Amazon’s External Environment
PORTER’S FIVE FORCES AND THE ONLINE RETAIL INDUSTRY
Michael Porter developed a model of five competitive forces
affecting all industries:threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threatof substitutes, and rivalry among existing competitors (Porter, 2008). The degree towhich each of these competitive forces affects an industry is key in determining howcompetitive and profitable an industry is (Porter, 2008).
Retail (Catalog and Mail Orders) Industry:
Amazon Inc. is based in the Retail industry under Catalog and Mail Orders because theyare primarily an online retailer of general merchandise (OneSource, 2012). 60% of Amazon’s sales come from electronics and general merchandise (S&P, 2012). The IBISWorld Industry Report Database lists Amazon under the E-Commerce and OnlineAuctions Industry, Online Television Sales, and Online Shoe Sales industries as a major player (IBIS World, 2012). These sub-industries illustrate the wide array of products andservices that Amazon Inc. offers to customers. The overarching Retail (Catalog and MailOrders) industry “comprises establishments primarily engaged in retailing all types of merchandise using non-store means” (OneSource, 2012).
Threat of New Entrants:
The Retail industry, specifically covering non-store sales, is such a saturated industry thatnew entrants will find it difficult to compete with the top players. It is easy, technically,for new online retailers to emerge because of the openness of the Internet; however,competing with global powerhouses, such as Amazon and eBay, may deter new entrants.Reasons that new entrants would be deterred include unequal access to distributionchannels and incumbency advantages (Porter, 2008). Companies like Amazon haveestablished relationships with well-known product manufacturers and have been in theindustry long enough to create a brand image and customer recognition. Theseadvantages are the product of time and acquired resources and the fear of competingagainst them could inhibit new entrants. Overall, while the barriers to entry are low, thefear of competing with top players may still deter new entrants.
See Figure 1 for Porter’s Model Illustrated