Competitive Dynamics Revisited: Porter's Five Forces Analysis of Amazon

Introduction

In the current hypercompetitive business environment, firms are increasingly seeking ways of maintaining a competitive advantage in order to secure their long-term survival. In the same era, industrial economics (the study of organisations, industries, and markets) has gained increased attention. According to Hofmann and Osterwalder (2017), industrial economics is concerned with the behaviour and organisation of companies as well as the market an industry competition and economic policy and therefore has a significant influence on strategic management of firms. Porter’s five forces which was proposed by Michael Porter in the late 1970s remains a central framework that links industrial economics to strategic management of business organisations in this era (Juliana and Nyoman 2019). The aim of this report is to analyse the application of Porter’s five forces to Amazon. The report has the following sections: overview of Porter’s five forces, critique of the theory, its strengths and limitations, application of the theory to Amazon, an analysis of how effective the theory is to Amazon, a conclusion, and recommendations.

Overview of the Porter’s Five Forces

The basic idea of the Porter’s five forces framework is that for a business organisation to achieve long-term profitability, it has to respond to competition in a strategic way (Yunna and Yisheng 2014). According to Porter, the five forces that influence the competitive position of a firm in an industry or market are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitute products, and the rivalry among existing firms (Mahat 2019). These five forces support a strategic analysis of the interactions between firms, and the structures that edge their relative success as well as the positions within that structure (Mahat 2019). In addition, the five forces can be used to analyse the strength and threats to a company whereas identification of threats allows a firm to identify its opportunities and in turn develop appropriate strategies to maximise profit gains and to ensure long-term survival of the organisation (Hofmann and Osterwalder 2017).

Critique of Porter’s Five Forces

Porter’s five forces framework has been applied to the analysis of competitiveness by many organisations and industries. According to Alexandros and Metaxas (2016), Porter’s five forces framework is a simple but powerful tool through which businesses can understand where power lies in different business situations helping them make the most out of each situation. The authors assert that although the strength of each of the forces vary from industry to industry, the tool is very effective because once used together, the forces determine the long-term profitability of a business in a particular industry. On the other hand, Dälken (2014) argues that Porter’s five forces model is imperative for informing strategy formulation for many firms given that the model acknowledges that firms need not only to consider direct rivals within their own industry but also other forces that influence competition outside the industry. Still, Weeks (2015) writes that Porter’s five forces framework remains valuable and applicable in the current innovative and changing business environment as it helps organisations to understand the industry players that hold most power and those that have a higher likelihood of determining the rules of activities.

Despite the above praises, the Porter’s five forces framework has its critics. According to Dalken (2014), the theory legitimises and justifies three common trends that are key to dominant financial capitalism namely domination by large firms, the concentration of capital, and excessive centralisation of hierarchies. In the same vein, Hove and Masocha (2014) criticise the theory holding that Porter does not offer any assistance to small firms in a particular industry and even does not provide help to firms that want to use the experience and knowledge of their employees in developing their strategies. Analogously, Miyamoto (2015) writes that the five forces model needs adjustment for analysing the competitive behaviour of small and medium-sized enterprises as these small businesses differ from large organisations yet most of the emphasis of Porter’s five forces is based on large organisations. Nonetheless, Lumbanraja et al. (2019) argue that Porter’s five forces framework is more realistic as it focuses on large organisations, which in reality control many industries. From a different perspective, Julita and Arianty (2017) maintain that Porter’s five forces framework is static in nature thus might be a challenge to innovation, trends, the rapidly evolving market environments, changes in the ethnic structures of a population, and advances in technology. From these critics, it is evident that small businesses as well as businesses considering change and innovation must make relevant adjustments to the five forces model if they choose to use the model to establish their competitiveness.

Advantages, disadvantages and pitfalls of porter five forces

Porter’s five forces framework has facilitated a systematic structural analysis of industries and organisations enabling potential entrants and existing firms to establish and maintain a competitive advantage through formulation an implementation of smart decisions. According to Chen and Cheng (2019), the five forces model allows an entrant to make informed entry decisions based on an industry’s level of profitability in that an entrant is able to gain a foothold in an industry where the five forces are strong yet the existing industries have weaknesses. On the other hand, Yunna and Yisheng (2014) assert that Porter’s five forces model enables existing firms to assess the positions of their competitors and therefore prepare an effective competitor response profile through which the firm is able to predict the future moves of its competitors. In the same vein, Mahat (2019) writes that the five forces theory helps an existing firm to choose and execute strategies that create a competitive advantage, which is mostly attained by creating mobility barriers and barriers to entry. The Porter’s five forces model is also beneficial as it helps new entrants and incumbents to understand key entities in an industry thus build strategic relationships key different stakeholders in order to alter the bargaining power in favour of these organisations (Hofmann and Osterwalder 2017). The Porter’s five forces has also been essential to firms as it helps them make timely decisions in exiting from industries that are unprofitable and are likely to remain unprofitable in the future (Dälken 2014).

Despite the above strengths, Porter’s five forces model has its limitations. According to Takata (2016), the model assumes relative stability in the structural characteristics and therefore does not explain how profits are distributed among industry players over time. On the other hand, Yunna, W. and Yisheng (2014) write that the model is more appropriate for analysis of industries in developed economies in that in was developed in a developed country thus does not incorporate institutional contextual factors in developing economies. Finally, Dalken (2014) write that the model does not consider the influences that globalisation has on industry structure and profitability.

Application of Porter’s five forces framework to Amazon

Amazon is among the largest online retailers worldwide. The company has gone global serving customers from more than 180 countries (Amazon 2020). Amazon holds a competitive position but faces still competition from Walmart among other online stores. Amazon just like other organisations needs to learn more about the opportunities that it may be positioned to take advantage of and the conditions that threaten its performance and survival. Despite being among the most successful online companies, strategic thought and action are increasingly important to the continued viability and effectiveness of Amazon. This section analyses how Amazon responds to the five forces to promote its long-time survival.

Bargaining power of buyers

The bargaining power of buyers is a strong force for Amazon, which is influenced by factors such as access to high quality information, low switching costs, and high availability of substitutes. In this digital era, the internet gives consumers access to high quality information regarding online retailers, their services, and the products they offer. This implies that when through the internet consumers are able to find out about Amazon, they are also able to find alternatives and in view of the low switching costs, it is easy for customers to transfer from Amazon to other online retailers. The high availability of substitutes further empowers consumers to shift to other online stores. This means that Amazon must consider the strong bargaining power of buyers as a major factor influencing its competitiveness and survival. In response to this strong force, Amazon is obsessed with its customers rather than focusing on its competitors (Amazon 2020). In addition, Amazon has a passion for invention (Amazon 2020), which makes sure its products better meet the dynamic needs of customers with an aim of retaining its customers. Further, Amazon is committed to operational excellence (Amazon 2020) in which it seeks to deliver its services in a flawless manner so it can retain its customers when attracting more. Finally, Amazon is committed to long-term thinking (Amazon 2020) whereby it concentrates on how it can establish a long-lasting relationship with its customers.

Bargaining power of suppliers

This is a moderate force for Amazon, which is influenced by a small population of suppliers, moderate size of suppliers, and moderate forward integration. While the small population of suppliers empower suppliers against Amazon, the moderate forward integration cushions Amazon against suppliers while the moderate size of equipment manufacturers further limits the influence suppliers has over Amazon. To further lower the power of suppliers, Amazon has set Supply Chain Standards, which defines the expectations that suppliers willing to work with the company should meet. The suppliers are required to contractually commit to the standards failure to which the contract is terminated (Amazon 2019).

Threat of new entrants

The threat of new entrants is a weak force for Amazon and is influenced by low switching costs, high cost of brand development, and high economies of scale. Although Amazon’s consumers can easily switch to products offered by new firms, new entrants incur high cost of brand development, which hinders them from entering the industry. In addition, Amazon benefits from high economies of scale, which makes its e-commerce business strong. To further bar new entrants, Amazon is committed to invention and is seeking for new ways to better meet the needs of its customers (Amazon 2019), which further develops its brand name. Further, Amazon has invested in enormous warehouses where it stocks its inventory of computer peripherals, books, and DVDs among others, an approach that helps the firm to benefit from increased dimension. The economies of scale means that Amazon is able to purchase products directly from manufacturers and in a wholesale price thus sell at a lower price, which new entrants cannot keep up with.

Threat of substitute products

The threat of substitute products is a strong force for Amazon and it is influenced by low switching costs, high availability of substitutes, and low cost of the substitutes. The low switching costs means that customers can easily buy from other firms in the e-commerce industry. The high availability of substitutes and the low cost at which they are offered means that customers can easily acquire alternatives from Amazon’s competitors. In response to this strong force, Amazon continues to prioritise its customers and ensuring they are offered high-quality products as compared to those of competitors (Amazon 2020). The company has also dramatically lowered its prices, which further increases customer value. In all its operations, Amazon seeks to offer its customers something they cannot get in any other way (Amazon 2019), which it has been able to achieve through its commitment to invention. For example, the company ensures it brings its customers a selection of books that is much more than a physical store could achieve.

Rivalry among existing firms

Rivalry among existing firms is a strong force for Amazon, which is influenced by high aggressiveness of firms, high availability of substitutes, and low switching costs. Retail firms are aggressive in nature and therefore they exert a strong competitive force against each other (Matchaba-Hov and Vambe 2014). Amazon’s competitors make substitute products more available to consumers; for example, Walmart has physical and brick-and-mortar stores, which substitute for Amazon’s online retail services while customers encounter minimal barriers in switching to these services. To despite rivalry among existing firms being a strong force for Amazon, the company continues to focus on customer obsession rather than competition (Amazon 2020). While creating compelling value to customers would help Amazon retain its customers and even attract more, the company would collaborate with other firms to ensure consumers can get all they need in Amazon stores. In addition, Amazon would consider competing on price basis and therefore offer its services and products at lower prices with cannot compare with those of the competitors.

An analysis of the effectiveness of model for Amazon

Amazon has effectively applied the Porter’s five forces framework to identify opportunities it could take advantage of and conditions that threaten its survival. Through the model, Amazon has been able to drive value for its customers and as a result retained a loyal customer base. In addition, the company has been able to invent new products and services that match the needs of customers further giving the company a competitive advantage. Further, the company has realised it faces a greater risk of losing its customers thus responded by ensuring its products are unique. Despite Amazon realising the threat it faces from its competitors, it does not focus on competition but on its customers, which could be a major pitfall.

The major limitation faced by Amazon while using the Porter’s five forces framework is failure to recognise that the rivalry among the existing firms is a strong force threatening its long-term profitability. According to Gong (2016), online companies that have physical stores such as Walmart and Tesco have an added advantage in that they are able to attract even customers that prefer buying what they can touch and see. Therefore, it would be fundamental for Amazon to use the five forces framework to predict the future moves of its competitors and ensure that despite those moves, it will still survive.

Conclusion

Porter’s five forces framework remains a valuable tool informing strategic decisions for competitive firms. In its success story, Amazon has effectively applied the model although it has ignored that rivalry among existing firms is a strong force that threatens its survival in the future. Through applying this theory, Amazon has been able to drive value for its customers and in return it has benefited with a loyal customer base. In addition, the company has been able to invent new products and services that match the needs of customers further giving the company a competitive advantage. Further, the company has realised it faces a greater risk of losing its customers thus responded by ensuring its products are unique. Despite these success factors, the company has not responded to the existing rivalry in the eCommerce industry as it is obsessed with customers not competitors, which could be a pitfall.

Recommendations

The major limitations of Porter’s five forces is inefficiency when examining small organisations and firms in developing countries, assuming stability in industrial structural characteristics, and inability to consider the effects of globalisation as a force affecting the competitiveness of modern firms. It is therefore recommendable that the model be revised to incorporate these aspects.

This paper reveals that Amazon has not strategically responded to rivalry among existing firms which is a strong force and could negatively affect its success. To maintain its competitive advantage, the following are suggested:

Amazon should use the five forces framework to predict the future moves of its competitors and develop strategies that will help it maintain its competitive position amidst these moves.

Amazon should consider a physical store whereby it can serve customers that prefer purchasing what they can see and touch.

Amazon should consider the prices of its competitors and ensure in as much as it is creating compelling value for customers, its prices compare or are relatively low that those of competitors.

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