Amazoncom Case Analysis Essay

This essay has a total of 4733 words and 24 pages.


Amazoncom Case Analysis




AMAZON.COM CASE ANALYSIS


OUTLINE

I. Executive Summary
II. Introduction/Background
III. Mission Statement Analysis
IV. External Evaluation
A. Opportunities and Threats
1. External Factor Evaluation Matrix
2. Competitive Profile Matrix
B. Opportunities and Threats Summary
V. Internal Evaluation
A. Ratio Analysis
B. Strengths and Weaknesses
1. Internal Factor Evaluation Matrix
C. Strengths and Weaknesses Summary
VI. Objectives
VII. Alternative Objectives
VIII. Strategies and Alternative Strategies Evaluation and Selection
IX. Bibliography
X. Exhibits- SWOT Matrix, SPACE Matrix, Grand Strategy Matrix,
Internal & External Matrix, Matrix Analysis and TOWS Summary,
and Quantitative Strategic Planning Matrix
Executive Summary
This case analysis serves the purpose to provide an analytical framework to evaluate
Amazon.com from an internal and external perspective, and to provide strategic direction
based upon the internal and external evaluation. The case will begin with an introduction
to Amazon.com.

Introduction/Background
Jeffrey Bezos, formerly a senior vice president for D. E. Shaw & Company, founded
Amazon.com in 1994. D. E. Shaw is a Wall Street-based investment bank, and Mr. Bezos was
assigned to find good Internet companies in which to invest. During the summer of 1994,
he stumbled across a Web site that showed the number of Internet users was growing by
2,300 percent per month. He quickly realized the vast potential of the Internet, and
began putting together a list of possible products that he could sell on the World Wide
Web. He eventually narrowed his list to music products and books. Although music
products and books both had enormous potential, he eventually selected books because he
believed that he could compete more evenly in the book segment due to the lack of a very
dominant player. "In contrast, the music industry had only six major record companies.
These companies controlled the distribution of records and CDs and, therefore, had the
potential to lock out a new business threatening the traditional record-store format"
(Kotha, p.11).

To begin his new venture, Mr. Bezos left New York and moved to Seattle. He decided to
move to Seattle for two reasons: 1) Ingram Book Group's warehouse is located near Seattle;
and 2) Because of the Seattle area's reputation for computer expertise. In 1995, Amazon
began selling books entirely online, operating out of a rented facility and using doors
laid across sawhorses for desks. He soon was able to generate several million dollars
from venture capitalists, and sales were astounding. Sales for 1995, 1996, 1997, 1998 and
1999 were $0.5, $16, $147, $610 and $1,640 million respectively.

Amazon's customer base has increased dramatically from 180,000 in 100 countries in 1996 to
12 million in 160 countries by mid-1999. In 1998, Amazon began to expand into other
product categories. The Company began to sell music products and videos, and within two
months of these additions, Amazon became the number-one seller of books, music, and videos
on the web. During 1999, the Company further expanded its product line. Amazon now
offers toys and video games, electronic greeting cards, electronics and software, home
improvement supplies, online auctions, DVDs, and an online mall called zShops. More
recently, Amazon has begun to expand internationally (Bartlett, p.21). Next, an analysis
of Amazon's mission statement will be performed.

Mission Statement Analysis
A mission statement should be comprised of, or address, nine essential components:
customers; products or services; markets; technology; concern for survival, growth, and
profitability; philosophy; self-concept; concern for public image; and, concern for
employees. While Amazon does not have a formal mission statement, the basic mission and
goals of the Company are evident in the words of Mr. Bezos, "We have one strategy at
Amazon.com - provide the customer with the best shopping experience." Additionally, "…our
goal is nothing short of building the world's most customer-centric Company." Lastly,
"our Company mission is to leverage technology and expertise to provide the best buying
experience on the Internet" (Balanced Scorecard, p. 1). These quotes from Mr. Bezos could
be combined to create an effective mission statement, as follows: The mission of
Amazon.com is to leverage technology and the expertise of our invaluable employees to
provide the best buying experience on the Internet. Our goal is nothing short of building
the world's most customer-centric Company capable of providing our customers with the best
shopping experience online today, and into the future. An evaluation of the
aforementioned mission statement follows:

Essential Component Evaluation Justification for Evaluation
Customers Strong Customers are frequently mentioned and are clearly the focus of a "customer-centric" Company.
Products or Services Moderate Identifies online shopping as service.
Markets Moderate The market is the online community.
Technology Strong "…leverage technology…" indicates that technology is critical for the success of Amazon.
Concern for survival, growth, and profitability Moderate Addresses concern for survival
and growth, but not profitability.

Philosophy Moderate Clearly indicates that Amazon wants to be the best.
Self-concept Strong "…best shopping experience…", "…world's most customer-centric Company…"
Concern for public image Moderate Clearly want Amazon's image to be the "best".
Concern for employees Strong "…invaluable employees…" indicates that Amazon realizes that
the employees are essential for continued success.


Amazon's mission statement does a very good job of addressing the nine essential
components of a good mission statement, as evidenced by the above chart, where the Company
received a strong evaluation on 4 out of the nine categories, and a moderate evaluation on
the remaining 5 categories. The mission statement also does a very good job of "hitting
emotional hot buttons." Using phrases like: "…best buying experience…"; "…world's most
customer-centric Company…"; and "…best shopping experience…", Amazon strives to stir one's
emotions. Next, the external evaluation for Amazon will be performed.

External Evaluation
The first step in the external evaluation is to perform an external factor evaluation
(EFE) matrix, which describes the external opportunities and threats facing Amazon. The
EFE matrix follows:

EFE MATRIX FOR Amazon.com

Critical Success Factors Weight Rating Weighted Score
Opportunities
Growing number of e-commerce bankruptcies 0.1 3 0.30
Platform monetization 0.15 4 0.60
Number of Internet users is continuing to rise 0.15 3 0.45
International expansion 0.1 3 0.30
Technological advancements can improve productivity 0.05 2 0.10
Threats
Weakening economy 0.05 2 0.10
US BMV segment experiencing anemic growth 0.15 3 0.45
Increased competition 0.1 3 0.30
Minimal barriers to entry 0.1 4 0.40
E-commerce may be a slowing consumer trend 0.05 2 0.10
TOTAL 1.00 3.10


The above chart would indicate that Amazon is responding to existing opportunities and
threats in its industry slightly better than the average competitor, as indicated by a EFE
Matrix score of 3.10. Several factors have varying levels of effect upon the online
shopping industry. For instance, the number of Internet users is continuing to rise
exponentially. In 1996 and 1998, there were 61 and 147 million worldwide users of the
Internet, respectively. Projections for 2002 are 300 million worldwide Internet users.
Growth such as this obviously has a dramatic effect upon the online retail industry, as
evidenced by a weight of 0.15 on the EFE Matrix. Additionally, companies, such as Amazon,
that have an established platform (technology, distribution centers, customers, brand,
etc.) have an increased ability to monetize their platform through partnerships like Toys
"R" Us and Borders Group. "After all, what if [Amazon] becomes the online commerce
partner (customer service, order fulfillment, inventory management, marketing services)
for a wide swath of brick-and-mortar partners: Blockbuster for videos, Ace Hardware for
tools, Tower Records for music, Best Buy, Circuit City for electronics, etc.? Then, in
aggregate, those deals could hasten profitability (slightly) and/or make steady-state
profitability larger" (Reamer, p. 2). This platform monetization can have an enormous
impact upon this industry, as evidenced by a weight of 0.15 on the EFE Matrix.

"Amazon posted $410MM in U.S. books, music, and video (U.S. BMV) sales. At 58% of total
revenue, U.S. BMV remains the single largest contributor to total revenue. Growth in this
sector continues to be fairly anemic: U.S. BMV grew just 2 [percent year over year]"
(Reamer, p.2). Moving into other segments of the online retailing industry (i.e.,
consumer electronics) could dampen this negative trend. Lastly, "the growing number of
bankruptcies among pure-play e-commerce companies should enhance the competitive position
of companies, such as Amazon, longer term. In other words, fewer industry participants
should lead to increased potential scale for survivors such as Amazon. Not only will
fewer companies lead to less distribution of e-commerce revenues among smaller e-tailers,
but [surviving companies] should also benefit from less price competition over time. Note
that less discounting among pure-play e-tailers should result in higher gross margins
longer term" (Patel, p. 10).

However, "one could argue that the rapid e-commerce growth over the last few years
reflected more of a fad that is losing momentum than a powerful secular trend. This is
not to say that e-commerce is going away, rather that the overall e-commerce market may
not be as large as once was projected" (D'Eathe, p. 3).

Another potential threat for Amazon is that the barriers to entry in the online retailing
market are minimal. Start-up costs are minimal, and anybody can start their own Internet
shop. "According to Mr. Bezos, Amazon differentiates itself from potential rivals in many
ways, besides just marketing and aggressive brand promotion. He observes (Fast Company,
1996): People who just scratch the surface of Amazon.com say-'oh, you sell books on the
Web'-they don't understand how hard it is to actually be an electronic merchant. We're
not just putting up a Web site. We do 90% of our customer service by e-mail rather than
by telephone. Fourteen of our 110 employees do nothing but answer e-mail from customers.
There are very few off-the-shelf tools that help do what we're doing. We've had to
develop lots of our own technologies. There are no companies selling software to manage
e-mail centers. So we had to develop our own tools. In a way this is good news. There
are lots of barriers to entry" (Kotha, p. 10).

Some additional threats, while not as threatening, do exist. For instance, online
e-tailers are being sued over shipping delays. "The FTC alleges that some online stores
did not give shoppers enough notice of impending shipping delays or that they continued to
promise deliveries they could not make during the holiday season" (Farmer, p.2). Lastly,
security concerns are limiting the growth of online retailing. Consumers often "surf" the
Web to obtain information about a product, but do not purchase the product online for fear
of putting their credit card number and other personal information on the Web. However,
encryption technology is so advanced today, that it is actually safer to give a Web page
your credit card number than it is to give your number to a salesperson over the phone.

Next, a competitive profile matrix (CPM) will be performed to demonstrate how well Amazon
performs relative to its competitor group. The CPM follows:


Amazon.com Barnes & Noble Barnes & Noble eBay

Critical Wtd. Wtd. Wtd.
Success Factors Weight Rating Score Rating Score Rating Score

Market Share 0.20 4 0.80 4 0.80 4 0.80
Management 0.15 2 0.30 3 0.45 3 0.45
Financial Position 0.25 1 0.25 2 0.50 2 0.50
Product Quality 0.15 3 0.45 3 0.45 2 0.30
Consumer Loyalty 0.25 3 0.75 3 0.75 3 0.75

Total 1.00 2.55 2.95 2.80


The CPM score of 2.55 indicates that Amazon performs slightly worse than its competitor
group. The above chart indicates that market share, consumer loyalty, and financial
position are the most important critical success factors, as indicated by a weight of
0.20, 0.25, and 0.25, respectively. Amazon's financial position is the critical success
factor that hurts its long-term viability the most. However, Amazon "has created the
leading online shopping hub - from both the customer-experience vantage point and market
share - that over time should harness the efficiencies of the Internet and could become
highly profitable. Amazon's robust technology platform and 30 million unique users make
the Company attractive to traditional offline merchants via its "virtual storefront""
(Legg, p. 3).

A financial comparison of Amazon and the competitor group follows:

Amazon continues to focus on developing its business, which has translated into market
share gains. Amazon's sales growth is exceptional, as evidenced by a 5-year growth rate
of 457.91%. Additionally, the Company's turnover ratios are excellent compared to its
competitor group. However, the Company's net profit margin is atrocious at (37.98%).
"The Company's fulfillment costs as a percentage of revenues remain well above traditional
retailer levels making it difficult for [Amazon] to compete in the long-term as it would
hold a significant competitive disadvantage in terms of outbound distribution costs"
(D'Eathe, p.2).

"However, Moody's believes that management's focus on achieving profitability, and a
clearer strategy to harvest investment in existing operations rather than expend capital
on new businesses, holds the potential for positive cash flow within the medium term.
Amazon invested heavily in distribution capacity during 1999, well in advance of need.
Moody's believes that Amazon is unlikely to grow sales rapidly enough to cover the costs
of carrying its current infrastructure. However, Moody's believes that Amazon may be able
to generate cash from sources other than retailing. The Company has an opportunity to use
its reputation in fulfillment, bolstered by the initial success of its recent alliance to
fulfill online orders for Toys "R" Us, to generate high-margin fee revenues and absorb
operating costs" (Reamer, p. 5).

The aforementioned opportunity will not come without challenges. Amazon has been facing
increased competition. The Company's primary competition is Barnes & Noble, Inc. (BKS)
and eBay Inc. (EBAY). "The site that is rapidly becoming known as The Place To Find
Anything is eBay. Trouble is, it doesn't have the simplicity that Amazon does. That's
still the image that many people have of eBay. They see it as a Turkish bazaar, where the
stuff is garbage, you have to haggle for a price, and no one can be trusted. eBay is
taking steps towards creating simplicity, however" (Lund, p. 2). Additionally, eBay and
Barnes & Noble both are financially sound to compete with Amazon. "Amazon has done a
solid job of aggregating products and making the experience simple, but its debt has put
itself into a position of weakness" (Lund, p.1).

Lastly, Barnes & Noble is in the somewhat enviable position of being a "bricks-and-clicks"
or "clicks-and-mortar" establishment. This mitigates the threat of security concerns. If
a consumer did not feel comfortable purchasing online, he/she could go into the physical
store location and make the purchase. However, since Amazon only has "virtual
storefronts", the Company does not have the high overhead associated with having physical
sites. So, there are advantages and disadvantages to only being online.

Next, an internal factor evaluation (IFE) matrix will be performed that summarizes and
evaluates the major strengths and weaknesses in the functional areas of business at
Amazon. The IFE matrix follows:

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