Amazon maintains its place as the fastest growing company in the global digital retail market. The entity has shown flexibility and dynamism despite the increased pressure and competition from companies such as Walmart, E-bay and Alibaba. The $ 560 billion company first entered into the e-commerce industry by selling books online. Later, it rapidly expanded and currently, it is dubbed as an “everything store” because it covers about every department in the retail industry. Amazon Inc. basically controls 43 percent of the retail sector. Not only does it control such an overwhelming percentage of the industry, most retailers depend on the firm’s technology platform. In fact, third party retailers are compelled to sell on Amazon marketplace platform, and that means that its competitors are paying the company, which makes it stronger. The first part of the paper covers the kind of market structure that Amazons is classified under. The second part comprises of PESTEL analysis which covers key concerns that are paramount to the business’s operations and success. Finally, the third section explores how the company operates in order to minimize potential impacts of the factors discussed in the Pestle analysis section.
Question 1: Monopolistic Competition
According to Dastan and Adam, Amazon represents a form of monopolistic competition in the digital and retail economy (2017, p.12). This type of market structure entails a company selling similar products in a distinct market containing a number of competitors. Among the characteristics of such a market include product differentiation, independent decision making, free entry and exit to an industry, companies offer a similar product and there are a number of competitors in the industry. Based on these characteristics, Amazon’s market structure has been further elaborated below.
Large Number of Buyers and Sellers
There are numerous firms that control the price-output policy to some extent. The company is classified under the monopolistic competition category because in the cleaning supplies sector, it competes with Walmart, Bath and Beyond. In the clothing and shoe retail business, the firm is competing with DSW, Foot Locker and Gap. Also, in the music, TV and book business, the organization is competing with Apple, Netflix and HBO. The bottom-line is that Amazon is performing successfully across all these fronts. In fact, the multinational generated at least 30 percent of all retail sales growth in the US. More importantly, the firm’s dominance goes beyond the retail sector. It lends credit, manufactures hardware, rents servers, publishes books, among others. Basically, it is an “everything store.” By controlling critical infrastructure, the organization set terms with rivals who use its networks and servers. As such, it acts as both a competitor and distributor to its competition.
Free Entry and Exit
Since Amazon is in the retail business, companies are free to enter and exit. Firms enter when competitors are making supernormal profits and they will exit when existing companies are making losses/normal profits. A big share of the e-commerce sector is generally owned by Amazon Inc. Thus, the MNC creates a form of centralization but it also allows for small firms to enter the retail industry. Amazon being a dominant player allows entrants to sell through its website. The company’s economic and financial power may also cause exits due to excessive competition. That has been the case for large start-ups such as jet Inc., which later exited the industry and was later acquired by Walmart. Moreover, the purchase of Whole Foods gives Amazon an infrastructural advantage because it has over 400 small warehouses spread across the United States.
Price differentiation and Different Selling Cost
One other feature that classifies an organization under monopolistic structure is the ability to promote its products by lowering or increasing its prices (Carter 2017, p.12). Amazon is also one of several tech companies such as Facebook and Google. Its market power may not map into traditional notion of a monopoly but it dominates the market as a monopolistic competitor. The company controls the market by keeping prices low and by doing so, its locks customers into buying more of its products. For example, it sells gadgets for little profit and then pushes the clients to purchase digital movies that they can watch them on the same tablets. Therefore, it prices are differentiated based on a volume strategy rather than a profit strategy. It can be argued that the company can set its own prices as much as it can. Over 70 million Americans are prime members of Amazon (Carter 2017, p.13). More so, the company offers free shipping and their prices are the most competitive in the market. More power and influence is concentrated and consolidated in the hands of the firm due to the low prices.
Lack of Perfect Knowledge
Sellers don’t have homogenous information about the market. Since products are close substitutes of each other, sellers do not know exact preference of its clients (Castrpnova 2014, p.45). If a seller gets such information, it can leverage against its competitors. For instance, Amazon leverages on other business and pushes out the competition, as seen in the grocery delivery business. In 2017, Amazon bought Whole Foods firm for 13.7 billion USD. Later in the week the company’s stock increased by $ 14 billion (Carter 2017, p.15). That basically means that the Amazon bought the company for free and made profits of $ 1 billion in the process. From the acquisition, it is clear that Amazon will be a force in the $ 700 billion grocery store business. Additionally, its acquisition of its competitors such as Zappos.com and Diapers.com made it a major player in the industry.
Elastic Demand
Under the monopolistic structure, the demand curve is elastic and thus in order to sell more, companies they have to lower their prices. That is exactly what Amazon does with its products. Some home and electronic gadgets are almost free on their websites (Roper 2017, p.16). While the corporation is a clear global e-commerce leader, most of the retail spending is still on brick and mortar stores.
Product Differentiation
Product differentiation means that the buyers differentiate the product with other competitors. The services are slightly different from its competitors. Differences could deliver incentives, product appeal or after-sale services. Amazon offers discount sales for those shoppers that sign up for regular delivery and those that frequently purchases items on the site. Free shipping makes it even more tempting, other incentives include bonuses, cash backs and use of gift cards. Prime membership entails packages such as free TV shows, movies and music from prominent artists such as Adele and Coldplay (Deagon 2017, p.3).
Question 2: Pestle Analysis
PESTLE Analysis is an approach that explores the external environment trends in the socio-economic, political and environmental factors in an organization or an industry (Collins 2014, p.56). The Porters Five forces and SWOT analyses are used as the base of discussing PESTEL analysis (Gillespie 2007, p.35). The following is a discussion of Amazon’s PESTEL analyses:
Political
Firstly, trade protectionism threatens existence of foreign firms in the US and UK. While Amazon is a US company, most of the revenue and operations are carried out overseas. For instance in the UK, Its operations are threatened by expected reduction of foreign imports and tariffs imposed on foreign imports (Sindi and Roe 2017, p.56). Additionally, Brexit effect on Amazon has been substantial. The implications to leave European Union may create inflation/escalation of prices. One reason for increase in prices is the weakening pound against the dollar. The range of political concerns affecting Amazon also depends on political instability in a country. Market lobbying as well as attitude of the administration to e-commerce may affect the operations of Amazon (Gov 2016, p.3). Also, government support of foreign investors means that there is a high chance of increase competition. For instance, allowing Chinese online retailers to expand their operations to US is likely to have an impact on the market. On a positive note, Amazon enjoys political stability in the US. Stability creates an opportunity for the organization to expand to other countries in Europe. Moreover, there is overall government support for e-commerce in the US and UK. Improved business conditions due to efficient laws against cybercrime ensures that the company spends less on legal suits and puts more focus on service delivery.
Economic
There are a number of economic issues such as tax and inflation rates that affect the firm and its overall economic growth. Among the economic factors are unemployment, and currency ex-change rate which directly affects revenue volumes. For instance, in 2016, net revenue from international businesses accounted for 32 percent of its consolidated revenues (Carter 2017, p.15). Currency exchange risks have affected the corporation’s profitability. Fluctuating exchange rates have negatively impacted on the 2016 and 2017 by USD 5.2 Billion and USD 636 million respectively (Gov 2017, p.3). Amazon’s critics proclaim that the firm looks to cut down on labor costs by reducing the number of job opportunities due to the implementation of technology. Technology will replace traditional jobs done by human resources. On a positive note, recent reports indicate that Amazon is creating additional jobs in USA and UK due to expansion and creation of new Amazon facilities (Law 2017, p.4). To add on, the share market’s uncertainties is becoming a challenge for the global economy. For instance, the company’s expansion into the grocery sector is further heightened by uncertainty because competitors such as Walmart have experienced a substantial drop in share prices in the recent past (Vandevelde 2017, p.2).
In the UK, research shows that traditional capitalist structures no longer fit the strategies that are employed in the current business context (Dastin and Sadam 2017, p.3). Recently, Douglas and Gross argued that the Amazon capitalistic ways are the key to future productiveness because it reinvests its gains into the market through innovation and research (2016, p.2). One big threat from Brexit will be taxation and its effect on sellers (Denning 2017, p.4). Depending with the kind of treaties negotiated between UK and EU, there is high likelihood that additional taxes may be imposed. Economic conditions in Europe and United States are changings because of the decline in purchasing power. Lastly, economic stability of the US and UK increases the likelihood of business success in these segments. Moreover, stability minimizes economic sanctions and other issues that may affect expansion. There is also the issue of developing markets. Increase in disposable income in developing economies is likely to boost Amazon’s financial performance.
Socio-Cultural
According to Bedard, over 700 million people across the globe are classified as either obese or overweight (2017, p.3). Increasing pressure is therefore put on government to promote physical and healthy lifestyle. Amazon on the other hand is extending delivery services to the extent that groceries can be delivered to a person’s doorstep. Such non-active lifestyles may increase occurrence of obesity (Bedard 2017, p.15). One other social aspect is a behavioral shift in the use of smartphones. Rise of phablets means that owners to use their phones to carry out complex task such as online-shopping. Such customer behavior presents a big opportunity to Amazon.
Another issue of concern is the increasing wealth disparity between the affluent and poor. Such conditions threaten Amazon’s business model because of stagnation of disposable income (Gov 2017, p.3). Lower disposable income will mean that there is decrease in revenue levels. More so, declining degree of consumerism creates fewer opportunities for Amazon. On a positive note, increased marketability of online purchases around the world provides an opportunity for the company to penetrate and expand to developing economies.
Technology
To begin with, research and development is important for a company wishing to maintain competitive advantage (Collins 2014, p.8). Amazon has announced that they will double the staff to work in the R " D Centre in London (Ruddick 2017, p.56). This signifies that the company is increasingly employing the use of technology in their strategic framework. In addition, increasing competition in terms of advancement in technology means that there is need for efficiency and effectiveness with regard to the demands of complicated and highly globalized supply chains (Sindi and Roe, 2017). In 2017, the company invented “hub”, a tech that is basically locks systems that allow products to be dropped off when the client is not home or at their premises (London 2017, p.4). The tech will be useful to non-business clients segmented in the online Omni channel retail field (Foss and Saebi 2017, p.3). Data breaches are likely to compromise sensitive information to the firm’s clients and this may lead to fraud. Complexities of the algorithm economy pose increasing risks to Amazon. Thus, the firm needs to focus on detecting the ever-evolving digital threats. Also, the threat of ever changing and rapid technological obsolescence imposes pressure on the organization’s assets.
Environmental
Notwithstanding the fact that Amazon is an online e-commerce company, the operations are predisposed by underlying conditions surrounding it. For instance, inadequate corporate social responsibility is likely to significantly affect the organization’s image (Plavia, Zigli " Palvia 2016, p.38). To enhance a strong brand image, it is imperative that the organization implements higher business sustainability. In the recent past, focus has been put on production and sale of low carbon items. Thus, the entity is required to implement environmentally friendly energy-saving policies. Before 2016, Amazon.com had not published reports on sustainability. This led to investigation on how the environmental parameters of the organization’s operations affect the global environment. To add on, increasing pressure of government on large organizations to reduce emissions is likely to impact on Amazon. A large part of the company’s operations depend on logistics and delivery on same-daily basis. Governments on the other require multinationals to comply with local regulations. Such impediments are likely to substantially affect the company’s profitability (Boland 2017, p.3).
Legal
The Federal trade commission in the United States has sanctioned Amazon for releasing misleading claim with respect to discounts on 1000 products and services offered by the company. Also, there is increasing pressure on the risk of assessing its politically sensitive clients (Mankiw 2012, p.23). Currently, Amazon.com is under federal investigations for selling products to people that are on the terrorist watch list. Such activities are risky because they are prone to sanctions due to disregard to safety and international laws. While Amazon is not facing legal challenges in the UK at the moment, it has in the past had fraught relationship with HMRC. The company had paid 11.9 million pounds in 2014 in UK taxes. This resulted in public pressure and pubic shaming (Bowman et al. 2014, p.2). Rise in product regulation is another legal concern faced by Amazon Inc. there are legal repercussions of selling counterfeit products. The company is vulnerable to selling counterfeit products because they are obtained from the seller on trust basis. Also, there are regulations that touch on imports and exports. Without a proper legal framework, the organization may face challenges associated with importing and exporting certain products (Plavia, Zigli " Palvia 2016, p.90). Lastly, the rising environmental conservation regulations decrease business competitiveness and affect the brand’s image.
Question 3: How the Company Operates/How it can operate to minimize potential impacts of PESTEL
How the company Minimizes impacts of Political Factors
Due to the extensive nature of business operations in Amazon, the firm plays an indirect role in politics both in USA and UK. The strong presence means that the ruling government has certain stances towards the company (Greenspan 2017, p.3). To ensure that political issues are dealt with, the e-commerce giant hired Jay Carney (former US secretary of State) as the VP of Worldwide Corporate Affairs. The work of the former politician is to deal with political aspects that have an impact of the business. The figure below is an illustration of the lobbying budget for the past 10 years. Among the issues covered include tax battles, antitrust lawsuits and corporate tax reforms matters.
Political Lobbying Budget for Amazon
(Greenspan 2017, p.1)
To add on, the firm is expanding to bigger markets such as China. Despite the strict censorship policies by the Chinese government, the rapidly growing use of internet users in China provides an opportunity for further growth of Amazon (Murphey " Gause 2014, p.14). Another opportunity that the company is considering is to venture into developing markets where laws protecting internet users have not been fully developed. Expanding to such countries may prove to be a challenge but with proper negotiation by the senior administration office, Amazon will venture into these markets. To add on, Amazon is also expanding its brick and mortar bookstores operations in the United States and UK (Greenspan 2017, p.3). Government support for e-commerce is an opportunity that the firm can take advantage. Moreover, Amazon continues to expand it markets with proper governmental support.
Operations that Minimize Potential Impacts of Economic Factors
To minimize the impact of economic factors, Amazon has focused on grocery sector development by investing the offline market, Moreover, reducing job opportunities and employing technology means that direct and indirect costs are substantially reduced. Decline in purchasing in the United States has made the company to explore other regions such as Europe, China, Pakistan and United Arab Emirates (Gov 2017, p.4). A strategic presence in developing countries presents a major growth opportunity that is based on positive economic development. To add on, the move to open brick and mortar business is important in minimizing the adverse economic effects facing the company. To maintain competitiveness against large retailers with significant presence, the company has invested more than $ 10 billion in the grocery store business (Greenspan 2017, p.3). More market research needs to be done in order to catch up with competitors such as Walmart. Also, an automated procedure for product assessment will help in reducing the amount of phony products sold by the firm. Therefore, such procedures will reduce economic sanctions and it will ensure the brand image is maintained. Layout design and strategies are important economic factors. The objective of optimizing human resources and materials is to align them to computer-assisted process. For example Amazon’s fulfillment centers are organized using high tech computerization policy. Its corresponding layout maximizes aisles in order to achieve optimal capacity and increase efficiency in the online retail business (Greenspan 2017, p.2).
The operations that are underway to curb inefficiency and high taxation costs including the following: To begin with, the firm employs the concept of quality management by maximizing the standards of operational output in order to satisfy customer expectations. Amazon’s management approach comprises of continuous improvement in terms of innovation and creativity among employees (Vlachvei et al. 2017, p.37). Amazon encourages its staff to be bold in coming up with pioneering in creating new concepts to solving and improving the operability of the business.
Operations that Minimize Potential Impacts of Social Factors
On the social front, the firm’s expansion into the grocery industry enables customers to receive merchandise on their doorstep within hours. Expansion into the grocery market means that the number of customers is likely to increase substantially. To solve the negative publicity resulting from social factors discussed, the company is delivering what the customer wants. It is expanding product categories and the shipping is the most efficient (Leigh and Pershing 2016, p.12). Amazon’s online shopping is targeting the young generation and the elderly who have difficulty in driving and walking to shopping places. Although usage of the internet is growing rapidly, the challenge is the trust and credibility of online payments. To solve this issue the IT department is working on advancing its technological knowhow.
Increasing gap between the rich and the poor threatens the expansion of Amazon in the US and UK. However, increasing consumerism in the developing market is one opportunity that Amazon is considering. Market penetration and expansion strategies targeting the rest of Europe and developing markets are underway. Moreover, a location strategy is important to the organization’s operation management. Emphasis on location of warehouses is important in expansion of the operations (Vlachvei et al. 2017, p.90). For instance, the organization must locate its warehouses at a point where it is close to its online retail business.
Technological Factors
To minimize potential impacts of technological factors, the corporation is experimenting creative ways for clients to receive their packages. Amazon is testing a new initiative of drone delivery whereby product delivery will be automated. However, they face the challenge of government regulations (Greenspan 2017, p.2). Additionally, the firm is using digital technology to build relationships with its customers. For instance, Amazon.inc emails its customers with reminders about products that they would want to put in their wish list. One signs up for an account, Amazon sends information about purchases that the client looked at but did not buy. To add on, the organization offers a 24 hour live chat support that helps customers in case of any problems with package delivery (Vlachvei et al. 2017, p.36). Whether it means untimely delivery or need for refund, there is always someone that one can talk to. Additionally, Amazon has kept itself updated with technological advancements. The business is developing mobile phone applications that facilitate customers with different kinds of smartphones. Moreover, clients are concerned with safety of their personal information. To solve that challenge, Amazon has equipped itself with the latest technology that protects customer’s information. Customers in new markets find it easy to purchase via Amazon without compromising their safety. There has been significant investment in technological measures to protect against cybercrime. The problem of rapid technological obsolescence presents an opportunity to the organization. The enterprise’s continued heavy investment of IT framework is likely to boost competitive advantage and protect its business from potential entrants into the online retail sector. IT efficiency will maximize online productivity and at the same time minimize operational costs. Additionally, the design of the goods and services is important in operations management (Vlachvei et al. 2017, p.25). Amazon uses advanced ICT to ensure that online presence is convenient to the target clientele. Such technology ensures maximum effectiveness of the corporation’s electronic commerce operation. Development and capacity design is another role of the IT department. Amazon Inc. optimizes production process by extensive automation in a bid to streamline its business process. For instance, the institution automates ordering process in a bid to increase capacity and at the same time accept as many simultaneous orders as possible.
Operations that Minimize Potential Impacts of Environmental Factors
Environmental factor is another concern that affects the operations of Amazon. To avoid environmental issues, the company’s cloud storage eliminates consequences of using hardware devices which may end up polluting the environment (Nikaido 2015, p.34). There is no need for mass production of computer components such as drives. Online shopping ensures that travel time is eliminated which results less pollution. Moreover, the company has come up with an initiative that implements greener shipping solutions and in packaging of shipments. Furthermore, there has been an improvement of corporate social responsibility strategies. This presents major opportunities in maintaining goodwill and enhancing business sustainability. To further enhance the company’s brand image, higher sustainability standards need to be implemented. Also, increasing advocacy for low-carbon lifestyle is an opportunity for Amazon to boost its corporate image. Also, the company implements extensive energy saving policy for the purpose of carrying out operations that enhance a carbon-free lifestyle (Roper 2017, p.17).
Operations that Minimize Potential Impacts of Legal Factors
On the legal front, the company has bolstered its operations by investing in reduction of counterfeit sales on its retail website. Moreover, the organization provides an opportunity for growth based on such an external factor. Amazon can also enlarge its operations by exploiting the capability of vendors to access supplies from foreign countries (Vlachvei et al. 2017, p.56). Appropriate CSR policies addressing environmental protection can largely increase its competitiveness and at the same create a good rapport with foreign governments.
Conclusion
Classification of Amazon under a monopolistic competition market structure is justified by characteristics such as price differentiation, market differentiation, numerous competitors and elastic demand. These features have been fully analyzed in the paper. The second part has extensively covered the socio-economic, political, environmental and technological factors. From the PESTEL analysis, it can be suggested that the firm should expand to developing regions. This will present immense potential of growth. The PESTEL analysis recommends that the company should address IT security issues due to the growing cybercrime in the online retail business. To improve its brand strength, the corporate social responsibility strategy should address current issues that link the business and its environment. The idea of opening an online book store was just but the beginning of a company that now serves more than 160 countries. Currently, it is placed among the top 100 fortune companies. However, reaching that level has constantly come up with a series of challenges. The third part covers ways in which the company uses PESTLE analysis as a tool for improving its operations. Among the recommendations to improve its operations include improvement in IT security, enhancing amicable agreements with governments, strengthening brand image through corporate social responsibility, among others.
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Top of Form
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