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Amazon Case
Amazon Case
Amazon.com, Inc: Retailing Giant to High Tech Player?
I. CASE ABSTRACT
Founded by Jeff Bezos, online giant Amazon.com, Inc. (Amazon) was incorporated
in the state of Washington in July, 1994, and sold its first book in July,
1995. Amazon quickly grew from an online bookstore to the world's largest
online retailer, greatly expanding its product and service offerings through a
series of acquisitions, alliances, partnerships and exclusivity agreements. By
2010, 43% of Amazon net sales were from media, including books, music,
DVDs/video products, magazine subscriptions, digital downloads, and video
games. More than half of all Amazon sales came from computers, mobile devices
including the Kindle, Kindle Fire, and Kindle Touch, and other electronics, as
well as general merchandise from home and garden supplies to groceries,
apparel, jewelry, health and beauty products, sports and outdoor equipment,
tools, and auto and industrial supplies. Amazon faced several other challenges
including those from state governments that wanted it to collect sales taxes
so that it did not adversely compete against local businesses. Amazon was at a
crossroads with regard to its push into technology vs. its general
merchandise.
Decision Date: 2012 FY Sales: $48 billions
FY Net Income: $631 millions
II. CASE SUBJECTS AND ISSUES
Industry Analysis
Strategy Formulation Competitive Advantage
Strategy Implementation New Product Development
Core Competencies Market Segmentation
Online Marketing Online Sales
Competitive Strategy Manufacturing/Outsourcing
Digital Media/Streaming ebooks/eReaders
Same Day Delivery Sales Tax/State Govt. Relations
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III. STEPS COVERED IN STRATEGIC DECISIONMAKING PROCESS
IV. CASE OBJECTIVES
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
VII. DISCUSSION QUESTIONS
2. Does it make sense for Amazon to sell Kindle below its cost?
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IX. CASE AUTHOR’S TEACHING NOTE – Not Available
X. STUDENT STRATEGIC AUDIT
I. Current Situation
A. Current Performance
B. Strategic Posture
2. Mission
Company's Mission Statement: "Earth's most customer-centric
company ... a place where people can come to find and discover
anything they might want to buy online."
Amazon is an e commerce business investing heavily in technology
to gain market share and differentiate itself. It sells a wide
variety of goods and services including Web Services, Kindle etc.
The company's mission statement properly addresses the e-commerce
specialization. In addition, the investments in technology
infrastructure and goods & services offered (web services,
acquisitions of Zappos, Quidsi, etc.) provide support to the e
commerce business and in alignment with the firm's mission.
3. Objectives
To increase sales domestically and internationally
Gain and retain the market share in the e commerce industry
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4. Strategies
To increase sales and market share through partnership,
acquisitions and strategic alliances
o Allow 3rd party sellers to place links on Amazon web sites
o Provide hosting and web site maintenance services for
partners.
Sacrifice short term profits to gain or retain market share in
certain business lines, such as e-reader (Kindle) in the long term
Heavily invest in technology infrastructure
Invest in inventory management, shipping, and other business
capabilities, e.g. FBA, FWS and Frustration Free Packaging.
Utilize technology/web site capabilities to
o Analyze website traffic
o Customer/non-customer data collection
o Better market products and services to customers
Utilize technology to offer customers unique and useful tools and
services
o Ratings engine
o Safe and convenient transaction environment
o Ease of web site use
Continuous adaptation to ever-changing environment
Effective online marketing techniques to attract customers and
satisfy partners
o Pay-per-click advertisements
o Permission email marketing
o Amazon Prime Membership
Strategic positioning of fulfillment centers (near airports) at
low costs
The strategies are consistent with each other as they support the
corporate and business objectives.
5. Policies
Maintain a lean corporate culture, focused on increasing its
operating income
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6. International Operations
Amazon's strategic goal is to gain international market share in
e-commerce with the support of technology. Current mission, objectives,
strategies and policies encourage expansion, including international
operations. In order to expand overseas, the Company must have
customized set of objectives, strategies and policies for each region
which has a unique set of geographical, economical, business, political
and social factors.
2. The Chairman, Jeffrey Bezos, holds 19% of stock, and the remaining 9
directors hold 0.03% of stock collectively.
5. The directors served on the board for various lengths of time. The
Chairman, Mr. Bezos, has served since 1994, total of 6 directors have
served for over 8 years. Two directors have served for less than 1
year (See Table I below).
6. The Board is responsible for the control and direction of Amazon Inc.
The Board is very much involved in the firm's strategy and meets
several times a year to address Amazon's issues and strategies.
Furthermore, the Board also reviews CEO succession planning.
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Table I
Served
Directors Shares Owned Since Industry
87,
Jeffrey P. Bezos 963,414 1994 Ecommerce
Patricia Q.
Stonesifer 39,549 1997 Art
Thomas O. Ryder 31,579 2002 Media
Tom A. Alberg 28,344 1996 Technology
John Seely Brown 17,566 2004 Academia
William B. Gordon 7,242 2003 Venture capital
Blake G. Krikorian 6,950 2011 Technology
Alain Monié 6,550 2008 Technology / wholesale
Jonathan J.
Rubinstein 1,831 2010 Technology
Jamie S. Gorelick 4 2012 Law
B. Top Management
1. President, Chairman of the Board, and CEO is Jeffrey Bezos. There are
11 more officers (See Table II on the following page).
2. The Officers of the company have been a part of Amazon for various
lengths of time. However, all of them have held the position for at
least 5 years. Management background includes holding managerial or
officer positions at Apple, GE, MS, Intel, and Deloitte Touche. They
possess expertise in technology, consulting, and accounting
(www.amazon.com).
Three officers hold international Sr. VP positions in International
Consumer Business, Worldwide Operations and Worldwide Digital Media.
One officer has extensive experience in international business from
his prior positions in Amazon and Apple (www.amazon.com).
None of the officers come from companies acquired by Amazon.
3. Most of the officers have been internal hires. None of the officers
have held a position for less than 5 years. Therefore, their
contribution is evident from Amazon's performance in various
strategic areas: e-commerce, partnerships, technology, etc.
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Table II
www.amazon.com
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1. The following forces are affecting both Amazon and the e-commerce
industry which it competes. These forces present both current and
future threats (T) and opportunities (O).
a. Economy
Global marketplace (O)
Disposable income of target population [Economic Boom (O),
Recession (T)]
Cost of transportation (oil) (T)
Cost of real estate (T)
Expiration of Tax Exemption(T)
b. Technological
Industry-related technology advancement (O)
Security of web site and transactions (O / T)
Mobil functionality (O)
Increase in Cloud Spending (O)
More tech savvy customers (O)
c. Political – Legal
Patent, License and Copyright Laws (O / T)
Increased Risk of Litigation (T)
Increase in Taxes (T)
Regulation of Industry (O / T)
d. Sociocultural
Growing comfort with online shopping in different countries (O)
Buying Local (T)
Increase demand for immediate product fulfillment (O / T)
2. Since Amazon is a global retailer, does not have the same limitations
as a brick and mortar retailer, Amazon's environment forces vary at
different degrees based on the region in the world of the purchaser.
Many of the forces apply to each but they affect Amazon at different
levels.
B. Task Environment
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B. Corporate Culture
1. Encouragement of top management to discuss and share ideas
illustrates a well defined culture composed of shared beliefs,
expectations and values.
2. The culture is indeed consistent with strategies and policies. The
focus on customer service and analysis to provide customer oriented
recommendations provides an inference about team work.
3. Culture of openness and knowledge sharing can generate more
innovations to better serve its customers. Flexibility and
adaptability to the ever changing industry is essential to the firm’s
culture. Productivity is reinforced by stock-based compensation and
quality of workplace environment.
4. Employees are cross cultural and multi-national.
5. The presence of different websites for multiple countries and
fulfillment & customer service centers in North America, Latin
America, Europe and Asia illustrates that Amazon values different
cultures and practices.
C. Corporate Resources
1. Marketing
a. Objectives
Growth/Expansion in Target Markets Segments (North America and
International)
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Strategies/Programs
Online Marketing - vital to strategy
Amazon Website (ease of use as marketing tool)
o Amazon websites were designed to be easy and simple
(e.g. Payments for multiple products could be done
once and payments would follow the same process
regardless if the sale was directly from Amazon or
one of it's associates.)
o Website traffic tracking and analysis allowed
Amazon to direct visitors to items them may be
interested in.
Pay-Per-Click Advertisements
o Advertisements on search engines such as Google.
Amazon paid a fee per each visitor who clicked on
the sponsor website.
Permission marketing/E-mail Marketing
o Permission to e-mail customers with specific
production promotions based on prior purchases.
Amazon Prime
o Membership program that was offered for a $79
annual fee which allowed for free next day delivery
and free access to Amazon Instant Video.
Television & Radio Advertisements
o Amazon initially reduced television and radio
advertisements as they believed them to be ten
times less effective. However, in 2010, television
advertising was launched to increase brand
awareness.
Free Shipping Offers/Speedy Delivery
o As part of maintaining its objective of competing
on price, Amazon offered a number of free shipping
offers.
o In the third quarter of 2011, Amazon’s shipping
fees generated $360 million in revenue, which was
reduced by $918 million in shipping expenses.
o Amazon expedited shipping by strategically locating
its fulfillment centers near airports.
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Kindle/Kindle Fire
o Kindle was sold below cost as it was expected to generate
increased sales of e-books and other digital content.
o E-book sales took off and increased by more than
100% according to the Association of American
Publishers. Other products were being offered in
digital formats.
o In 2010, 43% of Amazon net sales were from media,
including books, music, DVDs/video products,
magazine subscriptions, digital downloads, and
video games.
o Half of all Amazon sales came from computers,
mobile devices including the Kindle, Kindle Fire,
and Kindle Touch, and other electronics.
Product/Service Selection
One of Amazon's core principles is selection. Amazon
strived to offer a wide selection of merchandise.
Through Partnership and Acquisitions Amazon has been able
to offer a wide variety of products and service.
o In July 22, 2009 Amazon acquired Zappos, an online
shoe and clothing retailer
o In November 8, 2010 Amazon acquired Quidsi, the
parent company of Diapers.com, an online baby care
specialty site, and Soap.com, an online site for
everyday essentials.
o In December 2, 2010, Amazon invested in $175million
in LivingSocial, a site dedicated to offering easy
access to restaurants, shops, activities and
services.
o In January 20, 2011, Amazon acquired Lovefilm a
European web-based DVD rental service.
Amazon Market Place
o Developed partnerships with many retailers, such as
Target, Sears Canada, Bebe Stores, Timex
Corporation and Marks & Spencer
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i. Trends
Continued increases in online shopping as customer have become
more comfortable with shopping online.
North America website visitors dominated with accounting for
66.8% of all Amazon online visitors.
In 2009 sales of media sales accounted for 52% of all sales and
in 2011 this number decreased 36% with Electronics growing to
64%.
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2. Finance
a. Objective
Achieve long-term sustainable growth and profitability
Strategy
Amazon objective is to maintain a lean culture focused on
increasing its operating income through continually increasing
revenue and efficiently managing its working capital and
capital expenditures, while tightly managing operating costs.
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Table III
i. Trends
Operating expenses increase due to increases in R&D and Selling
and General Expenses. This has reduced Net Profit Margin.
o Operating expenses represented 21% of revenues in 2011
which is a 4% increase from prior year. This includes
expenses related to software and web-development
expenses.
Revenues have consistently grown with International sales
growing each year closer to 50% of all sales.
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v. Competitive Advantage
Amazon's heavy investment in Research and Development and
Technology has given Amazon a competitive advantage. It
provides a secure website which customers trust, collect and
analyze web traffic to push products to customers, provide a
number of web services, and creates brand loyalty with products
like the Kindle.
Operating Expenses have been substantial to Amazon's financial
performance as they are used to support principles of ease of
use and customer service which give Amazon a competitive
advantage.
Strategy
Invest heavily in technology infrastructure
o Investment in software to support "Frustration Fee
Packaging" program that would help identify appropriate
packaging for each item.
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ii. Core principles such as; ease of use; speedy, accurate search
results; selection, price and convenience; a trustworthy
transaction environment; timely customer service; and fast,
reliable fulfillment are all enabled by the sophisticated
technology.
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b. Operation Capabilities
i. Global brand with website presence in Canada, United Kingdom,
Germany, France, China and Japan
ii. Partnerships with many retailers for online hosting and
management of websites
iii. Strategic locations of fulfillment centers near airports.
Programs such as Amazon Prime intended to deliver products
within two days to the customers were thus possible
iv. Amazon Marketplace allowed retailers to embed Amazon links on
their websites. Amazon earned fixed fees, revenue shared fees,
per-unit activity fees or some combination thereof
v. Utilization of warehouses to store products by the retailers
for a fixed fee and sell them as demand arises
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Strategies:
Good Monetary and Other incentives. (Increase in payroll
expenses was also one of the reasons for net income decline
between the years 2009 and 2010)
Keep the employees motivated and challenged so as to be
innovative
Target development of staff in areas such as
a. Research and Development. Sales & Customer Support.
b. Web Analytics, Data Mining, Web Services, User Interface
Design.
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A. Strategic Alternatives
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2. Alternative Strategies
a. Cost Leadership - Part of the Current Strategy
Pros:
Increase Sales
Helps to attract customers by passing cost savings to
customers (low cost shipping and purchase processing fee, if
any)
Can create a positive free cash flow and frees up financial
resources for further profitable developments and
acquisitions
Large size allows Amazon to utilize economies of scale
Cons:
Competing on basis of free/low cost shipping will decrease
Amazon's revenues as expenses increase
Requires continued effort to increase revenues or decrease
costs to ensure it does not become destructive
Kindle selling below cost eats up profits
Cons:
Costs may exceed the revenues (e.g. Kindle costs)
Web-based products may be replicated by competitors
Some unique Amazon products and services may not be
profitable (e.g. one day shipping)
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Cons:
Competition may hamper the business (eBay and metro AG)
Nature of industry requires growth (no stability) in lieu of
highly competitive business
B. Recommended Strategy
i. Growth / Stability
a. Existing cloud computing technology infrastructure could be
leveraged better by its application across different
devices. Amazon has stayed competitive in the cloud business
and continued focus can be beneficial to Amazon.
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ii. Differentiation
a. With an increase focus on cloud and web improvements on the
continuum, Amazon should not rush into one day shipping.
This will increase Amazon's expenses and may waste Amazon's
inventory space. However, Amazon should continue to seek
increase efficiencies such as with the Frustration Free
Packaging program.
b. Mobile development seems like an attractive strategy given
Amazon's technological strengths and increased digital
sales. This will differentiate Amazon even further from its
competitors similar to their expansion with the Kindle.
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VII. Implementation
A. Restructuring is not necessary as all areas are implemented to promote
e-commerce. However, special focus should be spent on Cloud, Kindle,
mobile developments and web services, as they can contribute to Amazon's
growth.
R&D:
No necessary changes.
Operations:
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mobile industry. The last area should be the same day delivery
as current pressures are not forcing this change in strategy.
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Amazon's ability to expand.
Amazon has been proactive in
Expiration of Tax anticipation that the tax emption would
Exemption/Increase in expire however sales will always be
Taxes 5% 5 0.25 threaten by increases in taxes.
Increased Risk of Threat of potential litigation as
Litigation 5% 3 0.15 Amazon continues to expand.
Regulation of Any changes in ecommerce regulations
Industry 5% 2 0.10 that would affect Amazon's operations.
Amazon's selection and prices keep it
competitive but growing culture of
"Buying Local" trend 3% 3 0.09 "buying local" can threat it’s success.
Total Score 100% 3.70
Exhibit II:
Internal Factor Analysis (IFAS)
Weighted
Factors Weight Rate Scored Comments
Strengths
Well developed website
features and
capabilities 15% 5 0.75 Customer loyalty, analytical tools
Allows to attract more customers,
Marketing techniques 10% 3 0.30 increases brand awareness
Strong distribution
channel / Logistics and
strategic location of Customer loyalty due to fast and
fulfillment centers 5% 4 0.20 reliable delivery
Strategic partnerships Diversification of products offered to
and alliances 5% 3 0.15 customers
Variety of webbased
products to
individual/business
customers 15% 4 0.60 Diversification of clientele
Frustration free Promotes firms as a environmental
packaging program 5% 3 0.15 friendly business.
Strong financial Provides liquidity and solvency,
position 10% 2 0.20 available funds for investments
Highly skilled labor 10% 4 0.40 Quality of work deliverables is high
Weaknesses
High production costs 10% 3 0.30 Hardware is a low margin business. The
loss could reduce the total income
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(example: Kindle)
High shipping expenses 10% 3 0.30 Decreases margins
Suggests lack of analytical skills,
which has resulted in several
Prone to unsuccessful unsuccessful acquisitions, followed by
acquisitions 5% 1 0.05 financial losses
Total Score 100% 3.40
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Exhibit III:
Strategic Factor Analysis (SFAS)
Weighted
Factors Weight Rate Scored Short Interim Long Comments
Expansion in Global Key strategy for
marketplace (O) 15% 5 0.75 X X expansion
Industryrelated
technology advancement Supports key
(O) 5% 5 0.25 X X operations
Customer
Security of web site satisfaction and
and transactions (O) 5% 5 0.25 X X loyalty
Mobile functionality Diversification,
(O) 5% 3 0.15 X X new market share
Cost of transportation
(oil) (T) 12% 3 0.36 Increase costs
Cost of real estate
(T) 10% 3 0.30 X X Increase costs
Expiration of Tax
Exemption/Increase in
Taxes (T) 5% 5 0.25 X Increase costs
Well developed web
site features and Key factor in e
capabilities (S) 15% 5 0.75 commerce
Marketing techniques
(S) 10% 3 0.30 Brand name
Variety of webbased
products to Key to attract
individual/business customers and
customers (S) 10% 4 0.40 diversification
Weak in
High production costs production cost
(W) 8% 3 0.24 management
Total Score 100% 4.00
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Exhibit V:
Common Size Income Statement (%)
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