978-1259913747 Amazon Inc Case

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Structure of the Case

The case is written from the perspective of Jeff Bezos, CEO of Amazon.com, as he ponders the com-

pany’s strategy over the next several years. At one point, Bezos believed there was room in the mar-

ketplace for the Kindle as a dedicated e-reader alongside tablets and laptops. Since its introduction in

2010, however, Apple’s iPad has become the all-in-one vehicle for digital content and competition in

the mobile device industry has risen sharply. Meanwhile, traditional boundaries between hardware

and software, products and services, and online and physical stores have become increasingly blurred

in an epic battle for control of the digital ecosystem. The case provides information on the historical

background and competitive positioning of several of the main competitors in the mobile technology

industry.

Jeff Bezos started Amazon.com as an online bookstore in 1995 with nearly instant success. The

company set itself apart from the outset by pioneering such features as one-click shopping, customer

reviews, and order verification via e-mail. By the time it went public in May 1997, Amazon had already

earned $15.6 million in revenue, far exceeding even its largest physical competitors. Amazon expanded

both its international presence and range of product offerings through a series of acquisitions and

alliances over the next several years. After a brief setback in 2001 (due to the bursting of the dot.com

bubble), Amazon resumed its proliferation of retail products and online services. The Kindle, released

in 2007, represented the company’s first foray into hardware development. Sold at near breakeven

prices, the Kindle line has fueled the popularity of electronic books and driven increasing numbers of

customers to the online store to purchase content. Amazon released the Kindle Fire, a tablet version of

the e-reader device, in 2011. Amazon’s current product and service mix includes its online wholesal-

ing, retailing and advertising, Amazon Prime (a premium subscription service), smart devices (tablet,

phone, and TV), online publishing and content, and a full contingent of cloud-based services.

Apple was the first to market with both the iPhone (2007) and the iPad (2010), giving it a substantial

lead in consumer awareness and loyalty. As other competitors have launched copycat devices, how-

ever, Apple’s market share has been dropping. However, with the release of the latest iPhone, Apple

has reestablished itself as the leader in the hardware space. Apple’s main competitive advantage lies in

application development and other complementary products, among them Apple TV and the pending

smartwatch. The iTunes Store is the world’s largest music vendor and accounts for approximately 10

percent of Apple’s revenue. After an early period when Apple carried only Apple content in its online

store, both iTunes and Amazon now carry cross-platform content.

Amazon.com, Inc.

TEACHING NOTE

MHE-FTR-033

1259420477

REV: FEBRuARy 6, 2015

Teaching Note — Amazon.com, Inc.

Google started as a search engine but has expanded into online advertising, online retail, cloud

computing, mobile gadgetry, and even communications infrastructure. It acquired the Android open-

source mobile operating system in 2005. The first Android-based phone was the HTC Dream phone,

released in 2008, followed two years later by the Nexus One (made by Google with HTC as its manu-

facturing partner). By 2012, the Android OS was employed by three out of four phones worldwide,

the most popular of which has been the Samsung Galaxy line. Google acquired Motorola Mobility for

$12.5 billion in 2012, with plans to maintain it as an independent subsidiary. However, Google exited

the phone hardware business just 22 months later by selling the unit to Lenovo, but keeping the intel-

lectual property that was part of the acquisition. After Apple released the iPad in 2010, Google quickly

scaled up the Android OS for use in tablets in conjunction with hardware manufacturers like Samsung.

Android-based tablets tend to be smaller and cheaper than their Apple counterparts, as well as more

customizable to user specifications. As a result, their popularity with consumers is rapidly increasing.

Google has complemented this success with the release of their own Chromebook product, a cloud-

based tablet that has the basic functionality of a laptop. The company is currently rolling out its Google

Fiber, a high-speed fiber optic play designed to make available high-speed Internet available at a lower

cost.

of the messaging app WhatsApp and an attempted acquisition of SnapChat. Facebook is also mak-

ing a push into e-commerce, another means by which to complement its advertising revenue. Finally,

in the hardware space, the company has acquired a virtual reality hardware manufacturer and part-

nered with HTC in 2014 to produce the “Facebook phone,” a device built around the Android-based

Facebook app.

dominance of e-commerce online, it is also set to square off with Amazon with respect to cloud services.

Alibaba has a nascent service around cloud computing and Internet infrastructure which is growing

particularly quickly in China.

With these major tech players all competing in multiple areas with each other, the case closes with

the issue of where to next for Bezos. Which of these areas represent the appropriate strategic focus at

a corporate and business level for the medium to long term, and how might Bezos mitigate the short-

term pressure to become profitable, and the anticipation that AWS may become the center of attention

for a spin off at the pressure of investors?

Teaching Note —Amazon.com, Inc.

Suggested Answers

AnAlysis: Focus on ExtErnAl And/or intErnAl EnvironmEnts

1. Assess Amazon’s resources and capabilities using the VRIO framework. Can Amazon gain and

sustain a competitive advantage? Why or why not?

Valuable:

Do the resources help Amazon to increase the perceived value of its offering in the eyes of the

consumers?

The resources that Amazon has at its disposal can certainly be deemed as valuable from the consum-

er’s perspective. The company’s e-commerce activities provide consumers with everything they could

Teaching Note — Amazon.com, Inc.

of McGraw-Hill Education.

possibly want/need in a cost effective and convenient manner, perhaps best exemplified by Amazon

Prime and the fact that consumers are willing to pay a subscription fee for access to expedited shipping,

reduced shipping fees, and efficient access to content, goods and services that are otherwise obtained

elsewhere albeit not via a fully integrated e-commerce platform. The same can be said of the company’s

AWS unit in its ability to meet the cloud computing needs of individuals and businesses alike.

Rare:

“The number of firms who possess the appropriate resources are less than the number of firms

required to produce a perfectly competitive firm environment.”

The resources that Amazon has at its core are also rare. Not only are many of the resources at

Amazon the culmination of being the first company to make a success out of Internet e-commerce on

Costly to imitate:

“A company seeking to possess the appropriate resources as incumbents do are unable to develop

or buy it at a comparable cost.”

The state of technology and its rapid evolution means that Amazon’s resources are not necessarily

costly to imitate. Perhaps the best example of this is the AWS unit: despite the unit being the com-

Organized:

“A company with a valuable, rare, and unique resource is organized effectively to exploit the

resource for competitive advantage.”

The unique way that Amazon grew and its ability to adapt to the changing technology environ-

ment means that the company is organized to leverage its resource towards competitive advantage.

Teaching Note —Amazon.com, Inc.

Overall, the VRIO framework indicates that Amazon can indeed gain a competitive advantage, but

needs to be vigilant in order to sustain any advantage. Current trends indicate a move toward signifi-

cant industry convergence, as Amazon, together with Google, Apple, Apple, Facebook, and Alibaba

fill in the gaps to compete directly against one another in multiple product and service markets. For

example, Amazon.com released the Kindle Fire, a tablet version of its popular e-reader in 2011, enter-

2. Perform a SWOT analysis for Amazon.com. Pay particular attention to industry convergence.

What are the strategic implications for Amazon?

students should be able to perform a swot analysis to identify some strategic implications as to how Amazon

FormulAtion: Focus on BusinEss, corporAtE,

And/or GloBAl strAtEGy

3. Which business strategies and business models are being employed by the major competitors in

this case? Which are most successful, and why?

Amazon has a strong business model in that it has diversified into many adjacent business areas

and products falling under the online merchandising umbrella. It operates on a direct-to-consumer

online model which boosts both inventory turnover and return, while at the same time operating lean

warehouse and inventory operations in multiple geographies. With this in mind, the company clearly

takes a cost leadership based approach to its business strategy. The aim of such a strategy is to create the

Teaching Note — Amazon.com, Inc.

of McGraw-Hill Education.

and complements. Apple, for example, has dedicated company stores staffed with in-house experts.

The company was also first to market with a smartphone and tablet and has largely set the industry

standard with respect to product features and complements. Thus, Apple tends to have the strongest

brand image and therefore charges the highest price premiums.

Facebook’s business model is based primarily on three functionalities of its social media platform:

News Feed, Timeline, and Graph Search. Overall, these three functions serve to attract eyeballs that

advertisers and marketers can then exploit. Because the platform can serve as basis for segmentation to

target specific segments of users, marketers and advertisers can reach, engage, and offer contextually

Of the major competitors exercising a broad differentiation strategy, it is perhaps Apple that executes

most successfully. The company monetizes sales very effectively via iTunes as well as the devices that it

sells, offers exceptional customer service and creates captive consumers by integrating all of its product

With that said, Amazon’s cost leadership, itself a function of the scale at which the company oper-

ates, means that Apple cannot compete with respect to retail scale. This ability of Amazon to offer, for

example, content and online streaming en masse may limit the growth potential of Apple’s iTunes

4. Formulate a business strategy and business model that would allow Amazon to become and

remain profitable.

Amazon lacks profitability primarily due to the low prices that have underscored its pricing strategy

both in terms of online retail as well as AWS. This is compounded by the fact that Amazon is direct-

to-consumer, meaning that it owns the majority of its inventory that it retails online, adding to fulfill-

ment and warehousing costs. There are also additional costs of data centers, fulfillment and sorting

Teaching Note —Amazon.com, Inc.

Given the cost leadership strategy that Amazon subscribes to, profitability may be reached primarily

through lowering costs. It should be remembered that Amazon has numerous competitors in the retail

space, and raising prices would place the company at a competitive disadvantage without offering a

A recent Forbes analysis,1 however, indicates that Amazon may not be at the bottom end of pric-

ing when compared to retail competitors such as Walmart and Target. Prices in some key product

categories are 5 percent to 10 percent cheaper than they are on Amazon, excluding shipping and taxes.

along the lines of a broad differentiator within the wholesale market.

A second possible approach would be for the company to continue to build out its own private label

merchandise to sell on its own platform. This has arguably already begun with the Amazon’s entry into

the CPG market through the release of its own diaper line.2 While this may yet contribute to margins

have with similar suppliers, and thereby jeopardize sustainable profits.

Finally, perhaps one of the more sound approaches Amazon could take is to stand up various busi-

ness units as standalone businesses via a spin out. Eligible units include the likes of AmazonSupply,

and most notably, AWS. Such an approach addresses two issues. First, as a separate business entity, a

unit like AWS would be able to break away from the broader cost leadership strategy of Amazon, and

5. What are the implications of your strategy formulation at the business level for Amazon’s

corporate strategy?

There are three major considerations and implications in considering spinning out a business unit

like AWS. To begin with, Amazon needs to determine how to organize itself to make optimal use of any

Teaching Note — Amazon.com, Inc.

of McGraw-Hill Education.

competitive advantage that spinning out an internal business unit might have, in accordance with the

VRIO framework. ultimately, the company still has to satisfy the VRIO criteria in order for profitability

to be sustainable. This organization may take on the appropriate structure as discussed in text Chapter

11 according to whichever structure best suits Amazon’s goals in terms of spinning out a particular

business unit.

Second, given that Amazon is in essence a collection of various business units, the company needs

to consider the implications of spinning out one of these businesses on the other business units. Given

the pressure stockholders are placing on Amazon to focus more on profitability, if not deliver sustain-

Finally, a business strategy that includes spinning out AWS such that Amazon overall can become

profitable presupposes that AWS can pursue successfully a strategy that is intrinsically different from

implEmEntAtion: Focus on rEcommEndAtions

And How to ExEcutE tHEm

6. How should Jeff Bezos go about implementing any changes to the business and corporate

strategy recommended earlier? What changes to structure and process need to take place?

As touched on in the last question, spinning out a unit like AWS requires Bezos to consider rami-

fications on how to best organize in order to create a sustainable competitive advantage once a deci-

sion of this importance has been made. Within this issue, it becomes important for the structure to be

appropriate and to match the chosen business strategy that the new spin out opts for (and not vice

versa). Perhaps most notably, the chapter text opens with the discussion of Zappos and the structure

Likewise, it becomes important for Amazon to commit to a business strategy for AWS, and then

organize the unit appropriately in order to be able to capture any value from the spin out. This is partic-

ularly important in the context of Amazon’s broad cost leadership strategy, and the notion that in order

for the spun-out entity to become a profit center for Amazon, the divested unit may have to consider

a differentiation strategy. According to a comparison of mechanistic vs. organic organizations, such a

Teaching Note —Amazon.com, Inc.

ultimately, Bezos will have to keep the structure of AWS as simple or more likely, functional, given

its current size. He will also have to think about placing in managerial and leadership positions indi-

Additional Resources

1. To read the interview with Jeff Bezos referenced in the case, see:

Hansern, M. T., Ibarra, H., and Peyer, u. (2013), “The 100 Best Performing CEOs in the

World,” Harvard Business review, January–February: 2–15. http://hbr.org/2013/01/

the-best-performing-ceos-in-the-world.

2. Additional good articles for background reading include:

“Another Game of Thrones,” the Economist, december 1, 2012. http://www.economist.com/

news/21567361-google-apple-facebook-and-amazon-are-each-others-throats-all-sorts-ways-

another-game.

Lessin, J. E., Bensinger, G., Rusli E. M., and Efrati, A. (2012), “2013 Preview: Apple vs. Google vs.

Facebook vs. Amazon—The Lines between Software and Hardware Continue to Blur,” the wall

street Journal, december 26, B.1.

“How Far Can Amazon Go?,” The Economist, June 21, 2014. http://www.economist.com/news/

leaders/21604550-it-has-upended-industries-and-changed-way-world-shops-it-should-beware-

abusing

“Amazon. Relentless.com,” the Economist, June 21, 2014. http://www.economist.com/news/

briefing/21604559-20-amazon-bulking-up-it-notyetslowing-down-relentlesscom

3. Supplemental videos:

tablet wars Heat up as Apple rolls off new ipads (2:05). http://www.cbsnews.com/8301-18563_162-

57608796/

October 22, 2013. A cBs Evening news segment highlighting the release of three new competing

tablets on the same day. Apple faces increasing price pressure and competition for market share

with the onslaught of cheaper, Android-based devices.

Google Joins the “tablet wars” (4:04). http://www.cnn.com/video/?/video/tech/2012/06/28/

church-google-new-tablet.cnn&iref=videosearch&video_referrer=http%3A%2F%2Fwww.cnn.com

%2Fsearch%2F%3Fquery%3Dtablet%2520wars%26sortBy%3Ddate#/video/tech/2012/06/28/

church-google-new-tablet.cnn

June 28, 2012. A cnn video clip highlighting the release of Google’s Nexus 7 tablet with an over-

view of other recent developments in the mobile technology industry (Microsoft Surface, Apple vs.

Samsung lawsuit, Google Glass).

Teaching Note — Amazon.com, Inc.

tablet wars Heat up with Kindle Fire (2:16). http://www.cnn.com/video/?/video/

tech/2011/09/28/bts-kindle-fire.cnn&iref=videosearch&video_referrer=http%3A%2F%2Fwww.

cnn.com%2Fsearch%2F%3Fquery%3Dtablet%2520wars%26sortBy%3Ddate

September 28, 2011. A cnn video featuring Jeff Bezos’ introduction of the Kindle Fire, discussing

its unique features.

watch Amazon cEo Jeff Bezos Get Grilled in rare public interview (6:35) http://www.businessinsider.

com/amazons-jeff-bezos-on-profits-failure-succession-big-bets-2014-12

December 16, 2014. A Business insider video of a rare one-on-one interview with Jeff Bezos, cover–

ing topics from the Fire phone disaster, the company’s frugality, Bezos’s succession plans, and how

the company convinced Wall Street to put less emphasis on quarterly profits.

Teaching Note —Amazon.com, Inc.

ExHIBIT TN-1 SWOT Analysis of Amazon.com

Strengths Weaknesses

Agility and ability to disrupt itself

Diverse array of technology offerings

Beyond Kindle, has stumbled in the consumer hardware space

Has a limited ecosystem-like platform to capture consumers

Encountering legal issues related to bargaining power (antitrust),

Continued growth and development of IaaS segment

Continued migration of consumers from traditional to e-books,

Plethora of tech startups representing potential future strategic

acquisitions

Unprecedented competition from both traditional and

nontraditional rivals

Teaching Note — Amazon.com, Inc.

Endnotes

1 Trefis Team (2014), “Amazon’s Profitability Can Further Decline in the Future (Part 2 of2),” Forbes, December

12.

2 Ziobro, P. (2014), “Amazon Tries on the Diaper Business,” the wall street Journal, December 4.

3 Farrell, M. (2015), “Carl Icahn Presses Apple to Buy Back Its Stock . . . Again”, the wall street Journal,

February 11.