CASE STUDY 10 Amazon.Com: An E-Commerce Retailer

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1 Amazon.Com Case Study CASE STUDY 10 Amazon.Com: An E-Commerce Retailer Patrick Collins, Robert J. Mockler, and Marc Gartenfeld STRATEGIC MANAGEMENT PMN6023 Prof. Madya. Dr. Hj. Hamzah Dato Hj. Abdul Rahman Prepared by : ADE SUHERLAN 89775

2 COLLEGE OF ARTS AND SCIENCES UNIVERSITI UTARA MALAYSIA 2008 Abstract 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, 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.

3 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

4 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 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 Comments Key factor to success, yet remember increasing cost Shall be decrease Must be carefully Focusing on certain product Continuous improvement and changing Weaknesses : 1. Must operate in free sales tax locations, location had to be an area with people who had 0.60 necessary programming talent to develop software, closeness to a major book wholesaler Collecting payment period 30 to 40 days, had inventory and administrative cost Unfocused where company Offer everything for every one (philosophy) Lack of control in term shipping and distribution and Sales minimum for free shipping cost Total Score Main Weakness Must shortest Focused Good relationship

5 The average weighted score of firm in industrie is always. 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 Table Key External Factors Weight Rating Scores Comments Opportunity 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 2. Expanded products offerings and sales growth 3. Loyal customer Main opportunity Increasing the cost Maintain Threats 1. Competitors 2. Decreasing customer confidence level 3. Poor economic condition and increase unemployment rate Suppliers and partners 5. Sales tax barrier (law), for international market local law and customs Total 1, Main threat Quality of service Economic condition Good relation Influence cost 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)

6 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. 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 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) Weig ht Ratin g Weight ed Score Duration S H O R T I N T E R M E D I A T E L O N G Comments Main opportunity Must focused on some certain product Competitor is main threat Serious threat for company Increase bargaining power

7 5. Suppliers and partners (T) 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) Carefully increasing cost Key success factor Decrease because competitor Decreasing expenses, produce profit margin (operating profit) 9. Financial and capital position, overhead cost (S) Quality key to success 10. Variety of offering products and Quality (S) 11. Technology (very easy to use/ 1- Click ordering) and Networking (S) Patented, Innovation continously, key to success 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) Influence cost

8 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 MATRI AND STRATEGY ALTERNATIVES EFA IFA 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 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 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

9 OPPORTUNITY (O) 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 2. Expanded products offerings and sales growth 3. Loyal customer TREATH (T) 1. Competitors 2. Decreasing customer confidence level 3. Poor economic condition and increase unemployment rate 4. Suppliers and partners 5. Sales tax barrier (law), for international market local law and customs SO 1. Maintain competitive price 2. Maintain distribution channel and market share 3. Expand to potential market area and international market 4. Maintain technology and continous improvement ST 1. Maintain product quality and customer service 2. Maintain competitive price 3. Innovation to improve competitive advantages WO 1. Developing new market 2. Provide market penetration 3. Develop new product by modification/ creating new product 4. Horizontal Integration 5. Asset Devastation 6. Reducing distribution cost and shipping cost WT 1. Maximize promotional activities by internet 2. Increasing cost efficiency 3. Emphasize cost reduction Matrix IE Analysis This matrix used to understanding strategy position and alternatives strategy of company by using total score IFAS in axis and total score EFAS in Y axis. Furthermore, can be knows which one of the best strategy for the company. HIGH TOTAL SCORE IFAS STRONGTH AVERAGE POOR I (3.54;3.67) II III TO TA L SC O RE EF A S

10 AVERAGE LOW IV V VI VII VIII I 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) = = (32.98) % Investment 4279 ROI (2001) = Net Income = (556.7) = = (14.62) % Investment 3808 ROI (2002) = Net Income = (150) = = (3.5)% Investment 4280 Return on Asset (ROA) ROA (2000) = Net Income = (1411.4) = = (66.12) % Total Asset 2135 ROA (2001) = Net Income = (556.7) = = (31) % Total Asset 1637 ROA (2002) = Net Income = (150) = = (7.54) % Total Asset 1990 Net Income (NI) (2000) = Net Income = (1411.4)

11 (2001) = Net Income = (556.7) (2002) = Net Income = (150) Liquidity Current Ratio (2000) = CA = 1361 = = 139.6% CL 975 Current Ratio (2001) = CA = 1208 = = 131.2% CL 921 Current Ratio (2002) = CA = 1616 = = 151.6% CL 1066 Quick Ratio = Cash + Marketable Securities + Receivables / Total Current Liabilities Quick Ratio (2000) = = = 112.8% 975 Quick Ratio (2001) = = = 108.1% 921 Quick Ratio (2001) = = = % 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

12 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

13 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

14 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.

15 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

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