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    Amazon Porters 5 Forces

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    Using Porter's five forces model, the document analyzes how the internet and e-commerce have made traditional retail industries less attractive. It discusses how online retailers like Amazon have weakened supplier power, buyer power, the threat of substitutes, and barriers to entry. While e-retail has high barriers, traditional retail has low barriers, yielding only stable low returns. The internet is changing industry dynamics and competition.

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    Amazon Porters 5 Forces

    Uploaded by

    shalimarakmat
    14K views5 pages
    Using Porter's five forces model, the document analyzes how the internet and e-commerce have made traditional retail industries less attractive. It discusses how online retailers like Amazon have weakened supplier power, buyer power, the threat of substitutes, and barriers to entry. While e-retail has high barriers, traditional retail has low barriers, yielding only stable low returns. The internet is changing industry dynamics and competition.

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    Using Porter's five forces model, the document analyzes how the internet and e-commerce have made traditional retail industries less attractive. It discusses how online retailers like Amazon have weakened supplier power, buyer power, the threat of substitutes, and barriers to entry. While e-retail has high barriers, traditional retail has low barriers, yielding only stable low returns. The internet is changing industry dynamics and competition.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14K views5 pages

    Amazon Porters 5 Forces

    Uploaded by

    shalimarakmat
    Using Porter's five forces model, the document analyzes how the internet and e-commerce have made traditional retail industries less attractive. It discusses how online retailers like Amazon have weakened supplier power, buyer power, the threat of substitutes, and barriers to entry. While e-retail has high barriers, traditional retail has low barriers, yielding only stable low returns. The internet is changing industry dynamics and competition.

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    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    of 5

    Business Studies – Business Policy CSE3, 0010028

    Using Porter’s five forces explain how the internet/world wide web is making
    retailing industries less “attractive” for retailing players.

    Introduction

    Since early 1980s, Michael Porter’s Five Forces (Porter, 1980) has brought
    breakthroughs to the conventional business strategy concepts, and has
    become the “bible” guide for leaders from nearly every business and industry
    to perform effective strategic analysis. The Five Forces model is generic
    enough and applicable to explain the behaviour of many different markets.

    Though after 20 years of its introduction the model is challenged and


    reinterpreted by some other analysis techniques such as the Creative Web
    (Conklin and Tapp, 2000) and the Delta Model (Hax and Wilde, 2001) for its
    limitations to certain areas, it is still nevertheless valid when coping with the
    analysis of the market behaviour under the revolutionary development of
    Internet and e-Business in recent years.

    In this article we will show this by employing Porter’s five forces to analyse how
    the development of Internet and e-Business is affecting the existing retailing
    industries.

    Impacts of the Internet to retailing industries

    Since the Internet became part of our daily life in the late 1990s, the
    development of the technology has enormously shortened the distance
    between people and provided niches for new forms of business. Successful
    examples such as Amazon.com and Dell have significant implications to the
    potentials for e-Retail businesses to take over the market shares of their
    traditional retailing competitors. This phenomenon can be explained using
    Porter’s five forces:

    Supplier Power

    In the case of Amazon.com, like its retailing competitors, its supplier


    companies are mainly publishers. Just as many readers, there are
    thousands of publishers in the world, thus they are not concentrated at all.
    Most publishers rely their income from the profit of book sales, hence the

    Page 1 of 5
    Business Studies – Business Policy CSE3, 0010028

    readers, i.e. the buyer industry, is an important customer of them. The


    24-hour easily-accessible service of Amazon.com provides a broader range
    of potential buyers than its retailing competitors, which attracts suppliers
    more.

    Many readers do not always need to find a particular book in bookshops –


    they may have an interested topic and would browse through similar books
    to choose a right one for them. So the books of particular publishers (product)
    are not an important input for the readers (buyers). The searching facilities in
    Amazon.com help reinforcing this fact more than its retailing competitors.

    Moreover, publishers have limited amount of productions and are less likely
    to set up bookshops by themselves; it is also less likely for them to acquire
    existing bookshops (either retailing ones or online ones) due to cost
    effectiveness, therefore there is no much threat of forward integration.

    Buyer Power

    Amazon.com started its business in the form of a website, and its customers
    are visitors and potential visitors to the Web site and its competitors’ sites
    (Kyle, 2002). One of the advantages for the business to take the form of a
    website over conventional retailing approach is to minimise the running cost
    of renting and opening stores to sell books, and hence the books they sell
    can be priced lower than other non-website competitors to balance out the
    postal fee expenses. Another important advantage is to provide a 24-hour,
    with no physical location limitation and customisable book-search service to
    customers. The effectiveness of this selling model yields savings on auxiliary
    costs (such as transportation time and costs) and hassles, where buyers
    may become less price sensitive to postal fees of different delivery options
    and even minor price gaps of the books with all these advantages are taken
    into account.

    Amazon.com’s customised and reliable service helps creating loyalty and


    thus the “lock-in” effects - the customers might consider buying books online
    more even when they walk pass a bookshop physically, simply because they
    don’t bother to carry heavy books which are not needed urgent! Compare to
    those of the conventional retail bookshops, these “lock-in” effects further
    weaken the already-weaken bargaining power of buyers.

    Page 2 of 5
    Business Studies – Business Policy CSE3, 0010028

    Threats of Substitutes

    The way how e-Retail business works today creates a lot of substitute
    threats to conventional retailing players. Amazon.com itself started as a
    substitute of conventional bookstore – it provides other means and sources
    for the same products, services, or information (Kyle, 2002) as its retailing
    competitors provide.

    The impacts of typical B2C (Business-to-Consumers) e-Retail business are


    mainly regarding to the reforms in distribution channels and value chains.
    Retailers traditionally take goods from wholesalers and distribute them to
    consumers. The chain model is being challenged by the Internet’s
    distance-shortening power, where wholesalers and even manufacturers can
    now distribute their goods to consumers easily and directly. The B2C model
    imposes a new type of substitutes which was unforeseeable for conventional
    retailers in the old days, resulting in making them become less attractive.

    Barriers to entry

    Most businesses in UK and also the rest of the world are SMEs and even
    self-employed businesses (EIM, 2000). It is not uncommon that even unskilled
    or old people can set up a little retail business such as take-away or
    second-hand fashion shops fairly easily. Therefore the conventional retailing
    markets are easy to enter in general.

    E-Retail is a new-born and difficult-to-master business. Since the


    “technology bubble” burst two years ago, many people are threatened to
    enter the game. This is because e-Retail businesses such as Amazon.com
    have high entry barriers, which include the expensive setup (or switching)
    and maintenance costs of equipments and expertise; compliance of
    government regulations on data protection and privacy; the possible use of
    patents and proprietary resources; asset speciality of businesses etc. (Porter,
    1980, 1985).

    Rivalry

    The rival intensity of the conventional retail markets is high because there
    are usually a large number of retailers competing to each other for the same

    Page 3 of 5
    Business Studies – Business Policy CSE3, 0010028

    source of customers, but it may not be the same for e-Retail markets. In the
    Amazon.com case, its competitors include The Waterstones, WH Smith, The
    Books Etc., The Borders, and many other smaller bookshops, but not many
    of them have as well-established and automated online system as
    Amazon.com’s.

    Other competitive advantages of e-Retail businesses over conventional


    ones are:
    - Goods storage costs are much lower, as goods can be ordered
    dynamically according to the orders received.
    - It is easier to provide differentiated products on the website to test the
    market’s demand than to put the physical ones onto the shelves.
    - The e-Retail market is rapid-growing with alongside the new Internet
    technologies.

    However, e-Retail businesses themselves do have their own kind of rivalry


    issues: heavy investment means difficult to exit, and this encourages
    competitions between the businesses; as the technologies become more
    mature, more competitors join in.

    Conclusions

    As discussed above, conventional retailing businesses have low entry and exit
    barriers which yield low but stable returns; e-Retail businesses with high entry
    and exit barriers, on the other hand, can generate higher but riskier returns.

    Porter’s five forces help us visualising the dynamics of conventional retail


    markets and e-Retail ones, and explains why the former is less attractive than
    the latter nowadays. But the world always repeats itself – when the e-Retail
    markets saturate, they will soon have the same situation as the conventional
    retail markets have today.

    References

    Conklin, D. W.; Tapp, L. (May/Jun 2000); The Creative Web, Ivey Business
    Journal Vol. 64 Issue 5

    EIM Small Business Research and Consultancy, The European Observatory

    Page 4 of 5
    Business Studies – Business Policy CSE3, 0010028

    for SMEs Sixth Report 2000.

    Hax, A.; Wilde II, D. (August 2001); The Delta Model: discovering new sources
    of profitability in a networked economy, European Management Journal,
    Volume 19, Issue 4, August 2001, Pages 379-391

    Kyle, Bobette (2002); Strategies for Your Web Site Marketing Plan, Web Site
    Marketing Plan (available at
    http://www.websitemarketingplan.com/strategies.htm)

    Porter, M. E. (1980); Competitive Strategy: Techniques for Analyzing Industries


    and Competitors, NY: The Free Press

    Porter, M. E. (1985); Competitive Advantage: Techniques for Analyzing


    Industries and Competitors, NY: The Free Press

    Bibliography

    Porter's Five Forces: A MODEL FOR INDUSTRY ANALYSIS, QuickMBA.com


    (available at http://www.quickmba.com/strategy/porter.shtml)

    Slater, S. F.; Olson E. M. (January-February 2002); A fresh look at industry and


    market analysis, Business Horizons

    Word count: 1157 words (excluding references and bibliography)

    Page 5 of 5

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