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TEACHING NOTE
CASE 3
Amazon.com’s Business Model
and Its Evolution
Overview
In July 2015, Amazon surpassed Wal-Mart as the world’s largest retailer by market value after a surprise
second quarter profit that led to a surge in the company’s stock value. Amazon shares rose 17%, giving the
company a market value of $262.7 billion, compared to Wal-Mart’s market capitalization of $233.5 billion.
After it posted two consecutive quarterly profits in 2015, analysts noted that Amazon was a company capable
of both investing in itself and sustaining long-term profits. Going forward, the company planned to launch new
digital products and service categories, build more fulfillment centers, power AWS, and expand the Kindle Fire
Ecosystem. The company also planned to hire 100,000 people in North America for the holiday season.
According to some critics, if the huge investments made by Amazon in diversifiying its business did not work
out, investors’ patience would finally run out and the company would be in trouble. Amazon would have to be
selective about where it invested in order to maintain profitability. Moreover, some analysts felt that between
price-match guarantees, free shipping, and plans to go multi-channel, other competitors were finally catching up
with Amazon in the online retail market space. Amazon would need to work harder to meet the expectations of
its customers to maintain its dominance in the highly competitive online retail sector, they added.
Although Amazon had a number of competitive weapons in its arsenal to drive customer loyalty and sustain
market position, the battle would be tough as competitors were set to give the company a hard fight. The challenges
that the company faced could severely threaten its business model. As the company commenced its 22nd year
in operation, Amazon needed to be able to carve out a sustainable piece of the mobile device ecosystem where
Apple and Google already had a head start, and where Facebook most likely would enter.
Suggestions for Using the Case
This is a high-interest case and one that will certainly trigger lively classroom discussion. Students are very
interested in discussing the Amazon case, given the ubiquity of its services and products across many computing
platforms. Many are likely to have read in the popular press about founding CEO Jeff Bezos and how he has
inculcated and nurtured a unique culture at Amazon.
This case provides a unique opportunity for students to discuss Amazon’s growing dominance in the e-commerce
industry, and to compare its strong position in the cloud computing services industry to its much weaker posi-
tion in mobile devices and their complement, the digital media streaming industry. Students should develop an
appreciation of the need for companies to tailor a strategy and develop capabilities that fit the specific industry
to build a sustainable competitive advantage.
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*This teaching note reflects the thinking and analysis of Professor Armand Gilinsky, Sonoma State University. We are most grateful
for his insight, analysis and contributions to how the case can be taught successfully.
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This Amazon case can also be paired with the material on diversification strategy, covered in Chapters 8.
nEstablishing investment priorities that focus resources on the most attractive business units: (covered in
Chapter 8)
• Pursuing rapid-growth strategies via the most promising businesses
• Initiating profit improvement / turnaround strategies in weak-performing businesses that have potential
• Divesting businesses that are no longer attractive or that don’t fit into management’s long-range plans.
n Actions to boost the combined performance of a collection of businesses: (also covered in Chapter 8)
• Sticking closely with an existing business lineup and pursuing opportunities presented by these
businesses
• Broadening the scope of diversification by entering additional industries,
• Retrenching to a narrower scope by divesting poorly performing businesses
• Restructuring by divesting some businesses and acquiring others so as to put a whole new face on the
company’s business lineup.
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Finally, if used as a final review assignment prior to an examination or course project deliverable, the Amazon
can also be useful to preview the strategy execution concepts in Chapters 10 and 12:
nGood strategy execution requires continuously building and upgrading the organization’s resources and
capabilities: (covered in Chapter 10)
• Superior strategy execution capabilities may also enable a company to react more quickly to market
changes and beat other firms to the market with new products and services.
nA company culture that is consistent with the requirements for good strategy execution can energize
employees, deepen their commitment to execute the strategy flawlessly, and enhance worker productivity in
the process: (covered in Chapter 12)
• A culture that is well matched to the chosen strategy and the requirements of the strategy execution
effort focuses the attention of employees on what is most important to this effort.
The assignment questions and teaching outline presented below reflect our thinking and suggestions about
how to conduct the class discussion and what aspects to emphasize.
To give students guidance in what to think about and what analytical tools to utilize in preparing the Amazon’s
To facilitate your use of study questions and to make them available to students, we have posted a file of the
assignment questions contained in this teaching note for the Amazon Business Model case in the instructor
resources section of the Connect Library. (We should also point out that there is a set of study questions posted
in the student section of the OLC for each of the 31 cases included in the 21st Edition.)
Video for Use with the Amazon Case. There is a 10:49 minute video that you can show in class (or have
students view on their own entitled “Amazon.com Business Strategy in the 2000s—Profit vs. growth—Long
Runway for Success,” that can be accessed at https://www.youtube.com/watch?v=lvzrRx5-He4
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One option is to show the video right before you ask the class for action recommendations, but you can also show
them at the beginning of the class period if you prefer.
This case is suitable for both written and oral presentations. Our recommended assignment questions are as fol–
lows:
1. As part of your internship requirements with Apple Inc., you have been asked to prepare an analysis of
Amazon’s competitive position in the markets for e-commerce, digital media players, cloud computing,
and content creation and streaming. Your report should contain 2-3 pages of recommendations for
2. A key executive at Amazon has learned of your considerable skills in strategic analysis and has hired you
to develop a strategic plan that will enable Amazon to improve its position in the e-commerce industry,
continue to build a strong position in the market for cloud-based computing, and make a decision about
Assignment Questions
1. What are the chief elements of Amazon’s overall competitive strategy? How well do the pieces fit together?
Is the strategy evolving?
2. What are the key elements of Amazon’s strategy in e-commerce, cloud computing services, personal media
players, digital media streaming? Are those strategies successful? Are they compatible? Explain.
3. What does a competitive strength assessment reveal about Amazon’s e-commerce business, as compared to
the leaders in the retail industry? Use the methodology in Table 4.3 to support your answer.
4. Does it appear that the company’s competitive positions in personal media players and digital streaming are
stronger or weaker than its position in e-commerce and cloud-based computing services? What steps should
it take to ensure that the digitally streamed media—and mobile platforms to access that media—become a
major contributor to the company’s overall performance?
5. Does it make good strategic sense for Amazon to be a competitor in the e-commerce, cloud-based computing
services, and personal media device industries? Which of its three principal product lines—e-commerce,
cloud computing services, or personal media players—do you think is most important to Amazon’s future
growth and profitability? Why? Should any of the product lines be discontinued?
6. What is your assessment of Amazon’s financial performance the past three years? (Use the financial ratios
in the Appendix of the text as a guide in doing your financial analysis.)
7. What strategic issues confront Amazon in 2015? What market or internal circumstances should most concern
Jeff Bezos and the company’s senior leadership team?
8. What recommendations would you make to Amazon to address the strategic issues confronting it in 2015
and sustain its impressive growth in revenues and maintain its profitability?
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Teaching Outline and Analysis
1. What are the chief elements of Amazon’s overall competitive strategy? How well do the
pieces fit together? Is the strategy evolving?
Students should recognize that Amazon has done a formidable job of developing and piecing together
its very distinct “put long-term investment, market gains, and value creation ahead of short-term profits”
strategy through effective innovation. As stated in the case, Amazon “constantly plowed cash back into the
business and continued building new businesses in the hope of getting greater returns in the future.” This
“invest and grow” strategy resulted in an increasing proliferation of new product and service introductions
and the improvement of existing services.
Amazon has employed a broad low cost strategy linked to innovation with its three core products –
e-commerce, web services for other businesses, and personal media players and mobile phones (and the
content to be downloaded onto those devices).
2. What are the key elements of Amazon’s strategy in E-commerce, cloud computing and web
services, and personal media players? Are those strategies successful? Are they compatible?
Explain.
Students should be able to identify the following elements of Amazon’s broad low-cost strategy utilized in
its e-commerce, web services, and personal media players businesses.
Components of Amazon’s Strategy in E-commerce
The four pillars of Amazon’s business model in e-commerce were: low prices, wide selection, convenience,
and customer service (via fast and reliable delivery and returns).
nLow prices: Reportedly, the prices of goods sold by Amazon were up to 13% lower than those prevailing
in other online and brick-and-mortar stores.
• The sales tax advantage it derived in some places where it did not have a physical presence also helped
the company in keeping its prices low and gave it a cost advantage over brick-and-mortar stores.
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• By purchasing large volumes of products directly from manufacturers, distributors, and publishers,
Amazon received discounts from them.
• Offering consistently low prices on the best-selling items supported a perception among consumers
that Amazon had the best prices overall.
nCustomer service: Customer service, loyalty, and retention were the three most important aspects of
Amazon’s service culture, which catered to an estimated 270 million worldwide.
• Amazon primarily focused on three primary customer groups: consumers, sellers, and developers.
• Case Exhibit 6 lists 15 selected features offered to Amazon’s consumer customers, few of which
have yet been duplicated by rivals in e-commerce.
• Amazon invested heavily in building advanced technological infrastructure and spent huge sums of
money on customer service and loyalty programs, even though it affected the operating margins of
the company (as will be shown in the coverage of Amazon’s financial performance in Question 6).
• Over the years, it had rolled out Amazon Prime, Mayday, One Day Delivery Service, Amazon
Fresh, Amazon Dash, Amazon Lockers, and Automatic Refunds.
Students should be pressed to evaluate and reflect on case Exhibit 5, Amazon’s Core Values, which supported
the company’s superior strategy execution efforts in e-commerce.
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Components of Amazon’s Strategy in Cloud Computing and Web Services
Students should be directed to case Exhibit 4, depicting Amazon’s Business Model Evolution from retailer
to e-commerce platform and web service provider to small businesses, self-publishers, and developers.
Amazon Web Services (AWS) also provided marketing and promotional services for third-party retailers
and web services for developers.
nAWS had grown into one of the largest computing services platforms in the world.
nAmazon had also expanded into new categories like film streaming and cloud computing.
Undoubtedly, Amazon faced formidable competition in the technology market from better capitalized rivals
such as Apple, Google, Microsoft, and potentially even Facebook, as shown in case Exhibit 1. Amazon’s
lead in business-to-business customer service and the recruitment, training, and retention of seasoned
IT developers probably could be trumped over time by rivals such as Google and Facebook, as it seems
inevitable that those rivals will move from their primarily online advertising business models into Amazon’s
“customer data and ratings on products for resale” space.