Amazon.Com Case Study

CASE STUDY 10

Amazon.Com: An E-Commerce

RetailerPatrick Collins, Robert J. Mockler, and Marc Gartenfeld

STRATEGIC MANAGEMENTPMN6023

Prof. Madya. Dr. Hj. Hamzah Dato Hj. Abdul Rahman

Prepared by :

ADE SUHERLAN89775

COLLEGE OF ARTS AND SCIENCESUNIVERSITI UTARA MALAYSIA

2008Abstract Amazon.Com is considered to be the premier online retailer in the world. Under pressure from the financial market s to abandon the company’s oft-stated goal of sacrificing short -term profits for building long-term growth, market share, and increased shareholder value, the Amazon’s CEO proved that his online retail business model could produce operating profit. Amazon.com was faced with the task of developing an effective differentiating enterprise wide strategy if Amazon.com was to survive and prosper against aggressive competition over the intermediate and long-term futures. In an earnings statement announcement released January 23, 2003, this company showed some outstanding financial numbers. Amazon.com continued to meet its internal goals of focusing on increased market share, expanded product offerings and overall sales growth, the company was still facing pressure from the stock market to produce consistent operating profits and to prove that its business model worked finally over the long-term. This pressure, combine with a decreasing customer confidence level and an increased unemployment rate, had made the retail future look uncertain.

Products, Amazon.com sold a wide variety of products; there are Books, Music, Video/DVDs, Electronics, Tools and Kitchen Segment, Apparel, Toys, Web Operations. Services, Amazon.com offer auction service and a store-hosting program for small and medium-sized business (zShops). Partnerships, there are zShops, Online auctions, Amazon Web Services. Customers, Amazon.com customer’s came from variety generations there are senior, baby boomers, generation X, generation Y. Customer service, the company also provide customer service there are product recommendations, share the love program, A-to-Z guarantee, Amazon payment option, safe shopping guarantee. Sales and distribution, Amazon.com developing 1-Click ordering method, which it patented. This method allowed its customer to store their billing and shipping information on the company’s website. Technology, Amazon.com implemented numerous website management, search, customer interaction, recommendation, transaction processing and fulfilment services and other systems, using a combination of proprietary technologies and commercially available, licensed technologies. In the other hand also concern with patents and trademarks, encryption technology, and wireless selling platform (PDA, cell phones).In term of Advertising, Amazon.com use Television and radio, print, Internet. Market segmenting of Amazon.com also based on geographical region these are Domestic (US) and International markets (Canada, France, Germany, Japan, and UK).

Financial Position, Amazon.com focus on increasing sales and reducing expenses to produce operating income, in early 2000 facing issue of sales tax, and early 2003, there was moratorium on the taxation of e-commerce transactions. Stock option needed to be addressed for Amazon.com. in term of Management strategy, Amazon.com focused on increasing market share and offering superior customer services (strike a balance between increasing market share and producing profit. Company again focused on proving the viability of his business model. Produced

profit by cutting expenses. For the future, Amazon.com faced pressure from increased competitions, poor economic environment and sales tax.

Key Issues on the Case

Some particular issues was found on this case, on one hand it’s become strength and

opportunity for Amazon.Com, yet in the other hand, those particular issues will be

threats and weaknesses for the company. Those key issues are:

1. Increase in competition(competitor entry to Amazon.Com market, Internet tax

moratorium law and sales tax issues, and poor economic conditions

2. Pressure from financial market to abandon the company’s oft-stated goals of

sacrificing short-term profit for building long-term growth, Focused on

increasing profit and market share, increased stakeholder value and reducing

expenses.

3. Focused on customer satisfaction and loyalty with provide superior customer

service, Variety of offering products, maintain Brand Image and Quality and

Innovation products.

4. Financial ratio that indicate by financial statement

5. Lack of control in term shipping and distribution Sales minimum for free

shipping cost

6. Technology (1-Click ordering) and Networking (Partnerships, affiliation

agreement, etc).

Analytical Tool and Technique

To analyze and synthesis some internal factors of Amazon.Com (strength and

weaknesses), is appropriate to use IFAS (Internal Factors Analysis Summary)

which is one way to organize the internal factors into the generally accepted

categories of Strength and weaknesses as well as to analyze how well a particular

Amazon.Com’s management (rating) is responding to these specific factors in light of

the perceive importance of these factors to the company. This table shows internal

factors result scanning for Amazon.Com and analysis, as follow:

IFAS Analysis

Internal Factors Weight Rating Weighted Score

Comments

Strength :1) High level customer service,

Quality of services, insurance, distribution centre, Capacity of the company, Customer service and different programs, Brand Image, Competitive Prices & delivery cost, Sipping options, free shipping ordered over a minimum levels.

2) Market share

3) Financial and capital position, overhead cost

4) Variety of offering products, Quality and Innovation product

5) Technology (very easy to use/ 1-Click ordering) and Networking

Weaknesses :1. Must operate in free sales tax

locations, location had to be an area with people who had necessary programming talent to develop software, closeness to a major book wholesaler.

2. Collecting payment period 30 to 40 days, had inventory and administrative cost

3. Unfocused where company Offer everything for every one (philosophy)

4. Lack of control in term shipping and distribution and Sales minimum for free shipping cost

0.15

0.20

0.05

0.15

0.20

0.15

0.05

0.02

0.03

4.0

4.5

3.0

4.0

5.0

4.0

2.0

2.00

3.00

0.60

0.90

0.15

0.60

1.00

0.60

0.10

0.04

0.09

Key factor to success, yet remember

increasing cost

Shall be decrease

Must be carefully

Focusing on certain product

Continuous improvement and changing

Main Weakness

Must shortest

Focused

Good relationship

Total Score 1.00 3.54

The average weighted score of firm in industrie is always 3.0. Amazon.Com has total

score is 3.54, above average or strength, but Amazon.Com must be carefully, it also

has some treath and weakneses which have to manage.

External Factor Analysis Summary (EFAS) for Amazon.Com

EFAS Analysis TableKey External Factors Weight Rating Scores Comments

Opportunity1. The growth of demand (increasing

broadband access/ internet user world wide), international market (increasing market share) and shopping habits by website also growth, Technology and computer user is growth

2. Expanded products offerings and sales growth

3. Loyal customer

0.25

0.20

0.10

4.0

4.0

4.0

1.00

0.80

0.40

Main opportunity

Increasing the cost

Maintain

Threats1. Competitors2. Decreasing customer confidence level3. Poor economic condition and increase

unemployment rate

4. Suppliers and partners5. Sales tax barrier (law), for

international market local law and customs

0.100.10

0.05

0.12

0.08

3.03.0

3.0

4.0

3.0

0.300.30

0.15

0.48

0.24

Main threatQuality of

service

Economic condition

Good relation

Influence costTotal 1,00 3.67

Remarks:

Weight

1.0 (Very important) – 0.0 (very unimportant)

Rating

1 = Poor (opportunity is poor, threats is very high)

2 = Below average (opportunity is below, threats is high)

3 = Average (opportunity and threats are equal)

4 = Above Average (opportunity is high, threats is below)

5 = Outstanding (opportunity is very high, threats is poor)

The average weighted score of firm in industrie is always 3.0. Amazon.Com has total

score is 3.67, above average or strength, but Amazon.Com must be carefully, it also

has some treath and weakneses which have to manage. The highest-weighted EFAS

and IFAS factors shall be appear in the SFAS matrix, its provide information that is

essential for Amazon.com strategy formulation as follow :

Strategic Factor Analysis Summary (SFAS) Matrix

Strategic Factors Weight

Rating

Weighted

Score

Duration Comments

SHORT

INTERMEDIATE

LONG

1. The growth of demand (increasing broadband access/ internet user world wide), international market (increasing market share) and shopping habits by website also growth, Technology and computer user is growth (O)

2. Expanded products offerings and sales growth (O)

3. Competitors (T)4. Decreasing

customer confidence level (T)

5. Suppliers and partners (T)

0.15

0.05

0.08

0.04

0.03

0.05

4.0

3.0

4.0

4.0

3.0

4.0

0.60

0.15

0.32

0.16

0.09

0.20

X

X

X

X

X

X

X

X

X

X

X

X

X

Main opportunity

Must focused on some certain product

Competitor is main threat

Serious threat for company

Increase bargaining power

6. Sales tax barrier (law), for international market local law and customs (T)

7. High level customer service, Quality of services, insurance, distribution centre, Capacity of the company, Customer service and different programs, Brand Image, Competitive Prices & delivery cost, Sipping options, free shipping ordered over a minimum levels (S)

8. Market share (S + O)

9. Financial and capital position, overhead cost (S)

10. Variety of offering products and Quality (S)

11. Technology (very easy to use/ 1-Click ordering) and Networking (S)

12. Must operate in free sales tax locations, location had to be an area with people who had necessary programming talent to develop software, closeness to a major book wholesaler (T+W)

0.150.06

0.06

0.05

0.18

0.10

4.03.5

2.5

3.0

4.5

2.0

0.600.21

0.15

0.15

0.81

0.20

XX

X

X

XX

X

X

X

X

X

X

Carefully increasing cost

Key success factorDecrease because

competitor

Decreasing expenses, produce profit margin

(operating profit)

Quality key to success

Patented, Innovation continously, key to

success

Influence cost

1.00 3.64

After analyze the company environment using EFAS and IFAS on the input stage, the

next stage is analyze these EFAS and IFAS result in TOWS matrix. This matrix

constitute of continue analysis tools in the reconciliation stage which is important in

determined and develop a proper strategy. The key factors that used in TOWS matrix

are key factors that using in EFAS and IFAS. TOWS Matrix analysis is reconciliation

strength, weaknesses, opportunity and threats of company to formulated some

strategies there are SO, ST, WO and WT. SO strategy chosen when company has a

streght to utilizing some opportunities. ST strategy chosen when company has

strength to facing threats. WO strategy chosen when company attempt to break a

weaknesses by utilizing opportunities and WT strategy chosen when company attempt

to break a weaknesses and avoiding threats.

TOWS MATRIX AND STRATEGY ALTERNATIVES

STRENGTH (S)1) High level customer

service, Quality of services, insurance, distribution centre, Capacity of the company, Customer service and different programs, Brand Image, Competitive Prices & delivery cost, Sipping options, free shipping ordered over a minimum levels.

2) Market share3) Financial and capital

position, overhead cost

4) Variety of offering products, Quality and Innovation product

5) Technology (very easy to use/ 1-Click ordering) and Networking

WEAKNESES (W)1. Must operate in free

sales tax locations, location had to be an area with people who had necessary programming talent to develop software, closeness to a major book wholesaler.

2. Collecting payment period 30 to 40 days, had inventory and administrative cost

3. Unfocused where company Offer everything for every one (philosophy)

4. Lack of control in term shipping and distribution and Sales minimum for free shipping cost

OPPORTUNITY (O)1. The growth of

demand (increasing broadband access/ internet user world wide), international

SO1. Maintain competitive

price2. Maintain distribution

channel and market share

WO1. Developing new market2. Provide market

penetration 3. Develop new product by

modification/ creating

EFA

IFA

market (increasing market share) and shopping habits by website also growth, Technology and computer user is growth

2. Expanded products offerings and sales growth

3. Loyal customer

3. Expand to potential market area and international market

4. Maintain technology and continous improvement

new product4. Horizontal Integration5. Asset Devastation6. Reducing distribution

cost and shipping cost

TREATH (T)1. Competitors2. Decreasing customer

confidence level3. Poor economic

condition and increase unemployment rate

4. Suppliers and partners

5. Sales tax barrier (law), for international market local law and customs

ST1. Maintain product quality

and customer service2. Maintain competitive

price3. Innovation to improve

competitive advantages

WT1. Maximize promotional

activities by internet2. Increasing cost

efficiency3. Emphasize cost

reduction

Matrix IE Analysis

This matrix used to understanding strategy position and alternatives strategy of

company by using total score IFAS in X axis and total score EFAS in Y axis.

Furthermore, can be knows which one of the best strategy for the company.

TOTAL SCORE IFAS STRONGTH AVERAGE POOR 4.0 3.0 2.0 1.0

I (3.54;3.67)

II III

IV V VI

HIGH3.0 – 4.0

AVERAGE2.0 – 2.99

TOTAL SCORE EFAS

3.0

2.0

VII VIII IX

Based on the IE matrix analysis, knows that Amazon.Com stay in cell I (3.54, 3.67), it

means that Amazon.Com has strength internal performance condition (involve big

opportunity) but also in industry it has high risk and threats. Alternatives strategies in

this cell are Maintain competitive price, Maintain distribution channel and market

share, Expand to potential market area and international market, Maintain technology

and continous improvement.

Financial Statement Analysis for Amazon.Com

Return on Investment (ROI)

ROI (2000) = Net Income = (1411.4) = 0.3298 = (32.98) % Investment 4279

ROI (2001) = Net Income = (556.7) = 0.1462 = (14.62) % Investment 3808

ROI (2002) = Net Income = (150) = 0.0350 = (3.5)% Investment 4280

Return on Asset (ROA)

ROA (2000) = Net Income = (1411.4) = 0.6612 = (66.12) % Total Asset 2135

ROA (2001) = Net Income = (556.7) = 0.3401 = (34.01) % Total Asset 1637

ROA (2002) = Net Income = (150) = 0.0754 = (7.54) % Total Asset 1990

Net Income (NI)

(2000) = Net Income = (1411.4)

(2001) = Net Income = (556.7)

(2002) = Net Income = (150)

LOW1.0 – 1.99

1.0

Liquidity

Current Ratio (2000) = CA = 1361 = 1.396 = 139.6% CL 975

Current Ratio (2001) = CA = 1208 = 1.312 = 131.2% CL 921

Current Ratio (2002) = CA = 1616 = 1.516 = 151.6% CL 1066

Quick Ratio = Cash + Marketable Securities + Receivables / Total Current

Liabilities

Quick Ratio (2000) = 822 + 278 +0 = 1.128 = 112.8% 975

Quick Ratio (2001) = 540 + 456 +0 = 1.081 = 108.1% 921

Quick Ratio (2001) = 738 + 563 +0 = 1.2204 = 122.04% 1066

Analysis and Discussion

Financial Strength

Amazon.com, during the period of year 2000 to 2001 straight to improving in

financial performance, it is because Amazon.com reduced the expenses particularly in

promotion expenses. In 2002, Amazon.com earns operating profit. Amazon.com

sacrificing short-term profit for future growth. ROI during 3 years (2000 to 2002)

average is (16.98)%, ROA during 3 years average is (35.89)%, Net Income during 3

years average is (706.03), Current Ratio during 3 years average is 140.8%, Quick

Ratio during 3 years average is 114.3%. The data shows that Amazon.com has a good

financial performance for during the period. The company in this industry is very easy

to exit from market, because some competitor in industry can be substitute and also

the risk is very high for the business which using high technology and technology

itself very fast to change.

Industry Strength

The competition in industry is very high; competitor has accessibility to entry market

and barrier to entry quite easy. Technology is main resources that assurance the

business viability, new technology and innovation become important factors to be

company attentions. Control on supplier and distributor by company is quite weak

because they have bargaining power among company in industry. The opportunity to

potential growth among company in industry is similar, potential profit that can gain

also has similar opportunity among companies. In industry, companies should be have

financial stability performance to compete with others. Efficiency in term resources

utility, operating cost should be done to be cost leader in industry.

Environment Stability

In this industry technology changing every time, each company in industry always

improve technology innovation to be the best in technology, different with others and

they have competitive advantage, give the facilitation to access easier than another, it

become value added to company itself. Economic condition also affect industry

stability such as inflationary rate shall be influence consumer buying power, price

increasing, so it can be direct influence to demand and bringing on demand variability

which very difficult to predict by companies. The condition brings to difficulty to

access or entry market (barrier to entry). Competition pressure also can be causation

of instability environment.

Competitive advantage

In this case, market share increase become main issue. Amazon.com agigated for

increasing market share in long-term. To differentiate with competitor, Amazon.com

provide high level service quality for their customer and other stakeholder (supplier,

distributor, emplyee, shareholders). Customer loyalty also become notice for the

company to maintain. With the compatitive avantage such as in term technology with

1-Click ordering methode gave easy to accesibility for customer. Also internal

efficiency such as decreasing promotional expenses is good for short term but in the

long-term must be find other alternatives. Capacity of company should be utilize by

improving company prductivity such as product and market expanding.

Alternatives Strategy

In this case, we try to generate some alternatives strategy which can be used by

Amazon.com such shows in TOWS matrix above.

SO

Maintain competitive price (free shipping for minimum ordered, etc)

Maintain distribution channel and market share

Expand to potential market area and international market

Maintain technology and continous improvement

WO

a. Developing new market

b. Provide market penetration

c. Develop new product by modification/ creating new product

d. Horizontal Integration

e. Asset Devastation

f. Reducing distribution cost and shipping cost

ST

a) Maintain product quality and customer service

b) Maintain competitive price

c) Innovation to improve competitive advantages

WT

- Maximize promotional activities by internet

- Increasing cost efficiency

- Emphasize cost reduction

Recommendation

For Amazon.com case, we try to recommendation some strategy which company

should be done.

1. Horizontal integration and implement a business to business (B2B) exchange for

suppliers, manufacturers, distributors and retailers to use. In my opinion here, this

strategy the company can be share risk and cost with the partners. It can cause the

efficiency for the company. These efficiencies would translate into lower price for

Amazon.com. This alternative would be the steady cash flow it would receive

through the charging of hosting fees and commissions on completed transaction.

Patented technology, easy to access, guarantee, security and accessibility in term

of payment processing bringing on customers comfortable. This strategy in line

with second alternative which CEO and management team offered.

2. Maintain high level customer services and accessibility and easy to using website

and communicate the technology innovation, improvement and patented

technology to customer and other stakeholder

3. Expand to potential market in international market to increasing market share