Amazon Porter’s Five Forces Analysis

Porter’s Five Forces analytical framework developed by Michael Porter (1979)[1] represents five individual forces that shape the overall extent of competition in the industry. The essence of Amazon Porter’s Five Forces is represented in figure below:

Amazon Porter's Five Forces Analysis

Amazon Porter’s Five Forces Analysis

 

Threat of new entrants in Amazon Porter’s Five Forces Analysis

Threat of new entrants into online retail business is significant. There are certain industry entry barriers such as the economy of scale and expected retaliation from current market players such as Amazon. Nevertheless, potential new market entrants may base their competitive advantage on innovative features and capabilities of their service offering or an innovative business model in general. In other words, innovation and creativity may play an instrumental role in terms of reducing the impact of industry entry barriers and the absence of switching costs for consumers further increases the threat of new entrants.

Moreover, new market entrants will not have problems with access to distribution channels due to the readily available courier services such as DHL, TNT, UPS and others. Time of entry also can be mentioned as a significant factor increasing the threat of new entrants due to increasing popularity of online shopping. The absence of switching costs from Amazon to another e-tailer for customers can be mentioned as additional factor that can increase the threat of new entrants.

 

Bargaining power of buyers in Amazon Porter’s Five Forces Analysis

Bargaining power of Amazon buyers is great in general. At the same time, it is important to clarify that for Amazon, the extent of buyer bargaining power varies across customer categories depending on the nature of products and services being consumed.

Customers who purchase from Amazon marketplace possess the highest bargaining power because they are able to switch to a competition or substitute products and services and they are price sensitive to a significant extent. Moreover, buyer’s ability to go for substitute website may be great due to highly intensive competition in the marketplace. Similarly, customers of Amazon electronic devices such as Kindle e-readers, Fire tablets, Fire TVs, and Echo have substantial bargaining powers due to the intensity of competition and the absence of switching costs.

Buyers of Amazon Web Services (AWS), on the other hand, have less bargaining power compared to buyers from Amazon Marketplace, due to the presence of switching costs to an alternative service provider. Sellers on Amazon Marketplace as another category of Amazon customers do not yield a substantial bargaining power because of a lack of alternatives to Amazon and the company’s leadership position as a global online retailer.

 

Bargaining power of suppliers in Amazon Porter’s Five Forces Analysis

Bargaining power of Amazon suppliers is insignificant. Amazon deals with a wide range of suppliers due to the diversity of its business and the company exercises a vast bargaining power in relation to the majority of its suppliers. For example, authors and independent publishers with Kindle Direct Publishing are contracted on the basis of 70 per cent royalty option[2] and they are not in the position to bargain the amount of their royalty with Amazon. During 2017, no vendor accounted for 10% or more of Amazon purchases.[3]

The ranges of factors that reduce supplier bargaining power include great numbers of suppliers aiming to work with Amazon and a moderate level of forward integration by suppliers. The e-commerce giant’s ability to substitute its suppliers with ease can be mentioned as another factor with negative implications on supplier bargaining power…

Amazon Inc. Report 2018 contains a full analysis of Amazon Porter’s Five Forces Analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Value Chain analysis, Ansoff Matrix and McKinsey 7S Model on Amazon. Moreover, the report contains analyses of Amazon leadership, business strategy, organizational structure and organizational culture. The report also comprises discussions of Amazon marketing strategy, ecosystem and addresses issues of corporate social responsibility.

[1] Porter, M. (1979) “How Competitive Forces Shape Strategy” Harvard Business Review

[2] Annual Report (2017) Amazon.com Inc.

[3] Annual Report (2017) Amazon.com Inc.

 

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