Amazon SWOT analysis 2016

| October 19, 2016

Company Background

Key Facts
Name Amazon.com, Inc.
Logo
Industries served Internet (Amazon Marketplace, Amazon Web Services, Amazon Video)
Retail (Amazon Marketplace, Amazon Prime)
Consumer Electronics (Amazon Kindle, Fire HD, Fire TV, Amazon Echo)
Geographic areas served Worldwide
Headquarters Seattle, Washington, U.S.
Current CEO Jeff Bezos
Revenue US$107.006 billion (2015) 20.2% increase over US$88.988 billion (2014)
Profit US$596 million (2015) 347% decrease over US$(241) million (2014)
Employees 230,800 (2016)
Main Competitors Alibaba Group, Apple Inc., eBay, Inc., Facebook Inc., Google Inc., International Business Machines Corporation, Microsoft Corporation, Netflix Inc., Wal-Mart Stores, Inc. and many other Internet and retail companies.

Amazon.com business overview from the company’s financial report:

“Amazon.com opened its virtual doors on the World Wide Web in July 1995. We seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking.

In each of our two geographic segments, we serve our primary customer sets, consisting of consumers, sellers, enterprises, and content creators. In addition, we provide services, such as advertising services and co-branded credit card agreements.

We serve consumers through our retail websites and focus on selection, price, and convenience. We design our websites to enable millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our websites directly and through our mobile websites and apps.

We also manufacture and sell electronic devices, including Kindle e-readers, Fire tablets, Fire TVs, Echo, and Fire phones. We strive to offer our customers the lowest prices possible through low everyday product pricing and shipping offers, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment, and timely customer service.

In addition, we offer Amazon Prime, an annual membership program that includes unlimited free shipping on millions of items, access to unlimited instant streaming of thousands of movies and TV episodes, and other benefits.

We believe that the principal competitive factors in our retail businesses include selection, price, and convenience, including fast and reliable fulfillment. Additional competitive factors for our seller and enterprise services include the quality, speed, and reliability of our services and tools, as well as customers’ ability and willingness to change business practices.

Our business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. We recognized 33%, 33%, and 34% of our annual revenue during the fourth quarter of 2015, 2014, and 2013.”[1]

Amazon.com SWOT Factors

Strengths

1. Low cost structure, the largest merchandise selection and a huge number of third party sellers.

Amazon is the largest online retailer in the world. In 2015, the company earned more than US$90 billion purely from online sales, more than any other retailer in the world. At the current growth rate Amazon will become the 2nd largest retailer (as measured by revenue) in the world, behind Wal-Mart by 2018.

Figure 1. Amazon growth rate compared to e-commerce sales growth in U.S.

The diagram shows how Amazon's e-commerce growth rate outpaced U.S. e-commerce growth rate. Except 2015, Amazon was growing on average twice as fast as the total U.S. e-commerce.

Source: Amazon financial reports[1] and Internet Retailer[2]

Note that Amazon has grown much faster than the entire U.S. e-commerce market, meaning that the company has actually increased its market share by taking it from competitors.

What is the key to such success? According to Jeff Bezos, the founder and CEO of Amazon.com, the company’s success lies in its low-cost structure and wide variety of merchandise.

Figure 2. Jeff Bezos “napkin sketch” outlining Amazon’s strategy

Jeff Bezos outline Amazons strategy like this: Lower cost structure leads to lower prices, which lead to better customer experience. Better customer experience results in higher traffics, which in turn entices more 3rd party sellers to join the marketplace. More sellers means wider selection, which also points to the better customer experience. In the middle of the circle is the Amazon's growth, which is turned into further lowering of cost structure and lower prices.

Source: Seeking Alpha[3]

A low-cost structure leads to lower prices, which combined with a huge range of products, results in a better customer experience. Satisfied customers invariably return to the Amazon websites, creating ever-growing traffic, which subsequently attracts 3rd party sellers to Amazon’s marketplace. All of these factors lead to faster business growth for Amazon.

Amazon follows a cost leadership strategy, but so do many other online and offline retailers. Why then does Amazon outperform them?

  • Low cost structure. By only selling online, Amazon doesn’t incur any cost related to running physical retail outlets, which are usually very high. Online marketplaces also potentially allow for selling more units without any increase in marginal costs. Amazon constantly invests in both additional fulfillment centers and to existing centers to enable a reduction in order fulfillment times and shipping costs. These time and cost savings result in lower prices that are passed on to consumers.

    Figure 3. Walmart prices compared to Amazon.com prices

    Walmart prices are compared to Amazon prices in 23 categories. Walmart offers lower prices in such categories as auto, pets, beauty, household essentials and home. Amazon offers lower prices in batteries, cameras, toys, GPS, wearables, phones, electronics accessories, video games and home audio. In the rest of the categories, Amazon's and Walmart's prices match.

    Source: Boomerang Commerce[6]

    Figure 3 illustrates that even though Wal-Mart is using the same cost leadership strategy as Amazon, it cannot beat Amazon’s prices on most products.
  • Selection. According to Monsoon Commerce[4], Amazon sells around 339.7 million of stock keeping units (SKU’s) in its Amazon.com Marketplace. In comparison, Walmart offers only 8 million SKU’s[14] in its online shop, or just 2.35% of the number of products that Amazon offers. This vast difference in range is the reason why online customers are more likely to visit Amazon.com rather than Walmart’s e-shop.

  • Third party sellers. Amazon’s business model includes accommodating third party sellers who are able to offer their own merchandise on Amazon’s sites and whose products therefore compete against Amazon’s. Third party sellers are mainly attracted to because of the high volume of traffic on Amazon sites. They often offer products that are not available through Amazon’s retail division. More than 2 million third party sellers account for more than 50% of the total units sold on Amazon’s sites.[1] eBay is the only other online company that has as many third party sellers as Amazon.

Low prices, a huge product range and the vast number of third party sellers are all key factors in improving the Amazon customer experience and in driving more traffic to their sites. Few companies can compete with Amazon in any of these areas.

2. Synergies between Marketplace, Amazon Web Services and Prime.

Amazon is involved in 3 key businesses:

  • Amazon Marketplace
  • Amazon Web Services (AWS)
  • Amazon Prime

All three Amazon offerings support each other and create benefits that would not be achieved if the businesses operated independently.

Figure 4. Amazon’s synergies

An illustration of synergies between Amazon's 3 key businesses

Source: Strategic Management Insight

AWS was introduced in 2006 when Amazon realized it could sell its servers’ excess capacity to other enterprises. For Amazon as an online retailer, the key place to sell its goods is its website. To run an e-commerce website with millions of visitors each day the company had to invest heavily in its server infrastructure. These investments and the resulting server capacity have helped AWS to grow. In return, AWS provides two important elements for its sites

  • Speed. Amazon has calculated that a slowdown of just one second in page load could cost them 1% in sales each year.[7] That would equal to at least US$9 billion loss. Therefore, page load speed is crucial for Amazon. AWS helps to speed up the website’s load time, so that Amazon is able to serve each customer as quickly as possible.

  • Capacity. During the peak times of Cyber Monday (the Monday after the Thanksgiving holiday in the U.S), Black Friday (the Friday after the Thanksgiving holiday), and in the several weeks leading up to Christmas, Amazon receives an overwhelming number of visitors to its sites. AWS’s huge capacity, which is not needed during the rest of the year, is employed during these peak times to help Amazon cope with the increased number of visitors.

In 2005, Amazon introduced the Amazon Prime subscription service, which offers access to Prime Instant Videos, Prime Music, free two-day delivery and many other benefits for a flat annual fee. There are currently more than 54 million Prime members worldwide who use Amazon as their primary non-grocery retail store.[8] Prime users buy more merchandise and spend more on each item than regular users.[1]

Marketplace helps to attract new visitors to Prime through its fulfilled-by-amazon program (FBA). The FBA program allows third party sellers to place their products in Amazon’s warehouses, where Amazon takes responsibility for all logistics, customer service, order fulfillment and returns. This enables more products to become eligible for Amazon Prime, which is the key for the program to flourish. In addition, packaging and shipping costs are reduced when two or more items are shipped. As a result, Prime becomes more profitable and Amazon customer satisfaction increases.

Synergies between Amazon’s Marketplace, AWS and Prime are rarely quantifiable, but CEO Jeff Bezos recognizes them as providing some of Amazon’s strongest competitive advantages.[1]

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Published: April 19, 2016
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Pages: 28
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