Write a 1-page, single-space, 10-point font case analysis on the Amazon.com case making sure to address the following questions:
- What is Amazon.com’s business strategy? What is Amazon.com’s organization strategy? What is Amazon.com’s information systems (IS) strategy? Were the three strategies aligned? If so, provide specific examples for such alignment. If not, explain why not.
- Trace the evolution of the Amazon.com business model from the company’s launch in 1995 to 2016.
- How was Amazon.com able to avoid declaring bankruptcy during the dot-com collapse in 2000?
- Provide specific examples of IS assets and IS capabilities Amazon.com used in order to stand out from its competitors.
- Explain Amazon.com’s offerings in the hardware and software services areas.
- Provide a summary of key statistics provided in Exhibits 1 through 7.
NOTE: Any additional reference must have an in-text citation as well as be presented in a reference section at the end of the case analysis. There reference section is not included in the 1-page page limit. You must use the APA format for in-text citations and for items listed in the reference section.
Amazon.com, 2016 9-716-402 R E V : M A Y 1 0 , 2 0 1 6 Professor John R. Wells and Research Associates Galen Danskin and Gabriel Ellsworth prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2015, 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. J O H N R . W E L L S G A L E N D A N S K I N G A B R I E L E L L S W O R T H Amazon.com, 2016 On January 28, 2016, Amazon.com (Amazon) announced record 2015 operating profits of $2.2 billion on $107 billion of sales, and the markets responded with cautious optimism (see Exhibits 1 and 2). For years, founder and CEO Jeffrey Bezos had prioritized growth and investment in new business areas (see Exhibit 3) over profits—but pressure from analysts was mounting as growth was slowing and profits were failing to materialize. In 2014, Amazon had recorded a net loss of $241 million on revenues of $89 billion, in stark contrast to China’s leading Internet player Alibaba, which reported $3.9 billion of net income on revenue of $12.3 billion. While Alibaba was a third-party marketplace with no distribution or inventory holding, Amazon’s business model was more diverse. Amazon was primarily an online retail department store, offering a wide range of product categories, but it also maintained a significant third-party marketplace where it offered shipping, customer service, payment processing, and return services to independent retailers. Amazon also offered software and cloud storage services, online video streaming, and its own line of electronic hardware (mobile, e-reader, and smart television products). In addition, Amazon published books, hosted its own app store, funded video content development, and operated Amazon Prime, an annual membership program with a wide range of benefits. Indeed, Amazon’s activities overlapped with those of Apple, Google, eBay, Alibaba, and many other companies. Amazon had proven itself to be aggressive and resilient during the dotcom crash and a revenue- focused, secretive corporation in the years after, providing little information on the profitability of its lines of business, many of which were believed to be unprofitable. Which businesses would drive Amazon’s future growth? Would the investments Amazon was making in market share (see Exhibits 4a–4e) eventually translate into profits? Or would another major competitor or business model replace Amazon? On a visit to the United States in June 2015, Jack Ma, chairman of Alibaba, stated, “We’re not coming here to compete.”1 Could Amazon or its investors afford to believe him? History Jeff Bezos, the founder of Amazon, began his career as a programmer for Wall Street trading firms and hedge funds. In the early 1990s, Bezos had worked for D. E. Shaw, a hedge fund, in a division For the exclusive use of M. Pagi, 2017. This document is authorized for use only by Moses Pagi in BINS 7250-X1 Spring 2017 taught by Dr. Ravi Thambusamy, HE OTHER from January 2017 to July 2017. 716-402 Amazon.com, 2016 2 that invested in technology companies. Based on this work, Bezos began exploring the idea of founding an online retail service company. He considered over 20 categories of products for his venture and ultimately chose to focus on books. The Book Business In the 1990s, the book retailing business was highly fragmented, complicated, and prone to inventory and return problems. The traditional book retail market was composed of national chains and independent booksellers. The two major chains were Barnes & Noble and Borders. These chains collectively had more than 2,000 stores across the United States and typically offered discounts of 10% to 30% off popular books. There were also 5,500 independent booksellers in the United States operating 7,000 stores.2 This number had been falling through the 1990s, partly as a result of price competition from chain stores. Mass merchants (e.g., Wal-Mart and Kmart), wholesale clubs (e.g., Sam’s Club and Costco), grocery stores, and other non-bookstore outlets were another major source of competition, accounting for almost half of book sales.3 For an author’s book to reach a retail store, the book typically had to go through four intermediaries: agents, publishers, distributors, and wholesalers. First, an agent would accept a book and market it to a publisher. Some of the major publishers in the 1990s were Penguin Books, Harper Collins, Random House, and Simon & Schuster. The top 20 publishers accounted for 88% of sales in North America. If a publisher accepted the book, it would manage publication, marketing, and sales. In order to distribute the book, the publisher would contract with a distributor. A distributor’s primary responsibility was to act as a middleman between the wholesaler and the publisher. Distributors would ship and return books from the wholesaler to the publisher, and they would give smaller publishers the bargaining power to get their books stocked by a major wholesaler. Wholesalers were the key link between retailers and the publishing world. Ingram was the largest wholesaler and controlled 50% of the U.S. market. Wholesalers would distribute catalogues to bookstores and fulfill book orders placed by retailers. In order to ensure that they could meet retail demand, wholesalers would maintain inventories of publishers’ books and ship them out to bookstores on demand. If a retailer misjudged the number of copies that would sell, a bookstore could return to the book to the wholesaler (who would then return it to the publisher) for a full refund (minus shipping costs). In this way, books were sold on consignment and had high return rates and high inventory costs to the publisher. Publishers typically received back over 30% of their initial book run.4 Barnes & Noble and Borders sourced much of their inventory directly from publishers, cutting out wholesalers and distributors, and stored their inventory in company-owned distribution centers. In 1996, 40% of Barnes & Noble’s inventory was pushed directly from publishers, and the company expected this figure to increase to 50% by 1998. It took several weeks to source a book directly from the publisher, and Barnes & Noble and Borders could ship a book from their own distribution centers to a retail store in two to three days.5 Amazon’s Entry In 1994, Bezos quit his job at D. E. Shaw and drove across the country to Seattle, Washington. Bezos chose Seattle for three reasons: its technology cluster; its proximity to Ingram, the largest book wholesaler; and its lack of sales tax.6 Wherever Bezos shipped a book in the United States, he would not have to levy sales tax, which put him at an immediate advantage over local bookstores. Sales tax varied from state to state but averaged about 6% of sales. Bezos began Amazon out of his garage. The company name reflected his ambitions for the firm: like the Amazon River, he intended to be the For the exclusive use of M. Pagi, 2017. This document is authorized for use only by Moses Pagi in BINS 7250-X1 Spring 2017 taught by Dr. Ravi Thambusamy, HE OTHER from January 2017 to July 2017. Amazon.com, 2016 716-402 3 biggest in the world. After a year of software development with a team of 10 employees, Amazon’s website was launched in July 1995.7 From the start, Amazon was focused on making e-commerce attractive, secure, and easy for first- time online buyers. Customers needed only an email address, a credit card, and a password in order to make an order. Amazon listed over 1 million titles in its database, and prices were often deeply discounted compared to physical retailers’.8 In Amazon’s first letter to shareholders, Bezos noted: From the beginning, our focus has been on offering our customers compelling value. . . . Therefore, we set out to offer customers something they simply could not get any other way, and began serving them with books. We brought them much more selection than was possible in a physical store . . . and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day.9 By September 1995, Amazon was generating weekly sales of $20,000.10 For 1995, annual sales were $511,000.11 To accommodate the rapidly increasing demand, the company moved out of Bezos’ basement into headquarters in Seattle and built a 50,000-square-foot distribution center.12 In July 1996, the company launched Amazon Associates, which allowed individuals to embed links to Amazon within their own websites, write reviews or recommendations, and gain a 3% to 8% commission on books purchased through these links. There was no cost to join the program, and associates could enroll through Amazon and begin selling products through their site within hours. This network of sellers helped to drive traffic to the Amazon site. While the typical newly launched Internet company spent 119% of sales on advertising during the late 1990s, Amazon’s marketing was 10% of sales.13 In 1996, Amazon recorded sales of $15.7 million and an operating loss of $6.0 million.14 Going Public and Growth (1997–1999) In May 1997, Amazon went public at $18 a share, raising $54 million and valuing the company at $438 million.15 By December of 1997, Amazon’s stock had risen to $59 per share. The company recorded sales of $148 million in 1997 and an operating loss of $29 million.16 Amazon’s IPO success was not