Running head: AMAZON 1

Amazon

Ashley North

Arizona State University

OGL 260: Resource Allocation in Organizations, Module 5

July 30, 2021

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Amazon

Regarding revenue, Amazon.com Inc. is among the largest internet-based companies in

the world. In 1994, Jeff Bezos began selling books through his online bookstore, tentatively

named Cadabra, Inc. later becoming known as Amazon. Little did consumers know that Bezos

had much bigger plans in store for the business. Growing an astronomical amount, the

organization now offers consumers an array of items online ranging from books to groceries to

household items. In addition, Amazon has expanded beyond the internet, offering some cities

physical bookstores and grocery stores. With such rapid and extreme growth, how did amazon

gain its financing to begin with and how has Amazon flourished so eloquently?

As Keown, Martin & Petty (2020) stated, “The amount of business risk the firm decides

to take on is most critical at the time the business is started” (p. 401). According to Eyal (2019),

in a 60 Minute interview, Bezos stated that “the riskiest moment for Amazon … was the very,

very beginning … the whole thing could have ended before the whole thing started” (para. 2).

For Amazon to operate it needed $1 million, which Bezos ended up obtaining by giving up 20

percent of the company to its early investors (Eyal, 2019, para. 2). As Bezos contemplated

expansions throughout the organization, he had to take into consideration the risk of Amazon’s

future earnings.

As Eyal (2019) stated, Bezos would base his risks off what he referred to as the “regret

minimization framework” (para. 3). Eyal (2019) goes on to state that rather than “assessing how

much risk a decision has, [Bezos] instead questions if he’ll regret a decision in the future” (para.

3). According to Eyal (2019), Bezos suggests that:

There are two types of decisions that any business will make: Type 1 and Type 2. Type 1

decisions are irreversible, and should therefore be made with caution. Type 2 decisions
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are ones that are easily reversible. If a Type 2 decision is not working out, a business can

simply revert back to its former state. Amazon makes a lot of Type 2 decisions,

constantly trying out new services or products and quickly cutting them if they aren’t

working out. (para. 10)

In having this mentality, Amazon has developed two of the company's largest services, Amazon

Prime and Amazon Web Services (Eyal, 2019, para. 11). In addition, Amazon purchased Whole

Foods Market in 2017 for approximately $13.7 billion to expand its online grocery experience

(Coppola, 2021, para. 3).

As the pandemic forced people to stay inside and shop virtually, the corporation utilized

its platforms to assist individuals across the globe to obtain everyday essentials at the click of a

button. According to Keown, Martin & Petty (2020), “The stability of the domestic economy …

The exposure to, and stability of foreign economies … Sensitivity to the business cycle … [and]

Competitive pressures in the firm’s industry” are all factors in “a firm's business risk” (p. 401).

While most of the world is facing hardship overcoming these risks throughout the pandemic,

Amazon deemed these business risks as business opportunities. Amazon generated a net income

of roughly $21.3 million in 2020, an increase of nearly $12 billion from 2019 (Coppola, 2021,

para. 1).

As Keown, Martin & Petty (2020) stated, having an expansive organization, such as

Amazon, requires a large investment towards plants and equipment resulting “in high fixed

operating costs regardless of the level of plant operation” (p. 401). According to Gupta (2021),

“Amazon’s cost structure is driven by value” (para. 20). This means that Amazon makes

decisions that will benefit them the most economically. For Amazon to operate on a global scale,

the organization must rely on its IT department as well as its fulfillment centers. As Gupta
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(2021) stated, “Other essential elements utilized in the cost structure of Amazon include its

customer service centers as well as software development centers across the world” (para. 20).

Considering Amazon has expanded rapidly over the coming years, Bezos’ theory on decision-

making seems to be paying off. According to The Wall Street Journal Markets, Amazon had

expected earnings before interest and taxes (EBIT) in 2020 of roughly $22.8 billion, an increase

of just over $8 billion from 2019 (para. 17). With a continual increase in revenue, Amazon can

continue to explore an assortment of business ventures.

While Amazon has developed substantially in terms of market capitalization and sales,

there is still risk in investment. As Keown, Martin & Petty (2020) stated, “because business risk

can affect the volatility of a firm’s revenues, it can affect the firm’s earnings per share” (p. 401).

According to Downie (2020), “The biggest risks of investing in Amazon.com, Inc. (NASDAQ:

AMZN) stock are increasing competition, profit potential uncertainty, revenue growth

uncertainty, speculative valuation and share price volatility” (para. 1). If Amazon does not

continue with its forceful tactics, Downie (2020) suggests the “stock will likely depreciate

because the market has already assumed future performance will be strong. This speculation

further compounds risk by making Amazon’s stock price highly volatile, disproportionately

exposing investors to market fluctuations” (para. 2). Amazon stock currently has a beta of

approximately 1.3, making it an extremely risky investment enticed by future growth (Downie,

2020, para. 3). While Amazon has faced competition from retailers such as Target Corporation,

Wal-Mart Stores, Inc., and Costco Wholesale Corporation, specialty retailers including Bed Bath

& Beyond, inc., and Best Buy Co. have invested densely in online sales channels (Downie, 2020,

para. 4). As Downie (2020) stated, “These developments remain mere threats … as Amazon still

holds more than 40% of the highly fragmented online retail market as of 2019” (para. 4).
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Altogether, it’s evident that Amazon has understood the difference between a business

and a financial risk. By utilizing Bezos’ theory on decision-making, and the company’s financial

resources, Amazon has been able to expand its business line far beyond its original online books

store. While Amazon’s stocks remain a speculative investment, the company's steady revenue

growth has investors hoping for a strong future performance.

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References

Coppola, D. (2021, July 7). Amazon annual net income 2020. Statista.

https://www.statista.com/statistics/266288/annual-et-income-of-amazoncom/.

Downie, R. (2020, January 12). The biggest risks of investing in Amazon stock. Investopedia.

https://www.investopedia.com/articles/markets/100215/biggest-risks-investing-amazon-

stock.asp.

Eyal, E. (2019, February 11). From Jeff Bezos to Elon Musk: What true innovators know about

risk. Shopin. https://medium.com/@ShopinApp/from-jeff-bezos-to-elon-musk-what-true-

innovators-know-about-risk-828dfcaa17d8.

Gupta, S. K. (2021, February 13). Amazon business model: How does Amazon make money.

Business Strategy Hub. https://bstrategyhub.com/how-does-amazon-makes-money/.

Income Statement. Dow Jones & Company. (n.d.). Amazon.com Inc. The Wall Street Journal.

https://www.wsj.com/market-data/quotes/AMZN/financials/annual/income-statement.

Keown, A. J., Martin, J. D., & Petty, J. W. (2020). Foundations of finance: The logic and

practice of financial management (10th ed). New York, NY: Pearson.