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 Wal-Mart, E-bay and Alibaba. The $560 billion company first entered into the e-commerce industry by selling books online (Ferguson, 2017). Later, the firm rapidly expanded and currently, it is dubbed as an “everything store”, covering every department in the selling industry. Amazon Inc. basically controls 43% of the retail sector. Not only does it control an overwhelming percentage of the industry, most sellers depend on the firm’s technology platform. In fact, third party retailers are compelled to sell on Amazon marketplace platform. Therefore, the firm receives payment from competitors, a factor that makes it stronger (Vlachvei et al., 2017). The first part of the paper discusses Amazon’s market structure. The second part has PESTEL analysis, which includes key concerns that are paramount to the business’s operations and success. The final section explores how the company operates in order to minimize potential impacts of the factors discussed in the Pestle analysis section.
Key Stakeholders in Amazon
The company has internal and external stakeholders, who have an active role in its operations. The internal stakeholders include owners, employees and manager. External stakeholders are customers, shareholders, creditors, society, government and suppliers. Customers have a significant impact on the performance and success of the company as they can determine if the business will be profitable or make loss continuously. The CSR strategy in the company gives the highest priority to the customers as they significantly affect revenues (Ferguson, 2017). The consideration is in line with Amazon’s mission of centrality of customers in its business model. For employees, Amazon values its staff as they play a major role in determining the performance and in implementation of policies and programs. The organization is headed by Jeff Bezos. Human resources facilitate the development of fresh idea which increases business efficiency. Currently, the number of employees in Amazon Inc. is 566,000. As aforementioned, the firm is accountable to other stakeholders, for instance, the government, suppliers and the public. The government provides social amenities and regulates the taxes and tariffs, while the suppliers ensure that products are available on demand (Ferguson, 2017).
Question 1: Monopolistic Competition
According to Dastan and Sadam (2012), Amazon operates in a perfectly competitive market in the digital and retail economy. The type of retail structure entails a company selling similar products in a distinct market containing a number of competitors. The characteristics of such a market include product differentiation, independent decision making, free entry and exit to an industry. Companies may offer a similar product and there are a number of competitors in the industry (Diamond, 2017). Based on these characteristics, Amazon’s market structure has been further elaborated below.
Large Number of Buyers and Sellers
Amazon trades in more than 12 million products and these products are derived from different manufacturers and producers (Vlachvei et al., 2017). Clothing, shoes and jewellery account for 33.4%, home improvement items take up 11%, while home and kitchen products constitute 54.3% (Diamond, 2017). Numerous firms exist which control the price-output policy to some extent. The company competes with Wal-Mart, Bath and Beyond (Vlachvei et al., 2017). In the clothing and shoe retail business, the firm is competing with DSW, Foot Locker and Gap. In the music, TV and book business, the organisation is competing with Apple, Netflix and HBO. The bottom-line is that Amazon is performing successfully across all these fronts. For instance, the multinational generated at least 30% of all sales (Vlachvei et al., 2017). More importantly, the firm’s dominance goes beyond the retail sector, lending credit, manufacturing hardware, renting servers, and publishing books, among others. 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 rivalry.
Free Entry and Exit
Companies are free to enter and exit since Amazon is in the retail business. Firms arise when competitors are making supernormal profits and they will disappear when existing companies are making losses/normal profits (Carter, 2017). A big share of the e-commerce segment is largely owned by Amazon. Thus, the multinational corporation creates a form of autonomy, however, it allows 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 cause exits due to excessive competition (Vlachvei et al., 2017). Large start-up firms such as jet Inc. experienced similar forces, which led to its exit from the industry and was later acquired by Wal-Mart.
Price differentiation and Different Selling Cost
One other feature that classifies an organization under perfect competition is the ability to promote its products by lowering or increasing its prices (Carter, 2017). Amazon is 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 (Carter 2017). The company controls the retails by keeping prices low and by doing so, its locks customers into buying more of its products. For instance, the firm sells gadgets for little profit and then pushes the clients to purchase digital movies that they can watch on the same tablets. Therefore, the 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 depending on industry trends (Carter 2017). Furthermore, Amazon offers free shipping and its 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 do not have homogenous information about the market. Since products are close substitutes of each other, vendors do not know exact preference of its clients (Lehdonvirta and Castrpnova, 2014). If a seller gets such information, they can leverage against its competitors. For instance, Amazon influences other business and pushes out of 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). Thus, the company 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 (Roper, 2017). Additionally, acquisition of its competitors such as Zappos and Diapers made it a major player in the industry.
Elastic Demand
Under perfect competition, the demand curve is elastic and thus in order to sell more, companies has to lower their prices (Carter, 2017). Some home and electronic gadgets are almost free on their websites. While the corporation is a clear global e-commerce leader, most of the retail spending is still on brick and mortar stores (Roper, 2017).
Product Differentiation
Product differentiation means introducing minor variations into goods to distinguish them from those provided by competitors. A similar case can occur in service delivery, whereby they are made to appear unique hence attracting many customers. Differences could bring incentives, product appeal or after-sale services (Carter, 2017). Amazon offers discount sales for those shoppers that sign up for regular delivery and those that frequently purchase 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, a factor that reduces customer turnover ratio (Deagon, 2017).
Question 2: Pestle Analysis
Political
Firstly, trade protectionism threatens existences of foreign institutions. While Amazon is a US company, most of the revenue and operations are carried out overseas (Sindi and Roe, 2017). Additionally, Brexit effect on Amazon has been substantial. The implications to leave European Union may create inflation/escalation of prices. One reason for the increase of prices is the weakening pound against the dollar. The range of political concerns affecting Amazon depends on political instability. Market lobbying and attitude of the administration to e-commerce may affect the operations of Amazon (Gov, 2016). Government support of foreign investors means that there is a high chance of increase competition. For instance, if the state allows foreign firms to share the same market with local businesses, the level of competition will increase thereby making it difficult to gain a large retail control. Notably, Amazon experiences political stability, which creates an opportunity for the organization to expand to other countries in Europe (Gov, 2016). Moreover, there is overall government support for e-commerce. Improved business conditions due to efficient laws against cybercrime ensure that the company spends less on legal suits and puts more focus on service delivery.
The pressure on the risk of assessing the company’s politically sensitive clients exists (Mankiw, 2012). Currently, Amazon is under investigations for selling products to people that are on the terrorist watch list, which is risky as the company is prone to sanctions due to disregard to safety and international laws (Bowman et al., 2014).
Furthermore, international policies may make it difficult for Amazon to continue expanding into different market segments. In some countries such as Iran and North Korea, the existing political policies do not relate to online policies, thereby making it difficult for Amazon to attract customers.
Economic
A number of economic issues such as tax and inflation rates affect the firm and its overall economic growth. Other economic factors are unemployment, and currency ex-change rate which directly affects revenue volumes. For instance, in 2016, 32% of Amazon’s revenues came from international customers, an implication that negative changes in foreign exchange could lower the income (Carter, 2017). Fluctuating rates have adversely impacted the firm’s revenues in 2016 and 2017 by USD 5.2 Billion and USD 636 million respectively. Recent reports indicate that Amazon has opened up new employment opportunities following its expansion into the UK market (Law, 2017). To add on, the uncertainties on the company’s market share is becoming a challenge for the global economy. For instance, the company’s expansion into the grocery sector is further heightened by uncertainty as competitors such as Wal-Mart have experienced a substantial drop in share prices in the recent past (Vandevelde, 2017).
Research by Dastin and Sadam (2017) shows that traditional capitalist structures no longer fit the strategies that are employed in the current business context. Recently, Douglas and Gross argued that the Amazon capitalistic ways are the key to future production because it reinvests its gains into the market through innovation and research.
One big threat from Brexit will be taxation and its effect on sellers (Denning, 2017). Depending on the kind of treaties negotiated with the EU, there is a high likelihood that additional taxes may be imposed. For example, Burton (2017) says that finance ministers in Europe plan to impose a turnover tax on giant tech firms such as Google and 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. Lower disposable earnings will mean that there is a decrease in revenue levels. More so, declining degree of consumerism creates fewer opportunities for Amazon (Carter 2017, p.14).
The cost of purchases from overseas nations is likely to increase. The burden of unfavourable exchange rates may force companies such as Amazon to absorb loss into margins (Vlachvei et al., 2017).
High import costs due to decline in the pound may result in increased pressure on the chain retailers. Additionally, growth in the sector will depend of the cost of labour, both locally and internationally. The firm is likely to face extra taxes and tariffs from the local government (Carter, 2017).
Individual firms existing in the monopolistic market (such as Amazon) are likely to respond to this by hedging their imports and exporting labour to developing nations. To curb inefficiency and high taxation, 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 improvemenst in terms of innovation and creativity among employees (Vlachvei et al., 2017). 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.
Increasing consumerism in the developing market is one opportunity that Amazon is considering (Diamond, 2017). 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 the location of warehouses is important in expansion of the operations (Vlachvei et al., 2017). For instance, the organization must locate its warehouses at a close point to its online retail business.
Socio-Cultural
Amazon has improved distribution of groceries to person’s doorstep. Such non-active lifestyles may increase occurrence of obesity (Bedard, 2017). One other social aspect is a behavioural shift in the use of smartphones. For instance, it is easy to use a smartphone or a tablet to shop items from online stores and this customer behaviour presents a big opportunity to Amazon.
The on-going social trends and cultural changes have a positive impact on the performance of Amazon. Many people consider shopping from online stores due to associated convenience since they can get all information pertaining to a product. Increased marketability of online purchases around the world provides an opportunity for the company to penetrate and expand to developing economies. Unlike in the past when consumers believed that the traditional stores had quality products, majority of people worldwide have trusted online platforms after making several successful purchases. Therefore, the number of global customers for Amazon’s products could increase following a huge social influence on use of online stores for a wide range of products.
Technology
To begin with, research and development is important for a company wishing to maintain competitive advantage (Collins, 2014). Amazon has announced that they will double the staff to work in the R & D Centre in London (Ruddick, 2017). Therefore, 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 a 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). The tech will be useful to non-business clients segmented in the online Omni channel retail field (Foss and Saebi, 2017). Data breaches are likely to compromise sensitive information to the firm’s clients, an act that could generate into fraud. Complexities of the algorithm economy pose increasing risks to Amazon. The company needs to focus on detecting the ever-evolving digital threats. Accordingly, the threat of ever changing and rapid technological obsolescence imposes pressure on the organization’s assets. Furthermore, the use of internet supports communication between the company and its clients. Therefore the firm can monitor the quality of its services through the level of customer satisfaction following feedback provided. In essence, technology could favour Amazon’s operations by allowing improvement of services delivered.
Environmental
Notwithstanding the fact that Amazon is an online e-commerce company, the operations are predisposed by underlying conditions surrounding it. Environmental pollution during packaging and shipment of the products is a key factor that could destroy the company’s reputation (Plavia, Zigli & Palvia, 2016). To enhance a strong brand image, it is imperative that the firm 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 (Diamond, 2017). Before 2016, Amazon had not published reports on sustainability, a factor that let to investigation on how the environmental parameters of the organization’s operations affect the global environment. 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, causing implementations that are likely to substantially affect the company’s profitability (Boland, 2017).
Legal
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 goods because they are obtained from the seller on trust basis. Furthermore, there are regulations that touch on imports and exports (Diamond, 2017). Without a proper legal framework, the organization may face challenges associated with importing and exporting certain products (Plavia, Zigli & Palvia, 2016). Moreover, international laws have sanctioned Amazon for releasing misleading claim with respect to discounts on 1000 products and services offered by the company. 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
From the PESTEL analysis, the first point of concern is unfavourable international laws that could make it difficult to invest in different markets across the world. The second factor is high taxation rates and increasing wealth disparities. The third factor is negative publicity as a social factor that could arise when the firm invests into technology and begins delivering products.
How the Company Minimizes Impacts of Political Factors
Due to the extensive nature of business operations in Amazon, the firm has an indirect role in politics. The strong presence means that the ruling government has certain stances towards the company (Greenspan, 2017). 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. Carney’s work was to deal with the political aspects that affect businesses negatively. The figure below is an illustration of the lobbying budget for the past 10 years. Other issues covered includes tax battles, antitrust lawsuits and corporate tax reforms matters. The firm tries to comply with most of the taxation requirements and legal provisions. However, Amazon has established a mechanism of solving any arising complaints related to either tax or anti-trust laws.
Political Lobbying Budget for Amazon: Panmore Institute (Greenspan, 2017)
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. The company is extending its brick and mortar bookstores operations (Greenspan, 2017).
Operations that Minimize Potential Impacts of Economic Factors
To minimize the impact of economic factors such as taxation, Amazon has focused on grocery sector development by investing the offline market. Moreover, reducing job opportunities and employing technology mean that the direct and indirect costs are substantially reduced (Gov, 2016). With these strategies, the firm manages to reduce operational costs. A strategic presence in developing countries presents a major growth opportunity that is based on positive economic development (Greenspan, 2017). Amazon helps to address the issue of wealth disparities in developing countries through job creation. As a result, the disposable income for majority of people increases, with some being spends on the firm’s products. More so, an automated procedure for product assessment will help in reducing the amount of phony products sold by the company. Therefore, the procedures will reduce economic sanctions to ensure the brand image is maintained (Greenspan, 2017).
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 more efficient (Leigh and Pershing, 2016). Amazon’s online shopping is targeting the young generation and the elderly who have difficulty in driving and walking to shopping places.
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 despite facing the challenge of government regulations (Greenspan, 2017). The firm is using digital technology to build relationships with its customers. An example is emailing customers to remind them 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. The organization offers a 24 hour live chat support that helps customers in case of any problems with package delivery (Vlachvei et al., 2017). 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
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), which leads to the reduction of production of computer components such as drives. Online shopping reduces the number of people travelling to traditional store or malls, a factor that lowers emission of CO2 and other greenhouse gases to the atmosphere. Moreover, the company has come up with an initiative that implements green packaging and shipment.
Furthermore, there has been an improvement of corporate social responsibility strategies. The firm has managed to create opportunities in maintaining goodwill and enhancing business sustainability. To further enhance the company’s brand image, higher sustainability standards need to be implemented. Increasing advocacy for low-carbon lifestyle is an opportunity for Amazon to boost its corporate image. The company implements extensive energy saving policy for the purpose of carrying out operations that enhance a carbon-free lifestyle (Roper, 2017).
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 enlarge its operations by exploiting the capability of vendors to access supplies from foreign countries (Vlachvei et al., 2017). Appropriate CSR policies addressing environmental protection can largely increase its competitiveness and at the same create a good rapport with foreign governments.
Conclusion
Despite Amazon dominating the retail e-commerce sector, several rivalling firms such as e-bay could reduce its market size. The rapid expansion means that its market power is increasing especially in the grocery market industry. The company controls 74% of E-books sales. The company’s growth is justified by the fact that it does not pay dividends and it sells its goods below cost. From the PESTEL analysis, it can be suggested that the firm should expand to developing regions to have an 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 has to solve the current issues that link the business and its environment. Currently, Amazon is placed among the top 100 fortune companies. Other 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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