PESTEL Analysis

Discuss about the Developing Market Strategy for Electronic Business.

Amazon is an electric commerce corporation which operates in online shopping industry and offers its services across the globe. It was founded in 1994 by Jeff Bezos as an online bookstore; it headquarters is in Seattle, Washington, US. After that, the company branch into e-commerce sector and started offering thousands of products to its customers worldwide (Hartmans, 2017). Currently, Jeff Bezos is the Chairman, CEO and President and Werner Vogels is the CTO of the company. The firm has hired more than 541,900 employees worldwide (Fiegerman, 2017). Amazon’s products include Amazon Kindle, Amazon AppStore, Amazon Echo, Amazon Prime and many others. In terms of market value, Amazon (US$427 billion) is world’s fourth largest company (Statista, 2017). The major market of Amazon in terms of net sales includes the United States, Germany, United Kingdom and Japan. This report will focus on analysing external and internal environment of Amazon and identify issues faced by the firm. Further, this report will provide recommendations for Amazon which can assist it in addressing business issues.

Figure 1: Amazon’s Logo

(Source: Amazon, 2018

A PESTEL analysis is referred to a framework or tool which assists market experts in monitoring and analysing external marketing environment (macro-environment) factors which influence a corporation (Yuksel, 2012).

Figure 2: PESTEL Analysis

(Source: Murphy, 2015)

Trade protectionism which is implemented by the Trump administration threatens the operations of existing foreign firms in the county. Although Amazon is an American corporation, a large amount of its goods comes from overseas enterprises. The ban on free trade in the US can negatively affect Amazon’s operations (Mac, 2017). Currently, the American and British government are holding discussions for potential trade deals in the light of Brexit negotiations. New trading policies can serve to ease Amazon’s operations in the United Kingdom by reducing import taxes and imposing of fewer regulations (Hortense, 2017).

Amazon started offering its services in Australia from 2017, and it raises concerns about increased unemployment. Many critics argue that Amazon is reducing jobs by implementing and using new technology for performing different jobs which are traditionally done by human resources. However, reports have shown that Amazon is actually creating more jobs by creating new work for human resources and it positively affects the unemployment rate in Australia. The economic stability in Amazon’s major market such as UK, US, Japan and Germany creates new opportunities for the firm. Even in recession, the retailing industry was doing well which is a good sign for Amazon. E-commerce grew 23 percent in 2017 to reach US$2.3 trillion, and much more growth is expected in the sector in upcoming years (IPC, 2017).

Porter’s Five Forces Analysis

Increasing rate of obesity is growing worldwide, with more than 1.9 million people classed as overweight increases the pressure on governments to encourage a healthy lifestyle and physical activity among people (WHO, 2018). On the other hand, Amazon’s services such as groceries delivered to the doorstep and same-day deliver are encouraging non-active lifestyle. Furthermore, demographics of e-commerce retailers are changing as smartphones and internet become popular in emerging market. A large number of people choose online shopping because of its convenience and wider choice of products.

Technology assists e-commerce organisations in increasing their efficiency and effectiveness of services. Amazon uses high-level technologies in its logistics process to keep track of millions of products. In 2017, a new service called ‘Hub’ was launched which allows Amazon to deliver products for customers even when they are not at home (Popper, 2017).

Due to pressure from governments, organisations are focusing on reducing their carbon emission. Amazon has opened new campus in Seattle which is an eco-friendly office that is filled with 40,000 plants (McGregor, 2018). Until 2016, Amazon did not publish a sustainability report. The firm started focusing on reducing its carbon emission by investing in more eco-friendly officers and technologies.

The pressure over multinational corporations is increasing because governments are implementing strict regulation. Currently, Amazon is under investigation for an Iran-linked sale in which the company delivered products to a person which was on the terrorist list (Baron, 2017). Amazon was under investigation by the Federal Trade Commission in the US for providing misleading claims regarding discounts on more than 1000 products (Bartz, 2017). Therefore, while operating in overseas and domestic markets, Amazon has to comply with a number of legal requirements.

The Porter’s five forces model assists in analysing and identifying competitive forces that shape every industry, and it also assists in determining an industry’s weaknesses and strengths (Dobbs, 2014).

Figure 3: Porter’s Five Forces Model

(Source: CGMA, 2013)

The threat of new entrants in e-commerce industry is high. There are certain entry barriers in the industry such as high investment requirements, economy of scale and expected retaliation for current players. Innovation and creativity of organisations play a crucial role in reducing the entry barriers in the industry. The absence of switching costs for customers also increases the threat of new entrants. Easy access to courier services such as UPS, DHL, TNT and others reduces barriers to entry in the e-commerce industry (Azadi & Rahimzadeh, 2012).

VRIO Analysis

There are a wide variety of direct and indirect substitution for products and services offered by Amazon. Substitutions for Amazon include traditional physical stores and supermarkets. Online websites for selling specific objects such as Emusic for music, Newegg for electronic products and Barnes and Noble for literature include in direct substitutes of the firm. The switching cost for customers is nil, therefore, the threat of substitute products is high for Amazon (Dalken, 2014).

Amazon has an advantage over its suppliers, and they have to work according to the firm’s guidelines. The number of Amazon’s suppliers is big, and they have to follow a code of conduct which is set by the enterprise. Amazon maintained a positive relationship with its supplier and entered into a contract with them to ensure that they comply with following guidelines (Ignat & Maha, 2012):

• Health and safety is production
• Prevention of child labour
• Right to legal wages and benefits
• Fail and ethical treatment
• Appropriate working hours and overtime pay

The number of suppliers is also large in the retailing industry, and Amazon can easily switch suppliers if they did not comply with its guidelines.

The bargaining power of buyers in the online retailing industry is substantially high because they are able to easily switch to competition or substitute products or services of Amazon. Customers are also priced sensitive to an extent which means Amazon cannot make changes to its pricing structure without losing thousands of consumers (Mohapatra, 2012). Furthermore, due to high competition, buyers’ ability to go for substitute website is substantially high.

The degree of rivalry in the online retailing industry is high because a large number of e-commerce players operate in the industry. Amazon also faces competition from traditional retail brands such as Wal-Mart and Costco. Other than intense competition from giant organisations, there are also a large number of small brands that creates competitive pressure and fight for market share (Miller & Clifford, 2013). The firm also faces heavy competition from Alibaba Group in Asian markets as it is the world’s largest e-commerce enterprise in terms of revenue. Some non-US based brands have started entering the US e-commerce market which poses new threats to Amazon. Therefore, competitive rivalry in the online retailing industry will continue to increase for Amazon.

The VRIO analysis is referred to an analytical technique which assists in evaluating a company’s resources and analysing its competitive advantage. VRIO is an acronym for value, rareness, imitability and organisation. It is a tool which is used in analysing a company’s internal resources and capabilities in order to find out whether they can be a source of sustained competitive advantage (Lin, Tsai, Wu & Kiang, 2012).

Conclusion

Figure 4: VRIO Analysis

(Source: Jurevicius, 2013)

Value: Amazon has a strong brand name; According to Forbes (2017), it is world’s sixth most valuable brand with a value of US$54 billion. The corporation is well-known for offering the lowest prices on products and providing excellent services to its customers.

Rarity: A large number of Amazon’s competitive are relatively small, and their brand names are not recognised worldwide. However, few competitors have well-recognised brand names, and they pose great threat to the firm such as eBay, Alibaba, Wal-Mart and others. Amazon is nurturing its brand name by improving its services and increasing its market share (Turban, King & Lang, 2011).

Imitability: Positive and well-recognised brand name is a strength of Amazon, and most customers visit Amazon’s website during the online shopping process. Due to strong and positive reputation, it is difficult for small competitors to position themselves near Amazon. In the US, eBay is the only key competitor of Amazon. Wal-Mart is investing heavily in improving its online retailing services. However, Amazon’s brand name is inimitable in the online retailing sector.

Organisation: Amazon understands that its strong brand name provides a competitive advantage and the firm use it to attract new customers, suppliers, partners and publishers. Strong brand name provides a competitive advantage to Amazon and provides it above average returns.

Value: Amazon has generated a competitive advantage through effective distribution network which allows them to offer a wide variety of products to customers. Many other e-retailers collaborate with Amazon to so that they are able to offer a wide range of products to their customers. Amazon uses modern technologies to improve its massive distribution network (Mudambi & Schuff, 2010).

Rarity: Amazon’s distribution network is spread throughout the world, and it connects the company to a large number of suppliers and customers. Many organisations invested heavily in building a vast distribution network but failed to do so, therefore, Amazon’s distribution network is rare.

Imitability: Amazon’s distribution network is very difficult to imitate for its competitors due to lack of resources and technologies. Organisations collaborate with Amazon for using the potential of its distribution network to reach a wider audience, therefore, it is inimitable.

Organisation: Amazon has organised and developed its distribution network through years, and it assists the company in capturing new markets. Amazon’s ability to use the potential of its distribution network provides the firm a sustainable competitive advantage and above average returns.

Value: Effective customer service assists Amazon in increasing its loyal customer base which results in increasing its sales.

Rarity: Amazon has an advantage over its competitors because of its exceptional customer services.

Imitability: It is easier for other e-retailers to obtain effective customer services which provide Amazon a temporary competitive advantage.

Value: Amazon’s more important tangible resource is its online store through which it is able to offer a wide range of products to its customers.

Rarity: Every e-commerce retailer operates through an online store, and a wide range of products can be found on other websites as well. Therefore, it provides the firm competitive parity.

Value: Pricing strategy of the Amazon enables it to offer low priced products to its customers which provide the firm an advantage over its competitors.

Rarity: Along with Amazon, many other organisations also offer low pricing to their customers. Therefore, it is a competitive parity for the firm.

Following are different issues face by Amazon which negatively affects its competitive advantage and overall performance.

• The firm is facing fierce competition from online retailers such as eBay and Alibaba along with offline retailers such as Wal-Mart, and Target. Wal-Mart is also investing in online retailing which will increase the issues for Amazon (Floyd, Freling, Alhoquil, Cho & Freling, 2014).
• The company has failed to invest in effective environment-friendly policies which negatively affect its reputation.
• There are fewer barriers to entry in the online retailing industry which results in increased competition for the enterprise.
• The corporation has been involved in lawsuits such as delivering products to a person who is on the terrorist watch list of the government and acquisitions by Federal Trade Commission (FTC) for providing misleading claims regarding discounts on more than 1000 products. These incidents negatively affect the brand value of Federal Trade Commission.
• The firm operates all its processes through online portals which increases the risk of hacking or cyber-attacks. Cybercriminals can hack the database of Amazon and used to collect confidential information of the firm which can negatively affect its

Following are different implications and recommendations for Amazon which can assist in improving its overall performance.

• Amazon is facing fierce competition from other e-commerce retailers; therefore, it should use its strong brand value to maintain its competitive advantage. It should market its services based on its strong brand value which can assist it in capturing new markets (Baier & Stuber, 2010).
• The firm should invest in offline store to compete with its competitors such as Wal-Mart who offers both online and offline services. The firm has opened a new type of offline stores called “Amazon Go” in which no check-out Customers can use one application to enter the store, and they can exit without paying, and money automatically debits from their account (Wingfield, 2018). Currently, there is only one Amazon Go store; the company should invest in these stores to face giant competitors such as Wal-Mart.
• The firm should use its distribution network to increase the reach of delivering. It should invest in increasing its distribution network and offer services such as same-day delivery in emerging markets as well. These services will allow Amazon to capture new markets and maintain its competitive advantage quickly.
• Amazon already provides excellent customer services, but it should improve it by adding new features which reduce customers’ frustration. It will assist the firm in creating a loyal customer base which results in improving its

Conclusion

In conclusion, Amazon is a leading e-commerce retailer, and it offers its services worldwide. The firm has generated a competitive advantage by offering a wide range of products and through its vast distribution network. Different political, economic, legal and social factors negatively affect the firm’s operations, although it implements new technologies to improve the efficiency and effectiveness of its operations. The company has a strong brand name worldwide which provided it a competitive advantage. The firm faced a number of issues while operating in the online retailing industry such as high competition, lawsuits, low entry barriers, and risk of hacking. In order to address these issues, Amazon can invest in offline store and expand its distribution network. The company can leverage its strong brand name to expand its market share and improve its customer services to create a loyal customer base. These policies can improve its performance and sustain its future growth.

References

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