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CASE 10

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: 2012FY Sales: $48 billions

FY Net Income: $631millions

II. CASE SUBJECTS AND ISSUES

Industry Analysis

Strategy FormulationCompetitive Advantage

Strategy ImplementationNew Product Development

Core CompetenciesMarket Segmentation

Online MarketingOnline Sales

Competitive StrategyManufacturing/Outsourcing

Digital Media/Streamingebooks/eReaders

Same Day DeliverySales Tax/State Govt.Relations

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES

1. To discuss productinnovation: eReaders and tablets.

2. To discuss online sales and streaming.

3. To discuss domestic/international online growth opportunities.

4. To discuss the merits of same day delivery.

5. To discuss sales tax collection and state govt. relations.

V. SUGGESTED CLASSROOM APPROACHES TO THE CASE

1. This is an excellent case for instructor-led discussion.

2. This is an excellent case for an exam or written case analysis.

3. This is an excellent case for a team presentation.

4. This is an excellent case for an individual or team strategic Audit.

VII. DISCUSSION QUESTIONS

1. Is Amazon becoming a High-Technology Company?

2. Does it make sense for Amazon to sell Kindle below its cost?

3. Should Amazon collect state sales tax in every state?

4. Should Amazon invest in same day delivery?

5. Should Amazon expand its streaming content?

6. Can Amazon compete with Samsung, Sony & Apple?

Systematic Analysis of the case to aid instructor

I. Current Situation

  1. Current Performance

Based on a selected statistics below, Amazon Net Income and ROI declined, but the share price increased, which is partially due to share repurchase program in 2011 (10K).

  • Net income declined to $631m in 2011 from $1,152 in 2010
  • Share price rose to $194.44 on 1/3/12 from $169.64 on 1/3/11, or by 16%
  • Return on investment was 2.5% in 2011 and 6.1% in 2010
  1. Strategic Posture
  1. The corporation's mission, strategies and objectives are detailed below. The firm's mission is aligned with Amazon's performance and is manifested by its operations.
  1. 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.
  1. Objectives:
  • To increase sales domestically and internationally
  • Gain and retain the market share in the e commerce industry.
  • Achieve long-term sustainable growth
  • Provide exceptional customer service
  • Lower costs
  • Continuous improvement of web site.
  • Premium brand building and differentiation.

The objectives are aimed at Amazon's growth and profitability in an extremely competitive environment and are in alignment with the mission statement. They address the nature of external environment (competition, price, customer loyalty, and globalization) and internal environment (technological development, finance and marketing).

  1. Strategies
  • To increase sales and market share through partnership, acquisitions and strategic alliances.
  • Allow 3rd party sellers to place links on Amazon web sites
  • 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
  • Analyze website traffic
  • Customer/non-customer data collection
  • Better market products and services to customers
  • Utilize technology to offer customers unique and useful tools and services
  • Ratings engine
  • Safe and convenient transaction environment
  • Ease of web site use
  • Continuous adaptation to ever-changing environment
  • Effective online marketing techniques to attract customers and satisfy partners
  • Pay-per-click advertisements
  • Permission email marketing
  • 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.

  1. Policies:
  • Maintain a lean corporate culture, focused on increasing its operating income
  • Tightly manage operating costs
  • Encourage employees to develop to better serve customers
  • Reduce carbon footprint
  1. 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.

II. Corporate Governance

  1. Board of Directors
  1. 10 directors: 1 internal and 9 external
  1. The Chairman, Jeffrey Bezos, holds 19% of stock, and the remaining 9 directors hold 0.03% of stock collectively.
  1. The stock is publicly traded in NASDAQ under AMZN ticker. There is only one type of stock, the Common Stock.
  1. Directors have collective expertise in capital ventures, technology, media and law. One of the directors, Alain Monie, is a CEO of a Fortune 100 company, Ingram Micro Inc. which is world's largest technology distributor.
  1. 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).
  1. 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.

Table I

Directors / Shares Owned / Served Since / Industry
Jeffrey P. Bezos / 87,963,414 / 1994 / E-commerce
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
  1. 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).
  1. 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 (

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 (

None of the officers come from companies acquired by Amazon.

  1. 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.
  1. The top management has established a systematic approach to strategic management to support the firm's mission and objectives.
  1. Top management is responsible for strategic development of their departments, which are co-dependent and together contribute to Amazon overall market position. Each department/subsidiary has a strategic position and therefore it requires high involvement of top managements.
  1. All employees are encouraged to develop better solutions in their areas of expertise. Thus, top management relies on lower level managers to get new ideas for strategies, improvement and development. The board of directors oversees top management performance, and meet several times a year to discuss company's strategy and direction. The CEO is also a Chairman of the Board, which provides the Board a better "ability to focus on key policy and operational issues."
  1. Ethical and Social Responsibilities:
  • Environmentally friendly (Carbon foot print reduction initiative)
  • Use of recyclable materials in packaging
  • Reducing waste by determining a right size of the shipping box
  1. Officers' compensation is a combination of stocks, base salaries and bonuses. Stock compensation is a primary component of compensation which is "tied to long-term shareholder value" (
  1. Top management collectively has expertise in key areas, such as technology, e-commerce, consumer business and law.

From

Table II

From

III. External Environment: Opportunities and Threats (SWOT)

  1. Societal Environmental
  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).
  1. 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)
  1. 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)
  1. Political – Legal
  • Patent, License and Copyright Laws ( O / T)
  • Increased Risk of Litigation (T)
  • Increase in Taxes (T)
  • Regulation of Industry( O / T )
  1. Sociocultural
  • Growing comfort with online shopping in different countries ( O )
  • Buying Local ( T)
  • Increase demand for immediate product fulfillment (O / T)
  1. 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.
  1. Task Environment
  1. The following forces drive industry competition for Amazon. These factors affect Amazon globally at vary degrees depending on the region in which it is competing.
  1. Threats of New Entrants : Low
  • Need for high capital investment
  • Very crowded marketplace (EBay, Barnes & Noble, Apple, Metro AG etc.)
  • Large economies of scale
  • Partnerships
  • Brand Recognition
  1. Bargaining Power of Buyers : High
  • Price sensitive customers
  • Large number of Online retailers
  • Cut throat price competition
  1. Threat of Substitutes: High
  • High Presence of Brick & Mortar retailers
  1. Bargaining Power of Suppliers: Moderate
  • Provision of free inventory storage, increased brand presence and product push directly to the consumer helps maintain supplier loyalty
  • FBA and FWS help ease inventory management for the suppliers
  • Suppliers have options to sell directly to its customers
  1. Rivalry Among Competitors: High
  • EBay sales reached 62b US$ in 2010, Metro AG 67b euro in sales.
  • Kindle currently selling below cost price.
  • Apples ipad presence and i-tunes also pose a threat to Amazon sales.
  1. Relative Power of Unions and Governments: Low to Moderate
  • Enforcement of local sales tax collection by the government.
  • Not affected by union presence or special interest groups.
  1. Competitors, Customers and Government are the key factors in the immediate environment currently affecting Amazon Inc. Each of the factors presents its own set of opportunities and threats both in the present and in the future. Currently Amazon Inc. is faces the risk of being affected by government enforcement of tax collection, price sensitive consumers and fierce competition.
  1. Summary of External Factors (See Exhibit I - EFAS Table)
  • Volatility of delivery costs is a substantial force.
  • Oil & Real Estate costs are volatile to market forces and will have an impact on the operations cost of Amazon Inc.
  • Amazon competes on an image of low costs and does include free shipping programs.

IV. Internal Environment (SWOT)

  1. Corporate Structure
  1. Amazon is structured into a business unit and then by functional unit
  1. The organization tree consists of a board of directors at its root followed by officers and top management.
  2. The firm is divided into different functional areas with a VP associated with each. The functional units culminate under one broad business unit
  1. Based on the information given, we could infer that the structure is well understood within the firm.
  2. As Amazon Inc. objectives and strategies revolve around e-commerce and technology, the division of the board of directors implies alignment.
  3. The structure is similar to eBay based on the inference on the similar acquisition strategies.
  1. 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.
  1. Corporate Resources
  1. Marketing
  1. Objectives
  • Growth/Expansion in Target Markets Segments (North America and International )
  • Achieved marketing goals will increase revenue generated by 4 streams: Media, Electronics and General Merchandise, Services, and Other
  • Marketing strategies revolve around price, selection ("One Stop Shop" website), ease of use, and customer satisfaction

Strategies/Programs

  • Online Marketing - vital to strategy
  • Amazon Website (ease of use as marketing tool)
  • 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.)
  • Website traffic tracking and analysis allowed Amazon to direct visitors to items them may be interested in.
  • Pay-Per-Click Advertisements
  • 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
  • Permission to e-mail customers with specific production promotions based on prior purchases.
  • Amazon Prime
  • 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
  • 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
  • As part of maintaining its objective of competing on price, Amazon offered a number of free shipping offers.
  • In the third quarter of 2011, Amazon’s shipping fees generated $360 million in revenue, which was reduced by $918 million in shipping expenses.
  • Amazon expedited shipping by strategically locating its fulfillment centers near airports.
  • Amazon Credit Card (brand recognition marketing tool)
  • Amazon also offered its own credit card co-branding with Chase Bank.
  • Amazon generated cash from Amazon purchases and from fees generated from non-Amazon purchases.
  • Amazon loyalty generated as consumers earned points towards Amazon gift cards.
  • Kindle/Kindle Fire
  • Kindle was sold below cost as it was expected to generate increased sales of e-books and other digital content.
  • 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.
  • In 2010, 43% of Amazon net sales were from media, including books, music, DVDs/video products, magazine subscriptions, digital downloads, and video games.
  • 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.
  • In July 22, 2009 Amazon acquired Zappos an online shoe and clothing retailer
  • In November 8, 2010 Amazonacquired Quidsi the parent company of Diapers.com, an online baby care specialty site, and Soap.com, an online site for everyday essentials.
  • In December 2, 2010, Amazon invested in $175million in LivingSocial, a site dedicated to offering easy access to restaurants, shops, activities and services.
  • In January 20, 2011, Amazon acquired Lovefilm a European web-based DVD rental service.
  • Amazon Market Place
  • Developed partnerships with many retailers, such as Target, Sears Canada, Bebe Stores, Timex Corporation and Marks & Spencer
  • Independent retailers and third-party sellers can sell their products on Amazon by placing links on their websites.
  1. Amazon's marketing strategies are clearly stated and are represented by Amazon's performance/budget.
  • 2011 Figures/Statistics:
  • Marketing expenses accounted for 3.4% of net sales ($1,630 million)
  • Affected by seasonality, Amazon recognized 36% of profits in the 4th Quarter
  • Software and web-development costs represent 4% of Net Sales
  • Amazon operated in facilities of approximately 48,307 thousand square feet
  • Shipping revenues account for 3.2% of Net Sales ($1,552 million) however shipping cost accounted for 8.2% of Net Sales ($3,989 million)
  • Growth (Since 2009)
  • In 2009 marketing expenses were $680 million and in 2011 were $1,630 million. In 2011 this was a year over year percentage growth of 58%.
  • In 2009 total net sales were $24, 509 million and in 2011 grew to $48, 077 million.
  • Shipping Revenues grew by 68% from $924 million to $1,552 million. Shipping Expenses grew 125% $1,773 million to $3,989
  • Amazon operated in 19,726 thousand square feet in 2009 and grew by 41% to 48,307 thousand square feet in 2011.
  1. Amazon's marketing strategies, objectives, and mission are consistent with internal and external environments.
  1. In 2012 software development, order fulfillment and customer service centers were located in North America, Latin America, Europe and Asia and fulfill orders in 200 countries.
  • In 2011, Amazons total sales were represented by 56% in North America and 44% International
  • In 2011, sales of electronics and other general merchandise represented 59% of total sales ($28,712 million).
  • 53% of all International sales and 65% of all North American sales
  • In 2011, media sales represent 37% of all sales ($17,779 million)
  • 46% of all International sales and 30% of North American sales
  • Amazon's products and services are in the growth phase. Change's such as additional products and services are consistently being added to Amazon e-commerce and features are being added to Kindle (Kindle Fire).

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