Amazon dominates the online retail market through strategies that account for business challenges, such as the ones identified in this Five Forces analysis. Michael Porter’s Five Forces analysis model is a tool for the external analysis of business organizations. In the case of Amazon, external factors define the conditions of the information technology, consumer electronics, consumer goods, e-commerce and online services, and retail industry environments. Amazon remains the biggest player in the e-commerce market. To keep this industry position, the company regularly evaluates external factors in the online and brick-and-mortar business environments, such as through tools like the Five Forces analysis framework. The force of competition with IT and consumer electronics firms, like Apple, Google (Alphabet), Microsoft, and Samsung, as well as e-commerce and retail firms, like Walmart, Costco, Aldi, Home Depot, and eBay, are addressed through strategies accounting for the influences of the Five Forces on Amazon’s competitiveness.
Amazon is an industry leader. However, external factors identified in this Five Forces analysis indicate risks affecting market share and business performance because of strong competition with large multinational retail and technology firms. Amazon’s generic competitive strategy and intensive growth strategies evolve as the market changes.
Summary & Recommendations: Five Forces Analysis of Amazon
Amazon competes with a variety of firms, including smaller online retail stores and large information technology firms. The global scope of the e-commerce business exposes the company to a diverse set of external forces. The following are the intensities of the external factors affecting Amazon, based on Porter’s Five Forces analysis model:
- Competitive rivalry or competition: strong force
- Bargaining power of buyers or customers: strong force
- Bargaining power of suppliers: moderate force
- Threat of substitutes or substitution: strong force
- Threat of new entrants or new entry: weak force
Recommendations. Amazon must address the major forces of competition, customers, and substitutes, based on this Five Forces analysis of the business. Competitive advantages and business strengths noted in the SWOT analysis of Amazon can mitigate and resolve issues resulting from such competitive forces. These recommendations aim at increasing the company’s competitiveness and potential for long-term success in online and brick-and-mortar business environments. Based on this Five Forces analysis, the following are recommendations for Amazon:
- The company can boost its brand image, which is among the strongest in the industry. This recommended action helps address competitive rivalry.
- Amazon can address the external factors linked to the strong force or bargaining power of buyers by focusing on service quality. For instance, counterfeit reduction can improve customer experience in using the company’s online marketplace.
- Amazon can counteract the threat of substitution by making its service more attractive. For example, the company can enhance the usability of its website to optimize user experience.
Competitive Rivalry or Competition with Amazon (Strong Force)
Amazon’s competitors are strong and aggressive. This aspect of the Five Forces analysis model examines the effects of firms on each other. In the case of Amazon, the following external factors are responsible for the strong intensity of competition or competitive rivalry in the industry environment:
- High aggressiveness of e-commerce firms (strong force)
- High availability of substitutes (strong force)
- Buyers’ low switching costs (strong force)
E-commerce firms are aggressive, and they exert a strong competitive force against each other. For example, Amazon competes with Walmart, which has a significant and expanding e-commerce presence. Providers of online services, such as movie streaming and cloud computing, are also aggressive. Moreover, Amazon 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. Smaller brick-and-mortar retailers also compete with the company. Furthermore, low switching costs impose a strong force on the company. In the Five Forces analysis context, low switching costs correspond to low barriers for customers to transfer from one provider 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 is a strategic priority in ensuring the company’s long-term competence.
Bargaining Power of Amazon’s Customers/Buyers (Strong Force)
Amazon’s mission statement and vision statement highlight the company’s customer-centric approach to business. This aspect of Porter’s Five Forces analysis model determines the influence of customers 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)
- Customers’ low switching costs (strong force)
- High availability of substitutes (strong force)
Customers have access to high-quality information on online services, consumer electronics, and other products. In the Five Forces analysis model, this external factor affects Amazon in terms of the ability of customers to easily find alternatives to the company’s products. Also, the low switching costs make it easy for customers to transfer from Amazon to other firms, such as Walmart. Moreover, the high availability of substitutes empowers customers to shift from one company to another. For example, instead of purchasing on Amazon’s e-commerce website, a customer can easily go to one of Walmart’s stores. 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.
Bargaining Power of Amazon’s Suppliers (Moderate Force)
Suppliers control the availability of supplies or materials Amazon needs for its operations, such as hardware components for servers and information systems. The influence of suppliers on the company’s industry environment is outlined in this aspect of the Five Forces analysis model. Amazon experiences the moderate intensity of the bargaining power of suppliers based on the following external factors:
- Moderate population of suppliers (moderate force)
- Suppliers’ moderate forward integration (moderate force)
- Moderate size of suppliers (moderate force)
Their moderate population empowers suppliers to impose a moderate force on Amazon’s e-commerce business. For example, changes in the prices of IT equipment from suppliers directly impact the company’s online retail operational costs. However, the moderate forward integration limits suppliers’ actual effect on Amazon. In the Five Forces analysis context, moderate (and limited) forward integration equates to a moderate degree of control that suppliers have in the sale of their products to 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 information technology and online service business environment. This Five Forces analysis illustrates suppliers’ moderate impact on Amazon’s operations management and productivity, particularly in the strategic area of supply chain management.
Threat of Substitutes or Substitution (Strong Force)
Amazon competes with substitutes for its goods and services. 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:
- Buyers’ low switching costs (strong force)
- High availability of substitutes (strong force)
- Low cost of substitutes (strong force)
Amazon’s strategies address the strong force of substitutes, which threatens the e-commerce company’s performance. In this Five Forces analysis, the low switching costs show that customers can easily transfer from the company to substitute providers. For example, consumers can easily decide to buy at Walmart stores or other retail establishments instead of buying from Amazon. The high availability of substitutes and the low costs of their product offerings further increase the influence of substitutes on the company. Thus, the external factors in this aspect of the Five Forces analysis of Amazon show that substitution is among the priorities in the company’s strategies for long-term success.
Threat of New Entrants or New Entry (Weak Force)
New firms have the potential to reduce Amazon’s market share. The effects of new entrants are considered in this aspect of the Five Forces analysis model. Amazon experiences the weak intensity of the threat of new entry based on the following external factors:
- Buyers’ low switching costs (strong force)
- High cost of e-commerce and retail brand development (weak force)
- High economies of scale (weak force)
Amazon’s customers can easily transfer to new firms that provide e-commerce services. In the Five Forces analysis model, this factor empowers 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 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, the company 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.
References
- Amazon.com, Inc. – Form 10-K.
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- Amazon.com, Inc. – Who We Are.
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- Sforcina, K. (2023). Digitalizing Sustainability: The Five Forces of Digital Transformation. Taylor & Francis.
- U.S. Department of Commerce – International Trade Administration – Retail Trade Industry.
- U.S. Department of Commerce – International Trade Administration – Software and Information Technology Industry.