world’s leading online retailer, Amazon derives its strengths
primarily from a three-pronged strategic thrust on cost leadership,
differentiation, and focus. This strategy has resulted in the company
reaping the gains from this course of action and has helped its
shareholders derive value from the company

Low cost-leadership is pursued by Amazon by differentiating itself primarily on the basis of
price. We believe that offering low prices to our customers is fundamental to our future
success. We seek to partially mitigate the costs of lowering prices over time through
achieving higher sales volumes, negotiating better terms with our suppliers, and achieving
better operating efficiencies. Amazon makes sure that it offers the same quality products as
other companies at a considerably cheaper price. Analysis of competitors? Are there services
we (can/could) offer using our infrastructure that could command a premium price?
With our customer differentiation strategy, Amazon provides current and prospective
customers with differentiation through design, quality or convenience by selecting a strategy
that is different among the competitors.
The focus strategy takes one of the two other strategies and applies it to a niche within the
market Based on this, Amazon focuses on outstanding customer service as a niche but not the
whole market because each niche has its own demand and requirement

In Amazon’s case, the core strategy is clearly more a cost leadership one when compared with
bricks and mortar retailers. Amazon has massive warehousing facilities and processing capability,
which give it physical economies of scale. That in turn gives it cost advantages. But in its service it
is differentiated - so it is something of a hybrid.
Amazon is ultra-keen on customer feedback, and Bezos has spread customer focus as a mantra
throughout the organization. So when my wife’s year-old Kindle suddenly stopped working and she
called Amazon customer service, they immediately agreed to send her another. Delighted
customers spread such feedback as I have just done. Such service differentiation doesn’t just bring
loyalty but also encourages customers to buy more from Amazon.



Low cost structure, the largest merchandise selection and a
huge number of third party sellers. Amazon is the largest online
retailer in the world. In 2014, the company earned more than US$80
billion purely from online sales, more than any other retailer in the
world. At the current growth rate Amazon will become the 2nd largest
retailer (as measured by revenue) in the world, behind Wal-Mart by
2018. Built on its early successes with books, Amazon now has product
categories that include electronics, toys, games, home and kitchen,

white goods, brown goods and much more. Amazon has evolved as a
global E-commerce giant in the last 2 decades.


Figure 1. Amazon growth rate compared to e-commerce sales growth in
U.S.



Source: Amazon financial reports] and Internet Retailer



Amazon has grown much faster than the entire U.S. e-commerce market,
meaning that the company has actually increased its market share by
taking it from competitors.
A low-cost structure leads to lower prices, which combined with a huge
range of products, results in a better customer experience. Satisfied
customers invariably return to the Amazon websites, creating evergrowing traffic, which subsequently attracts 3rd party sellers to
Amazon’s marketplace. All of these factors lead to faster business
growth for Amazon. By only selling online, Amazon doesn’t incur any
cost related to running physical retail outlets, which are usually very
high. Online marketplaces also potentially allow for selling more units
without any increase in marginal costs. Amazon constantly invests in
both additional fulfillment centers and to existing centers to enable a
reduction in order fulfillment times and shipping costs. These time and
cost savings result in lower prices that are passed on to consumers.

Figure 3. Walmart prices compared to Amazon.com prices






Source: Boomerang Commerce
Figure 3 illustrates that even though Wal-Mart is using the same cost
leadership strategy as Amazon, it cannot beat Amazon’s prices on most
products.
Selection. According to Monsoon Commerce, Amazon sells around 339.7
million of stock keeping units (SKU’s) in its Amazon.com Marketplace. In

comparison, Walmart offers only 8 million SKU’s in its online shop, or just
2.35% of the number of products that Amazon offers. This vast
difference in range is the reason why online customers are more likely to
visit Amazon.com rather than Walmart’s e-shop.


Third party sellers. Amazon’s business model includes
accommodating third party sellers who are able to offer their own
merchandise on Amazon’s sites and whose products therefore compete
against Amazon’s. Third party sellers are mainly attracted to because of
the high volume of traffic on Amazon sites. They often offer products
that are not available through Amazon’s retail division. More than 2
million third party sellers account for more than 40% of the total units
sold on Amazon’s sites eBay is the only other online company that has
as many third party sellers as Amazon.



Customer centric: Company’s robust CRM has created customer
centric processes in order to carefully record data on customer’s buying
behavior. This enables them to offer individual items, related items or
bundle them as an offer, based upon preferences demonstrated through
purchases or items visited. Also, the company claims that 55% of their
customers are repeat buyers resulting in low cost of acquisition of new
buyers.
Amazon delivers the goods within the promised window. It is easy to return
goods and get a refund. And on the only occasion something did not turn up
when expected, I found it easy to get hold of Customer Services, and the call
was handled by a friendly agent, who got my situation, validated my feelings,
made a promise to have the issue fixed by the next day, and it was fixed.



Cost leadership: In order to differentiate itself, company has created
several strategic alliances with other companies to offer superior
customer service. The most important strategic tie ups are with logistics
provides who control costs. Because of playing on economies of scale,
Amazon is able to lower the inventory replenishment time.



Efficient delivery network: With its strategic partners & due to its
Amazon fulfilment centers, Amazon has created a deep & structured
network in order to make the product available even at remote
locations. It also has free of cost delivery charges in certain geographies.



GLOCAL strategy: By using the strategy of “Go global & act local”,
Amazon is able to fight with domestic E-commerce companies through
absorbing & by forming / partnering with supply chain companies. The
branding too is done as per local taste. For example- In India, Amazon is
currently using the “Aur Dikhao” campaign to encourage users to browse
more of their products.



Acquisitions: Acquiring companies like Zappos.com, Junglee.com,
IMBD.com, woot.com etc. has proven to be a successful and revenue
generating step for the E commerce giant.



Amazon primarily derives its competitive advantage from leveraging IT
(Information Technology) and its use of e-Commerce as a scalable and
an easy to ramp up platform that ensures that the company is well
ahead of its competitors.
One of the key strengths of Amazon is that it enjoys top of the mind
recall from consumers globally and this recognition has helped it enter
new markets, which were hitherto out of bounds for many e-Commerce
companies.





Using superior logistics and distribution systems, the company has been
able to actualize better customer fulfillment and this has resulted in
Amazon deriving competitive advantage over its rivals.

WEAKNESSES


Shrinking margins: Due to extensive delivery network & price wars
Amazons margins are shrinking, which is resulting in even losses. In
India, Amazon had a loss of $359 crores in the year 2013-14.



Tax Avoidance issue: Amazon has attracted negative publicity on
account of Tax Avoidance in countries like U.S & UK. Most of its revenue
is generated from these well established markets.
Amazon got picked up by the parliamentary committee for running its sales out
Luxembourg. When you buy a book on amazon.co.uk, you actually enter into a legal
contract with, and pay your money to, Amazon Luxembourg.
One reason is under current EU rules (being replaced from 2015), if you buy an ebook from
Amazon, it is the Luxembourg VAT rate of only 3% that you end up paying.



High Debt: In many developing nations Amazon is still struggling to
make the business profitable thereby affecting the overall profitability of
the group resulting into High debt.
http://seekingalpha.com/article/2761685-why-i-believe-amazon-chosedebt-financing

http://www.forbes.com/sites/greatspeculations/2014/10/20/threereasons-why-amazons-cash-flow-is-a-trap/
http://seekingalpha.com/article/1030291-amazon-and-the-issue-of-debt



Product flops – Amazon launched the fire phone in the US which was a
big flop. At the same time, Kindle fire did not pick up as strongly as
Kindle did. Thus, there were several product flops which caused a dent in
Amazon’s deep pockets.



In recent years, Amazon as part of its diversification strategy has been
“spreading itself too thin” meaning that it has allowed its focus to
waver from its core competence of retailing books online and allowed
itself to venture into newer focus areas. While this might be a good
strategy from the risk diversification perspective, Amazon has to be
cognizant of losing its strategic advantage as it moves away from its
core competence.
As Amazon offers free shipping to its customers, it is in the danger of
losing its margins and hence, might not be able to optimize on costs
because of this strategy.
A simple tweak to the free shipping offer for Prime members could make a big difference
to Amazon.com Inc. and create an even bigger threat for its bricks-and-mortar rivals,
according to The Harvard Business Review. Unlimited free shipping for Prime members
has been Amazon’s AMZN, +0.38% most effective tool in its mission to edge out
competitors, but the increased market share comes at a cost. The company loses an
estimated $1 billion to $2 billion on Prime shipping annually, The Harvard Business
Review reported, citing Forrester Research. That is up to 11 times more than the $178
million in operating income that the company reported for fiscal 2014.





Considering the fact that Amazon is an online only retailer, the singleminded focus on online retailing might “come in the way” of its
expansion plans particularly in emerging markets.
One of the biggest weaknesses and something that has been oft
commented upon by analysts and industry experts is that Amazon
operates in near zero margin business models that have severely
dented its profitability and even though the company has high volumes
and huge revenues, this has not translated into meaningful profits for
the company.

OPPORTUNITIES


Backward Integration: Amazon can come up with its In-house brands
in different product categories. They can also differentiate their offering.
This will help them make profits in highly competitive E-commerce
market.



Global Expansion: Expansion mainly in Asian & developing economies
will help Amazon because those are the markets with low competition in
E-commerce industries & are not saturated like developed economies.
Expanding its global footprint and open more sites in the emerging
markets, which would certainly give it an edge in the uber-competitive
online retailing market.



Acquisitions: By acquiring E-commerce companies it can decrease the
competition level & also can use the specialized capacity of the other
company.



Opening physical stores outside U.S: By doing this Amazon can help
the customers to engage with the brand, resulting in increase in repeat
purchases & increase in loyal customer base.



Another opportunity, which Amazon can capitalize on, relates to it rolling
out more products under its own brand instead of being a forwarding
site for third party products. In other words, it can increase the number
of products under its own brand instead of merely selling and stocking
products made by its partners.
Amazon can increase the portfolio of its offerings wherein it stocks more
products than the norm currently which places it in a position of strength
and comfort as this can translate into higher revenues.



Amazon Elastic Compute Cloud

Amazon Elastic Compute Cloud (Amazon EC2) is a web service that provides resizable compute
capacity in the cloud. It is designed to make web-scale computing easier for developers.
Amazon S3 Storage

Amazon S3 provides a simple web services interface that can be used to store and retrieve any
amount of data, at any time, from anywhere on the web. It gives any developer access to the
same highly scalable, reliable, fast, inexpensive data storage infrastructure that Amazon uses to
run its own global network of web sites. The service aims to maximize benefits of scale and to
pass those benefits on to developers.

Amazon Cloud Front

Amazon Cloud Front is a web service for content delivery. It integrates with other Amazon Web
Services to give developers and businesses an easy way to distribute content to end users with
low latency, high data transfer speeds, and no commitments.
Amazon Fulfilment Web Service

Amazon Fulfilment Web Service (Amazon FWS) allows merchants to access Amazon's worldclass fulfilment capabilities through a simple web services interface. Merchants can
programmatically send order information to Amazon with instructions to physically fulfil
customer orders on their behalf.
Amazon continues to develop the IT systems related to the support of the Kindle e-book reader.
In particular the online Kindle Book Store and the related "Whisper net'" wireless distribution
network.

THREATS


Low entry barriers of the industry: Low entry barriers affect the
current player’s business as more & more company means tough
competition, price wars, shrinking margins & losses resulting into
questioning the sustainability of the players.



Government regulations: Not having clarity on the issues related to
FDI in multi brand retail, has been a big hurdle in the success of the Ecommerce players in many developing nations.



Local competition – India has Snapdeal and Flipkart who are local E
commerce retailers and are taking away majority of the market.
Similarly, there are many local players who take bites from the market
share thereby making it hard for a big player like Amazon to make
profits.



One of the biggest threats to Amazon’s success is the increasing
concern over online shopping because of identity theft and
hacking which leaves its consumer data exposed. Therefore, Amazon
has to move quickly to allay consumer concerns over its site and ensure
that online privacy and security are guaranteed.



Because of its aggressive pricing strategies, the company has had to
face lawsuits from publishers and rivals in the retailing industry.
The obsessive focus on cost leadership that Amazon follows has become
a source of trouble for the company because of the competitors being
upset with Amazon taking away the business from them.



On November 10, 2010, a controversy arose over the sale by Amazon of an e-book by
Phillip R. Greaves entitled The Pedophile's Guide to Love and Pleasure: a Child-lover's
Code of Conduct. Readers threatened to boycott Amazon over its selling of the book, which
was described by critics as a "pedophile guide".



In September 2011 Allentown, Pennsylvania's Morning Call interviewed 20 past and
present employees at Amazon's Breinigsville warehouse, all but one of whom criticized the
company's warehouse conditions and employment practice. Specific investigatory concerns
were heat so extreme it required the regular posting of ambulances to take away workers
who passed out.



In December of 2014, the Supreme Court of the United States ruled unanimously against
temporary staffing workers for Amazon warehouses in Nevada who were seeking
compensation for time spent waiting to go through security screening checkpoints

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