Case 1-2

amazon.com The Brink of Bankruptcy

A-1 Christina Mattox Brian Sawyer

Case Timeline
• 1995 Amazon.com launched (online bookstore only) • 1997 Amazon.com goes public • 1998 Expands to new products and international markets • 1999 Expanded marketplace business model by equity partnerships with leading online retailers. • 2000 Investors are weary of Profit issues – Stocks Dive perilously low – Brink of Bankruptcy

Company History
• Non savvy employees built software • Location in Seattle, Washington • Starting online = lower overhead costs= lower prices • Uses the internet to create value for customers even in established and large markets • Admit starting strategy not without risk

Porter’s 5 Forces

http://www.wikiwealth.com/five-forces:amazon

http://en.wikipedia.org/wiki/Amazon.com

http://voices.yahoo.com/analysing-amazoncom-macro-environment-competitive-138171.html?cat=31

Porter’s 5 Forces
• Barriers to Entry
High Risk: Industry in General e-commerce is inexpensive Technology getting easier to source Brick & Mortar Stores poised for entrance Low Risk: Amazon’s business model Amazon.com’s IT infrastructure hard to replicate Innovation Leader Name Recognition Hard to establish

Porter’s 5 Forces
• Supplier Power
High Risk: Dependant on Suppliers for goods Partnership Dependency Brick & Mortar Leverage

Porter’s 5 Forces
• Buyer Power
High Risk: Low-cost model = Fair-Weather support Variety of choices and Growing Diverse Offerings = Diverse Competitions

Porter’s 5 Forces
• Threat of Substitutes
High Risk: Brick and Mortar option Other e-commerce sites

Porter’s 5 Forces
• Rivalry
High Risk: Brick and Mortar Establishment - Instant Online Competitors - Books/Music/Auction

Amazon.com is uniquely situated to combat high 5-Force Risks.

Problem Statement
“Jeff Bezos, founder and CEO, is convinced that the company will be able to leverage its strategic position, within a network of customers, suppliers, and partners, and the capabilities it built, to achieve profitability by year- end 2001.”

Question:
As a member of the company’s board of directors, what advice would you give to Jeff Bezos in early 2001?

For Consideration
• How did the Amazon.com business model evolve from the company’s launch in 1995 to early 2001?
- The evolution from a narrowly defined business model to an expanded, broadly defined business model - From “We Sell Books” to “We Sell Everything”

For Consideration
• What role did IT play in the company’s early strategy and the capabilities it built to execute strategy?
- Company Strategy: Become “Earths Biggest Bookstore”

- Built IT structure to be 70-80% over current capacity. “If we build it, they will come”
- Being online doesn’t limit market Online is boundary-less

Problem Questions
• How do we: – Become Profitable? – Inspire Investors? – Capture larger Market share?

Bezos’ Solution
• Infrastructure Services business model
“The amazon.com platform is comprised of brand, customers, technology, distribution capability, deep e-commerce expertise, and a great team with a passion for innovation and serving customers well…”
- Amazon.com 1999 Annual report

-Launch new e-commerce businesses faster -Higher quality of customer experience -A lower incremental cost -Higher chance of success -A clearer path to profitability any other company

Bezos’ Solution
• “Jeff Bezos, founder and CEO, is convinced that the company will be able to leverage its strategic position, within a network of customers, suppliers, and partners, and the capabilities it built, to achieve profitability by year-end 2001.”

Breakdown
• Infrastructure Services business model
-Labor intensive shipping supported by technology -Removes excess concerns of new business model activities being scaled across range of products - Hosting both PHYSICAL and ONLINE customer logistics services

Problem Statement
• As a member of the company’s board of directors, what advice would you give to Jeff Bezos in early 2001?

- Go For it

Problem Evaluation
-Time and money -Infrastructure -Consumer faith -We have a plan…

Additional Questions
• Would Amazon.com achieve its aggressive goal of becoming cash flow positive by the end of 2001 with this plan?

- It Depends

Additional Questions
• Depends on What?
-New Business Model -Expanded Partnership Roles (Bubble Out)

-Internal Expansion (Bubble In)
- Product Diversification

Additional Questions
• With the Bezos Plan, was Amazon.com poised for exponential growth in revenues, profits, and returns to investors?

-Yes

Additional Questions
• Why?
-Cyclical Effect

Additional Questions
• How much time had the company had to implement it’s plan?

-Just 5 Years
• How much time would it need to spend to prove that it could create and sustain value over time?

-Just 1 Year

Additional Questions
-Company Timeline -Projected Future Timeline

-The Plan

Recommendations
• Reduced prices, more desirable shipping for larger orders, and downsizing of product selection.

• Focus on cost reduction = lower price = more customers = less cost per unit sold= cost reductions
• Mixed Bubble with cost reduction focus (cyclical solution)

Questions?

Current Timeline
• Acquisitions
2010: Touchco., Woot, Quidsi, BuyVIP, Amie Street. 2011: Lovefilm, The Book Depository, Pushbutton 2012: Kiva Systems

Products and Services
2008 film production (20th century fox), MP3 service to subsidiary websites worldwide; Partnered with Fisher-Price, Mattel, Microsoft and Transcend to offer products with minimal packaging to reduce environmental impact and frustration. 2010 e-book sales for Kindle reader outnumbered sales of hardcover books for the first time ever during the second quarter of 2010. 2011: released a Mac download store

Current IT Focus
• Current IT Strategy
– High-performance transactions systems – Complex rendering and object caching – Workflow and queuing systems, – Business intelligence and data analytics, – Machine learning and pattern recognition, – Neural networks and probabilistic decision making

Today’s Technology
• Customer Relationship Management (CRM) and Information Management (IM) support Amazon’s business strategy. • The company can best manage the disruptive innovation as well as technology through active communication channel between alliances and partnerships with their respected publishers as well as other online retailers and technology providers as a strategic notion. • The massive technology core that keeps Amazon running is Linux-based. • Amazon’s technology architecture handles millions of back-end operations every day, as well as queries from more than half a million third-party sellers. • The company carefully records data on customer buyer behavior which enables them to offer or recommend to an individual specific item, or bundles of items based upon preferences demonstrated through purchases or items visited.

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