Index IntroductionExternal analysisPolitical factorsEconomic factorsSocial factorsTechnological factorsIndustrial environmentInternal analysisSWOTCompetitive strategyAlternatives/recommendationsElimination of free shippingIncreasing the catalog of items available for Prime shippingExpansion into physical businessRecommendation and implementationIntroductionSince the Amazon launch. com Inc. (Amazon) in 1995, the company has grown at an exponential rate like no other of its kind. It earned total revenue of $16,000,000 in its first year of business and in 2016 it earned total revenue of $135,987,000. This is a growth of 27% compared to 2015 in terms of revenue. While the company's revenue has been steadily increasing, its operating income has not seen the same increase. Amazon did not turn a profit until 2003, 8 years after its launch, and in 2016 operating income ($4,186,000) was only 3.1% of the company's total revenue ($135,987,000). Continued revenue growth comes from Amazon's various business lines ranging from books, publishing, music, cooking, hardware and software products, to name a few. However, it is unclear which business areas will translate into profits and lead to the company's future growth. Investors are wondering whether the recent improvement in profits is an indication of expected future growth or whether Amazon will be replaced by a competing service/business model. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay External Analysis Political Factors Amazon should pay attention to various government regulations that may impact operations as it considers business expansion and investment in new industries. As it explores the possibility of using drones or other aerial vehicles for delivery, there may be laws in place that could prevent the company from achieving this goal. Additionally, as a company operating in a private region of China, there may be government instability that could impact operations. Strict rules and regulations may also prevent it from providing all the services it would normally provide to customers. For example, Prime Shipping does not mean 2-day delivery like in the US. In China, Prime members will receive their products in 5-9 days due to additional processing time through customs channels and limited distribution centers. Another point of concern for Amazon is the working environment it provides to its employees. While Jeff Bezos has refuted the idea that Amazon encourages “incredibly insensitive management practices,” employees suffering from medical or personal issues have been penalized or expelled. Although Amazon has a Pay to Quit policy, which encourages dissatisfied employees to leave on their own, wrongful terminations like the ones mentioned above could lead to possible legal action against the company if the compensation does not comply with regulations. Economic Factors Amazon's performance is directly linked to the economy in which the online retail business is conducted. The developed markets of North America provide a stable environment for the company to operate in, which increases the chances of success. In China, however, falling long-term interest rates have raised concerns about an impending recession. This could have a major impact on Amazon's operations in the country as it is new to the market and is attempting to gain significant market share given the tough competition. Amazon may also consider itincreasing manufacturing and warehousing operations in countries where labor costs are lower. As of 2014, India's labor cost is one of the lowest in the world, at $0. 92/hour compared to China where it costs $3. 52/hour. Since Amazon is an international company, it is also affected by currency exchange risk. If the US dollar weakens relative to international locations, Amazon's operating expenses will be higher, and if the US dollar strengthens, operating expenses will be lower. In 2016, foreign currency exchange resulted in an expense of $550,000,000. Social Factors Social trends determine Amazon's performance as a major Internet retailer. There is currently an increase in online shopping habits. Amazon has capitalized on this trend and holds the highest market share in this industry. As shown in Exhibit 4d of the case, in 2015 Amazon had the highest market share with 31.1%, followed by eBay Inc. with only 9.8%. Along with the increase in online shopping, there is also an increase in the use of cellular devices making the internet more accessible and, as a result, websites like Amazon. com more accessible. This appears to occur primarily among millennials, which could lead to a change in customer demographics for the company. One negative social factor, however, is the growing wealth inequality in North America. Due to labor outsourcing and variable exchange rates, companies are able to remain competitive in the United States. This has resulted in a 20% loss of factory jobs since 2000. Although service jobs have increased, they are not as well paid as factory jobs. This will ultimately impact Amazon's profits as shoppers will have less disposable income. Technological Factors Amazon must constantly keep up with the latest technologies and technology trends to succeed as a company. It did this by launching Kindle, Fire Tablet, Fire Phone, Echo and others. Customers now look for the best customer service and innovative service modes when choosing a company to support. This can be achieved by using technology to make it accessible and more efficient. With the increase in the use of cellular devices, there is also an increase in the use of social media. This is an opportunity for Amazon to leverage marketing as a means to reach the millennial demographic. Industry Environment Since Amazon operates in various business sectors, it has more competitors to consider. In the online retail industry, it has a strong market share, and the second leading company is eBay, but it lags behind by 21.3%. The threat of substitutes is still strong as a consumer might switch to eBay if they find a product at a lower price. Amazon overcomes this risk by diversifying and vertically integrating its products to build customer loyalty. When a customer buys a Kindle, they later spend money to also buy books and accessories from Amazon. This gives Amazon its foothold in the portable player market, while also providing growth opportunities. In this market there is a strong rivalry between competitors as Apple Inc. has the maximum market share with 32.9%, but Amazon is far behind with 24%. Given the company's strong financial position, the threat of new competitors is weak as Amazon is an established and trusted brand. This takes time for e-commerce businesses due to the risk of fraud. While any company can create a web platform to sell their products, it would be nearly impossible to achieve a position in the market that can compete with Amazon. However, in the non-Internet retail sector, the consumer can easilyswitch to another business that would provide products at a lower price. This market is led by Wal-Mart Stores Inc. with 11.8% and Amazon is in fourth place with 2.9%. Amazon's main competitor in this space is currently Kroger Co and CVS Health Corp as they hold 3.3% and 3.4% market share respectively. Once Amazon surpasses its market share, it can expand in ways that would allow it to surpass Wal-Mart Stores Inc. Buyers' bargaining power varies across customer segments. When considering the Amazon marketplace, buyers have high bargaining power as they could easily switch to a competing platform or find a different product to purchase. Amazon's Prime membership is a way to retain buyers and prevent them from entering the competition. Amazon Web Services (AWS) buyers have less bargaining power as they would face high costs to switch to an alternative platform. Suppliers have very low bargaining power. Amazon is consolidated and suppliers won't get the same visibility elsewhere. Amazon also handles shipping and returns for a low fee that won't be available elsewhere. The lack of alternatives to Amazon and its market position as an online retailer give suppliers very low bargaining power. Internal Analysis As mentioned in the introduction, the company has seen huge increases in its revenue every year since it was founded. However, operating income as a percentage of total revenue is significantly reduced. For Amazon in 2016 it was 3.1%, while for Apple Inc., a strong competitor, it was 27.8% (Google Finance). It is increasing its total liquidity and short-term investments by issuing more debt, and its investments are producing an increasing negative return. SWOT One of Amazon's biggest strengths is its brand. Amazon is known globally and has established itself as a strong player in various markets. It has strong distribution channels that allow it to meet Prime membership shipping criteria. It has its own warehouses where items are stored, thus eliminating a distribution company which allows Amazon to maximize its profits. The website is extremely easy to use and is secure. As an e-commerce business, it provides consumers with over 500 million unique items, often at a lower price than brick-and-mortar retailers, from the comfort of their homes, 24 hours a day. As for associates who sell their products on the platform or embed links to Amazon on their individual websites, the process is simple and there is no cost associated with it. After joining the program, they can sell products easily and quickly through Amazon. One weakness that could impact Amazon is employee dissatisfaction. If working conditions are too harsh and demanding, the company may lose key talent that could propel its growth forward. Employees may decide to go to competing companies such as Apple Inc. or Google where employee satisfaction is higher. Another weakness of the company is its catalog of items available with free 2-day Prime shipping. Of the more than 500 million items Amazon has, approximately less than 7% of items are eligible for Prime according to Exhibit 6 of the case. Prime members are known to purchase more from Amazon than non-Prime members. By increasing the number of items available for Prime shipping, the company could see a significant increase in sales. Amazon also offers free shipping to non-Prime members on orders over $25. Although only certain items are eligibleto this, free shipping causes the company to lose profit margins. Another weakness of the company is the fact that it operates a near-zero margin business. While this allowed the company to keep product costs low, it also prevented it from making significant profits. There are several trends in the market that prove to be opportunities for Amazon. With growing environmental awareness and the need to “be green,” Amazon can partner with suppliers whose products align with this trend and will provide “greener” products. On the other hand, with rapid and constant innovative changes in the technological world, Amazon has the opportunity to disrupt the market with new devices, as it did with Kindle. Another opportunity Amazon can explore is expanding into the physical store business. As indicated in Exhibit 4a of the case, the market size of in-store retailing was approximately $3,000,000 in 2015, while non-store retailing, and more specifically Internet retailing , was approximately $270,000 million. This presents a huge expansion opportunity for Amazon. A huge threat to an online business is the risk of cybercrime and hackers. With a potential cyber attack, Amazon could compromise the confidentiality of its customer base and lose credibility. The company could also lose market share if another brand or company were to build a similar business model to Amazon and imitate the website's design. Another threat to the company is the variety of competitors. Amazon not only competes with other Internet retailers like eBay, but it also competes with retailers like Wal-Mart and CVS Health Corp in the United States, and it also competes with the likes of Apple Inc., Alphabet (Google ) and Samsung in various types of markets. This could lead to Amazon losing focus on one market to focus on another, which would ultimately impact its sales. Competitive Strategy Amazon's primary goal is to provide a convenient shopping experience for consumers by offering a wide selection of products at the lowest possible prices. Cost is its main competitive advantage. This is evident not only in the products available through the Amazon marketplace, but also in other areas of its business. AWS' release of Elastic Compute Cloud (EC2) allowed websites to use Amazon's cloud space as needed. Following a pay-as-you-go model, EC2 was available at a much lower price than any other product on the market. Furthermore, when the Fire Phone did not respond well in the market, Amazon offered the Fire at a minimum cost of $0.99 with a two-year contract, bundled with free Prime membership for one year. While Amazon now has the Kindle priced at $79.99, the Kindle Fire is priced at $49.99 for those who may be looking for a cheaper alternative. This pricing differentiation has allowed Amazon to grow at the rate it has grown. However, this same strategy has prevented it from earning higher profits as the products have very low margins. Alternatives/Advice Eliminate free shipping Amazon has over 500,000,000 items and only less than 7% qualify for Prime shipping, which means free two-day shipping. Of the remaining 93%, some are eligible for free shipping on orders over $25. While this encourages sales over $25, the revenue is not enough to cover operating expenses and shipping costs. In 2015, shipping costs incurred by the company amounted to $11.5 billion but it only collected $6.5 billion in commissions from customers. Eliminating free shipping.