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Project- Part 1
An External Environment Analysis for Amazon.com
I. Introduction
A. History
Amazon is the world’s largest online retailer. Amazon was founded in 1994 by Jeff Bezos and launched the site in 1995 as an online book seller. Amazon initially worked mainly as a reseller and did not actually have warehouses of its own. They would order their books as from a wholesaler and then reship them to their customers. This is a distant shadow of what Amazon does today. Amazon quickly moved into selling items such as DVDs, video games, electronics, CDs, clothing and furniture. Amazon quickly grew traction as a notable online retailer in the e-commerce field. Per an article by Funding Universe, “In just four months of operation, Amazon.com became a very popular site on the Web, making high marks on several Internet rankings. It generated recognition as the sixth best site on Point Communications' ‘top ten’ list, and was almost immediately placed on Yahoo's ‘what's cool list’ and Netscape's ‘what's new list.’ (1).
Amazon went public in 1997 after just two short years as an online retailer with an initial public offering of three million shares. According to Dawn Kawamoto from CNET.com, the initial target price for shares in Amazon were to be between $12-$14. That quickly changed to $18 per share when the company went public. When Amazon went public they raised $54 million dollars which put their evaluation at $438 million dollars (2). This large amount of capital afforded Amazon the opportunity to expand. Amazon soon opened a new distribution center in New Castle, Delaware and then also expanded its facilities in Seattle, Washington where it is now headquartered.
Amazon have always been innovative. In-order to not rely solely on their reach they started an associates program. This program would allow other sites to link to Amazons products and they would then see a commission on those sales. By 1998 Amazon had already amassed around 60,000 associates in this program (1). During this period Amazon also started making acquisitions of other companies to help expand their reach and to further their sales.
Being at the forefront of e-commerce, Amazon pushed to make lucrative deals with third party companies such as Toys R Us and the now defunct Borders and Circuit City. These kinds of deals are what helped Amazon push through the collapse of the “Dot-Com” boom that happened in the late 90’s. Still while making billions of dollars in sales Amazon saw many years of losses. During this time and into the early 2000’s, Amazon continued to confidently acquire more and more companies. This allowed them to take out their competitors while also increasing their portfolio. These companies range from companies such as CD Now, Audible and Zappos.
Amazon also moved into providing a larger variety of products such as groceries. Amazon also moved into providing their own electronics such as the Kindle and Amazon Fire. Amazon also provides their own apps on iPhones and Android devices. They also moved from providing books on demand to videos. Currently customers can buy or rent digital movies or TV shows from their services with an ever-expanding line up.
B. Present Conditions
Over around a twenty-year history Amazon saw nearly zero profits. While their revenue continued to rise their profit, margin stayed low. This is primarily due to their numerous acquisitions, reinvestments into technology and trying to keep their prices low. While many investors may look at a company such as Amazon as having tons of potential but with little payout per share it is Amazons mission to continue to grow and expand. In 2014 those investments finally started to pay off mildly and then continued to grow up into 2016 before seeing another large drop. According to an article on Recode by Jason Del Rey, Amazon posted a profit in the third quarter of 252 million dollars or the equivalent of 52 cents per share. This was a far change from the 857 million dollar profit that they saw in the second quarter. This caused their stock to drop down in price by 6 percent (3). According to Nasdaq.com. the following quarter in December of 2016 Amazon appears to have regained traction and saw 1.54 earnings per share (4). This is likely due to the increase in demand during the holiday season.
This constant fluctuation in profits should not be taken as a warning sign of a company that may go bankrupt. Not unlike Amazons early years they are continuing to grow and expand their resources. Amazon has been focusing on adding more fulfillment centers across the globe. This expansion has allowed Amazon to start a relatively new service called Amazon Now. Amazon now offers free two-hour delivery of select items to locations that are within a certain distance of local fulfillment centers. Amazon is also pushing into the local air space with Amazon Air. Amazon Air is a service that will allow drones to parachute packages up to thirty pounds to subscribing customers. They are also testing a new facility in Seattle, Washington called Amazon Go. Currently traditional brick and mortar stores must employee numerous staff to fulfill the needs of a traditional store. With Amazon Go, Amazon is looking to change that. They are testing a brick and mortar store that employees a very minimal staff with. A customer will log into their Amazon Go app before entering the store. Then they will shop just like normal but when they are done, they just walk out. There is no check-out line as sensors will be able to detect the items that they have taken and then charge them accordingly. It is this kind of innovation and persistent furthering of new lines of business that has kept Amazons profits per share low.
3. Mission and Objectives
According to Amazon’s FaceBook page their mission is as follows “Our vision is to be Earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online” (5). This is follows directly in line with how they have been operating since the start. They have continued to add more and more products to their inventory and have diversified their products that they offer. Their recent ventures are all to provide what people want as soon as possible in a fashion that is the most convenient for the consumer at all while keeping prices low. They are currently the number one online retailer and with the way that they are positioning themselves they are likely to remain in that top spot.
II. External Environmental Analysis (Threats and Opportunities)
A. Economic
The global economy plays a huge role in the success and failure of Amazon. Amazon ships to over one hundred countries worldwide. Economic stability in the US and other developed countries allows for more disposable income which can then be used to purchase Amazons products. According to an article by Joe Myers on the World Economic Forum, emerging markets such as China and India are expected to see growth from around 6.5 and 7.5 percent respectively (6). Both countries have extremely large populations and while the divide between economic classes in those countries is vast, the uptick in gross domestic product will allow for more opportunities for Amazon to sell their products.
On the other hand, the unstable economy in the UK after Brexit is a threat to Amazons global operations. Food and fuel prices have risen in the UK since Brexit and thus reduces the amount of disposable income that citizens can spend on non-essential goods.
B. Social
A major opportunity for Amazon is the changing buying habits of consumers. More and more people are taking advantage of online services such as Amazon and are choosing to make purchases online. An article Fareeha Ali published on InternetRetailer.com shows that 79 percent of U.S. adults have made purchases online. This is a rise from the 49 percent that was reported in 2007 (7). An article by Lisa Fickensher from the New York post states that traffic through traditional brick and mortar stores was down roughly 10 percent in December of 2016 (8). This is an indication that people’s buying habits are shifting and that e-commerce is on a vast upswing which is very advantages for Amazon.
C. Technological
It is very evident that technology is moving at a very quick pace. It can be assumed that most households in the U.S. have access to the internet. This can be through traditional means such as a personal computer as well as smart phones. This is a massive opportunity for Amazon as their reach can extend to more and more consumers. Amazons lines of business are not limited to just e-commerce though. The also provide a vast array of web based video content and are pushing into self-published original content. Amazon both provides subscription video services as well as rentals and purchases. Many younger households are seeking to “cut the cord” from traditional cable TV. The rise of high-speed internet and content availability will give Amazon the ability to capitalize on the growing technology.
While the growth of technology is a major advantage for Amazon, it can pose a threat. Web services are becoming easier and easier to create and with this ease it makes it possible for new entrants to enter the market especially in niche fields. It is easy for a small company to set up an e-commerce site and sell their products that cater to more specific consumers. It would benefit Amazon to continue to try to make deals with these types of companies and host their products or subsidiary stores on Amazons site.
D. Competition
Amazon has become a very diversified which gives them quite a bit of weight in e-commerce. With such diversification, it does make it so that Amazon has quite a bit of competition. With Amazon’s success, other traditional brick and mortar stores have attempted to push their e-commerce sites in reaction. One of Amazon’s benefits is their Amazon Prime program. Being a member entitles people to get free two-day shipping on many items. Another benefit is that every year Amazon has a “Prime” day with huge discounts. In reaction to that companies such as Wal-Mart, publicized huge discounts on the same days. This was to pull customers away from the Prime deals and to redirect consumers to their offerings. Grocery stores have also looked to make it so that consumers can receive their products faster. Stores such as Publix, Wal-Mart and Kroger have recently allowed consumers to shop for their groceries online and then schedule a pick up at their locations thus eliminating the need for a consumer to wade through the busy stores and lines.
Amazons video services also have many competitors. Many homes have cable or satellite TV or services such as Netflix or Hulu. Netflix and Hulu have a huge array of content and direct deals with many content providing companies. While those exclusive deals do put Amazon at a disadvantage, they have been smart by including this content with their Amazon Prime memberships. Also, what the other companies do not have is the ability to rent or purchase shows that are not a part of their available programing.
It would be recommended that Amazon continue to provide services beyond what the other more specific companies can provide. This will help set Amazon up as a suite of services rather than just one specific thing. Amazon should also continue to research into other means of providing convenience. While other stores are allowing the consumer to order online and pick up at the physical location, Amazon should continue to expand their two hour delivery options.
References
(1) http://www.fundinguniverse.com/company-histories/amazon-com-inc-history/
(2) https://www.cnet.com/news/amazon-com-ipo-skyrockets/
(3) http://www.recode.net/2016/10/27/13438946/amazon-q3-earnings-2016
(4) http://www.nasdaq.com/earnings/report/amzn
(5) https://www.facebook.com/pg/Amazon/about/
(6) https://www.weforum.org/agenda/2016/04/worlds-fastest-growing-economies/
(7) https://www.internetretailer.com/2016/12/16/how-e-commerce-changes-79-americans-shop-online
(8) http://nypost.com/2016/12/21/brick-and-mortar-stores-having-a-rough-holiday-shopping-season/