Analysis of the Amazon.com Case Study
Threat of Substitutes
The threat of substitutes is high - Analysis of the Amazon.com Case Study introduction. Amazon.com is in the Internet Services and Retailing Industry. With the exception of its patented technology (such as 1-Click Ordering), there are quite a lot of alternatives to Amazon’s products and services. It is important to note that most companies, in addition to brick and mortar stores, have an online store. Both the physical store and online store act as a substitute for Amazon.com because brick and mortar companies do not compete in the same industry as Amazon.com and its direct competitors. Amazon.com’s products can be purchased all over the internet; they are just spread out among different web sites. Some substitutes for Amazon.com could be Walmart.com, Kohls.com, Lowes.com and Bestbuy.com. Books can be purchased at brick-and-mortar bookstores such as Borders (although Amazon runs their web site, its stores still constitutes as a substitute), Barnes and Noble Books, Books-A-million, and Half Price Books. Books are additionally sold at newsstands, drugstores, and discount stores like Walmart and Kmart. Books can also be borrowed for free at a community or university library. The music selection Amazon.com offers can be purchased at music and entertainment retailers like Trans World Entertainment or Virgin Megastores as well as consumer electronics retailers like Best Buy. Music can also be purchased at discount retailers;
Walmart’s music department has a wide variety of products with competitive prices. People could also listen to and/or record local radio stations music. DVDs and videos can be bought at large consumer electronic/media retailers like For Your Entertainment (f.y.e.) or Best Buy. DVDs and videos are sold at discount retailers and there also is the option that videos and DVDs could be borrowed from the community library. Electronics (cameras, camcorders, cell phones, computers, and software) can be purchased at brick and mortar stores like Best Buy, Circuit City, Dell or Walmart. There are also small businesses in local communities that might sell these type of electronics. Tools could be acquired at a Home Depot or a Lowe’s physical store location. They could also be purchased at discount stores such as Walmart or Kmart and at small local businesses.The kitchen products Amazon.com offers could be obtained by going to specialty furniture stores like IKEA, department stores like Sears or J.C.Penney, and discount retailers like Christmas Tree Shops. There are a lot of substitutes for purchasing apparel from Amazon.com, as
there are many brick and mortar apparel retailer locations. Department stores (Macy’s, Nordstrom), specialty apparel retailers (Gap Inc, H&M, Men‘s Wearhouse), discount department stores (Marshall’s, KOHL’s), and small independent clothing retailers (for example; Zanna in Amherst, MA) all offer clothing with different price ranges across the country. There are also thrift stores and the option of sewing your own clothes.Toy stores such as KB Toys, Toys’R’Us, and Trend Times Toy Stores offer a extensive line of products. In addition, there are other specialty brick and mortar toy stores such as Build-A-Bear Workshop and Game Stop that focus on certain types of toys/products.Substitutes for Amazon’s web services (or use of its selling platform) are somewhat minimal. Businesses have the option of creating their own web site platform using their own computer programming employees or they have the option of hiring outside web programming/ web design firms. Overall, there appear to be many substitutes to Amazon.com’s product offerings. Although Amazon’s products can be substituted fairly easy, the physical stores and web sites themselves may not offer the same quality of customer service and convenience to its customers as Amazon.com has done.
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Threat of New Entrants
Threat of new entrants is low. It would be virtually impossible for a new company to reach the magnitude of inventory and status that Amazon.com maintains. When visiting Amazon.com, the number of products and services it offers is mind-blowing. Amazon.com has been in the internet marketplace for about thirteen years now; it would be extremely difficult for a start-up company in the industry to raise enough capital to even compete with Amazon.com on a lower level. Amazon.com has sufficient product and service differentiation to keep customers loyal; the American Customer Satisfaction Index survey conducted for the fourth quarter of 2007, Amazon.com attained a score of 88, which continues to be the highest score for the entire E-Commerce sector (ACSI, 2008). A start-up company in the Internet Services and Retailing industry would need to possess some very extraordinary characteristics. For example, it would have to have a new, patented use of technology that Amazon.com and its direct competitors do not have. This new technology would have to revolutionize the way people shop online and become extremely appealing to the population as a whole. It would also be extremely
difficult for a start-up company to gain economies of scale, or cost advantages associated with large-scale production, as the other major players in the industry already have done. Large firms, such as Amazon.com, have the ability to utilize machinery and other technology that requires a large initial investment but increase cost efficiency in the long term (AFSC). A large initial investment is “outside the reach of smaller firms“, and therefore cannot produce economies of scale (AFSC). Switching costs for consumers may not be that low because while Amazon.com can afford to offer lower prices with its economies of scale, a start-up may need to charge slightly higher prices in order to get by financially. It is relatively easy now a days to start-up your own e-business, however, for it to compete on the same level of Amazon.com would be virtually unattainable.
Rivalry among Competing Firms
Rivarly among competing firms is high. Amazon.com has countless competitors, and since Amazon offers such an extensive selection there are more companies competing with its products and services. Amazon.com’s direct competitors include internet retail web sites such as Barnes and Noble.com, eBay, Overstock.com, and Buy.com. Amazon’s Marketplace (Amazon Auctions & zShops) directly competes with auction web sites like eBay, Ubid.com, and Yahoo!Auctions; and online store hosting web sites like the ones offered by Internet portal companies such as Yahoo! and MSN (Case 10: Amazon, 10-8). Amazon’s A9 search engine competes with the search engines of Google, Yahoo and Ask.com. Amazon MP3 directly competes with Apple’s iTunes. A new form of competition arose with Google when the company announced their aim to compete head to head with Amazon’s Web Services with their latest service offering, Google App Engine (Ingram, 2008). Amazon.com indirectly competes with some specialty/focused online retailers. For instance, online retailers Newegg (electronics), Columbia House (DVDs/videos) and eToys (toys), compete indirectly with the electronics, DVDs/videos and toys sold on Amazon.com. Some of Amazon.com’s indirect competitors include those companies who have developed online stores after the development of their brick and mortar stores. Despite the fact that they sell many of the same products as Amazon, web sites such as Walmart.com, Kohls.com, Lowes.com and Bestbuy.com, are examples of indirect competitors because they are technically not in the
same industry. Amazon is first and foremost in the Internet Services and Retailing industry, while a company like Walmart is in the discount and variety stores industry. Jack Love, publisher of articles on InternetRetailer.com, explains that the internet is now in the mainstream of America’s retail industry: “You can no longer prosper on the web simply by finding a new niche; segment after segment is now crowded with web merchants, each trying to outperform the other with new web site features and designs. Staying in business requires staying ahead of the web’s learning curve” (Love, 2008). The internet retailing industry is growing in a stagnant retailing market: “Last year, e-retail sales grew by 18% and store sales grew less than 4%. This year, Forrester Research Inc. says online retailing will grow 17% to $204 billion while overall retail sales will struggle to grow at all” (Love, 2008). As internet retailing slowly takes over the retailing market, Amazon.com will continue to face intense competition. If Amazon.com continues to offer lower prices and free shipping on many orders over $25 (Case 10: Amazon, 10-7), consumers could face higher switching costs with other web sites and end up sticking with Amazon. The competition should not seriously threaten Amazon.com’s future level of growth and success. Customer service ratings for Amazon are remaining the highest in the industry (i.e. score of 88 on the ACSI survey) and last holiday season (2007) Amazon.com had more visitors or higher web site traffic than its number one competitor, eBay (Stone, 2008).
Bargaining Power of Buyers
The bargaining power of buyers is high. Amazon.com’s customers have the option of buying the products and services they desire on the hundreds of thousands of other retail web sites on the internet. If Amazon.com does not offer low enough prices to satisfy the customer then the customer will search the internet until they find that low price. Fortunately, since Amazon.com did not operate retail stores, the company had very little overhead costs and “was able to pass these savings along to customers in the form of low prices” (Case 10: Amazon, 10-7). On top of low prices, Amazon.com set out to be “the earth’s most customer-centric company” (Case 10: Amazon, 10-10) with its excellent customer service tactics. “Because of the empowerment of the customer, maintaining a high level of customer
service was necessary” (Case 10: Amazon, 10-11). Over the years, Amazon.com has diligently provided new customer service tactics so the customer is satisfied and does not make purchases elsewhere online.
Bargaining Power of Suppliers
The power of suppliers is medium-high. Suppliers have a medium power in the sense that much of Amazon’s own inventory could be obtained from numerous suppliers across the country or even across the globe. Furthermore, Amazon.com is a large buyer of products as its goal is to “offer everything to everyone” (Case 10: Amazon, 10-19). They decide what specifically goes on their web site and can utilize their influence over smaller suppliers. Suppliers have a higher power given that Amazon.com cannot compete with suppliers. Amazon.com does not run any production plants. Aside from their own inventory, the suppliers of products for Amazon.com include the sellers on the marketplace (Auctions or zShops) and the companies they have web service partnerships with. Amazon’s success depends heavily on the collaboration they have with online sellers and business partnerships like Target, Borders, or Office Depot. Without these two key providers, Amazon would not have the large selection of products it has today and would not follow Bezos’ philosophy of “offering everything to everyone” (Case 10: Amazon, 10-19).