Risk management process

Case study
Amazon

Presented by Tural Arif oglu

Student number: 46407
Contact: tural.arifoglu@student.wsb.pl
 Content

Introduction------------------------------------------------------------------------------------------4
 How does Amazon work and what does it sell------------------------------------------------5
Revenue model of Amazon------------------------------------------------------------------------9
SWOT analysis-------------------------------------------------------------------------------------12
What are Amazon's biggest fears? ------------------------------------------------------------15
Data loss and security breaches ----------------------------------------------------------------17
Defensive Measures--------------------------------------------------------------------------------19
Amazon Inventory Risks ------------------------------------------------------------------------20
Solutions---------------------------------------------------------------------------------------------22
Analytic’s opinion for potential risks about Amazon company--------------------------23
Conclusion------------------------------------------------------------------------------------------25
 Introduction

The risk assessment analysis will be performed on Amazon.com Inc., an

innovative and fastest growing online store located in Washington, United
States. The firm has set targets for becoming the U.S.’s largest online
retailer. and one of world’s biggest online stores (Amazon,
2013). Additionally, Amazon has been a industry leader in managing and
reducing the risks associated with running a business. Hence, the study
would be carried out with the help of secondary findings collected from
authenticated websites pertaining to Amazon, which will derive a
comprehensive understanding of the risks associated with the company and
the steps to be taken in order to mitigate such risks.
 How does Amazon work and what does it sell

• Amazon runs a platform business model as a core which has several other business units within
the main model. Some units, like Prime and the Advertising business, are highly tied to the e-
commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing
its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.
Amazon sells various products of its own on the platform but also allows third party sellers to sell
to customers.
• Currently the platform offers products and services like Amazon Prime Video, Amazon Music,
Appstore for Android, Echo and Alexa, Fire Tablet and TV, Kindle e-readers and books,
merchants products and vendor products. The target audience of amazon are the customers that
buy the products, subscribe to their services. So the sellers sell their products on the platform and
developers are focus using the AWS tech for infrastructure, digital products and services.
 Amazon business model revolves around four main players:

Developers
Consumers Sellers and
enterprises

Content
creators
The main products and services of Amazon
 Revenue model of Amazon
• With a market capital of $1.7 trillion, Amazon is currently the most
valuable retailer in the world. By the end of 2020, the company will
account 4.6% of the total US retail sales. The online stores of Amazon
bring in high margins, while the other parts of the Amazon business
model, like Amazon advertising services, Amazon Prime and Amazon
AWS run with much higher margins.
• Thus, Amazon’s online stores are the foundation for those other
businesses that make the overall company more profitable in the long run.
The product sales from Amazon website generated $163 billion from
2019 to 2020. A significant day for online sales is the Prime Day, which
has grown into a major shopping event comparable to Black Friday and
Cyber Monday.
 the breakdown of the Amazon revenue mix:

• Online stores – Includes product sales and digital media content where
we record revenue gross. Amazon leverage our retail infrastructure to
offer a wide selection of consumable and durable goods that includes
media products available in both a physical and digital format, such as
books, videos, games, music and software. The digital product
subscriptions that provide unlimited viewing or usage rights are included
in the Subscription services.
• Physical stores – This includes product sales where our customers
physically select items in a store. The sales from a customers who order
goods online for delivery or pick up at our physical stores are included in
online stores.
• Third party seller services – The commissions and any related fulfilment
and shipping fees and other third party seller services, the company
benefits a lot of revenue from third party sellers.
• Subscriptions – Amazon Prime memberships gives out annual and
monthly fees. Amazon also gives out subscription services for audiobook,
digital video services, digital music, eBooks and other non-AWS services.
Amazon’s standard Prime subscription rate is $119 per year, which would
translate into revenue of more than $17.8 billion, although the company
offers discounted memberships for students and others.
• AWS(Amazon Web Services) – The AWS includes global sales of
computing, storage, database and other services.
• Other services – These can include sales of advertising services, as well
as sales related to our other service offerings.
 SWOT analysis

Strengths Weaknesses
Global brand • No physical presence
• Focus on research and development • Low profit margins
• Strategic location • Low cash flows
• Customer-centric vision • Weak performance in China
• Diverse products
• Applied advanced technology
• Amazon.com’s Merchant Program
• Skilled workforce
• Strong logistics
Opportunities
Growth in movie downloads
• Social networking
• Growth of online shopping in China
• Beijing Olympics 2008
• Expansion through acquisitions
• Growing e-commerce sales
• Growth in digital media
• Increased consumer spending in India
Threats
Dependent on vendors
• Strong competition
• Patent infringement
 STRENGTH(S) WEAKNESS(W)
  DIVERSE PRODUCTS S2 STRONG LOGISTICS S9   LOW PROFIT
STRONG GLOBAL MARGINS W2
BRAND S1 NO PHYSICAL PRESENCE OR STORE W1  
STRONG FOCUS ON APPLIED ADVANCE
R&D TECHN. S4  
S3

    WEAK PERFORMAN CE IN
STRATEGIC LOCATION ASSOCIATE CHINA W4
S5 PROGRAMME S6
    LOW CASHFLOWS W3
CUSTOMER CENTRIC SKILLED WORKFORCE
VISION S7 S8

Opportunities ( O ) BEIJING OLYMPICS GROWING E-  INCREASED CONSUMER    

03 COMMERCE SALES O6 SPENDING IN INDIA O8  S1 + S9 + O6 = use such
strengths to make sure as
much of the new expected
expenditure as possible is
spent at
amazon.com
 S1 + S9 + O6 = use such
strengths to make sure as
much of the new expected
 GROWTH IN SOCIAL  RECENT ACQUISITI ONS GROWTH IN DIGITAL expenditure as possible is
NETWORKING O2 O5 MEDIA spent at
O7  S1 + S9 + O6 = use such
strengths to make sure as
much of the new expected
GROWTH IN MOVIE GROWTH IN INTERNET expenditure as possible is
DOWNLOADS O1 USAGE IN CHINA
spent at
04
 W4 + O4= Review
and improve on
current strategy in
China.
 O8 + O6 + W2 = Tap
into these in a bid to
increase profit
margins
.
 W2 + T2 = improve this
in order to stay ahead of
rivals
 T3 +W2 +W3 = reduce
such disputes to improve
increase retained
earnings
 What are Amazon's biggest fears?
There are some typical risk factors which Amazon mentioned in its 2016 annual report:
 disruption of our ongoing business, including loss of management focus on existing businesses;
problems retaining key personnel;
 additional operating losses and expenses of the businesses we acquired or in which we invested;
 the potential impairment of tangible and intangible assets and goodwill, including as a result of
acquisitions;
 the potential impairment of customer and other relationships of the company we acquired or in
which we invested or our own customers as a result of any integration of operations;
 the difficulty of incorporating acquired technology and rights into our offerings and unanticipated
expenses related to such integration;
 the difficulty of integrating a new company’s accounting, financial reporting, management,
information and information security, human resource, and other administrative systems to permit
effective management, and the lack of control if such integration is delayed or not implemented;
for investments in which an investee’s financial performance is incorporated into
our financial results, either in full or in part, the dependence on the investee’s
accounting, financial reporting, and similar systems, controls, and processes;
 the difficulty of implementing at companies we acquire the controls, procedures,
and policies appropriate for a larger public company;
potential unknown liabilities associated with a company we acquire or in which
we invest;
foreign transactions, additional risks related to the integration of operations across
different cultures and languages, and the economic, political, and regulatory risks
associated with specific countries
 Data loss and security breaches
“As a result of our services being web-based and the fact that we process, store, and
transmit large amounts of data, including personal information, for our customers, failure
to prevent or mitigate data loss or other security breaches, including breaches of our
vendors' technology and systems, could expose us or our customers to a risk of loss or
misuse of such information.”(Amazon Annual report)
Perhaps the biggest risk facing Amazon is hackers. No company can completely
guarantee that its security won't be breached. That's a large concern at a company that
could have its store knocked offline or the hundreds of millions of credit cards it holds
information on compromised. Amazon laid out its concerns in its annual report.
The online retailer also acknowledged that it does use some third-party technology and
that could be breached as well. Amazon even admits that while it has "developed
systems and processes that are designed to protect customer information and prevent
data loss and other security breaches," that "such measures cannot provide absolute
security.“
 Defensive Measures
 In 2020, Amazon launched Amazon Vulnerability Research Program in Hackerone
platform and after provided live stream events which allows to Hackers submit bugs
related to data privacy in Amazon.com and other risks instead of bounties which amazon
paid to them.
 Defensive Measures to minimize hackers' effects, Amazon should encrypt stored data to
ensure unauthorized people have difficulty accessing it. For this to be effective, it will
require encryption of file and network traffic systems, the addition of encryption for
sensitive data (Bisong & Rahman, 2011). Where possible, less-confidential data can be
stored in virtual servers, while more essential data gets stored in different locations.
Amazon published and released a document that comprises of the best practices to avoid
third party access. The users have been advised to continually update their security
configurations, strengthen their firewalls, and any other existing security control.
Moreover, they should be careful about who has access to their root network security
configuration.
 Amazon Inventory Risks
Since there’s a huge amount of cash tied up in your products, you must make every
effort to mitigate the risks associated with holding inventory.
Amazon sellers often must forecast demand before they order inventory from their
supplier. The potential for an imbalance between demand and inventory is called
inventory risk. When your stock level is too low for an upcoming sales event
because you under-ordered or transferred too late, it increases your risk of running
out of stock earlier than expected. Therefore, you’re likely to miss out on a lot of
opportunities. Inventory risk also refers to the probability that your products
decrease in value or quality in a warehouse if not sold out quickly. For example,
neglecting slow-moving products leads to overstocking, which may result in
markdowns, stock liquidation, obsolescence, and even possible theft.
 Poor
inventory
planning
Product
loss and Stock out
damage

Warehous Excess
e theft stocks
Inventory
risks

Inaccurate
forecastin Value loss
g quantity of
of products
products

Poor order Unreliable

tracking suppliers
 Sell UNDERSTAN
Through or DING
SUPPLY AND
Liquidate DEMAND
Excess RISK
Inventory

Calculatin
Soluti g and
setting
ons reorder
point

Avoid Streamline
Stockouts Your Data
 Amazon warning signs that could potentially result in the
“demise of Amazon.” (According to D. A. Davidson & Co.)
The law of large numbers: Amazon has become so big that it would become harder to
impress investors with rapid growth rates. For example, Amazon needs a whopping $2.3
billion of additional sales just to generate 1% growth, based on last year’s total revenue of
$232 billion, Forte noted. As a result, Forte expects Amazon’s sales to increase at a 15.5%
compound growth rate, down from the previous three years’ 29.6% compound growth rate.
Succession: What’s going to happen when Amazon CEO Jeff Bezos decides to step down?
It could lead to “significant succession risk,” Forte notes, as the move to the next CEO
could slow the overall business. At the same time, Forte notes that Amazon is well-prepared
for the change, with a deep bench exucitives who could potentially take the helm once
Bezos leaves. Bezos, now 55, hasn’t said much about his succession plan. For reference,
Bill Gates was 45 when he left resigned as Microsoft CEO, while Starbucks’ Howard
Schultz and Walmart’s Sam Walton both had much longer careers.
• Competition: Amazon will face intensifying competition in the its core e-commerce
space, as most of the weaker players have already vanished. That means, in order to
sustain its growth rate, Amazon will have to enter new, large markets, where more
competition awaits, Forte writes. Two of the most challenging areas for Amazon going
forward are apparel and grocery, Forte notes, as the company’s has struggled to see
much growth in either area. He believes Amazon needs more than just advanced
technology to win categories like women’s fashion, while noting the Whole Foods
acquisition hasn’t really moved the needle in winning share in the grocery category.
• Regulation: Forte notes that the U.S. government could “stop Amazon in its tracks” if
it steps up antitrust or other regulatory scrutiny of the company. While Amazon’s low
price offerings could make an antitrust case challenging to pursue, Forte says the
company’s huge market influence could draw additional regulatory pressure, both in
the U.S. and overseas. He wrote the potential for antitrust and regulation across the
globe could “negatively impact Amazon’s operating results and stunt its future
growth.”
 Conclusion
• Implementing these controls and solutions within Amazon’s environment
will ensure consumer data is protected in transit, as well as all company
systems and data remains protected and confidential. If Amazon wishes to
remain profitable and to maintain its status as the number one e-commerce
provider in the world these identified risks must be addressed.