Amazon.com, Inc.

Strategic Management MGT - 490

Case Study : Strategic Analysis on

Prepared by : Group - 3 Name Md.Zahirul Quiyum Md. Abul Hasnath Nahid Habiba Wali Muhammad Iftekharul Islam ID no# 0620369 0730169 0720559 0630220

Amazon.com, Inc.

Letter of Transmittal
To,
Mr. Hanif Mahtab

Course Instructor MGT 490 Independent University, Bangladesh

Subject: Submission of case study on Amazon.com, Inc.

Dear Sir, We are very grateful to you for giving us such a wonderful opportunity for composing this case study on Amazon.com, Inc. This assigned task has developed upon our knowledge based and data accumulation on this topic.

We have tried our best within our limitations to make this report useful one and undoubtedly completing this paper was worth the effort. Finally we would be highly oblige if you overlook the minor errors in the report and earnestly hope that you enjoy reading this report as much as we did while composting it.

Yours truly, Md.Zahirul Quiyum Md. Abul Hasnath Nahid Habiba Wali Muhammad Iftekharul Islam ID: 0620369 ID: 0730169 ID: 0720559 ID: 0630220

Amazon.com, Inc.

Acknowledgement

This project report might not be possible without taking some helps from the books and the internet. This report has been prepared by a group of 4 people as a part of the MGT 490 course requirement. It has been prepared after having extensive research and analysis. Moreover we would like to mention the name of Mr. Hanif Mahtab, our course instructor for his valuable time and suggestions as we have bothered him in time to time. Thats why our true gratitude goes to Mr. Hanif Mahtab for his polite and kind cooperation and we hope him to have a very successful and smooth career in future.

Amazon.com, Inc.

Table of Contents
Section 1.0 1.1 2.0 Contents Introduction Mission Statement Evaluation of current performance of the company 2.1 2.2 3.0 4.0 4.1 4.2 4.3 5.0 5.1 5.2 6.0 6.1 Analysis of Competitors Financial Information Financial Ratio Analysis Problem Statement External Environment Scanning PEST Analysis Industry analysis: Porters Five-Forces Model The External Factor Evaluation Matrix

Internal Environment Scanning

Functional Approach The Internal Factor Evaluation Matrix Situational Analysis Strategic Factor Analysis Summary (SFAS) Matrix

7.0 8.0

Recommendation Reference

Amazon.com, Inc.

1.0 Introduction
Amazon.com, Inc. is a US based multinational electronic commerce company. Headquartered in Seattle, Washington, this company was founded by Jeff Bezos in 1994 and launched it online by him in 1995. At first Amazon.com, Inc. was started as an online bookstore, but soon diversified it by starting to sell DVDs, CDs, MP3 downloads, computer software, video games, electronics, apparel, furniture, food and toys. In addition to selling products, Amazon.com offers services to web developers, independent film and music producers, and also offers third-party seller transactions on its web site to customers such s Target, Office Depot, and to small businesses. Amazon also contracts with other businesses to offer distribution and warehouse storage services. Amazon has established separate websites in Canada, Germany, United Kingdom, France, Japan and China.

1.1 Mission Statement

TO be the earths most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer customers the lowest possible prices.

Amazon.com, Inc. 2.0 Evaluation of current performance of the company 2.1 Analysis of Competitors Financial Information

Financial data (At the end of Year 2006) Net Sales Operating Income Net Earnings Total Assets Long-term Debt Stockholders Equity Amazon.com $10,711 389 190 4,363 1,247 431

In $ Millions Barnes & Noble $5,261.2 253.4 150.5 3,196.8 534.9 1,164.9 Borders Group $4,113.5 (136.8) (151.3) 2,613.4 5.2 642 Books-A-Million $503.8 23 13.1 311.7 7.2 145

At the end of the year 2006, it can be said that Amazon is dominating its competitors in terms of net sales, operating income, net earnings, and total assets. But the company is using debt intensively to finance its operational and investment activities compare to its competitors debt-to-equity ratio.

Amazon.com, Inc.
2.2 Financial Ratio Analysis
Financial Ratio Analysis Profitability Ratios: Gross profit margin Operating profit margin Net profit margin Return on total assets Return on stockholders equity Liquidity Ratios: Current ratio Quick ratio Leverage Ratios: Debt-to-assets ratio Debt-to-equity ratio Activity Ratios: Days of inventory Inventory turnover 39 days 9.41 32 days 11.40 0.90 9.12 0.93 14.02 1.33 0.99 1.54 1.24 22.93% 3.63% 1.77% 4.35% 44.08% 24.02% 5.09% 3.92% 9.01% 135.37% 2006 2005

2.2.1 Gross Profit Margin: The gross profit margin for the company decreased to 22.93% (in 2006) from 24.02% (in 2005). It represents the cost of goods sold as a percentage of sales. Thus, the costs of the company had increased in 2006 and it was burden for both of company and the customers. 2.2.2 Operating Profit Margin: The decreased operating profit margin in 2006 is indicating the overall operating inefficiency, incorporating all of the expenses of ordinary, daily business activities.

Amazon.com, Inc.
2.2.3 Net Profit Margin: In 2006, the company generated 1.77 cents profit from every dollar sales; which was less than half of the profit was generated in 2005 from each dollar sales. 2.2.4 Return on Total Assets: The return on assets ratio at the end of year 2006 is decreased to 4.35%, less than half of the return on total assets was in 2005. It means the company is facing inefficiency at managing its investment in assets and using them to generate profit. 2.2.5 Return on Stockholders Equity: The Company has generated lesser money for its stockholders in 2006 than in 2005, which means the company did not do a good job in 2006 with the investors money. 2.2.6 Current Ratio: Although the current ratio has decreased in 2006, as long as the ratio is above 1, the company is in good position to meet its short-term debt obligation with no stress. 2.2.7 Quick Ratio: The quick ratio of slightly less than the 1 in 2006 means that the company would need to sell its inventories to meet its short-term debt obligations. 2.2.8 Debt-to-Asset Ratio: This ratio shows that how much of the firms assets are financed using debt financing. The decreased debt-to-asset ratio in 2006 indicates that the firm paid some of its debt used to finance its assets. 2.2.9 Debt-to-Equity Ratio: it is a good sign that the debt-to-equity ratio has decreased in 2006, but it is still so much higher that the company needs to take a closer look at its borrowing practices and why it has need for more debt financing.

Amazon.com, Inc.
2.2.10 Days of Inventory: The increased days of inventory ratio in 2006 indicated that the company is taking more time than the previous year to sell its inventories. It is not a good sign for the company. 2.2.11 Inventory Turnover Ratio: The number of times inventory was sold and restocked in 2006 is lesser than the year 2005. The company needs to watch out for obsolete inventories.

3.0 Problem Statements

Computer technology is improving day by day and thus establishment cost of ecommerce businesses is decreasing day by day. In any kind of e-commerce business, establishment cost (fixed cost) is the major cost. Due to rapid growth in microprocessor and other computer related technologies, the establishment cost is becoming cheaper. Moreover, the increasing numbers of computer science experts and internet users are attracting entrepreneurs and other existing businesses to enter in this sector. So, the level of competition is becoming intensive and the company is bound to invest too much on the new technology to be updated and to compete with its competitors to achieve and hold the market shares. Consumers purchase goods and services using credit cards from amazon.com, Inc. So, gas prices, prices of consumers goods, the continuing wars in Iraq and Afghanistan, and the price of housing will influence the confidence level of consumers and they may think that their future and jobs are not secured. So consumers might be afraid of using more credit cards which may increase their debt level, and would stop or decrease spending through credit cards.

Amazon.com, Inc. 4.0 External Environment Scanning

4.1 PEST Analysis: A PEST analysis is an analysis of the external macro environment that
affects all firms in an economy. PEST stands for the Political, Economic, Social, and Technological factors of the external macro- environment. These external factors are usually beyond the firms control. 4.1.1 Political, government and legal: Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. So, changes in any laws, antitrust legislation, and tax rates can affect the e-commerce industry significantly. The economies of other countries and thus consumers ability to purchase internet products and services are impacted by government regulation and political instability. China has also recently increased internet related regulation that could impact the ability of U.S. companies to sell their product in China. The continuing wars against Afghanistan and Iraq may result in conflicts among different nations or Muslim countries may ban American companies in their nations. The value-added tax imposed by the European Union on U.S. providers of certain online products and services (such as- software, auctions, and music downloads) could impact sales of U.S. based online companies. 4.1.2 Economic: Consumers confidence in the economy plays a vital role for the success of any kind of businesses. Consumers need credit cards to purchase online and the usage of credit cards increases the consumers debt level. So, consumer confidence and consumer debt impact consumer online purchase. Gas prices, prices of consumer goods, the continuing wars in Iraq and Afghanistan, and the price of housing are major contributors to the levels of consumer

Amazon.com, Inc.
confidence in the USA. A good economy also contributes to more people purchasing computers and to higher levels of consumer internet access. Inflation, fluctuation of foreign currency exchange rates, the strength of U.S. dollar in international markets all pose difficulties for companies operating in international markets. Many emerging economies in Asia and Eastern Europe are eager to have operations of mass marketers in their countries. Although the operating situations in these countries are uncertain, these countries could be future prospects for companies who would like to expand their businesses. 4.1.3 Social, cultural, demographic, and environment More than half of the worlds internet users are from United States. Estimates are that 71 percent of U.S. households had internet access by the end of 2005. Projections are that the number of U.S. households with internet access will increase to 79 percent by 2010. Standard and Poors experts project that internet retail sales will increase by 29 percent in 2006 and by 19 percent in 2007. Most of the baby boomers have significant levels of disposable income and are brand loyal customers, while they are not as computer savvy as many of their children and grandchildren; baby boomers lead busy lives and are likely to drawn to online shopping because of convenience. Another market segment of interest to online consumers companies is the U.S. teen market (ages 12-19). These consumers are internet savvy and are likely to embrace internet purchasing as they become adults. They are already proficient in downloading internet materials to MP3 players and will embrace technology that allows the purchase of music, DVDs,

Amazon.com, Inc.
and television shows. People in their twenties are likely also an important segment for online consumer companies. While this group does not yet have high levels of disposable income, these consumers do embrace technology and expect consumer companies to market them through the internet. Another social trend that may impact online consumer companies is the popularity of social networks. Networks such as MySpace and Facebook are popular among high school students, college students, and young adults. These networks connect people with one another through virtual worlds and offer opportunities for making friends, dating, and establishing business contacts. This group of consumers will likely expect social networks to be part of the web sites of online consumer companies. 4.1.4 Technological The internet has changed the way consumers purchase products and the way consumers receive information about products. There is an increase in broadcasting, information, and telecommunication technologies for internet access. Rapid development of high-speed network services increases media-rich applications. Internet technology allows consumer businesses to target large groups of customers without having to set up brick-and-mortal stores and creates opportunities for traditional retailers to attract potential customers and to keep current customers. The internet also provides power for customers, who may research products features and pricing and make comparisons among competitors selling similar products. In addition to offering information to consumers, the convenience of shopping on the internet is an attraction to busy consumers.

Amazon.com, Inc.
4.2 Industry analysis: Porters Five-Forces Model
4.2.1 Rivalry Among Competiting Firms The competition among firms in the e-commerce industry is extremely intensive. E-commerce companies are not only subject to face rivalry from other e-commerce companies, but also from all of other companies who sell same sort of products and services to the customers. For example, the competitors of Amazon.com, Inc. are not only e-commerce competitors ,such asebay.com, toysrys.com, but also include physical-world retailers, book publishers, distributors, manufactures, and producers of products sold by Amazon.com, Inc.. So, attracting customers to these e-commerce companies depends lots of factors , such as- price, availability, convenience, brand recognition, customer service, and ability to adapt to changing conditions. 4.2.2 Potential Entry of New Competitors The barriers to entry in the e-commerce industry are very low. In the era of faster computers and continuously decreasing cost of these computers, the establishment cost of e-commerce Company is very low. Moreover, to open a book store or a grocery store does not need bulky amount of capital. Thus to stay in the industry, e-commerce companies need to gain economies of scale, technology and specialized know-how, strong customer loyalty quickly. 4.2.3 Potential Development of Substitute Products The internet is a global market; consumers can substitute any products by purchasing from foreign companies where products are cheaper, but of good quality. The spread of substitute products is high in the e-commerce industry. Moreover consumers like to touch, feel the

Amazon.com, Inc.
products before purchasing those products. So, substitute products in brick-and-mortal stores are the real challenges for e-commerce firms. Renting products online instead of buying them is increasing in popularity. This is a major concern for Amazon in their book sales as online retailers are proving much cheaper option than buying. 4.2.4 Bargaining Power of Buyer Consumers face a large variety of online shops and websites to compare bets prices. So, the bargaining power of buyer in the e-commerce industry is high. Consumers seek for discounts or other additional benefits attached with products to purchase online. So, e-commerce companies fight among themselves to offer the best price over another and to attract customers. 4.2.5 Bargaining Power of Suppliers For standardized products that are easily available, supplier power will be low for those products. But specialized products and brands increase switching costs for buyers and thus the suppliers power will be higher for those products. Online shops are making it easier for publisher/brands to sell directly to consumers without a third party, so the bargaining power of supplier will be high in this instance. Global shipping makes it easier for suppliers to deliver his/her products from any corner of the world. So, the amount of suppliers availability has increased and this has lowered the bargaining power o suppliers.

Amazon.com, Inc.
4.3 The External Factor Evaluation Matrix

Key external factors Opportunities Many emerging economies in Asia and Eastern Europe are eager to have operations of mass marketers in their countries Standard and Poors experts project that internet retail sales will increase by 29 percent in 2006 and by 19 percent in 2007 Most of the baby boomers have significant levels of disposable income, are brand loyal customers, lead busy lives, and are likely to draw to online shopping because of convenience The U.S. teens are internet savvy and are already proficient in downloading internet materials, such as- music, DVDs, and television shows to MP3 players. Networks such as MySpace and Facebook are popular among high school students, college students, and young adults Threats China has recently increased internet related regulation The continuing wars against Afghanistan and Iraq by USA The value-added tax imposed by the European Union on U.S. providers of certain online products and services The usage of credit cards increases the consumers debt level Total

Weight

Rating

Weighted score

0.15

0.45

0.15

0.60

0.10

0.30

0.11

0.33

0.06

0.12

0.15 0.11 0.10

2 2 2

0.30 0.22 0.20

0.07 1.0

0.21 2.73

Amazon.com, Inc.
The most important factors to being successful in this business are both Many emerging economies in Asia and Eastern Europe are eager to have operations of mass marketers in their countries and Standard and Poors experts project that internet retail sales will increase by 29 percent in 2006 and by 19 percent in 2007 as indicated by the 0.15 weight. Amazon is also doing well in handling these two factors. The weighted score of 2.73 is above the average of 2.5, so this e-commerce company is doing pretty well in this industry, taking advantage of the external opportunities and avoiding the threats facing the firm.

5.0 Internal Environment Scanning

5.1 Functional Approach
5.1.1 Marketing Issues Amazons marketing strategy is designed to increase customer traffic on the companys website, to promote repeat purchase, to build awareness of products and services available, and to strengthen the Amazon.com brand name. Amazon.com uses e-mail campaigns, portal advertising, and sponsored search as their primary means of advertising. Amazon also markets its products through their Associates Program where they contract with other websites to direct customers to Amazon websites to purchase products. Amazon pays commissions to participants in the program for customer referrals that result in sales. Excellent customer service is an essential marketing strategy. Company managers focus on continuous innovation to provide convenience for customers.

Amazon.com, Inc.
5.1.2 Distribution Issues Amazon.com leases corporate headquarters offices in Seattle, Washington. Other facilities such as fulfillment and warehouse centers and customer service offices are located throughout the USA. The company leases a corporate office, fulfillment and warehouse operations, customer service, and other facilities outside of the United States. The international offices are primarily located in China, France, Germany, India, Ireland, Japan, Luxembourg, and UK. Amazon entered into an agreement with BNSF Logistics in 2006 to assist Amazon in managing the U.S. inbound flow of goods to optimize availability on the items customers want to order. Fulfillment capacity was expanded in 2005 and 2006 to twelve million square feet. 5.1.3 E-commerce Technology Amazon.com has been a pioneer in its website design, testing, and optimizing and has excelled in use of technology to personalize the customers shopping experiences. Amazon has its own proprietary technology and licenses technology from other companies. Companys current strategy is to focus its development efforts on innovation by creating and enhancing its proprietary software and by licensing or acquiring commercially developed technology for other applications when it is needed. Amazon invests in several areas of technology, including digital initiatives, seller platforms, and web services. These computer applications are needed for such activities as fulfillment, customer service operations, order tracking, managing inventory, ensuring proper shipment of orders, and facilitating payment transactions.

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5.1.4 Management and Organization Amazon has historically hired the best executives from Wal-Mart, Microsoft, Barnes & Noble, and Symantec to work in areas such as marketing, software development, financing, and distribution. The company employed approximately 19,900 people at the end of 2006. The company hires independent contractors and temporary workers to supplement their workforce, particularly during the holiday season. None of the companys employees are represented by unions. Amazon depends on quality personnel to maintain and improve its technology systems and to handle customer service issues.

Amazon.com, Inc.
5.2 The Internal Factor Evaluation Matrix
Key internal factors Strengths Amazons sales increased from $8.5 billion to $10.7 billion (from 2005 to 2006) Expenses for fulfillment, marketing and technology increased
Total assets increased from $3.7 billion to $4.4 billion (from 2005 to 2006) Weight Rating Weighted score

0.14

0.56

0.14 0.09 0.12

4 4 3

0.56 0.36 0.36

Amazon entered into an agreement with BNSF Logistics in 2006 to assist Amazon in managing the U.S. inbound flow of goods to optimize availability on the items customers want to order None of the companys employees are represented by unions Amazon has contracts to sell many well known brands through its websites Weaknesses Net income decreased from $359 million to $190 million (From 2005 to 2006) The company is using too much long term debt to finance its assets and operational activities In 2006, the company performed very poorly compare to the previous year Total

0.04 0.10

3 4

0.12 0.40

0.12

0.12

0.14

0.14

0.11

0.11

1.0

2.73

The most important factors to be successful in the e-commerce business are Increase in sales and Increase in expenses for fulfillment, marketing and technology. The Amazon is also doing best on Increase in total assets, Having contracts to sell many well known brands through its

Amazon.com, Inc.
websites, and other two most important factors. The company also has some major problems with decreased net income, Using too much long-term debt, and Poor performance in the recent year. Overall Amazon got a 2.73 total weighted score, which is greater than the average of 2.5. The company is definitely doing well on utilizing its strengths, but performing poorly with its weaknesses.

6.0 Situational Analysis

Situation analysis is a matching step which helps Amazon.com, Inc. to examine and match the current situation of the organization and its external environment, so that the company can identify and agree upon the major issues which may affect the future plan and prospect of the company. SFAS matrix can be used to perform the situational analysis.

Amazon.com, Inc.
6.1 Strategic Factor Analysis Summary (SFAS) Matrix

Strategic Factors Strengths Amazons sales increased from $8.5 billion to $10.7 billion (from 2005 to 2006) Expenses for fulfillment, marketing and technology increased weaknesses Net income decreased from $359 million to $190 million (From 2005 to 2006) The company is using too much long term debt to finance its assets and operational activities Opportunities Many emerging economies in Asia and Eastern Europe are eager to have operations of mass marketers in their countries Standard and Poors experts project that internet retail sales will increase by 29 percent in 2006 and by 19 percent in 2007 Threats China has recently increased internet related regulation The continuing wars against Afghanistan and Iraq by USA Total

Weight

Rating

Weighted Score

0.13

0.52

0.13

0.52

0.10

0.10

0.13

0.13

0.14

0.42

0.14

0.56

0.14 0.09 1.0

2 2

0.28 0.18 2.71

Amazon.com, Inc.
The SFAS matrix combines the external factors and internal factors crucial for strategic decision making. The crucial external factors are taken from EFE matrix and the crucial internal factors are taken from IFE matrix. After rearranging these crucial factors, the new weights and weighted scores are calculated for each crucial factors and the total weighted score of 2.71 has been accomplished. The weighted score is grater that 2.5, which means the company is performing well in matching its internal environment with external environment. But there is a definite room for improvement, because the height possible weighted score is 4.0.

7.0 Recommendation
At the end of 2006, the company achieved the highest net sales compared to previous years, but the net income was extremely low than the previous years. Reasons could be the increased investments for fulfillment, marketing, technology, and asset accumulation. But expenses for free shipping and the Amazon membership plan must be monitored to be sure that these strategies are generating the intended business results for the company. The main goal of any public limited company is shareholders wealth maximization. Thus mere increase in net sales does not achieve the goal of the company, but also increase in net income is very much important. Because a portion of a net income is retained by the company to finance the operational activities and desired investments, and the rest of the portion is distributed to the shareholders as dividends. Moreover, the company has brought the money into the business

Amazon.com, Inc.
through taking excessive amount of long-term debts. If the company fails to meet its long-term obligation, the company can be bankrupted. Therefore, it is extremely necessary for the company to payout its long-term debt by either issuing more common stock in the market, selling some of its assets, or generating and retaining all of the net income of the following years. And the company also needs to generate convincing amount of cash to boost the confidence level of the investors, and shareholders of the company; so the stock price of the company can reach at its correct value and which will in turn benefit the shareholders and the company.

8.0 Reference
David F.R. (2009), Strategic Management: Concepts and Cases (12th Edition)

http://www.netmba.com/strategy/pest/ http://books.google.com/books?id=vWWRU8fUHWEC&pg=PA93&lpg=PA93&dq=what+is+SFAS +matrix%3F&source=bl&ots=UMg6oCOwHy&sig=hSGvvSthXVttFpLDB0tlzsQ1mEc&hl=en&ei=eb m6TIuJKI_44Ab4uDMDg&sa=X&oi=book_result&ct=result&resnum=8&ved=0CDQQ6AEwBw#v=onepage&q=what %20is%20SFAS%20matrix%3F&f=false