Amazon is one of the most easily recognizable names in the world and has wide-reaching effects on how we consume many products. However, the company is also affected by a number of external factors which may be beneficial or harmful to its overarching goal of providing its core value proposition and achieving profitability. Using this Amazon PESTLE analysis, we will examine these factors to determine how these various components affect the company.
Amazon Political Factors
Political factors are some of the strongest determinants of the success or failure of any organization, especially a large multinational corporation such as Amazon. Let’s take a look at some of the ways political factors such as tariffs, legislation, political stability, international trade agreements, and tax policies affect Amazon.
- Government policies: Government policies and regulations related to e-commerce and online sales significantly affect how Amazon operates and its profitability. For example, in the United States, before 2018, online retailers were not required to pay sales tax in states where they did not have a physical presence. This allowed companies like Amazon to pass along these savings as lower prices to the customers and encouraged e-commerce.
However, since a landmark Supreme Court ruling in 2018, the company has been forced to collect sales taxes even in regions where it does not have a physical presence. Not only did this curb the burgeoning enthusiasm for online retail, but it also reduced the competitive advantage Amazon had over smaller e-commerce platforms.
- International trade agreements: Amazon is one of the largest multinational companies in the world, with complicated supply chains spanning entire countries, regions, and continents. Therefore, international trade agreements have a significant impact on the ability of the company to develop, maintain and expand these massive supply chains. Several examples of international trade treaties which have supported the growth of Amazon both directly and indirectly include:
- The North American Free Trade Agreement (NAFTA) was signed between the United States, Canada, and Mexico from 1994 to 2020;
- The General Agreement on Trade in Services (GATS), was established by the World Trade Organization (WTO) and helps regulate trade in services between member countries;
- The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), was signed by 11 countries and aims at reducing trade barriers between its members. The agreement included some provisions for e-commerce platforms such as Amazon as well.
- Government tax policies: Tariff and taxation regimes differ widely across countries and even within different nations. Of course, countries which offer favorable tax policies to e-commerce platforms like Amazon are more likely to attract the company and its vast resources. Unfavorable tax policies are just one of the methods used by certain countries to stifle the growth of companies like Amazon.
Nations that heavily tax e-commerce platforms, such as Amazon, reduce the profits and competitiveness of the company by cutting down on their net revenue. They also cut down on profits by lowering their sales volume since they make their products more expensive since these higher costs are passed on to buyers.
- Political stability: Most prominent multinational corporations require intricate supply chains, trusted legal and financial services, as well as a healthy, well-educated workforce. All these factors and more are necessary for such massive organizations to function properly and carry out their core value proposition.
The maintenance of such factors requires a stable political environment and strong government institutions which can regulate both the private and public sectors. This explains why Amazon has such a strong presence in developed nations, but has been dealing with significant difficulty in expanding to developing and least developed countries.
- Favorable government policies: We have already discussed how government policies which encourage e-commerce are beneficial to companies such as Amazon. However, it is also important to remember that such policies also promote the rise of competitors within the online retail industry. This is especially true in developed countries that have solid antitrust laws, which encourage competition and prevent monopolies from forming between a few companies.
- Restricted market access: Another way in which political factors may affect Amazon is direct or indirect hostility from specific governments. For example, a country like China, with a rising middle class and a growing consumer base, would be fertile ground for Amazon.
However, the Chinese government has put in place certain measures and policies to stifle the growth of the company within the country and instead promote local online retail giants such as Alibaba’s Taobao and Tmall, JD.com, Suning.com, and Pinduoduo. This eventually led to Amazon closing down its Chinese subsidiary (Amazon China or Amazon.cn) in 2019.
Amazon Economic Factors
Economic factors such as consumer spending patterns, inflationary and fresh new pressures, interest rates, and exchange rate fluctuations all affect Amazon. Let’s more closely examine how these various external monetary factors influence the growth of the company.
- Macroeconomic trends: The prevailing macroeconomic situation is an essential driver of the profitability of companies such as Amazon. This is because the multinational corporation is built on consumerism and its ability to provide a vast array of products for its customers in a timely and affordable manner.
However, suppose customers cannot afford these products due to economic downturns, which reduce their purchasing power, such as recessions and inflation. In that case, consumer spending reduces significantly, and with it, Amazon’s revenue. Despite this, recent trends have shown that online stores such as Amazon are usually the least affected by such economic conditions due to the necessity of the services they offer to consumers.
- Exchange rate fluctuations: Amazon is a company that operates within international markets and is thus exposed to the positive and negative effects of exchange rate fluctuations. This unavoidable feature affects the revenue and profitability of the company in several ways.
For example, exchange rate fluctuations can affect the competitiveness of the company within different countries. If the currency with which Amazon purchases a majority of its product strengthens against another currency, it makes these items more expensive and thus less attractive to buyers.
Similar fluctuations can also cause the company to incur losses across a vast number of situations, such as paying employee wages, investments in various countries, as well as revenue. It is important to note that in certain situations, this can also work in favor of the company as well.
- Increasing economic opportunities within developing nations: We have mentioned the difficulty that a company like Amazon faces in building a strong presence in several developing nations due to the absence of vital infrastructure and resources. However, many developing nations also offer a unique opportunity to large multinationals like Amazon.
For example, such nations offer a large and growing market that is often underserved and offer the company an opportunity to gain a significant foothold in the market. Increasing internet penetration is also another reason why e-commerce platforms are becoming more popular among developing nations, a trend that Amazon can leverage.
Developing nations offer low-cost products and labor costs as well. Such nations also usually offer a number of incentives to companies such as Amazon in order to attract these businesses. Such nations also offer a pool of developing talent for the company.
- Favorable economic principles: Economies of scale or another important economic factor which helps determine the success of Amazon. Economies of scale refer to the advantages a business enjoys by virtue of its large production output and expanding its operations.
The key advantages this economic concept offers include increasing cost savings, better supply chain efficiency, market dominance, a stronger ability to diversify into new markets, and in summary, a higher competitive advantage over smaller companies in the same field.
- Global supply chains: Supply chains play a pivotal role in Amazon’s ability to offer a wide variety of products at competitive prices, as well as its ability to deliver those products quickly and efficiently. International supply chains give Amazon access to a vast array of products that it can offer to its customers. This enables the company to offer a diverse selection of goods, including items that may not be available in the local market.
These same supply chains enable Amazon to keep its costs low, as it can leverage economies of scale and source products from low-cost regions. This enables Amazon to offer competitive pricing to its customers, which is a key driver of its success. International supply chains also play a critical role in Amazon’s logistics and delivery operations. Having a global network of suppliers allows Amazon to quickly and efficiently move products from one part of the world to another.
Amazon Social Factors
Favorable social trends form a strong part of what makes Amazon a highly successful company. Let’s take a look at some key social factors that are involved in the rapid growth of the company within the last few years, as well as how Amazon was able to successfully capitalize on these trends.
- The popularity of e-commerce: The rapid rise in popularity of e-commerce and online shopping was quite fortunate for Amazon. This gave the company the base it needed to rapidly expand Its operations and gain a strong foothold in a newly emerging market.
There are several factors behind the popularity of online retailers, such as convenience, better Internet and payment processing services, competitive pricing, the availability of mobile phones, improved logistics, and delivery services, the exponential rise of social media marketing, and a more comprehensive selection of available products.
- Changes in consumer spending patterns: Shifts in consumer preferences are another significant social factor that affects Amazon. Changing demographics, as well as shifts in public perception concerning specific political and social issues, significantly affect what type of products customers prefer.
Currently, eco-friendly practices are a topical issue for many consumers from Western nations and influence the popularity of products on Amazon. Similarly, suppose customer research has shown that consumers now prefer certain pricing models or place more emphasis on delivery times. In that case, it will be necessary for Amazon To shift its business model accordingly to keep up with these demands.
- Local cultural differences: Local cultural practices are another social factor that Amazon must take into account. Multinational companies such as Amazon have to deal with a number of cultural features unique to the particular region they are serving. For example, regional cultural differences strongly influence consumer preferences when it comes to a number of products, particularly concerning food items, with certain foods being considered taboo in certain regions of the world.
Also, cultural considerations affect Amazon’s decisions on how it markets its products and services to the public, as well as the various marketing channels and themes it would choose to promote. Issues such as local dialect and common payment methods are also important issues considered by the company when dealing with a diverse range of regions with unique cultures.
- Demographic trends: The effects of an aging population are another significant social factor that Amazon has to take into account thoroughly. The elderly have less mobility and, therefore, more acutely appreciate the convenience offered by online retail services. Changing customer preferences in this age group is also important and would likely drive Amazon’s product range in the years to come.
However, many older individuals are less tech-savvy, and Amazon will need to invest significant resources in bridging this gap and creating trust among this customer segment. Another way an aging population may affect Amazon is by reducing the number of young workers available to fill in physically demanding roles, which are unsuitable for older workers.
- Several social controversies: The negative social impacts of Amazon are also important social factors. Amazon’s rapid expansion has led to the closure of many small businesses, leaving many workers without jobs. There have also been concerns about the working conditions in Amazon’s warehouses, including reports of grueling working hours, inadequate breaks, and unsafe working conditions.
Additionally, some people worry that Amazon’s dominance in the e-commerce industry could lead to higher prices and reduced consumer choice. Critics have accused Amazon of not paying its fair share of taxes, which deprives governments of much-needed revenue.
Furthermore, Amazon’s shipping and packaging practices have been criticized for contributing to its carbon footprint and generating a significant amount of waste. Amazon’s use of facial recognition technology has also raised concerns about privacy and the potential misuse of data.
- Positive social impacts: Amazon has created millions of jobs around the world, providing full-time, part-time, and seasonal positions to people of all backgrounds. Amazon’s business model has also made it easier and cheaper for people to access goods and services from anywhere in the world, particularly for those living in remote or rural areas. This has led to increased accessibility and convenience for many people.
The company is also committed to price competitiveness and affordability. By driving down prices for many consumer goods, Amazon has made products more affordable for people around the world. Amazon is also a global leader in technological innovation, and its research and development have had a positive impact on many other industries and sectors.
Amazon is committed to philanthropy and has donated millions of dollars to charitable causes, including supporting disaster relief efforts and education initiatives. Moreover, Amazon has helped small businesses reach a global audience through programs such as Amazon Marketplace and Amazon Web Services.
Amazon Technological Factors
The technological factors that impact Amazon play a significant role in the company’s success. As a technology-driven company, Amazon continually embraces new developments and integrates them into its business model. Let’s explore the technological factors that affect Amazon, including artificial intelligence, automation, and innovations for packaging and delivery.
- Constant drive towards innovation: Amazon has always been a company that never shied away from embracing the latest developments in technology and integrating them into its business model. This has served the company quite well and explains the significant investments they have made in a wide range of fields, such as artificial intelligence (AI), cloud computing, robotics, drone delivery services, and so on. Let’s take a look at how technology affects the company.
- The rise of AI: Various forms of technological advancements, particularly in areas such as the rise of artificial intelligence, can impact Amazon’s operations and competitiveness. For example, Amazon utilizes AI technology in a wide range of business-related activities, such as:
- Using artificial intelligence and machine learning to improve personalized product recommendations by analyzing buyer purchasing patterns and other aspects of customer behavior;
- AI technology is also used to power Alexa, Amazon’s voice-controlled virtual assistant;
- This form of technology also forms the backbone of Amazon Go, a series of cashier-less convenience stores operated by the company.
- The adoption of Blockchain technology: Aside from AI, the development of new technologies, such as blockchain, is another area that Amazon is researching as a means of expanding its business. One potential use case for blockchain technology is to improve the transparency and security of Amazon’s supply chain operations.
By using a decentralized ledger system, Amazon could track the movement of goods from the supplier to the end customer, ensuring that each step of the process is recorded and verified. This would increase trust and accountability throughout the supply chain, as well as reduce the risk of fraud and counterfeiting.
Additionally, blockchain technology could be used to improve the security of Amazon’s payment system, enabling fast, secure, and transparent transactions. While Amazon has not yet fully implemented blockchain technology, the company is undoubtedly actively exploring its potential benefits and evaluating its feasibility.
- Increasing automation: Automation is another important technological trend being promoted by the company. Falling birth rates and an aging population are both demographic trends that are best considered under social factors, yet their impacts are wide-reaching and complex. The two factors combined have contributed to a shortage of workers, something Amazon wishes to amend using increased automation as one of the possible solutions.
- Innovations in packaging: Innovations in packaging and delivery are also critical defining technologies for the Amazon business model. For example, in a bid to reduce waste and improve eco-friendliness, the company has adopted machine learning as a tool to determine the most efficient package options for its wide variety of products.
- Better delivery technologies: Improved drone services and delivery technology is also a key area that Amazon is investing heavily in as they search for solutions on how to most effectively ensure that their products reach customers.
Amazon Legal Factors
Amazon is a company that requires solid legal frameworks to effectively carry out its operations across the globe. However, the company is also subject to the laws of the countries it operates. Let’s carefully examine how some of these laws affect the operations of Amazon.
- Intellectual property laws: Intellectual property laws are pretty crucial to a corporation as large as Amazon. They affect the way the company operates, particularly in sectors such as technological innovation, product sales, and content distribution. Of course, the Amazon trademark is heavily protected by these laws, which also ensures that the company does not infringe upon the trademark rights of other brands as well.
Copyright protection and patent laws are also quite important since they protect a number of companies’ technologies, such as their unique algorithms, packaging, and delivery technologies. Amazon also makes use of patents and IP registries as a way of protecting brands that use their services from counterfeiting.
- Antitrust laws: Antitrust laws refer to policies that are designed to promote fair competition between businesses and prevent the formation of monopolies. In the case of a corporation as large as Amazon, these laws may act against their interests because they prevent the company from forming effective monopolies and achieving near-total control of the online retail industry.
These antitrust laws involve actions such as scrutinizing mergers and acquisitions by the company, as well as imposing heavy fines on the company for failing to comply with these antitrust laws.
- Cybersecurity laws: As a significant player in the e-commerce industry and a provider of cloud computing services, Amazon is subject to various cybersecurity laws and regulations. This includes national policies such as the European Union’s General Data Protection Regulation (GDPR), the United States Cybersecurity and Infrastructure Security Agency (CISA), Health Insurance Portability and Accountability Act (HIPAA), and Children’s Online Privacy Protection Act (COPPA). They are also subject to industry-specific standards as well, such as the GS1 Standards and Payment Card Industry Data Security Standard (PCI DSS).
Cybersecurity legislation affects the company in a number of ways, including providing compliance requirements and standard protocols for practices that involve personal user data and national security, determining the liability and possible punishment of the company if it breaches any of these standards, and building consumer trust between Amazon and its users.
Understandably, in a bid to meet these regulations and avoid possible data breaches, the company has invested heavily in data encryption, firewalls, access control to its network and user data, as well as intrusion detection and prevention.
- Worker’s rights legislation: Despite the controversy surrounding the company in terms of its effects on employment in the areas it operates, Amazon is still a major employer in quite a number of countries. Therefore, it is also subject to labor laws and regulations related to its workforce, such as minimum wage laws, workplace safety regulations, worker classification laws, workplace benefits, and other forms of legislation supporting worker rights.
This legislation affects the companies in multiple ways, which may lead to increased or reduced overhead costs in the long run and therefore affect their price competitiveness regarding other online retailers. For example, an increase in the minimum wage would increase the cost the company incurs In terms of wages and, by extension, reduce their profits. The company may, in turn, choose to hike Its prices to its final consumers in an attempt to maintain its revenue, eventually leading to more expensive products and less price competitiveness.
- Environmental laws: Not only do environmental laws affect Amazon in terms of regulation, compliance costs, and potential fines, but they also carry a significant reputation risk as well. Amazon is a company whose operations carry a significant environmental impact in terms of waste disposal, carbon emissions, habitat destruction, environmental pollution, and so on.
The company has attempted to address these issues by improving its technology and ensuring that it complies with the best practices in terms of environmental law. However, it has faced several lawsuits over the years from both environmental activists and governments concerning these issues.
Amazon Environmental Factors
Environmental factors refer to the impact of external factors such as climate change, natural disasters, and regulatory policies on the company’s operations. Let’s take a look at a few of these.
- Commitments to net-zero emissions: Amazon has made various commitments over the years to reduce its carbon footprint and increase sustainability by investing in several environmental programs and adopting more eco-friendly technologies and alternatives. While this is certainly a noble goal, especially in light of the current importance of climate change within the corporate world, it would be naïve to assume that these decisions would not impact the operations and supply chain of the company.
With respect to this, the company has pledged to achieve net-zero carbon emissions by the year 2040 through an integrated program known as the Amazon Climate Pledge. Some of the key components of this program include investing in sustainable technologies and energy sources, improving its packaging technology and systems in order to reduce wastage and pollution, promoting the use of electric vehicles among its delivery and logistic services, using sustainable building materials, and investing in carbon offset technology.
While all of these goals are targeted towards achieving the net-zero goal set by the Paris Accord, it is important to remember that investing in sustainable technology is quite capital-intensive and will certainly affect the overhead of the company for years to come.
- Extreme weather events: The impact of extreme weather events and natural disasters on the company’s operations, especially its fulfillment and delivery network, leads to delays and increased costs. For instance, hurricanes and flooding can damage warehouses and distribution centers, while wildfires can disrupt delivery routes.
To mitigate these risks, Amazon has implemented measures such as increasing the resilience of its infrastructure and enhancing its disaster response capabilities. However, it is important to remember that such measures also increase capital costs and therefore drive up the prices paid by the final consumer.
- Waste reduction efforts: Amazon has faced criticism for its excessive use of packaging in its operations. However, the company has implemented several waste management strategies to address this issue. One of their initiatives includes reducing the size of their plastic packaging by up to 7%, which helps decrease the amount of waste produced.
Additionally, they have introduced a program that encourages customers to recycle their packaging materials. Amazon has also invested in technology that optimizes packaging to reduce waste, and they have committed to using 100% recyclable materials in their packaging by 2025.
From the above, it is clear that a wide number of factors affect the ability of Amazon to operate. Some of these factors may act in their favor, while others are detrimental to the success of the company. This analysis has highlighted these key issues and how the company has developed strategies to capitalize on or mitigate their fix in order to achieve long-term profitability, expansion, and market dominance.