Amazon five forces model - Q&A

Chapter 3

Exercises / Assignment Answers

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Q1

Use Porter's model to assess the competitive position of a large online trader. It is suggested that the assessment is of amazon.com (as a online bookstore) against its online and conventional competitors. The external forces are:

Suppliers, principally the publishers;

Buyers, the book buying public;

New Entrants, the possibility of new (large scale) online bookshops being set up;

Substitution, that there would be a new sales channel for books or that the book itself would be replaced by an alternative media.

Consider all five forces separately, making notes on amazon's competitive position in each case. 

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A1

 Amazon.com started in the early days of the commercial use of the Internet and its rapid acquisition of market share took the conventional (bricks and mortar) bookstore chains by surprise. The conventional bookstores are however fighting back with new bookstore formats, sharper merchandising practices and their own online bookstores. Profitability in the whole sector has been affected by competition for market share - amazon.com has yet to post a profit and some of the conventional bookstore chains (Chapters in Canada for example) are also having liquidity problems.

Bargaining Power of Suppliers:

The book trade has, traditionally been a cozy sector with the retail price of books being set by the publishers and fairly standard trade discounts on that price being offered to both large and small retailers. Over recent years this position has been challenged by large retailers, e.g. supermarkets, seeking volume discounts on popular titles. This position has been pushed further by amazon.com with aggressive demands for discounting from the publishers. The other large booksellers (Borders, Waterstones, etc.) are also large customers of the publisher and are able to match the demands made by amazon.com. The suppliers are not in a strong position to resist - some have and the booksellers have simply stopped stocking their titles (although they still need to be in a position to meet their customers requirements).

Other causalities in these developments are the small, independent, booksellers who cannot get the same deal from the publisher as the large retailers.

The buyers are the members of the public who purchase books. Books are not an item that one bargains on - the book retailer (or the publisher) set the price and that is what the customer pays.

Over recent years and, in particular with online booksellers, there has been a trend to offering discounts on an increasing number of titles - the customer can shop around for the best deal (and online there are 'shopbots' that will search out the online bookstore that is offering the best price on a given title).

It is relatively easy to set up an e-Shop. However, e-Shops such as amazon.com now have very sophisticated web sites and considerable investment in their supply chain infrastructure - they also have brand name recognition (amazon.com is currently the best recognised brand on the net). Setting up a large, general purpose, online bookstore and getting customers to know about that bookstore and to use it is not going to be easy and is not going to be cheap (bol.com is one start-up that has taken on amazon.com in Europe but it is backed by a very large German media group). Most of the large, conventional book retailers have now set up online bookstores - they had the advantage that they could use their existing supply chain arrangements to feed the online bookstore - they have not achieved the brand name recognition of amazon.com. It is perhaps doubtful that we will see many / any new entrants into this market, the costs of matching the infrastructure and brand recognition of amazon.com are just too great.

It has been argued that, for this online market, there will be just two or three organizations that have significant presence and that could be right (an online retailer can not find a location that is not served by its competitors as a net presence serves all locations). Arguably each non English language market is a different market and it will be interesting to see developments in that field (amazon already have a German site).

Is an online bookstore a new entrant into book retailing or a substitute for the bricks and mortar version - an example of the definition issues one has when applying Porter's Model.

Given that for this answer we are treating conventional and online bookstores as competition (they both sell books) then what is the potential for substitution. Possible answers to that question are:

Disintermediation: The publishers could sell direct to the public - after all, excepting best sellers, many books are supplied to the retailer in ones and twos and if the order is taken online there is very little more work in selling direct - and no trade discount has to be given.

Electronic Publishing: If information is to be selected from electronic information banks and paid for in micro payments then there is no books and no bookshops - but to adapt a famous quote, the news of the death of the book has (probably) been greatly exaggerated.

Competition:

The cosy years of book retailing are now over. Online booksellers are providing real competition for the bricks and mortar booksellers and those conventional booksellers are competing among themselves with, for example, expanding bookshop chains knocking out long established local bookshops. The conventional bookshops are also (arguably) fighting back with enlarged ad updated shops that make for a very pleasant environment to browse and select a book.

Arguably the market should be seen as segmented:

There are those who like shopping online and those who do not.  There are books than need inspection before purchase (illustrated cookbooks for example) and those which do not (the compulsory course text or the latest from your favorite fiction author).

There are books that will not be in stock so, given they have to be ordered, why not order online.

There are books that need immediate collection (something to read on the plane as you rush to board with your e-Ticket).

The problem is that margins have been eroded and a retailer may well be doing useful business but be unable to cover their costs. Interestingly (or perversely) financial institutions seem keen to support loss-making e-Tailers but not conventional stores that might be struggling.

The competition seems to between a couple of large online book retailers and the large book retail chains (Borders, Waterstones, etc.) many of which have their own e-Stores. Interestingly the conventional retailers are moving to offer mix modes, for example – order online and pick up at the bookstore - the outcome is unpredictable but, hopefully, the customers will retain a choice.

Q2

Continuing with the online bookshop theme, consider ways that a bookshop could seek to achieve cost leadership, differentiation and focus. Make notes suggesting the strategy that could be applied in each case. Note that simple discounting is not to be considered a satisfactory strategy if the result is that the bookshop ends up in bankruptcy. 

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A2

Amazon.com is a general bookstore in the way that Borders and Waterstones are general bookstores - they stock a wide range of books and will order almost any book. Possible approaches to achieve specific competitive advantage include:

Cost Leadership: Amazon.com has tried to achieve cost leadership. This is partly facilitated by extracting additional trade discounts from the publishers and by not having the expense of maintaining retail premises.

These factors are, however offset to a degree by the investment in ICT systems and the cost of delivery to customers (a cost conventional bookstores do not have). Amazon has achieved a degree of cost leadership but at the cost of continuing losses - a position that might

not be sustainable.

Arguably the way to achieve cost leadership is to concentrate on the best seller market - buy in bulk and sell at a discount. Some supermarkets have made some effort in this direction and if that trade became substantial it could hurt all specialist book retailers.

Differentiation: Arguably the conventional retailers and the online retailers are very different (and as noted in answer 1 they are best suited to different parts of the market). The online retailers are attempting to differentiate themselves with technologies such as 'one click' and next day delivery

(in selected locations) but these innovations are easily copied (unless the courts rule to the contrary!).

Focus: This is about not being a general bookstore but specialising in a particular segment of the market. Specialist bookstores can be found online for dog lovers, horror afficionadoes and doubtless many other requirements - they also need to differentiate themselves and create a sense of community as doubtless amazon, et al. would also provide most of the titles they are able to stock. A further example of focus is the campus or airport bookstore, both of which have the advantage of location and of specialist local knowledge.