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Strategic Financial Management
Table of Contents
Introduction 3
PESTEL Analysis of Online Retail Industry (Amazon) 3
Political Factors 3
Economic Factors 4
Social Factors 4
Technological Factors 5
Environmental Factors 5
Legal Factors 5
Porter’s Five Forces for Amazon 6
Threat of Existing Rivalry 6
Bargaining Power of Customers 6
Bargaining Power of Suppliers 7
Threat of Substitutes 7
Threat of New Entrants 7
Current Strategic Position of the Company 8
4 Future Strategies for Amazon 11
Screening of Options – A winning Strategy 12
Conclusion 13
References 14
Introduction Strategic Financial Management
The second part of the assignment revolves around the strategic analysis of the business selected for this purpose i.e. Amazon Inc. This part covers the PESTEL analysis, Porter’s five forces, and other strategic business analysis tools. At the end of this second part, the assignment is concluded and recommendations pertaining to improvement of strategy for Amazon are also provided for the even higher success of business.
PESTEL Analysis of Online Retail Industry (Amazon)
As prescribed by Rothaermel (2015), the PESTEL analysis is carried out to analyze the macro factors pertaining to an industry. It is one of the most common tools to analyze the external environment for a business in specific or industry in general. The term PESTEL stands for the study of political, economic, social, technological, environmental and legal factors that can affect an industry. In this case, the same factors are highlighted in the case of Amazon as discussed in the sub-sections below.
Political Factors Strategic Financial Management
According to Rothaermel (2015), multiple political forces affect the online retail businesses at any given time. The global online retail businesses like Amazon are subject to political forces of more than one country as per their operations. According to Ignat and Maha (2012), the following points summarize the key political factors that can affect the Amazon and other online retail businesses:
• The Amazon mainly operates in the developed countries with some exceptions; it has been observed that politics of developed countries are stable now. This political stability motivates the owner to increase investment for the growth of business.
• Another political factor is government support for e-commerce in the countries where Amazon is operating. This factor presents an opportunity in some countries and a threat to the others.
• The third political factor is that the governments of most of the countries are not focused on cyber security which enhances customer confidence and experience in the e-commerce industry.
Economic Factors Strategic Financial Management
The performance of Amazon is highly dependent on the economic cycle of the countries, it is operating in. Being an e-commerce venture, the business operates in multiple economies and is affected by an economic cycle of each country. The economic factors affecting the Amazon and e-commerce retail industry can be summarized as follows:
• The instabilities in an economic cycle around the globe and potential for global recessions are two big economic threats to the online retail industry. Recently, there has been a global crisis which initiated in 2008 and affected almost all the economies. These crises reduce the growth of the retail business as well because the purchasing power of common people reduces significantly.
• An opportunity presented due to economic factors is that the disposable income of people has increased in general and as a result of this, their purchasing power has increased. Given the same propensity to consume, people will now consume more amounts and hence retail sector is expected to grow (Labat et al., 2004).
Social Factors Strategic Financial Management
The social or socio-cultural factors also affect all the businesses; the social factors affecting the e-commerce retailing or online retail industry are as follows:
• A threat to retail business, in general, is that the wealth disparity around the globe is increasing at a very rapid pace. The increase in wealth disparity means that only a few people will be able to pay for luxurious goods or even basic necessities in the coming years.
• An opportunity presented by social factors is that the internet users are growing globally and the habitat to purchase goods online has also increased over the years. This is the main reason why the number of e-commerce business is increasing over the last few years.
Technological Factors Strategic Financial Management
As the Amazon is involved in business based on the internet, technological factors play a leading role in determining its growth and survival. The technological factors affecting e-commerce retailers are as follows:
• The increasing IT efficiency is a major opportunity for the retailers like Amazon given that the core of their business is linked to IT. The improvements in IT are expected to move the consumers’ concentration towards online businesses and can help them grow at a higher rate.
• A technological threat to the Amazon and related companies is that the cybercrime has increased swiftly over last few years. Though regulations are being stringent in the recent times but the cybercrime is still increasing; therefore, customers are de-motivated to deal with e-commerce businesses (Greenspan, 2017).
Environmental Factors Strategic Financial Management
As prescribed by Rothaermel (2015), the world is now increasingly focusing towards environmental sustainability. The focus towards the environment desires the businesses like Amazon to sell products which are suitable for sustainability of environment only. As analyzed, the Amazon and other retail businesses do not harm environment much as most of the damage to the environment is done by manufacturing businesses.
Legal Factors Strategic Financial Management
The legal factors often pose challenges for the business in general including the retail businesses. Those threats and challenges arise due to:
• There are strict rules and regulations for the businesses that pose threat to retail businesses as well. The strength of these rules and regulations varies from country to country; the developed countries have more stringent legal requirements as compared to the developing countries.
• Further, the businesses like Amazon need to consider the intellectual property rights to safeguard their trademarks and other intellectual aspects (Greenspan, 2017).
The factors above highlight that the macro factors result in both opportunities and threats for the online retail industry.
Porter’s Five Forces for Amazon
In the view of Porter and Michael (2001), Michael Porter introduced five competitive forces that are faced by a company in the industry. The five forces identified include the threat of segment rivalry, bargaining power of suppliers, bargaining power of customers, the threat of new entrants and threat of substitutes in the industry. The Porter’s five forces for Amazon and retail industry are as follows:
Threat of Existing Rivalry
In the view of Koo, Koh and Nam (2004), the threat of existing rivalry is strong for Amazon specifically in the US market. The threat of existing rivalry is high due to following reasons:
• There is high aggressiveness between the rival firms in the e-commerce retail sector.
• There is immense competition in terms of both the variety of products and the pricing war.
• Another important factor causing the rivalry in the industry is the lower switching costs between the products and between the retail stores as well.
Bargaining Power of Customers
As mentioned in the vision and mission statement of Amazon, the Amazon believes in the customer-centric approach. Due to this reason, the satisfaction of customers’ needs and wants is the ultimate objective of Amazon’s strategy (Dalken, 2014; Amazon, 2017). The bargaining power of customers is also termed as the strong in the online retail industry. The reasons behind this statement are as follows:
• Firstly, there is a high level of information among the potential customers of Amazon due to the availability of target information on the internet. The high quality of information leads to consumers thinking towards switching products as they compare features as per their priorities.
• Secondary, lower switching costs in the retailing industry has also caused strong bargaining power of customers. Due to lower switching costs, the businesses have to compete on pricing and quality both.
Bargaining Power of Suppliers
The bargaining power of suppliers is determined by a number of suppliers in the market and number of competitive businesses as well. The bargaining power of suppliers in the online retailing industry is moderate as there is a high number of suppliers available in the market. Further, the reasons behind moderate bargaining power of suppliers include:
• There is a moderate level of forward integration in the e-commerce retailing industry. There is a trend of strategic alliances around the globe in the mentioned industry but forward integration is moderate.
• The size of suppliers supplying the goods to those retailers is also moderate; therefore, their bargaining power is also expected to be moderate (Evans and Neu, 2008; Greenspan, 2017).
Threat of Substitutes
The threat of substitutes arises from the extent to which the customers can easily find and purchase new products. The threat of substitute products in the online retailing industry is also strong as indicated by the factors below:
• As discussed earlier, the switching cost in the industry is low. Since the switching cost is low, it is easy to switch the product to substitutes and it implies higher competition in the industry.
• Other than that, there are many competitors and substitutes available in the industry; it also implies that many substitutes are available in the market and threat of substitute products is high in the industry (Greenspan, 2017).
Threat of New Entrants
The threat of new entrants is weak in the online retail industry due to the following reasons:
• The brand development costs in the industry are very high and time taking. Therefore, the time and money both are required while entering the designated market in this assignment. Every new venture does not have sufficient funds to match the level of existing competitors.
• In the view of Cullinane and Khanna (2000), the economies of scale in an industry pose the challenges to new businesses as they experience higher costs of operations as compared to the existing ones. In the case of online retailing industry where the Amazon is operating, the economies of scale are really high which suggest that the threat of new entrants is weak.
Overall, Porter’s five forces for Amazon suggest that there all the threats identified by portal are high expected the threat of new entrants in the online retailing industry (Greenspan, 2017).
Current Strategic Position of the Company
The current strategic position of the Amazon is highlighted from different aspects based on different models. Firstly, the strategic position of the Amazon is highlighted with respect to Bowman’s Clock strategy. The model suggests where the company lies with respect to the competitive edge held by the company. The generic Bowman’s clock is highlighted in the figure below:
Figure 1 – Bowman’s Strategy Clock
The figure above suggests 8 different positions proposed by Bowman. It can be suggested that the Amazon lies in position number 5 i.e. focused differentiation and position number 2 i.e. low price. The amazon has a special focus on the differentiation of the products and tries to protect products developed by them by means of intellectual rights production. Further, the vision and mission of the Amazon clearly highlight that they aim to satisfy the customers’ needs and wants by offering differentiated products at lower cost. It illustrates that the positions for Amazon are position number 2 and 5 as per the figure above.
Secondly, the strategic position can be analyzed by the analysis of ans-off matrix. The ans-off matrix divides the strategies by businesses into four main types as shown in the figure below:
Figure 2 – Ansoff Matrix
In the view of Pittaway and Thorpe (2012), the market penetration refers to a business strategy where the business aims to explore the existing market with the existing product offering. There may be slight changes in the product, however. The market development strategy refers to the exploitation of new markets with the existing product offering. The new market may be new geography, demography or even social class. The product development refers to a strategy where the new products are offered in the existing market and the diversification refers to the exploitation of new markets with developments of new products. In the case of Amazon, the product development and market development strategies are suitable as the business aims to cater current market with new products and also aims to explore new markets with the existing product range. The other two are not completely relatable in the case of Amazon.
The Amazon can also pursue two other strategies identified in the ans-off matrix as they can penetrate the current markets by building loyal customers to certain products and services. The diversification can also be pursued if the top management of Amazon can establish significant supplier relationship which can help them cater new markets. In the view of Carpenter and Fredrickson (2001), the role of top management is essential in development of strategies for a business including that of Amazon. The strategic management is generally role of the top management; therefore, the interference of top management is essential in growth of the business. The role of top management including the owner at Amazon is really eternal as he himself is involved in the business operations and forms the strategy himself. He is a believer of synergy at the workplace. The owner develops the strategies and forms the basis for synergy at the workplace. It is believed that the key reason behind the success of Amazon is due to the participation and leadership role from the owner himself. He is widely recognized as one of the living charismatic reasons around the globe.
Since the Amazon is an online business and operates in many countries around the globe. There is a need to form strategies for international operations. It must be noted that international human resource management is not required at Amazon as they are physically available in selected countries only. However, international business management is highly important in the given context. Firstly, they need to understand the entry and operating barriers in the countries they opt to invest and start their operations. The Amazon is expected to enter new markets only after an understanding of these aspects. Further, the macro environment of each country needs to be analyzed in specific by PESTEL analysis of each country; the analysis in this assignment is focused on global operations of the Amazon. From the analysis in the sections above, it can be concluded that the Amazon is in a good shape to face the future given that they are one of the leading e-commerce retailers around the globe. However, continuous improvement and innovation are required to enhance and maintain the strategic position of the company in the industry.
4 Future Strategies for Amazon
The above sections analyzed the current strategic position of the Amazon. The future strategies for Amazon are recommended in this section; which are as follows:
• To increase focus on the reduction of costs so that the business can become low cost leader in the market. There is a higher significance of lower cost in the online retailing industry as compared to the differentiation or any other strategies to gain competitive advantage.
• To diversify by acquiring new products and suppliers and exploit the new markets by means of those products.
• To penetrate current markets by current products…
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