Porter's Five Forces Model is the king of recognizing a company's environmental threats, or those forces outside their control that could either improve or take down their company. By looking at the five forces, a company can guage their attractiveness/competitiveness and, based on the analysis (which is more qualitative than a quantitative Excel sheet), adjust their strategy accordingly.
Amazon has it all, right? Let's see.
1. The threat of entry
Technically, it should be easy for someone to compete with Amazon: it's cheap to create an online platform and to minimize costs to a competitive level since there are no brick-and-mortar stores to erect. In fact, any current brick-and-mortar store could carry their customer base over to a similar online model, much like Barnes & Noble and Borders did in the online book-ordering segment, which Amazon created in the mid-90s.
But Amazon has natural costs of entry that would make any new entrant an actual threat. As easy as it is to enter the online market, it will be almost impossible to reach Amazon's level.
- Economies of scale: Amazon has 10,000+ vendors and has 75% repeat purchasers. They have built an impressive network of warehouses that were originally for book selling, but have grown to match their increasing product lines.
- Product differentiation: Amazon has no unique goods, meaning they have formed relationships with vendors in almost every sector, including books and other online entertainment.
- Cost advantages: Amazon's cost structure is lower than any of its competitors, and is considered to be one of its secrets. They spend three more times than the top five competitors put together on R&D, resulting in breakthrough efficiency and effectiveness models, including search improvements and removing 88% of the reasons users stop an online shopping search.
2. The threat of rivalry
Amazon has a multitude of rivals spanning a multitude of products and services, either directly or indirectly, and even more so as the internet increasingly becomes a main vessel for buyers. And as companies see the profit margin for going online, it’s a guarantee that more will come. However, Amazon has the advantage of 75% return buyer rate, making the switching cost high for a lot of buyers who are accustomed to Amazon’s layout, customer service (which remains high), and benefits (Amazon Prime).
Ultimately, the threat of rivalry could be considered high.
3. The threat of substitutes
Amazon offers such a wide range of products and services, they have a potential substitute or two at least every variation of that product or service in both the internet and retailing industries. (The benefit being that on Amazon, it’s all in one spot. Hello, convenience.) Amazon’s patented 1-click ordering offers a competitive advantage, but otherwise, any rival could technically substitute a product or service that Amazon offers.
Ultimately, the threat of substitutes could be considered high.
4. The threat of powerful suppliers
Amazon is a global, well-known company utilizing suppliers of all walks. Amazon has the benefit in that they buy in bulk (attractive to a supplier) and that their products aren’t unique, meaning of a supplier doesn’t work out, there will be another one who can provide what Amazon needs.
Ultimately, the threat of powerful suppliers could be considered low.
5. The threat of powerful buyers
In the online market, buyers can go to any online store that also has low overhead and competitive prices. Amazon works hard to maintain their customer base, but it is a dangerous situation, as they could easily leave if something goes wrong on Amazon’s side.
Ultimately, the threat of powerful buyers could be considered high.
Overall, Amazon has more challenges that you might think. However, if they continue to maintain their competitive advantage, just like they have sine 1995, they’ll still be top.
Sources:
- Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
- Strategy Framworks: Threat of New Entrants - Porter's Five Forces Model by Martin [http://www.entrepreneurial-insights.com/threat-of-new-entrants-porters-five-forces-model/]
- How to Use Porter's Five Forces Model by Annmarie Hanlon [http://www.smartinsights.com/marketing-planning/marketing-models/porters-five-forces/]
- Amazon’s Cost Advantage in a Cascade Chart by David Goldstein [http://www.mekkographics.com/amazons-cost-advantage-in-a-cascade-chart/]
- Amazon.com: An E-commerce Retailer by Sarah Bouchard [http://sarahbouchard.com/works/Papers%20etc/Amazon_PaperFINAL.htm]
