1.

0 Introduction:

Amazon.com is a multinational electronic commerce company which is the America’s

largest online retailer and headquartered in Seattle, Washington. Amazon.com is one of
the big companies that sell goods via the internet. It was founded by Jeff Bezos in
November 1994 in Seattle, United States. Amazon.com opened an e-commerce site in
1995. The company began as an online bookstore, while the largest brick-and-mortar
bookstores and mail-order catalogs for books might offer 200,000 titles; an on-line
bookstore could offer more. Products sold in this online company started with a book
and then quickly expanded into other products such as VHS tapes, DVDs, music CDs
then to the auction and is now amazon.com has sold thousands of different products with
forty-one product categories. Amazon provides several e-commerce services to other
businesses e.g. Merchants@, Amazon Enterprise Solutions, Website by Amazon, and
Fulfillment by Amazon. Web Services is offered to software developers and currently it
has a community over 240,000 registered developers to provide storage and compute
capacity. Amazon did not make a profit until 2003. For the third quarter of 2007,
Amazon’s net income increased 2.5% to $80 million, while revenues increased 13% to
$3.2 billion.

The vision of this company 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, and endeavors to offer the customers the lowest possible prices.’ To achieve this
vision they have planned to their strategy of-

• Developing new services

• Developing new offers
• Developing new partnerships while continuing to establish existing services.

1
2.0 Issues and Problems:

Based on the case provided, there are some significant problems and challenging issues
that can be identified for the firm. As Amazon.com adopted a policy to grow their
business which will ensure the return on capitals of the investors and the business would
be well aligned within the context of the overall company, it has been going through
some problem as-

1. Net Income has been reduced due to increasing expense on free shipping and order
fulfillment.
2. Losing control on gaining competitive advantages as many other e-commerce
based competitors are in the market.
3. Business expansion to other countries is getting tougher as per restriction from
other countries for business practice and technological adaptation.
4. High cost maintenance of technology is reducing the revenue.
5. Global recession is making an impact on the customer to use credit cards less to
avoid the high debt level.

The current problems actually making a ground of the Challenging issues that have to be
faced in future:

- Increased competitions from the retail and e-commerce.

- Increased expense for free shipping and membership service.
- Expansion is under risk because of the restrictions from other countries of
adopting technology and business practices.
- Technological infrastructure maintenance.
- Legal restrictions for technology that create barriers for efficient customer service
to provide better customer experience.
2
3.0 External Environmental Scanning:

The basic requirement of environmental scanning is to identify the possible opportunities

and threats of a firm. Opportunities can open the gateway for a firm to be benefited and
pre identification of threat would help the firm to avoid those threats. It would enable the
firm to respond either offensively or defensively to the factors by formulating strategies
that take advantages of external opportunities or that minimize the effect of potential
threats.

3.1 PEST Analysis:

PEST analysis is an important tool to measure the external factors which influence a
business from the outside. PEST stands for: Political changes, Economic changes, Social
changes, Technological changes.

3.1.1 Political and Governmental Factors:

Amazon.com has their international operation in Austria, Canada, China, France and
Japan etc. The efficiency of their operation depends on the political and governmental
factors of those countries. As it is mentioned in the case that the Chinese govt. is
imposing restriction for online business and service which is actually making an impact
on their international operation. Relate to changes in government or a change in
government policy. The economies of other countries and customers ability to purchase
internet product and services are impacted by government regulation and political
instability. These factors address legal issues such as trading laws etc.

3
3.1.2 Economical Factors:

Economical factors are one of the major concerns for Amazon. Changes in the wider
economy such as rises in living standards or the general level of demand, rises or falls in
interest rates, etc. it has a direct impact on consumer online purchase. A good economy
also contributes to more people purchasing computer and to higher level of consumer
internet excess. Because of the global recession, credit card debt could negatively impact
consumers spending if consumers feel their debt level is too high. International economy
provides unique challenges for internet consumer companies. There is a possible risk of
fluctuating of foreign currencies. A strong U.S. dollar will hurt the value of international
currencies and a weak dollar will help the value of international currencies. Amazon.com
benefitted from a historical weak U.S. dollar in 2006.

3.1.3 Social and Demographical Factors:

The demographic and social trends play a vital role to shape up the customer behavior
which creates a particular customer segment for a company that offers product or service.
The increasing access of internet increased the online purchasing behavior. It actually
made changed purchasing behavior of buying form a physical set up to virtual setup.
Specially, the baby boomers generation of U.S.A is one of the customer segments who
are not that much tech savvy generation but brand loyal. They lead a very busy life and
internet access influenced them to make frequent online purchase. Another segment is the
teenagers who are tech savvy and like to be updated buying latest things within the fastest
possible way. Internet has changed the way consumer purchase the product and way
consumer receives the information about the product. The United States has more then
half of the world internet users. S&P experts project that internet retail sales will increase
by 29% in 2006 and by 19% in 2007. Another social factor that impact online consumer
companies is the population network such as MySpace and Face book are among the

4
student of school/college and young adults. They likely expect social network to be part
of the website of online consumer companies.

3.1.4 Technological Factors:

As Amazon is operating their business base on e-commerce which means it is highly

dependent on the technological factors. It is related to the application of new inventions
and ideas such as the development of the Internet and websites as business tools.
Technological forces are another key determent of external forces. Introduction of new
technology or technological development in a particular region can create new market.
The main reason for Amazon setting up an online store was the growth in the use of the
World Wide Web technologies and their ability to offer a flexible service online. The
infrastructure of technology must be updated to ensure smooth operations and customers
can be served without interruption.

5
4.0 Industry analysis:

4.1 Potter’s Five Factors Model:

Porter’s Five Forces of Competition framework is a one of the tools for analyzing the
industry of a potential firm. It is a combination of competition from substitutes, potential
entrants, industry competitors, supplier’s bargaining power, and buyer’s bargaining
power that helps to analyze the industry.

4.1.1 Substitutes

There might be many be threats of many substitute products that can take place of the
existing products. Such as, substitutes for reading books include watching television,
going to movies, renting movies, listening to CD’s, tapes or the radio, playing computer
or video games, talking on the telephone, surfing the Internet, playing sports, exercising,
etc. The segment is unattractive because there are many actual substitutes for the product.
Increasing of these kinds of substitutes in the industry will reduce both the price and
profits. So Amazon should to conscious about these substitutes product.

6
4.1.2 Potential Entrants

The retail industry has very high barriers to entry as the capital requirements necessary to
enter the market and it would be virtually impossible for a newcomer. High product
awareness and large marketing budgets make it very difficult for new entrants to enter
into this industry. Though there are lots of new investors are also entering to the market.
The new e-commerce sites are increasing threat for Amazon.com that would reduce the
competitive advantage of the firm.

4.1.3 Industry Competitors

Amazon.com is operating its business in highly competitive industry. A consumer can

purchase products from any existing retail stores. A consumer could also choose product
from on-line. New comers will not try to enter the marker because already industry full
with numerous and aggressive competitors. To be a dominant player they must be
efficient and conscious about their consumers demand.

4.1.4 Buyer Power

As the switching cost is very low, consumer’s purchasing power is very high in the
industry. There is significant amount of substitutes and intense rivalry in the industry.
Consumer has many options to purchase a product. If buyers are not satisfied with the
price and quality of the product they easily can switch to other store and firm in the
industry, that will cause loss of profit.

4.1.5 Supplier Power

Supplier power in the retail industry would be considered moderate. Product retailers can
purchase from producers as well as wholesale distributors. Suppliers are not able to raise
price and reduce quantity supplied because there is significant number of supplier in the
industry.

7
So it is clear that the industry is difficult for new comer to enter, because there is large
number of substitute’s product, competition and buyer bargaining power is also very
high, lots of capitals are required to enter the industry. The existing firm has to advertise,
sell unique product, charge low price and provide more discount then competitors to do
business in these industry.

5.0 Internal Environmental Scanning:

The internal environmental scanning is required to identify the strengths and weakness of
the firm. The strengths of the company can be utilized for grabbing the opportunities and
working on weakness will help the firm to perform better. The internal and external
functions can be exemplified by proper financial ratio analysis. Financial ration analysis
exemplifies the complexity of relationships among the functional areas of business.

5.1 Marketing:

Providing excellent customer service is an essential marketing strategy of Amazon.com.

Company’s managers focus on continuous development and innovation of customer
service that will ensure convenient customer experience. The management of
amazon.com wants to ensure first and reliable fulfillment, efficient customer service, easy
to use functionality, and a trusted online transaction environment. Amazon’s customer
service is design to increase customer traffic on the company’s website, to promote repeat
purchase, to build awareness of products and service 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 special promotions are also used.
Their proper purchase guide help the customers to be in touch with latest trends and to
make purchase order accordingly.

8
5.2 Organization:

The Amazon.com has hired the best executives from Wal-Mart, Microsoft, Barnes and
Noble and Symantec to work in arias such as marketing, software development, financing
and distribution. At the end of 2006 they employed total 13,900 fulltime and part time
employees. Amazon depends on quality personal to maintain and improve its technology
system and to handle customer service issues.

President and
CEO
General Counsel and
Secretary

Business
North America Information Developme
Accounting Finance
Retail System nt
Web
Internationa Services
l Retail World Wide
Digital
Media
Worldwide E-commerce
Operations Platform

Organization chart for Amazon.com

5.3 Management Information System:

Amazon.com has been always a pioneer in website design, testing, and optimization and
has excelled in use of technology to personalize the consumers shopping experience. It
has own propitiatory technology and license technology from other companies. The
company’s current strategy is to focus on it’s development efforts on innovation by
creating and enhancing its propitiatory software and by licensing commercially
developed technology for other application. They invest in several areas of technology
including digital initiative, seller performs and web services.

9
5.4 Financial Issues:

Amazon’s sales increase in 2006 and but its net income has decrease to 190 million in
2006 from 359 million in 2005. In 2006 they announced to repurchase up to $500million
of their common stock, of company determines that its share are undervalued.

5.4.1 Profitability Ratios

No. Ratio Dec-31,06 Dec-31,05
1.1 Gross Profit Margin 22.93% 24.01%
1.2 Operating Profit Margin 3.63% 5.09%
1.3 Net Profit Margin 1.77% 4.23%
1.4 Return on Total Asset 5.63% 12.28%
1.5 Return on Stockholders’ Equity (ROE) 44.08% 145.03%

The profitability Ratios showing that Amazon.com is following a downward trend which
is not good as it measure management’s overall effectiveness as shown by the return
generated on sales and investment. These are the most attractive ratios for the investors.
Based on those ratio investor decide to invest in the firm.

5.4.2 Liquidity Ratios

No. Ratio Dec-31,06 Dec-31,05
2.1 Current Ratio 1.33 1.54
2.2 Quick Ratio 0.99 1.24

The liquidity ratios reflect the firm’s abilities to pay the liabilities the asset. The ratios has
been decreased compare to the year 2005 which is reflection firm’s ability to pay the
liabilities is decreasing. The quick ration is reflecting the increased dependency on
inventory to pay the liabilities which is not good at all for a firm like Amazon.com

5.4.3 Leverage Ratios

No. Ratio Dec-31,06 Dec-31,05

10
 3.1 Debt to Total Assets 28.58% 40%
3.2 Debt to Equity 289% 602%
3.3 Long term Debt to Equity 289% 602%
3.4 Times Interest Earned 498.71% 469.56%

It measures the extent to which a firm has been financed by debt. The above debt to
equity ratio shows that the percentage of total funds that are provided by creditor was in
huge margins. The long term debt to equity ratio shows that Amazon continuously has
high long term debt than current debt records. The total leverage ratio is reduced in 2006
to 2005.

5.4.4 Activity Ratios

No. Ratio Dec-31,06 Dec-31,05
4.1 Inventory Turnover 12.21 15
4.2 Fixed Assets Turnover 23.43 24.46
4.3 Total Assets Turnover 2.45 2.30
4.4 Account Receivable Turnover 26.89 30.99
4.5 Average Collection Period 14 days 12 days

Activity ratio measures shows that how effectively a firm is using its resources. It is very
noticeable that Amazon.com has lost its efficiency in a very significant way. Though the
total asset turnover is very good but this is because the decreased amount of debt against
the total assets.

6.0 Strategic Factors:

6.1 Internal Strength and weakness-

Strengths:
• Ability to provide low price product with most convenient service.
• Innovative product developments i.e. kindle.

11
 • Shipping Cost free for a certain amount purchase.
• International operation based on e-commerce.
• Customer friendly feedback and guideline.

Weakness:
• High expense on free shipping and order fulfillment.
• High expense on technological maintenance.
• Poor financial performance.
• Reduced management efficiency.

6.2 External Opportunities and Threats-

Opportunities:
• Partnership with shipping and logistics companies.
• Partnership with retail companies to make better offers.
• C2C market.
• Expansion in Asian market.

Threats:
• Potential competitor’s entry.
• Increased amount of shipping cost.
• Govt. regulations on technology and business practice.
• Economical factors such as recession.
7.0 Strategic alternatives:

It is obvious that Amazon.com is under a pressure based on the future challenges. To

overcome the challenges amazon.com needs to utilize its strength to grasp the
opportunities. Amazon.com needed to reduce its weakness that will ensure efficiency in
the management. The financial operation has to be much more efficient by reducing the
12
cost that returns very low output. Need to keep up the increased sales with efficient
service to retain the customers. Being aware of the threat, the firm needs to go for
expansion with innovative setup, services and distribution management system.

8.0 Recommendation:

Based on the problems and issues, these are the recommendation given for Amazon.com
to gain strategic advantages to overcome future challenges-
1. As Amazon.com is in a very competitive and price sensitive market, it needs to
establish effective partnership with the existing retail market.
2. Amazon.com needs to divide its international market into different demographic
area to come up with a better products and distribution management.
3. Amazon.com needs to reduce the shipping cost or order fulfillment cost by
establishing regional shipping and logistics partnership.
4. To overcome the impact of recession on credit card usage, Amazon.com can go
for partnership with Banks or with other Financial Institutions to arrange attractive
promotions.
5. Amazon.com can introduce C2C market that will create another market segment
of Amazon.com using the same technical set up.

13