SWOT analysis of Amazon (5 Key Strengths in 2020)

Ovidijus Jurevicius | March 16, 2020

SWOT analysis of Amazon.com Inc.

This Amazon SWOT analysis reveals how the largest online retailer used its competitive advantages to become the dominant player in the retail industry.

It identifies all the key strengths, weaknesses, opportunities and threats that affect the company the most. If you want to find out more about the SWOT of Amazon, you’re in the right place.

For more information on how to do a SWOT analysis please refer to our article.

Keep reading.

Company Background

Key Facts
Name Amazon.com, Inc.
Founded July 5, 1994
Logo
Industries served Internet (Amazon Web Services, Amazon Video)
Retail (Amazon Marketplace, Amazon Prime, Whole Foods)
Consumer Electronics (Kindle, Fire tablet, Fire TV, Echo and Ring)
Geographic areas served Worldwide (Amazon Marketplace in 17 countries)
Headquarters Seattle, Washington, U.S.
Current CEO Jeffrey P. Bezos
Revenue (US$) 280.522 billion (2019) 20.5% increase over 232.887 billion (2018)
Profit (US$) 11.588 billion (2019) 15% increase over 10.073 billion (2018)
Employees 798,000 (2020)
Main Competitors Alibaba Group, Apple Inc., eBay, Inc., Facebook Inc., Alphabet (Google Inc.) Inc., International Business Machines Corporation, Microsoft Corporation, Netflix Inc., The Walt Disney Company, Wal-Mart Stores, Inc. and many other internet, retail, consumer electronics and video entertainment companies.

Amazon.com business overview from the company’s financial report:

“We seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, and content creators. In addition, we provide services, such as advertising to sellers, vendors, publishers, and authors, through programs such as sponsored ads, display, and video advertising.

We serve consumers through our online and physical stores and focus on selection, price, and convenience. We design our stores to enable hundreds of millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our offerings through our websites, mobile apps, Alexa, devices, streaming, and physically visiting our stores.

We also manufacture and sell electronic devices, including Kindle, Fire tablet, Fire TV, Echo, Ring, and other devices, and we develop and produce media content. We seek to offer our customers low prices, fast and free delivery, easy-to-use functionality, and timely customer service.

In addition, we offer Amazon Prime, a membership program that includes unlimited free shipping on over 100 million items, access to unlimited streaming of tens of thousands of movies and TV episodes, including Amazon Original content, and other benefits.

We believe that the principal competitive factors in our retail businesses include selection, price, and convenience, including fast and reliable fulfillment. Additional competitive factors for our seller and enterprise services include the quality, speed, and reliability of our services and tools, as well as customers’ ability and willingness to change business practices.”[1]

You can find more information about the business in Amazon.com official website or Wikipedia’s article.

Amazon SWOT analysis

Strengths

1. Low cost structure, the largest merchandise selection and a huge number of third party sellers

Amazon is the largest online retailer in the world. In 2019, the company earned US$141.247 billion from online sales of its own merchandise and an additional US$53.762 billion from the commissions of the third party sellers’ sales in its online stores. In total, the company’s online retail operations brought in a massive US$195.009 billion in revenues – more than the next few largest online retailers earned combined.[1]

Amazon’s extraordinary online growth has allowed the company to become the 2nd largest retailer in the world, only behind Wal-Mart, when compared to other brick and mortar companies.

Figure 1. Amazon growth rate compared to e-commerce sales growth in U.S.

The diagram shows how Amazon's e-commerce growth rate outpaced U.S. e-commerce growth rate.

Source: Amazon financial reports[1] and Digital Commerce 360[2]

Note that Amazon has grown much faster than the entire U.S. e-commerce market, meaning that the company has actually increased its market share by taking it from the competitors.

What is the key to such success? According to the Amazon’s report, the online store’s success lies in its low cost structure, the largest merchandise selection and a huge number of third party sellers.

Figure 2. Jeff Bezos “napkin sketch” outlining Amazon’s strategy

Jeff Bezos outline Amazons strategy like this: Lower cost structure leads to lower prices, which lead to better customer experience. Better customer experience results in higher traffic, which in turn entices more 3rd party sellers to join the marketplace. More sellers means wider selection, which also points to the better customer experience. In the middle of the circle is the Amazon's growth, which is turned into further lowering of cost structure and lower prices.

Source: Seeking Alpha[3]

A low-cost structure leads to lower prices, which combined with a huge range of products, results in a better customer experience. Satisfied customers invariably return to the Amazon websites, creating ever-growing traffic, which subsequently attracts 3rd party sellers to Amazon’s marketplace. All of these factors lead to faster business growth for Amazon.

Amazon follows a cost leadership strategy, but so do many other online and offline retailers. Why then does Amazon outperform them?

  • Low cost structure. By mainly selling online, Amazon doesn’t incur huge costs related to running physical retail outlets. Online marketplaces also potentially allow for selling more units without any increase in marginal costs.

    Amazon constantly invests in both additional fulfillment centers and to existing centers to enable a reduction in order fulfillment times and shipping costs. These time and cost savings result in lower prices that are passed on to consumers.

  • Selection. According to ScrapeHero[4], Amazon sells around 120 million of various products in its Amazon.com Marketplace. In comparison, Walmart offers only 43 million SKU’s[5] in its online shop, or just 36% of the number of products that Amazon offers. This vast difference in range is the reason why online customers are more likely to visit Amazon.com rather than Walmart’s e-shop.

  • Third party sellers. Amazon’s business model includes accommodating third party sellers who are able to offer their own merchandise on Amazon’s sites and whose products therefore compete against Amazon’s. At the beginning, third party sellers were mainly attracted to the Amazon Marketplace because of the high traffic to its stores. Now the main drivers are such programs as ‘Fulfilled by Amazon’ and Prime. Third party sellers often offer products that are not available through Amazon’s retail division.

    In 2018, third party sellers accounted for 58% of all the products sold through the company’s online stores.[6] Amazon’s third party sales grossed US$160 billion in 2018, while eBay’s merchants sales only grossed US$95 billion in the same period.

Low prices, huge product range and the vast number of third party sellers are all key factors in improving the Amazon customer experience and in driving more traffic to their sites. Few companies can compete with Amazon in any of these areas.

2. Synergies between Marketplace, Amazon Web Services, Prime and subscription services

Amazon is involved in 4 key businesses:

  • Amazon Marketplace
  • Amazon Web Services (AWS)
  • Amazon Prime
  • Subscription Services

All four Amazon offerings support each other and create benefits that would not be achieved if the businesses operated independently.

Figure 3. Amazon’s synergies

Amazon is involved in 3 key businesses: Amazon Marketplace, AWS and Amazon Prime.

Source: Strategic Management Insight

AWS was introduced in 2006 when Amazon realized it could sell its servers’ excess capacity to other enterprises. For Amazon as an online retailer, the key place to sell its goods is its website.

To run an e-commerce website with millions of visitors each day the company had to invest heavily in its server infrastructure. These investments and the resulting server capacity have helped AWS to grow. In return, AWS provides two important elements for its sites:

  • Speed. Page load speed is crucial for Amazon. Every 100ms of delay costs the company tens or hundreds of millions due to the lost customers. AWS helps to speed up the website’s load time, so that Amazon is able to serve each customer as quickly as possible. Subscription services also benefit from this. The content and especially, the video content is served very fast to the subscribers, increasing their satisfaction with the service.

  • Capacity. During the peak times of Cyber Monday (the Monday after the Thanksgiving holiday in the U.S), Black Friday (the Friday after the Thanksgiving holiday), and in the several weeks leading up to Christmas, Amazon receives an overwhelming number of visitors to its sites. AWS’s huge capacity, which is not needed during the rest of the year, is employed during these peak times to help Amazon cope with the increased number of visitors.

In 2005, Amazon introduced the Amazon Prime subscription service, which offers access to Prime Videos, Prime Music, free two-day delivery, same day delivery and many other benefits for a flat annual fee.

As of December 2019, there are 112 million Amazon Prime members worldwide.[8] Prime users buy more merchandise and spend more on each item than regular users.[1] Marketplace helps to attract new visitors to Prime through its Fulfillment by Amazon program (FBA).

The FBA program allows third party sellers to place their products in Amazon’s warehouses, where Amazon takes responsibility for all logistics, customer service, order fulfillment and returns. This enables more products to become eligible for Amazon Prime, which is the key for the program to flourish.

In addition, packaging and shipping costs are reduced when two or more items are shipped. As a result, Prime becomes more profitable and Amazon customer satisfaction increases.

Prime members also get an access to the Amazon’s prime content and subscription services. Amazon marketplace customers who are signing up for the Prime membership for faster deliveries and bigger discounts are more likely to consume the Amazon’s prime content and will get locked to the Amazon’s Prime membership even more.

On the other hand, people who become Prime members due to the Amazon’s Prime content, will spend more on Amazon Marketplace due to the Prime membership benefits. Prime membership creates multiple benefits for every Amazon service and the company itself.

Synergies between Amazon’s Marketplace, AWS, Prime and subscription services are hardly quantifiable, but they provide some of the strongest competitive advantages any company could have.

Access the full analysis... more Amazon strengths, weaknesses, opportunities and threats

Published: March 16, 2020
Format: PDF + PowerPoint
Pages: 33
Words: 7,400
Charts/tables: 14

Price: US$19 US$9.99

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PDF analysis
PowerPoint presentation
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Comparison against rivals

Table of contents

  • Company Overview
  • SWOT Analysis
  • Strengths
  • Weaknesses
  • Opportunities
  • Threats
  • Summary
  • Sources

Sources

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About Ovidijus Jurevicius

Ovidijus is the founder of SM Insight and the lead writer since 2013. His interest and studies in strategic management turned into SM Insight project, the No.1 source on the subject online.

He's been using his knowledge on strategic management and swot analysis to analyze the businesses for the last 5 years. His work is published in many publications, including three books.