Amazon Case Study: Part One

By Natasha Terry-Armstrong, Shore School When Amazon.com was first launched it was an online bookstore which others though doomed to fail. Many critics thought Jeff Bezos crazy when stocked his online bookshop with one million book titles. The e-business has since expanded to sell music, electronics, videos, pharmaceuticals, pet supplies, home improvement products and groceries. Not to mention its evolution as a marketplace for third party sellers, a supply chain management expert for business customers and Amazon Web Services (AWS) for networking infrastructure. This case study will explore a range of successes and challenges faced by Amazon.com since its inception. Part One focuses on the range of strategies used by Amazon to succeed in a highly competitive market: including finance, HR, operations and culture.
Figure 1: Jeff Bezos, founder of Amazon. Source: Wikipedia Commons

Interesting Facts
Amazon is the No. 1 selling e-tailer in the world Amazons web sales are five times Walmart, Target and Buy.com web sales combined. Amazon serves 137 million customers a week (19.5 million daily) There are over 152 million active Amazon customer accounts In its first week of trading, Amazon took orders for $12,438 worth of books It took eight years for Amazon to turn a profit

Amazon gives the customers what they want: low prices, vast selection and extreme convenience
- Jeff Bezos (at a shareholders meeting in 2009)

STUDENT ACTIVITIES
1. Give reasons why people may have thought an online bookstore was doomed to fail. 2. What is happening when a business expands the variety of products it sells as Amazon has done? 3. Amazons vision statement is very general. To what extent do you think this is achievable? 4. Why do you think it took Amazon eight years to make a profit? 5. Time Magazines Brief History of Online Shopping http://www.time.com/time/business/article/0,8599,2004089,00.html provides an overview of the development of Amazon. Account for the rise of Amazon as part of the online shopping revolution.

Vocabulary/concepts

Define each of the following terms in their correct business context: third party seller, supply chain management, infrastructure, venture capital

Finance And Stock Market History

As indicated in the vital statistics above, Amazon was started using $10,000 savings (personal equity), a $44,000 bank loan and $245,000 borrowed from family. After 1996, an additional one million dollars was raised from 20 or so angel investors (venture capital). Amazon went public on NASDAQ under the ticker symbol AMZN in May 1997. The Initial Public Offering (IPO) price for shares was $18.00. By going public, Amazon acknowledged that only the stock market would be able to provide the kind of financing it was looking for. Heavy investment in establishing automated warehouses and distribution centres had left the business with over $2.1 billion in accumulated debt. Today the shares are valued at approximately $260. However, this has not been a story of steady growth. For example, in 2001 the stock price plunged to just $5.97 with the dotcom crash. Amazon managed to survive this industry challenge period, though had to close two warehouses and lay off 15 per cent of staff in the process. The company finally turned a profit in late 2001 despite the dotcom crisis. Even when profitable, Amazon have never declared or paid cash dividends on common stock; opting instead to retain all future earnings to finance future growth.
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Vital Stats
Prime Function: Amazon.com is American based multinational electronic commerce company. Founder: Jeff Bezos (founded in 1994 in a garage in Seattle, launched online in 1995) Vision: Our vision is to be earth's most customer centric company; to build a place where people can come to find and discover anything they might want to buy online Start Up Costs: $10,000 savings (personal equity), $44,000 bank loan, $245,000 borrowed from family. After 1996, an additional $1 million was raised from 20 or so angel investors (venture capital)

Organisational Culture: Amazon Leadership Principles

Organisational culture is the collective behaviour of humans who are part of an organisation and the meanings that the people attach to their actions. Culture includes the organisation values, visions, norms, working language, systems, symbols, beliefs and habits. Companies with positive adaptive corporate cultures, when combined with effective leadership efforts, consistently financially outperform other firms. In developing culture, Amazon has identified 14 key leadership principles which they state apply to every Amazonian: Customer Obsession Ownership Invent and Simplify Are Right, A Lot Hire and Develop the Best Think Big Insist on the Highest Standards Bias for Action Frugality Vocally Self Critical Earn Trust of Others Dive Deep Leaders Have Backbone; Disagree and Commit Deliver Results

Amazons distribution and fulfillment centres are large, each with hundreds of employees. Employees are responsible for: unpacking and inspecting incoming goods; placing goods in storage and recording their location; picking goods from their computer recorded locations to make up an individual shipment; and shipping. Each distribution centre is equipped with latest materials handing technologies such as pick to light system which used a terminal display to guide workers through picking and packing process. Frequency technology is used to direct workers to warehouse locations via radio signals. They also use voice technology computers communicate instructions to workers. Employees carry hand-held computers which communicate with the central computer and monitor their rate of progress. A picker with their cart may walk 15 or more kilometres a day. Amazon has one of the most-sophisticated supply-chain systems in the world, and it was all built from scratch. Homemade applications handle nearly every aspect of its supply chain: warehouse management, transportation management, inbound and outbound shipping, demand forecasts, inventory planning, and more. Amazon takes a Six Sigma approach to its distribution operations, and applies lean manufacturing and Total Quality Management methodologies to its processes. Development of a high level of automation is anticipated in the future following Amazon's 2012 acquisition of Kiva Systems, a warehouse automation company.

STUDENT ACTIVITIES
6. In 1997, Amazon shares opened at $18 each and the business had $2.1 billion debt. Would you have purchased these shares back then? Would you now wish that you had? 7. Why did Amazon choose to take its business public what kind of finance was it looking for? 8. What are some of the reasons why Amazon retains its profits rather than distributing them to shareholders? 9. Describe the organisational culture of your school or a workplace you have been in. 10. From the list of 14 Amazonian leadership principles, rank these from most to least important for a business of this size and type.

STUDENT ACTIVITIES
11. What sort of skills would employees at an Amazon distribution and fulfillment centre need to have? 12. How would these skills differ for managers? 13. Go to http://www.six-sigma.com.au How would this approach apply to distribution? 14. Amazon outsources some of its deliveries to FedEx. Watch here to learn how FedEx organises its distribution centre. http://www.youtube.com/watch?v=Cdm2t952jYg 15. Identify the type of integration Amazon has undertaken with its purchase of Kiva Systems http://www.kivasystems.com

Vocabulary/concepts

Define each of the following terms in their correct business context: organisational culture, adaptive corporate culture

Operation Management: Distribution Centres (DCS)

In 2008, Amazon had eight warehouses in the United States of America and another fifteen in the rest of the world. Amazon operates sites in Canada, China, France, Germany, Italy, Japan, Spain and United Kingdom; and maintains dozens of fulfillment centres around the world which encompass more than eight million square metres.
Figure 2: Amazon warehouse Glenrothes Scotland, UK Source: Wikipedia Commons

Vocabulary/concepts

Define each of the following terms in their correct business context: fulfillment centres, lean manufacturing, automation, total quality management

Human Resource Management At Amazon

Amazon currently employs more than 51,300 people around the world. Employees work in corporate offices, fulfillment centres, customer service centres and software development centres across North America, Europe and Asia. Employees contribute in a variety of functions and jobs, including: Software Development Information Technology Operations and Customer Service Finance and Administration Human Resources Legal (intellectual property and patent efforts, public policy initiatives, litigation)

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Benefits, Employee Stock and Relocation Assistance

The basic benefits for full-time, U.S. employees (vary for other employees in other locations) include: Health Care: A choice of three medical plans (employee and partner), dental plan, vision plan, life and accident coverage Employee assistance program including dependent-care referral services and financial/legal services Time Off: Salaried employees earn two weeks of vacation time in the first year, three weeks of vacation in the second; six personal days every year in addition to six holidays Savings Plans: 401(k) savings plan (similar to superannuation in Australia) with a company match, several employee discount programs Employee Stock: Most Amazon employees receive Amazon Restricted Stock Units (shares) Relocation Assistance: Amazon may provide relocation assistance for certain positions to attract and retain quality employees

Figure 3: Kindle 3 - an e-book reader displaying part of an e-book on its screen. Source: Wikipedia Commons

With regard to e-Books, Amazons vision is for all books ever printed to be available in any language in less than 60 seconds (downloading). Customers now purchase more Kindle books than print books. Amazons Kindle selection has grown from 90,000 (Nov 2007) to 950,000 (May 2011).

Key Success Strategies

1. 2. Knowing their market and industry: Amazon was the first to market in selling books on the internet which gave it a competitive advantage, particularly as no bricks and mortar bookstore can offer three million books in one place! Focus on value-adding for customers:

Were now seeing the transition weve been expecting. After five years, e-Books is a multi-billion dollar category for us and growing fast up approximately 70 per cent last year. In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a book seller, up just five per cent. We're excited and very grateful to our customers for their response to Kindle and our ever expanding ecosystem and selection.
- Jeff Bezos, December 2012

If you make customers unhappy on the Internet, they can each tell 6,000 friends
- Jeff Bezos, 1996

In Part 2 of the Amazon Case study, we will examine Amazons approach to Corporate Social Responsibility, Marketing and current growth strategies as well as the backlash they experienced with Occupy Amazon!

STUDENT ACTIVITIES
16. Ask an employee you know about the benefits they receive for health care, superannuation, vacations and stock. How does this compare to the benefits Amazon offers? 17. Evaluate Jeff Bezos 1996 statement that an unhappy customer tells 6,000 friends. This sounds like an exaggeration how might it be true? 18. What advantages would in house distribution channels have over outsourcing? What would be the disadvantages? 19. Using http://www.youtube.com/watch?v=GAf4vxGEOAo identify the areas of competitive advantage Kindle may have over other e-readers. 20. Account for the growth of e-readers over the past five to seven years. 21. If you were advising Jeff Bezos on the next step for growing Amazon would it be adding products or adding distribution? Why?

3. 4.

Amazon has developed a range of additional services for customers which enhance their e-commerce experience and build return custom. These include: user-contributed reviews, control of customer experience, similar books, interviews, recommendations. When you choose a book, Amazon will automatically indicate that customers who bought this book also bought and list the related titles based on purchase patterns of customers. This is used to intelligently cross-sell products. Evolving features include Search Inside the Book, 1-Click Shopping, Listmania, Wish List Logistics: Amazon has mastered distribution channels in-house to provide safe and quick delivery. This has been a deliberate choice as opposed to outsourcing to third party logistics companies. Actual deliveries are still through third party businesses including UPS and FedEx. Use of acquisitions, alliances and strategic partnerships to grow and bring in new customers. Each new partnership brings more customers to Amazons site.

Vocabulary/concepts

A Competitive Market e-Readers And Books

Amazon is locked in a high-profile battle with Apple in the fastgrowing market for tablet devices and the digital content music, movies, apps and books consumed on them. The companies rival products, the Kindle Fire and iPad, are expected to be among the hottest purchases this Christmas. Instead of trying to replace the printed book or the iPad, Amazons Kindle device has been developed with a few very differentiated features, dedicated to the reading experience to gain a competitive advantage.
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Define each of the following terms in their correct business context: intellectual property, patent, competitive advantage, cross-sell, differentiated features

References
Amazon Website: www.amazon.com Bacheldor, B. (2004) From Scratch: Amazon Keeps Supply Chain Close To Home, Information Week, http://www.informationweek.com/from-scratch-amazon-keeps-supply-chain-c/18300054 Chaffey, D. Amazon.com case study, found at http://www.smartinsights.com/digital-marketing-strategy/ online-business-revenue-models/amazon-case-study/ Garling, C. (2013) Amazon has extra clout - in the cloud, San Francisco Chronicle. Hane, P. J. (2012) Amazons Ever-Expanding Empire, Vol. 10, Information Today. Marcus, J. (2004) Amazonia. Five years at the epicentre of the dot-com juggernaut, The New Press, New York, NY. OMarah, K. (2012) Amazon beats Apple in battle for supply chain leadership, Supply Chain Management Review, found at http://www.scmr.com/article/amazon_beats_apple_in_battle_for_ supply_chain_leadership/ Ross, E. & Holland, A. (2007) 50 Great E-Businesses and the Minds Behind Them. Random House Australia.

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