Amazon: Online Shopping and Amazon.com

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Write a 1-page, single-space, 10-point font case analysis on the Amazon Case making sure to address the following questions:

1. On a scale of “1” (Very Poor) to “5” (Excellent), how would you rate Jeff Bezos as an entrepreneur? How would you rate him as an IT manager?

2. Trace the evolution of the Amazon.com business from the company’s launch in 1995 to the dot-com collapse in 2000. How did the company’s strategy change over time? How did capabilities evolve? What value did the company deliver to all stakeholders?

3. Do you agree with the decision to pursue the Toys “R” Us deal? Why did the company do the deal? Should Amazon.com do more deals like this? What impact does the Toys “R” Us deal have on Amazon.com’s business model in early 2000?

4. As a member of the Amazon.com board of directors in early 2001, what challenges did the company face and what actions would you take?

Amazon.com is a global leader in online-retail.

The company was founded by Jeff Bezos in Seattle in 1995, during the period of tech boom era of the 1990’s. Since founding as an online bookseller, Amazon.com drastically grown to expand its product offerings, fulfillment, and customer service. This growth required huge investments in technology and processes to support the complex business. Today, Amazon .com sells, or auctions, books, music, videos, toys, videogames, consumer electronics, software, and home products. On a scale of “1” (Very Poor) to “5” (Excellent), I would rate Jeff Bezos 5
out of 5 as an entrepreneur.

"Our vision is to be the world's most consumer-centric company, where customers can come to find anything they want to buy online."-Jeff Bezos. In 1994, Bezos was already a successful investment banker with estimated six figure salary. Bezos definitely had huge potential to rise in the company ranking but Jeff had a vision driven by a secret desire for the business of electronic retailing.

And just four years after Bezos created Amazon.com, the virtual bookstore became the model for how e-commerce businesses should be run. Now there are thousands of online retailer following his steps. Amazon begun on its strong root by starting up the business in Seattle during the dot com bubble meant Amazon.com was entering a new industry from its earliest beginnings. And being located in Seattle meant the company had e-commerce’s top talent and leading experts nearby. Other thing Bezos drove Amazon as a very successful entrepreneur is that his decision to become a business that offered multiple product lines meeting various consumer needs. The company also created a barrier to entry by being the first large online bookseller and finally a huge online retailer. I would rate Bezos 5 out of 5 as an IT manager as well. The company experienced extraordinary growth during and after the tech boom with customers increasing from 14 million in 1999 to over 20 million in 2000 .

But with rising fulfillment costs, the company had not produced profits during these years. The challenge Bezos and Amazon faced was turning the company profitable before cash ran out and operations would have to cease or go bankrupt. In fact, were it not for the $318 million raised through stock options in 1999 and another $680 million borrowed in early 2000, the company surely would have run out of cash. Strengths: Amazon.com strengths begin in its roots. Starting up in Seattle during the dot com bubble meant Amazon.com was entering a new industry from its earliest beginnings. And being located in Seattle meant the company had e-commerce’s top talent and leading experts nearby.

The company’s next strength came from its decision to become a business that offered multiple product lines meeting various consumer needs. The talent and industry that Amazon.com was surrounded by made it easy for the company to switch from a bookseller to retailer by utilizing virtual resources versus traditional physical requirements such as store fronts and floor space. The company also created a barrier to entry by being the first large online bookseller.

Since its incorporation in 1994, Amazon’s business model had expanded from offering a simple internet marketplace for books to providing web services to online retailers, storage solutions and a dramatically expanded product line. Nevertheless, despite massive sales the company failed to produce a profit for shareholders and Amazon was on the brink of bankruptcy at the beginning of 2001. If I were a shareholder who received the company’s 2000 annual report, I would have strongly agreed with CEO Jeff Bezos that the company must achieve profitability by year-end 2001. I would recommend that the company accomplish this by cutting costs related to fulfillment and inventory and by increasing revenue by capitalizing on the previous year’s investments in infrastructure.

While many expenditures in 2000 were related to Amazon’s efforts to implement its strategy for growth, operating costs had also increased. Amazon’s fulfillment costs were 11 11% of sales in 1997 and 1998, increased to 14 14% in 1999. Because e-Commerce was still new and just beginning to establish customer trust, it’s critical that these costs be reduced without negatively impacting quality, speed of delivery or customer service. Because of Amazon’s large scale and repeatable processes, I would recommend a continuous improvement strategy such as lean Six Sigma.

Another area of operational cash drain is inventory. After adding multiple new product lines and distribution centers in 2000, inventory management became a challenge for Amazon. In 1999, inventory turnover was 20% that of competitor Barnes and Noble and contributed to negative cash flow in 2000. Amazon would be well advised to use IT technology such as an advanced ERP to better estimate the inventory needed to meet demand without overstocking. In addition to cutting costs, Amazon must increase revenue

From its birth in 1994 to the dot com collapse in 2000, Amazon.com implemented a number of changes to its business strategy in attempt to stay on top of the e-commerce industry. Amazon.com started in 1994 as a simple online book retailer. Under this initial strategy, Amazon was receiving all of its revenue from its book sales (sales revenue model), and was popular because it was the first online retailer to do so. Amazon created value for customers early on by providing a space for customers to purchase a large variety of books in one place, thereby reducing the customers product search drastically from the traditional method of going to brick & mortar book stores. In the early stages, Amazon benefitted from the first mover advantage, and had a dominating market share. This attracted huge investment capital in the late 1990s, and Amazon used this capital to broaden its offerings in order to stay on top of emerging competitors.

In 1996, Amazon focused on making the shopping experience on Amazon.com better for its customers. It revved up its browsing and search capabilities, and personalized the whole experience by offering customized layouts and recommendations based on what you had been looking at and purchasing. At this point, Amazon aimed to provide additional value to its customers by providing a personalized shopping experience. By 1998, Amazon started expanding into international markets and new products categories, turning into an online superstore and providing convenience and further reduced search costs to its customers. During 1999, Amazon began exploring complementary business models, such as auctions and marketplaces. Under these models, Amazon did not assume control of the inventory, and as such acted as an agent (generating additional revenues under the brokerage revenue model). In late 2000, Amazon saw additional opportunities to...

1994
: Bezos, a N.Y. investment banker with no book publishing or retail experience, identifies book retailing as an industry segment that could exploit the power of emerging Internet technologies. Chooses Seattle as a location to be close to one of the largest book distributors. Writes the business plan and chooses the company name while driving cross country with his wife. 1995

: Between July 1994, when the company was incorporated, and July 1995 when the Amazon.com online bookstore was officially launched, Bezos and a few employees built the software that powered the website. By September 1995, the company was selling over $20,000 per week out of the founder’s garage. 1996

: Amazon.com focused on enhancing its product and service offerings and capabilities with increasingly sophisticated browsing and focused search capabilities, personalized store layout and recommendations, shopping carts, 1 Click shopping (which was later patented), wish lists, and greeting cards. Efforts to redefine and enhance the online shopping experience continued and, in 1999, Amazon.com was one of the first online retailers to enable shopping through wireless devices. 1997

: By the first quarter of 1997, Amazon.com revenues had increased to $16 million (which was equivalent to the company’s yearly revenues in 1996). Amazon.com went public on May 15, 1997. 1998

: Beginning in 1998, Amazon.com began aggressively
expanding
into new product categories and into
international markets. By early 2001, the company was not just an online bookstore, it was an online superstore selling a wide variety of products in over 160 different countries. 1999

: During 1999, Amazon.com began
exploring
new business models including, auctions (low-end and high- end) and marketplaces (zShops). For these businesses, Amazon.com provided software and services but did not assume control of inventory. As such, it acted as an agent—not a retailer. 2000