Amazon.com Inc. Five Forces Analysis & Recommendations (Porter’s Model)

Amazon.com Inc. Five Forces Analysis, Porter, competition, buyers, suppliers, substitution and new entrants e-commerce case study
An Amazon delivery box. A Five Forces Analysis (Porter’s model) of Amazon.com Inc. shows external factors that highlight competition, consumers and substitutes as strong forces in the online retail industry environment. (Photo: Public Domain)

Amazon.com Inc. continues to lead the online retail market as a result of integrating the issues identified in this Five Forces Analysis into the firm’s strategies. Michael Porter developed the Five Forces Analysis model as a tool for the external analysis of firms. In the case of Amazon, the external factors define the conditions of the e-commerce industry environment, with focus on the online retail market. The company remains the biggest player in this market. To keep this position in the long term, Amazon must regularly evaluate the external factors in the online retail industry environment, such as through the use of tools like the Five Forces Analysis model.

Amazon.com Inc. enjoys the top position in the online retail market. Nonetheless, external factors identified in its Five Forces Analysis must be considered and included in Amazon’s strategic formulation.

Overview: Amazon’s Five Forces Analysis

Amazon.com Inc. competes against a variety of firms, including smaller online retail stores and large firms like Walmart [Read: Five Forces Analysis of Walmart]. The global scope of the e-commerce business also exposes Amazon to a diverse set of external forces. Thus, the company must ensure that it remains resilient amid changes in the conditions of the online retail industry environment. The following are the intensities of the external factors affecting Amazon, based on Porter’s Five Forces Analysis model:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (strong force)
  3. Bargaining power of suppliers (moderate force)
  4. Threat of substitutes or substitution (strong force)
  5. Threat of new entrants or new entry (weak force)

Recommendations. Amazon must address the major forces of competition, consumers and substitutes, based on the Porter’s Five Forces Analysis of the business. It is recommended that the company must address the strong force of competitive rivalry by emphasizing competitive advantage and strengths of the e-commerce organization. For example, the company must continue boosting its brand image, which is among the strongest in the industry. Amazon.com Inc. can address the external factors linked to the strong force of the bargaining power of buyers by focusing on service quality. For instance, counterfeit reduction can improve customer experience in using Amazon’s e-commerce website. Another recommendation is for Amazon to counteract the threat of substitution by making its service more attractive. For example, the company must continue enhancing the usability of its website to optimize user experience. These recommendations aim at increasing Amazon’s competitiveness and potential for long-term success in the online retail industry environment.

Competitive Rivalry or Competition with Amazon.com Inc. (Strong Force)

Amazon competes against strong competitors. This aspect of Porter’s Five Forces Analysis model tackles the effects of firms on each other. In the case of Amazon.com Inc., the following external factors are responsible for the strong intensity of competition or competitive rivalry in the online retail industry environment:

  • High aggressiveness of firms (strong force)
  • High availability of substitutes (strong force)
  • Low switching costs (strong force)

Retail firms are generally aggressive, and they exert a strong competitive force against each other. For example, Amazon.com Inc. directly competes against giants like Walmart, which has a significant and expanding e-commerce website. Amazon also experiences the strong force of substitutes because of their high availability. For instance, Walmart’s physical or brick-and-mortar stores are substitutes to Amazon’s online retail service. Other brick-and-mortar bookstores and smaller retailers also compete against Amazon. Furthermore, low switching costs impose a strong force on the company. Low switching costs correspond to low barriers for consumers to transfer from one retailer to another, or from one company to a substitute provider. Based on the external factors in this aspect of the Five Forces Analysis of Amazon, competition must be a strategic priority to ensure the company’s long-term competence.

Bargaining Power of Amazon’s Customers/Buyers (Strong Force)

Amazon.com Inc.’s vision statement and mission statement highlight the company’s customer-centric approach to e-commerce business. This aspect of Porter’s Five Forces Analysis model determines the influence of consumers on firms and the industry environment. The following external factors support the strong intensity of the bargaining power of customers in affecting Amazon:

  • High quality of information (strong force)
  • Low switching costs (strong force)
  • High availability of substitutes (strong force)

Consumers have access to high quality information regarding the services of online retailers and the products they sell. This external factor affects Amazon.com Inc. in terms of the ability of customers to find alternatives to Amazon’s online retail service. In relation, the low switching costs make it easy for consumers to transfer from Amazon to other firms, such as Walmart. Also, the high availability of substitutes further empowers consumers to shift from one retailer to another. For example, instead of purchasing on Amazon’s e-commerce website, a customer can easily go to one of Walmart’s stores, which are strategically located throughout the United States. The external factors in this aspect of the Five Forces Analysis show that Amazon must consider the strong bargaining power of buyers as a major factor in addressing business challenges in the online retail industry environment.

Bargaining Power of Amazon’s Suppliers (Moderate Force)

Suppliers control the availability of supplies or materials Amazon.com Inc. needs for its e-commerce operations. The influence of suppliers on the online retail industry environment is outlined in this aspect of Porter’s Five Forces Analysis model. Amazon experiences the moderate intensity of the bargaining power of suppliers based on the following external factors:

  • Small population of suppliers (strong force)
  • Moderate forward integration (moderate force)
  • Moderate size of suppliers (moderate force)

The small population empowers suppliers to impose a strong force on Amazon.com Inc.’s e-commerce business. For example, changes in prices of equipment from a small number of large suppliers could directly impact the company’s online retail operational costs. However, the moderate forward integration limits suppliers’ actual effect on Amazon. Moderate forward integration equates to a moderate degree of control that suppliers have in the sale of their products to firms like Amazon. Moreover, the moderate size of most equipment manufacturers limits their influence on the company. Based on this aspect of the Five Forces Analysis of Amazon, the external factors emphasize the moderate significance of suppliers as a strategic determinant in the online retail industry environment.

Threat of Substitutes or Substitution (Strong Force)

Amazon.com Inc. competes with substitutes in the online retail market. This aspect of Porter’s Five Forces Analysis model identifies how substitutes affect the industry environment. In the case of Amazon, the following external factors support the strong intensity of the threat of substitution:

  • Low switching costs (strong force)
  • High availability of substitutes (strong force)
  • Low cost of substitutes (strong force)

Amazon continually addresses the strong force of substitutes, which threaten the e-commerce company’s performance. The low switching costs show that customers can easily transfer from the company to other retailers. For example, consumers can easily decide to buy from Walmart stores or other retail establishments instead of buying from Amazon.com Inc. The high availability of substitutes and the low costs of their product offerings further increase the influence of substitutes against the company. Thus, the external factors in this aspect of the Five Forces Analysis of Amazon.com Inc. show that substitution is among the priorities in the company’s strategies for long-term success in the online retail industry environment.

Threat of New Entrants or New Entry (Weak Force)

New firms potentially reduce Amazon’s market share in online retail. The effects of new entrants are considered in this aspect of Porter’s Five Forces Analysis model. Amazon.com Inc. experiences the weak intensity of the threat of new entry based on the following external factors:

  • Low switching costs (strong force)
  • High cost of brand development (weak force)
  • High economies of scale (weak force)

Amazon’s consumers can easily transfer to new firms, thereby empowering new firms to impose a strong force against the company. This condition is due to low switching costs, or the low negative effects of transferring from one provider to another. However, the high cost of brand development in online retail weakens the influence of new entrants on the performance of Amazon. For example, it would take years and billions of dollars to create a strong brand that directly competes with the Amazon brand. In addition, Amazon benefits from high economies of scale that make its e-commerce business strong. As such, new entrants need to achieve similarly high economies of scale to compete against the company. Based on the external factors in this aspect of the Five Forces Analysis, new entrants are a minor strategic issue in Amazon’s performance in the online retail industry environment.

References
  • Amazon.com, Inc. Form 10-K.
  • Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review24(1), 32-45.
  • Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(5), 213-229.
  • Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.