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Case 3 Teaching Note Amazon.com’s Business Model and Its Evolution
8
3. What does a competitive strength assessment reveal about Amazon’s e-commerce business,
as compared to the leaders in the discount retail industry? Use the methodology in Table 4.3
to support your answer.
Students should be able to prepare a competitive strength assessment for the major discount retailers.
Although the students’ strength measures, respective weightings, and ratings may vary, conclusions should
be consistent with Table 1.
TABLE 1. Competitive Strength Assessment for the Leading Rivals in the Discount Retail Industry
Rating Scale: 1 = very weak; 10 = very strong
Key Success Factors/
Strength Measures
Importance/
Weight
Amazon Walmart Costco
Rating
Weighted
Score Rating
Weighted
Score Rating
Weighted
Score
Customer service 0.20 81.60 61.20 61.20
Wide selection 0.10 90.90 80.80 70.70
Convenience 0.20 91.80 61.20 71.40
The table above indicates that Amazon is the strongest player in the discount retail market space, which
is supported by the market capitalization statistics presented in case Exhibit 1. Amazon’s competitive
strength is primarily a function of its superior customer service, distribution, and reputation for having a
wide selection of products and a convenient ordering system. Students are likely argue either way regarding
Amazon’s rating with respect to “low price,” as the case presents differing points of view on this category.
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?
Based on the analyses above and a careful reading of the case, it should be quite obvious that Amazon is a
late entrant into the mobile device and digital streaming markets. Unlike Apple or Google, Amazon has not
yet enjoyed any experience curve benefits of being a late entrant into mobile phones, tablets, or streaming
Case 3 Teaching Note Amazon.com’s Business Model and Its Evolution
9
media. There was no apparent direct linkage between those devices and its e-commerce platform, nor is
proprietary software required for capturing the streaming content on those devices (or on any of its rivals’
devices, for that matter).
A good argument could thus be made for Amazon to entirely exit (or at least reduce its investments in) per-
sonal media players and other electronic devices such as the Fire TV or Amazon Dash that are not essential
to access the company’s commerce or web services ecosystems. The case states that, “in the third quarter of
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, 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?
Amazon has become the most disruptive force to emerge in retail in several decades. Its low-cost operations,
network effect, and laser focus on customer service provide it with sustainable competitive advantages that
traditional retailers cannot match; this should yield additional market share gains in the years to come.
So, the answer is yes and no, it does make good strategic sense for Amazon to remain a competitor in
the e-commerce and cloud-based computing services businesses, while the personal media player business
remains a strong question mark or perhaps even a candidate for divestment.
nOne of Amazon’s key advantages is its low-cost operations.
The cost to maintain its scalable fulfillment and distribution network is lower than having a large physical
retail presence, allowing Amazon to price below its brick-and-mortar peers while still generating excess
economic returns. Additionally, U.S. tax laws currently mandate that online retailers collect sales tax
in states where they have a physical presence, with the tax responsibility falling to the end consumers
themselves. As a result, Amazon currently collects sales tax in states where it maintains a physical
Case 3 Teaching Note Amazon.com’s Business Model and Its Evolution
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nDespite ongoing large R&D investments in fulfillment, technology (hardware devices and AWS),
and content, we expect Amazon to continue generating positive cash flows, if not profits, for the
foreseeable future.
The shine may long be off its initial 2006 launch of the Kindle, which resulted in half a million devices
sold, and although the Fire Phone and Kindle Fire and other devices have met with limited market
acceptance to date, so Amazon should strongly consider abandoning the OEM business as it offsets
any profits from the current fulfillment and content streaming businesses that remain in high growth
markets.
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.)
Students should be able to use the financial information provided in case Exhibit 3 and the financial ratios
provided in the Appendix of the text to make calculations similar to those shown in Table 2.
TABLE 2. Selected Financial Statistics and Ratios for Amazon Inc., 2010 – 2014
n/a = not applicable or impossible to calculate.
Performance Ratios 2014 2013 2012 2011 2010
Net sales growth % 19.5% 21.9% 27.1% 40.6% n/a
Sales growth, products % 15.1% 17.7% 23.2% 36.4% n/a
Sales growth, services % 39.6% 44.8% 54.0% 78.1% n/a
Gross margin, % 29.5% 27.2% 24.8% 22.4% 22.3%
Case 3 Teaching Note Amazon.com’s Business Model and Its Evolution
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Students are likely to suggest that that the strength of Amazon’s strategy and products allowed it to withstand
the effects of the recession much easier than competing bricks-and-mortar retailers.
Students should quickly recognize that, although Amazon’s performance between 2010 and 2011 had been
exceptionally strong with net sales revenues growing by 41%, the growth rate in that category weakened
considerably in the succeeding years out to 2014. For purposes of comparison, revenue growth in services
remained robust relative to revenue growth in products during that four-year period. As a result, gross mar-
gins widened considerably, from 22% to nearly 30%.
7. What strategic issues confront Amazon in 2015? What market or internal circumstances
should most concern Je Bezos and the company’s senior leadership team?
We think it is always a good idea to push the class for their assessment of what issues management needs
to address before proceeding to ask for action recommendations. Issue identification (or compilation of a
“what I’d do if I were in her/his shoes” list) is a way for students to draw conclusions from all the preceding
analyses, plus it sets the stage for what actions need to be taken.
In Amazon’s case, we see several high-priority issues meriting priority consideration:
nHow best to sustain long-term growth and profitability
nDespite apparent reductions in general and administrative overhead, how to stem the declines in
operating profit as a percentage of total revenues
Case 3 Teaching Note Amazon.com’s Business Model and Its Evolution
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8. What recommendations would you make to Amazon to address the strategic issues confron-
ting it in 2015 and sustain its impressive growth in revenues and maintain its profitability?
Although the major societal trends towards replacement of analogue media by digital media and the
replacement of computers by larger-format smart phones are likely to continue unabated, Amazon
must be more selective with its capital allocation into any OEM personal devices.
nThat is, we believe the lack of consumer interest in the Fire Phone was a wakeup call for management’s
future capital decisions, as the company runs the risk of losing key personnel without stronger returns
on invested capital, owing to the equity component of many employees’ compensation structure.
However, the company should continue on its recent path with respect to acquisitions and investments in
fulfillment and streaming content.
nThese investments have been more directly aligned with Amazon’s stable growth core e-commerce and
higher growth AWS platforms.
TABLE 3. Selected Strategic Options for Amazon Inc.
Option Pros Cons
Continue Preserves entrepreneurial can-do spirit, company
culture, and investments in information technology
and operating systems
Rival firms such as Google or Facebook
may catch Amazon by developing similar
or stronger data analytics, customer
service & IT capabilities
Expand via JV
or acquisition
Could involve strategic alliance with — or acquisition
of — a large social media company with billions
of users e.g. Facebook or Snapchat or LinkedIn,
it may be able to achieve economies of scope
Requires massive amounts of capital &
cooperation to achieve
Potential dilution of ownership & control
Potential diminution of customer service &
Case 3 Teaching Note Amazon.com’s Business Model and Its Evolution
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Wrapping Up The Class
The Amazon case can provide instructors with an important “bridge” to strategy execution concepts covered in
later chapters, or it can even be paired with those chapters. We would encourage you to conclude by foreshadowing
the material in those chapters and by making the following points:
nDisruptive companies like Amazon that have superior competitive strength in one or two arenas—
such as e-commerce or web service—typically have prioritized a few key success factors (KSF) that
are necessary for industry dominance: (covered in Chapter 5):
• Develop a capability and a corporate culture to support superior customer service
• Make massive investments in logistics and fulfillment, often to the detriment of profits
• Adopt a virtuous circle that puts customers at the center, via a friendly, easy-to-use interface and policies
that reward rather than punish customers
nAmazon’s high performance, innovative culture is an excellent example of how companies get an
important boost from a culture that promotes superior strategy execution and operating excellence:
(covered in Chapter 12)
• Company strategies cannot be executed well unless you have inculcated a culture like Amazon’s, that is,
one highly conducive to adaptation and change.
• Strategy-supportive cultures like Amazon’s not only enable better execution, but also strengthen organi-
zational capabilities, enough, in certain industries at least, to provide a substantial competitive edge over
rivals
Case 3 Teaching Note Amazon.com’s Business Model and Its Evolution
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Epilogue
Sales increased 20%, 20%, and 22% in 2015, 2014, and 2013, compared to the comparable prior year periods.
Changes in foreign currency exchange rates impacted net sales by $(5.2) billion, $(636) million, and $(1.3)
billion for 2015, 2014, and 2013. For a discussion of the effect on sales growth of foreign exchange rates, see
“Effect of Foreign Exchange Rates” below.
AWS sales increased 70%, 49%, and 69% in 2015, 2014, and 2013, compared to the comparable prior year
periods. The sales growth primarily reflects increased customer usage, partially offset by pricing changes. Pricing
changes were driven largely by our continued efforts to reduce prices for our customers.
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, 2013 – 2015
(in millions, except per share data)
Year Ended December 31
2015 2014 2013
Net product sales $79,268 $70,080 $60,903
Net service sales 27,738 18,908 13,549
Total net sales 107,006 88,988 74,452
Operating expenses:
Cost of sales 71,651 62,752 54,181
Fulfillment 13,410 10,766 8,585
