Amazon's cloud computing (AWS, EC2) solutions; paper analyze competitive position Amazon's cloud computing solutions industry recommend strategies strengthen firm's competitive position international context.
Amazon's cloud computing (AWS, EC2) solutions
Cloud computing services which are accessed directly over the internet are gaining popularity in this technology age. Industry experts have referred to it as a game changer and it has been shown to give companies competitive advantage through giving them a unique selling point as well as other macroeconomic advantages such as changes in outputs and inputs which increase the profitability of the company. Cloud computing has many advantages above the traditional computing models. Cloud computing helps to create a dynamic world characterized by fast changes in the business world through agile business environments and globalization.
Amazon Web Services is a strong player in the cloud computing industry with 80 to 90% of the market share and the company deploys about 80,000 new computers on the cloud every day as compared to its competitors who deploy less than 10,000 new computers on the cloud every day. The industry structure shows the there is increased interest in the services provided and thus growth of the industry is expected. By the year 2020, the revenue from the industry is estimated to be at $4 billion as compared to the $1 billion it is currently.
By conducting analysis using Porter's five forces model, it is possible to get the industry structure and by reviewing literature on Amazon Web Service and the trends in cloud computing, it is possible to get crucial information regarding the market in which Amazon operates and thus give recommendations for Amazon. The threat of new entrants is high as a result of this potential for growth and so is the bargaining power of buyers. The bargaining power of suppliers will remain low for as long as there are few providers of the cloud computing services but as new entrants continue to flood the market, their bargaining power will continue to decrease. The alternatives evaluated include the use of green energy and the deployment of new data centers in emerging markets such as Africa, Asia and the Middle East and these alternatives are given as recommendations for Amazon to continue its dominance in the cloud computing industry.
Porter's five forces analysis
Threat of new entrants.
With the increased interest in cloud computing and the expected growth in the industry, there is bound to be an increase in the number of new entrants into the market who will create significant competition for Amazon Web Services (AWS). Other factors that will lead to increased number of new entrants is the low fixed costs for customers to switch from one provider to the other, extremely low brand loyalty in the industry as a result of its infancy and lack of government regulations. Though factors such as the high capital requirement for entrants into them market and the relatively high risk involved in the cloud computing industry, these do not bear as much weight as the factors that provide a supporting environment for the adoption of cloud computing.
Threat of new substitutes.
As argued by Guralnick and Constable (2010)
, the main competition for cloud computing is open source computing. SME clients might consider the adoption of the cloud computing strategy in preference to open source computing since the costs for switching over to the new costs are relatively low. Since cloud computing is still in the early stages of growth, there is a relatively high threat of substitutes as a result of new services being provided by new entrants into the industry. Current trends in the organization and low brand loyalty also increase the threat of new substitutes. The market is also largely price driven which increases the threat of substitutes.
Rivalry among existing competitors.
Amazon is one of the dominant players in the cloud computing market with between 80 to 90% of the market share. Among the competitors in the IaaS market, there is no true differentiation between the products being offered which is one of the leading factors for competitive rivalry in the industry. Furthermore, the lack of barriers of entry of new market players also creates increased rivalry among existing competitors who are also facing competition from new market entrants. The slow growth of the industry also creates rivalry among the existing competitors as a result of increased popularity and interest in cloud computing by existing and potential consumers.
Bargaining power of buyers.
The bargaining power of consumers of cloud computing services has the potential to improve greatly as a result of standardization of cloud computing products which reduces the amount of differentiation between the products. Since the industry is growing slowly and is still relatively young, it is expected there will be government policies which will be implemented. Market players will thus be needed to adjust their strategies for regulatory compliance with the law which will create increased bargaining power for the buyers. Additionally as a result of increased number of consumers of cloud computing services, they will have increased bargaining power. The industry also has a low cost of switching from one provider to another which increases the bargaining power of customers Adams, Nelson, & Todd, 1992()
Bargaining power of suppliers.
The bargaining power of suppliers is also high since the industry is unregulated and each supplier has the right to create their own terms and conditions for providing their clients with the services. Another reason for increased bargaining power of suppliers is that there are only a few dominant players in the industry against an increasing number of existing or potential customers. It is also expected that the suppliers will form strategic alliances which will help to improve their positioning in the marketplace. Amazon has a near monopoly in the provision of cloud computing services which gives them increased bargaining power.
Strategic grouping and mobility barriers that affect firm strategy
In the cloud computing industry, the only strategic grouping that exists for the market players are primarily based on pricing policy and product differentiation. There are three major strategic groups. The first is software as a service (SaaS) which are the companies that offer software through their cloud computing infrastructure such as email, word processors such as Google Drive and Office Live and business applications such as Salesforce and NetSuite. The second group is the platform as a service (PaaS) which are the companies that provide development and testing functionality as a service to its customers such as Force.com. The last group is infrastructure as a service (IaaS) which are the companies that provide data management processing and storage services on the cloud and include Amazon, Oracle and Google.
This strategic grouping is based on the ability of market players to compete majorly on pricing and other factors such as product differentiation. However, there is low differentiation between the market players in one strategic grouping. Rivalry is strongest in each of the strategic groups with the SaaS group having the strongest competitive rivalry. There are huge barriers to mobility of market players in the cloud computing industry who do not have the capital requirements in addition to other resources to move in the various strategic groups that exist in the cloud computing industry. These factors that create barriers to mobility are the same factors which separate these strategic groups. Since the industry has low levels of differentiation, it is extremely easy for the companies in the strategic groups to create a new strategic group which will create higher barriers of mobility through heavy advertising and promotion activities to develop brand awareness and greater economies of scale as a result of the new strategic group formed.
Evolution of the industry
Research by Forrester which was quoted in the Economist stated that the category of infrastructure as a service (IaaS) which involves data storage, server and database management services and data management generated approximately $1 billion in sales in the year 2010. This is the category in which Amazon is dominant with 80 to 90 per cent market share. The study also stated that the revenue of the IaaS market is expected to grow to $4 billion by the year 2020. It argued that this increase in revenue in the IaaS market will be as a result of reductions in the costs of computer hardware over the years. This trend will be similar to the personal computer market trend which saw prices reduce considerably over the years as the computers increased in popularity. As the personal computer market is characterized by products that are relatively homogenous so is the IaaS market hence there will be intense price competition and very low profitability. The Forrester research stated that the IaaS market which is low cost and involves large scale storage and management of data in remote servers will only account for 10% of the cloud computing market The Economist, 2010()
Another survey conducted by North Bridge Venture Partners in 2011 on representatives from cloud computing service vendors and end…