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CASE TEACHING NOTES
Amazon.com – from start-up to 2004
Gary Stockport and Mark Ivory1
This case: • • • Provides an understanding of the components of a global E-commerce business; Identifies the changes in the E-commerce environment between 1995 and 2003 in the US and other global regions; Tracks the fast moving development in Amazon.com’s business model year-by-year from 1995 to 2003.
This case analyses the changes in Amazon.com from its early first-mover advantage through to the technology bubble crash in 2000, the introduction of a cost discipline, and its eventual emergence to what seems to be a profitable company. The case highlights the strategic thinking behind adopting a long-term approach to developing an E-commerce business model that incorporated substantial growth, global expansion and an ever-widening range of products and services.
2. Questions for discussion
Questions that could be posed from the case material are: 1. How would you define Amazon.com’s business model throughout the 1995–2003 period examined and how has this changed and evolved? 2. Has it entered the harvest stage that CEO Jeff Bezos promised would eventuate? 3. Is Amazon.com a natural acquisition target for Wal-Mart? Some of the other questions asked at the end of the case study were:
This teaching note was written by Professor Gary J. Stockport and MBA student Mark Ivory, at the Graduate School of Management, University of Western Australia. It was prepared to accompany the case Amazon.com – from start-up to 2004. © 2004 Gary J. Stockport, University of Western Australia, Perth, Australia. Not to be reproduced or quoted without permission.
© Pearson Education Limited 2005
Instructor’s Manual 4. 1997 – Rapid growth through adopting a broader business model (product and service offering) and capital raising. 3. expanding global presence and an ever-widening business model. Should it continue to be all things to all people? 6. and these broadly were: • • • • • 1995 and 1996 – highly focused growth with a narrow product segment offering. 220 © Pearson Education Limited 2005 . 1998 and 1999 – Explosive growth incorporating a huge roll-out of infrastructure and staff. some of the key points using the year-by-year comparison provided within the case are identified below: Early start-up – 1995 and 1996 1995 and 1996 involved building capacity in the business including establishing relationships. and deveoping software.com is in 2004 as well as how it got there. Case analysis 3. Is the logical end game scenario to be the Wal-Mart of the Internet? Questions 1 and 2 ask students to consider where Amazon. Questions 3 to 7 are forward looking. 2002 and 2003 – Reaping the benefits of economies of scale and scope combined with efficiencies.1 How would you define Amazon. Locating in Seattle and clustering around book distributors and software talent. asking whether the existing strategies are sufficient for future challenges.com business model the right model looking ahead 5 or more years? 5. This involved: • • Concentration on the US book industry with a larger offering of titles than bricksand-mortar retailers. continued growth and expansion. The use of a strategy canvas is given in Figure 1 and shows how the key parts of the business model offering changed between 1995–2003. distribution. 2000 and 2001 – Cost reduction but with a continued widening of the business model and further global expansion.com’s business model throughout the 1995–2003 period examined and how has this changed and evolved? Amazon. Is the Amazon. Furthermore.com went through various phases of change during the 1995–2003 period. A review of the 1995–2003 period within the case enables students to consider the rapidly changing nature of the business model and determine what the key strategic changes were.
Key achievements included: • • • • 1997 net sales grew nearly 10× from 1996 levels. Building alliances through the associate program. R Vol. and cumulative customers exceeded 1.000 titles as a consequence of the need to put supply ahead of demand. 80 6 Corpration all rights reserved NB: Other criteria can be used in the canvas or substituted for existing criteria. 221 © Pearson Education Limited 2005 . Distribution centre capacity grew by over 5×. inventories rose to over 200. From early growth to IPO – 1997 1997 was a year of exponential growth but there was a continued focus upon the US book market. Yahoo. such as: • Superior Technology • E-commerce Offering • Fulfilment Speed • International Sales • • Adopting customer innovation as the primary reason for its focus on technology. from ‘Charting your company’s future’ by Kim.5 million.5 million (over 22% of net sales).Instructor’s Manual Figure 1: Strategy Canvas Global relates to developed markets Repeat customers makes an assumption about 2003 H I G H 2003 2000 L O W Price Product Range Global Presenc Repeat Customer Gross Profit 1995 Service Range Source: Adapted and reprinted by permission of Harvard Business Review. Vol 80. associates and employees by around 4×. all rights reserved. Excite and Alta Vista. Issue 6. Copyright © 2001 by the Harvard Business School Publishing Corporation. A number of key strategic partnerships were formed with other emerging Ecommerce players such as AOL. There was a Public Listing through an IPO which raised $50 million despite losses from operations exceeding $32. W & Mauborgne R.
com.Instructor’s Manual Fast growth – 1998 This year saw the geographic and product expansion of the business with the opening of UK and German websites as well as the entry into music.com and others. E-commerce services through Shops as well as the expansion of many of these immediately into the UK and German sites.com. • • Even faster growth – 1999 1999 saw an explosion in growth across all parts of the business as the company sought to position itself as the number 1 business in many segments and markets: • • • • Net sales grew by nearly 3× to over $1.com anywhere service features. although fulfilment rose slightly. Homegrocer.600. This demonstrated Amazon. Cumulative customers and repeat customers increased as the company focused on a brand strategy to reduce customer churn. introduced possibly as a response to the loss of 75% of Amazon. New products such as toys. Gear.6bn. Gross profit margins increased whilst marketing. 1-Click technology offered significant improvements for customers. Investments in other Internet companies such as Drugstore. cost cutting was selective and did not stop the company pursuing growth through a number of actions: • The opening of Amazon. technology and general administration as a percentage of net sales remained stable or fell. nearly 37% of net sales. Pets.com’s stock value.co.com. associates 7× to around 430.fr and Amazon. Continued improvement in the 1-Click technology as well as new product searches and Amazon.com’s superiority and core competency in technology development. Repeat customers reached 58% in 1998. electronics. gifts and video. However. videos and gifts. Other key points include: • The continuation of product growth through additional titles in books. cumulative customers 3× to over 17m. Net sales increased to over $600 million but losses also increased to $109 million. Losses were a staggering $605 million. 222 © Pearson Education Limited 2005 . Repeat customers grew to 73%.000 and employees 3× to over 7. • The bubble bursts – 2000 The technology ‘bubble bursting’ saw a new cost discipline begin.jp. making 5 store openings in 5 years. hardware.
Continued technology improvements such as ‘look inside the book’ and the first online credit card highlighting the commitment of the company to continual customer innovation. 223 © Pearson Education Limited 2005 .com had made as well as their capacity to be sustained. Additional strategic investments in other Internet based companies such as Ashford. photo and the expansion of UK and German sites. technology and general administration costs all fell in real amounts as well as a percentage of sales and fulfilment also fell as a percentage of sales. Given the original competitor comparisons during the early years between Amazon.6%. again whilst sales were increasing. Good news and bad news – 2001 This was the first year when economies of scale and scope began to filter through to the emergence of a profitable quarter and the halving of the previous year’s losses as sales continued to increase. Both of these companies offered luxury products. A strategic alliance with Borders linking into its physical book stores for the collection of products. suggesting the market was unconvinced as to the positive effects of the changes that Amazon.000. Continued losses from operations totalling $863 million from net sales that exceeded $2. First ever income profit for a quarter off-the-back of a huge 4th quarter sales as well as an increase in gross profit to 25. Other significant events were: • Lowest stock price since 1998 to $5.76bn.Com and eZiba. Marketing. Used.600 to 9. Further cost cutting measures saw distribution centres closed and a first ever reduction in employees. Other key points for 2002 included: • The opening of Canada as the 6th store and the introduction of Apparel and Accessories demonstrated again the continuing widening of markets and segments within the business model. • • • Everything comes together – 2002 During 2002.com. Barnes and Noble and other physical book stores. The number of employees grew from 7. The growth in the quality of senior management. wireless. this alliance constituted a ‘blurring’ of the lines about which businesses were in fact competitors.Instructor’s Manual • • • • Continued roll-outs of products and new stores such as health and beauty. the company began to consistently make profits (3 out of 4 quarters).com.97 adjusted.
sales were still increasing and gross profits margins were stable despite the changes in revenue streams to Used and E-commerce. technology and general administration would continue to fall in percentage terms to sales for the full year. Bezos confirmed the company’s belief that technology was the key differentiator in their business and noted the almost fixed cost of technology delivery. Other points included: • • • Another first in customer innovation (and satisfaction) with the Harry Potter book delivery on the Saturday of release.Instructor’s Manual • Increased sales. This showed continued efficiencies in the way the company operated and the benefits of cost cutting flowing through in the bottom-line results. 7 of the last 8 quarters have been profitable. This is a company that is proving its ability to both grow and evolve its business model whilst maintaining its gross profit margins. 224 © Pearson Education Limited 2005 . A major addition in revenue from the Used business. This contrasts with previous years where continued growth brought increased losses.com found itself being copied by new micro businesses conducting email fraud that forced it to launch multiple lawsuits. There was a shift in income streams linked to E-commerce solutions rather than just the fulfilment of orders. This showed a key vulnerability in the E-commerce model. more customers and more products and a new website combined with another slight reduction in employees. Amazon. Figure 2 shows profit by quarters 2002–2003 and Figure 3 shows profit by segments (groupings) 1996–2002. • • Success continues – 2003 All the indications were that savings in marketing.
000 $60.2 Has it entered the harvest stage that CEO Jeff Bezos promised would eventuate? Bezos stated that there would be 2 distinct stages.000 $100.000 -$100. Although this letter was non-specific as to timing.000 $40. Video (Nth America) Electronics.000 $50.000 2002 Qtr 2 $1. DVD's.000 $50.Instructor’s Manual Figure 2: Profit by Quarters (2002 & 2003) Profit by Quarter 2002 & 2003 $80.000 $150.600 2002 Qtr 4 $70.000 $30.000 $70. 225 © Pearson Education Limited 2005 .000) 2002 Qtr 1 $2.823 2003 Qtr 3 $51.000 $0 -$50.500 2002 Qtr 3 -$9. a growth phase followed a harvest phase.000 $0 -$10.000 -$250.000 -$300. Tools & Kitchen (Nth America) International Services Source: Amazon. Music.500 2003 Qtr 1 $39.000 $20. it was commonly thought by analysts this would take about 5 years after start-up.000 $200.000 -$200.931 Source: Amazon.000 $ (.com Company Reports (Quarterly) Figure 3: Profit by Segments 1996 to 2002 Pro forma Income (loss) by Segments $250.com Company Reports (Annual) 3.000 Y 1996 r Yr 1997 Yr 1998 Y 1999 r Yr 2000 Yr 2001 Yr 2002 Books.000 -$150.000 $10. This belief was first communicated in 1995 and later reinforced in the company Annual Reports that reprinted his 1997 letter to shareholders.225 2003 Qtr 2 $41.
3 Is Amazon.Instructor’s Manual The 2000 technology ‘bubble burst’.com is anywhere near the harvest stage. A flexible response to its product and service mix that enabled Amazon. vast product and services options.com’s global reach that had in 2003 over 35% of its revenue come from outside the US.com is the largest e-tailer in the world.com could utilise Wal-Mart’s larger distribution infrastructure and larger customer reach.com that the company was not meeting their expectations by wiping nearly 80% of value from the stock price. continual customer innovation.4m employees. Thus. Students might well conclude that a takeover by Wal-mart of Amazon.com a natural acquisition target for Wal-Mart? Wal-Mart. is nearly 100× bigger than Amazon. Wal-Mart could gain advanced competencies in E-commerce and technology development via Amazon. Wal-Mart could access Amazon. Real profits first arrived in 2002 and by 2003 it was clear the company could make consistent profits. The size difference suggests that Amazon.com business model the right model looking ahead 5 or more years? The Amazon.com’s sites and delivery services.4 Is the Amazon. An earlier rumour in 2001 suggested the market would look favourably upon a ‘union’ due to the potential synergies between the companies (see Appendix A). Wal-Mart is the largest retailer in the world. There is no evidence within the case study that Amazon. and global expansion. 3. and in the aftermath that lasted through 2001 investors sent a clear message to Amazon. 226 © Pearson Education Limited 2005 .com to move quickly into new directions and seize market opportunities.com would have to fight hard to prevent a hostile takeover in the event of Wal-Mart becoming interested. with 2003 sales totalling $246bn and some 1. These were identified in the article as: • • • • Amazon.com business model was built around a number of components. Providing additional product ranges or services became increasingly less expensive. Amazon. it actually took nearly 8 years rather that the predicted 5 for the company to make profits. Two core competencies that have permitted the ability of the company to succeed in its product and service delivery have been: • • Technology that attained a critical mass in its infrastructure cost. Wal-Mart could perhaps reduce branding and marketing costs.com is a distinct possibility in the future. 3. These included technology delivery.com but does not have a significant online business.
The speed within which Amazon. this ‘cherry picking’ approach to market rollouts may need to be changed with the diversified model fully adopted across all markets. Moore. the future potential of untapped business within the current business model. Amazon. In addition. Furthermore.21) presented a high technology market development model (Figure 4) which emphasised the importance of becoming the dominant ‘Gorilla’ within a market. It also shows the 2 largest markets in population (China and India) have very low penetration rates.com was able to extract a first-mover advantage through offering superior technology into new markets and services at a lower cost than competitors and is increasingly able to leverage upon its huge customer base when introducing new components to its business model.com’s global presence can be discussed within this framework.5 Should it continue to be all things to all people? This question centres upon 2 issues.com has moved globally suggests that particular countries may cross the chasm very quickly. 3. For example. the capacity to tap into this growing market was considerably enhanced by a diversified model which gives Amazon.6 Is the logical end game scenario to be the Wal-Mart of the Internet? A possible inference from the progressive Amazon. is that the company is ‘cherry picking’ the global market albeit with a vast array of products and services.com website rollout and its limit of just 6 sites in the world thus far by 2003. Secondly. p. Most markets will tend to move towards main street as their respective infrastructure improves making the Internet more accessible. is more likely to be situated on the early market part of the model. Within the first issue. Exhibit 8 within the case shows the sites chosen so far all have good-sized populations with high levels of internet penetration. possible further diversification to gain the benefit of cross-selling opportunities. Johnson & Kippola (1999.Instructor’s Manual As a result. Firstly. 227 © Pearson Education Limited 2005 .com scope to capture new users in one segment (grouping) and begin to cross-sell them into other segments. the case study indicated that the US represented less than 1. Amazon. This has put it into a very strong strategic position. on the other hand.2% Internet penetration. the online population was estimated at only 10 to 11% of the world population so it is reasonable to conclude that overall market growth will continue for the foreseeable future. perhaps through building first-mover platform technologies. India.5% of general retail business and suggested that capacity existed to exponentially grow in the future. the US market could be on or near main street with 63. Over time. 3.
Bezos Summarise the key points of the case Time (minutes) 10 40 25 15 15 25 20 20 10 A 1½ hour case study lecture would be difficult given the size of the case. Bezos Summarise the key points of the case Time (minutes) 5 35 20 5 10 10 5 228 © Pearson Education Limited 2005 . Johnson & Kippola. p.com’s evolution on the year by year basis Defining the Business & Business Model Analysis of the Industry & Competitors Intermission Break Evolution of the Business Model Innovation and Technology Competencies Other Issues – Wal-Mart. 1999.21 A 3 hour case study lecture could be apportioned in the following manner: Activity Introduction Amazon. but might be apportioned in the following manner: Activity Introduction Amazon.Instructor’s Manual Figure 4: Technological Development Life Cycle MAIN STREET CHASM EARLY MARKET BOWLING ALLEY TOTAL ASSIMILATION Timing of Lectures Source: Moore. Wal-Mart.com’s evolution on the year by year basis Defining the Business Model & Evolution Analysis of the Industry Innovation and Technology Competencies Other Issues.
The concept drew a positive reaction from market analysts. Analysts at Goldman. the Times said.com soared 25 percent in the first minutes of trading today on reports that it may be in negotiations for an e-commerce alliance with Wal-Mart Stores Inc. sporting goods. and Lee Scott.term.com. GS said. Sachs said that “given the current decelerating outlook for e-commerce growth.” There are a variety of different categories that make sense for Amazon to pursue either in the near-term or the long.as a vehicle to offset the slowing environment. HBA (health. The stock was at $12. WalMart’s chief executive. from online ordering to home delivery.. the impact of (such partnerships) has become increasingly important.Instructor’s Manual Appendix A – Wal-Mart Takeover Rumour Story March 5. the newspaper said. With total fourth-quarter sales topping $56. 229 © Pearson Education Limited 2005 . large customer base. or 15 percent of its staff. up from a Friday close of $10. and accessories).” said Amazon spokesperson Patty Smith.. are in talks for a deal that might be announced within several months. “We do not confirm or deny rumours or speculation about what we may or may not do in the future. including groceries. 2001 Amazon Soars on Wal-Mart Rumor By Beth Cox Stock of Amazon. The e-tailer. struggling to get into the black. a cash injection and a percentage of the sales it makes through Wal-Mart. consumer electronics and other big-box retail categories. The analysts reiterated their market outperform rating for Amazon. Amazon can leverage its existing assets (technology expertise.” “We would view these partnerships favorably and believe that Amazon shares are attractive for long-term investors.” “In theory. Goldman. Wal-Mart is the largest retailer in the world and operates its own Web site at walmart. GS said. The news of a possible alliance with Wal-Mart was reported in the UK’s Sunday Times and was attributed to an unnamed executive.300 workers. The Times said in its report that Amazon’s founder. Amazon would become Wal-Mart’s e-commerce supplier and Wal-Mart would gain access to the e-tailer’s expertise in managing an Internet retail operation.50 just after the opening bell. Sachs advised clients that such a partnership “could fill key voids or limitations in Amazon’s business by broadening its appeal and improving the economics of its model. Jeff Bezos. announced in January that it was laying off 1. apparel. Both companies declined to comment on the report. Amazon also would gain a presence in Wal-Mart’s 4. beauty.5 billion. and global brand awareness) to create partnerships that allow it to enter new categories or accelerate progress in existing categories to cast the widest net of awareness and still own the consumer.500 stores.
W. Moore. 2001. as well as reducing its marketing and promotional expenses.76–83. & Mauborgne. Source: www. GS said that Amazon might gain the ability to directly source its merchandise. 80. P.php/704671 References Kim. too. Johnson. 230 © Pearson Education Limited 2005 . Harvard Business Review. HarperBusiness.com/bus-news/article. & Kippola.internetnews. Issue 6. Vol. The Gorilla Game: An investor’s guide to picking winners in high technology. New York. R.. Boston. 1999. G. T. buying direct from manufacturers.Instructor’s Manual And there would be cost-saving opportunities. Charting your company’s future. pp.