CASE STUDY FIELD LAB
Online x offline: Analyzing Amazon's diversification strategy towards retail
29238 - CONSTANÇA MARGARIDA RIBEIRO XAVIER BEIRÃO 44875 - INÊS LEAL CORREIA NUNES SEQUEIRA
46453 - RAFAEL PEREIRA LEVY
Work project carried out under the supervision of: Afonso Almeida Costa
Case Study
1 Introduction
In 2016, 51% of American households went to church. 52% owned Amazon Prime.1(Exhibit 1) Data like this often brings to light how the tech powerhouse has successfully managed to capitalize on the era of digitalization and drive economic and cultural change throughout the 21st century.
Popularized as “The Everything Store”, Amazon quickly became the nemesis of retailers worldwide, offering fast, tailored, and cheap service for basically any product that consumers wish to buy. Despite their anchoring in the digital economy, in recent years they have taken the expansion of their business to a new landscape, physical stores. The development of cashier- less Amazon Go stores is another proof of the firm’s ability to adapt and transform industries in the process. In 2021, Amazon already has 98 stores located all over the U.S. offering a wide range of assortments, such as books, grocery, general merchandise, devices, among others.2 That without considering the acquisition of Wholefoods, a supermarket chain focused on selling organic produce, accounting for over 500 stores of itself.3
On July 5th of 2021, Jeffrey Bezos announced his stepping down as Amazon CEO after 27 years.4 Bezos leaves the company with a record $386bn in sales in 2020, and $21.3bn in profits, almost double of 2019, in a year of global pandemic and economic setback.5 To take his place, Amazon chose their former Head of Amazon Web Services, Amazon’s cloud-computing division, Andy Jassy.
The company’s next move will be to open department stores aiming to become more competitive in the clothing, household, and electronics segments. This will be Andy Jassy’s first challenge as the new Amazon CEO.6 He receives the firm in great shape, breaking revenue records, and listed as the most valuable brand on the planet. But will the cloud computing guru be capable of handling a more tangible business expansion, as opposed to his former digital business, or will Bezos’ withdrawal mark the end of an era of market domination and innovation for Amazon?
From the garage to the world
In 1994 Jeff Bezos kickstarted Amazon from his own garage in Bellevue, Washington. He was twenty-nine at the time, a committed workaholic looking for an opportunity to start his own business. Upon graduating with a Bachelor of Science in Engineering from Princeton in 1986, Bezos worked at a company called Fitel that was developing a private transatlantic computer network for stock traders. Afterwards, he went to Wall Street to work on D.E. Shaw & Co (DESCO), where he spent 7 years integrating the internet into the business.7
In 1985, Bezos became acquainted with the Internet at an astrophysics class at Princeton, but only at DESCO he had a grasp of its market potential. Firm owner David E. Shaw and Bezos frequently met to brainstorm ideas for the next technological wave. In one of these meetings, they came up with an idea they called “the everything store”. It was a simple concept: an Internet company that served as an intermediary between customers and manufacturers and sold nearly every type of product, all over the world.8
The big leap
While still working for D.E. Shaw, Bezos started pursuing the new venture. Amazon was registered in URL on November 1, 1994. The name was a reference to the world’s largest river, cueing what the firm aimed to be: The world’s largest store.9
Despite Bezos's confidence, he realized that in the beginning, a true "everything store" would not be feasible. To choose what should the company sell, he listed twenty possible product categories, including office supplies, computer software, apparel, and music.
In the end, books seemed to be the best category to follow since they had a universal demand at the time, there were hundreds of thousands of titles to be sold, they were not expensive, and books were simple to pack and would not break.10 Moreover, books had the advantage of being
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3 To fulfil his dream, Bezos knew he would have to dedicate all his time to the new company. So, he decided to leave his lucrative and comfortable job on Wall Street and move to Seattle, more specifically, Bellevue. The city was known as a tech hub, had some tax advantages, and was close to major book distribution centres. So it began, with Bezos and 2 other programmers creating a rudimentary website inside his own garage at the Bellevue suburb (Exhibit 2). 11 Amazon was promoted as “Earth’s biggest Bookstore” and opened as an online bookseller in July 199512. Within its first 30 days, it generated $20,000 in sales per week. 13The company’s customer accounts skyrocketed from 180,000 by December 1996, its first full year of operations, to 1,000,000 in October 1997, increasing its revenue from $15.7 million to $148 million, in those years. Fun fact, in 1997 Jeff Bezos delivered personally his one millionth order to a customer in Japan. In May of that same year, in order to sustain its company’s growth, Amazon went public with $18 per share and managed to raise $54 million14, which would fund its future acquisition strategy and aggressive growth. Despite the company`s early success and Bezos being acknowledged as Person of the Year in 1999 by Time Magazine, this was only the start for Amazon.
Get big fast
Since the beginning, Amazon’s motto was to “get big fast”, which was for Bezos the undeniable truth to succeed as an online retailer. He believed in the long-term results of achieving market leadership. According to him, “Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital”15. But to achieve that, they’d have to scale and reach more consumers than its peers.
Amazon was not the first company to sell books online but what distinguished them from the competition was the promise to deliver any book to any reader anywhere. The focus on providing the best possible customer experience was one of Amazon’s foundations. The e- commerce allowed customers to post reviews of their purchases and create a more transparent
e-retail space with key benefits for the consumer by providing available knowledge with which to make purchase decisions. They learned early on to use data from consumers to personalize the shopping experience, helping them in real time with product selections based on browsing and buying history and looking for ways to help customers get the best deals. In addition, to encourage a shift in shopping behaviour towards online commerce, Amazon developed tools to smoothen the experience, such as the 1-click patent, which reduced friction from online purchasing and drove Amazon sales even further.
In 1998, after it had already established itself as the largest bookstore in the world, Amazon foresaw how it would be a matter of time before other companies populated the business and reduced its margins. The solution was to tap into new categories, increase revenue, attract investors, and enable the e-commerce to invest in technology and dominate competitors. 16 During the 90’s, tech companies were on the spotlight, and Amazon was a superstar.17 Bezos had convinced investors of its vision of the future and managed to collect around $2.2 billion in funding with a 4.75% interest, historically low and cheap capital, proving the reliance of capital markets on Amazon’s promises. With that money, Amazon started looking for opportunities to grow, spending almost all of it in acquisitions and distribution centres. In a letter destined to shareholders in 1998, Bezos stated: “We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages…”. Amazon was set to measure its success in terms of customer base and revenue growth, favouring the firm’s long-term over short-term profitability.18
Between 1998 and 1999, Amazon went on a spending spree towards different fronts. First, it made the so called “megadeals” with portals such as Yahoo, AOL and MSN, where they were paid tens of millions to only showcase links to Amazon books within their search results. In addition, Amazon tried to diversify into different sectors among the internet scope, buying
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5 few. The fact that many of those purchases happened in the same short period of time made it hard for Amazon to properly integrate these firms’ structure and eventually led to the exodus of experienced executives. Finally, Amazon also played in the venture-capital market, investing tens of millions in shares of dotcoms that offered a range of different product categories, such as Gear.com, Wineshopper.com, and Pets.com, just to name a few. The rationale was that when eventually some of those paid off, Amazon would be well positioned on that specific product segment online.
Around those years, the e-commerce started to open different product categories, namely CDs, DVDs, toys, electronics and more. Some were easier than others, because Amazon could rely on third-party distributors to provide the items and take back what wasn’t sold, like CDs. But with toys and electronics, for example, big manufacturers weighed production based on the number of retailers they’d have to supply, and these had to calculate how much they would sell in advance as it was nonreturnable. Without either backup from suppliers or expertise in these new categories, the e-commerce was failing to keep popular items in storage while pilling up others.19
Amazon was also trying to sort out its distribution issues, buying warehouses and retrofitting existing ones to mimic Walmart’s operational efficiency in physical retail. It ended up spending
$300 million to solve capacity shortages. In 1999, Amazon had 5 distribution centres in the U.S., 2 in Europe, and a software that was tailored to ship books and now had to accommodate Amazon’s new categories with no predictability of demand, as orders were increasing every day, leading to misplacing, loss of inventory and severe accounting issues. To try to reduce the disparity between the number of orders and packages being shipped, Amazon had the famous holiday shifts, where executives would take their families to distribution centres to help speed up the delivery during busier times.20
The firm was undoubtedly growing fast, with net sales growing from $610 million in 1998 to
$1.64 billion in the next year, a 169% increase. 21But processes were chaotic, it was yet to achieve profitability and there were still many holes to cover if they were to become a solid and reliable company for its customers and, of course, the people who were funding this growth:
shareholders.
The dotcom Bubble
The beginning of the millennium was hectic for Amazon. Investors’ optimism was reaching its limit as dotcoms were subjected to scrutiny due to their lack of returns and high expenditures.
Newspapers were running stories about how Amazon and other dotcoms were quickly burning their cash without any perspective of reaching profitability. Suddenly, Amazon went from a rising star to a potential web hoax and had to convince a sceptical audience of its value.
The dotcom bubble that took place during the start of the year 2000 was a combination between the euphoria towards the new technological promises of the internet and a favourable financial background that induced investors to take more speculative and risky investments.22 Overvalued dotcoms that relied on steady cash injections to operate reached a point of reckoning as years passed by without any profits. The growing pessimism around these web companies’ prospects made their value shatter. With the eventual decrease of capital availability in the market, most of these companies went bankrupt within 1 year, including Pets.com, where Amazon had invested $50 million along with other VC partners.23
During the year 2000, Amazon would reach a loss of over $1.4 billion that included $343 million in write-offs related to its bad acquisitions. 24 Early in that year, already predicting major setbacks from the dotcom crash, Amazon went to the European market to look for investors, where it eventually managed to collect $672 million in debt funding from overseas investors25
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7 Without the bandwidth to further its acquisition strategy, Amazon had to develop different ways of growing. To establish new sources of revenue, it used the infrastructure of existing businesses such as Amazon Auctions and zShops to develop its marketplace and enable small and medium third-party seller to list products alongside Amazon’s. Sellers would pay fees for each sale and Amazon would benefit by offering customers a broader range of products. In terms of product portfolio, the e-commerce was still struggling with the stocking and shipping of new product categories. Looking for quick cash injections, Amazon’s solution was to sign multiple punctual deals with other retailers who were struggling to migrate to the online business, such as Toys R’Us and Circuit City. Amazon agreed to stock the retailers’ inventory and outsource the toys and electronics categories. Other deals included a $100 million contract to run AOL’s online shopping channel. These contracts weren’t ideal but essential to boost cashflow, broaden the product selection.26
To survive this new era, Amazon had to change its strategy. It needed to prove itself and battle the uncertainty towards its business model. Not only investors, but firm executives that had Amazon shares were also anxious about the future of the company, leading to mass quitting over the next few years. The solution was to radically shift from growth at all costs and start prioritizing current profitability. Therefore, Amazon took a step back and started reorganizing its processes aiming for efficiency, cost reduction and returns. To guide their efforts, Amazon’s executives drew a flywheel, the business’ reinforcing virtuous cycle, to better understand where efforts should be placed to enhance company performance. By offering low prices on its products, Amazon would attract more customers and increase its sales. Greater sales volume made it more attractive as a platform for third-party sellers. More sources of revenue enabled Amazon to get more out of its fixed costs, such as data storage and fulfilment centres. Finally, by raising efficiency, the company would be able to continue offering low prices.27
On the cost side, Amazon was cutting wherever it could, closing expensive and poorly planned investments, such as a call centre at The Hague, an expensive financial and diplomatic hub in the Netherlands, and Georgia’s fulfilment centre which was constantly falling behind schedule.
Bezos made a bold move by shutting down the centralized marketing department and using the extra money to enhance the customer experience in multiple ways. The first measure was to offer free shipping for orders above $100, which even though was expensive, ended up boosting sales and encouraging customers to get used to shopping in different product categories. In addition, Amazon did numerous money-losing offers on popular products such as Harry Potter’s Quidditch broom, during the launch of the 4th book of the series, which generated instant good publicity for the company.28 Amazon’s scale helped it negotiate better terms with big distributors, such as UPS, even though it had fixed rates for its services. In addition, the firm benefited from a negative cash conversion cycle, with near-zero days receivable, low days in inventory and enough size to press suppliers for better terms to pay them29, allowing Amazon to use the cash in its business before having to pay for products (Exhibit 3).
Finally, in the beginning of 2002, Amazon announced its first profits, a modest $5 million that surprised accountants worldwide.30 It was a defining moment for Amazon, serving as a tangible validation of its business model.
After the Storm
Growing with Structure
Growing 20% per year, Amazon had no choice but to master the complexity of its own systems to get more out of the investments it had already made. Amazon started to write its own software code tailored to its needs, improving the fulfilment system’s accuracy and reliability. The development of the logistic infrastructure enabled the company to launch Prime’s two-day
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9 party vendors storing and shipping services in an initiative called Fulfilment by Amazon (FBA).31
From e-tailer to innovator
Most of the companies bought during the 90’s eventually faded out due to Amazon’s incapability of organically incorporating them to its business. The firm was now prioritizing the development of their own capabilities rather than buying them out.
Born out of Amazon’s own need to build a way for developers to access the firm’s server’s infrastructure and run and test their software seamlessly, AWS was commercially launched in 2006 and provided data management and storage services to whoever needed it. The service would revolutionize the demands of IT infrastructure, turning an expensive fixed cost with servers and computer engineers, to an adjustable variable cost depending on your usage of it.
With the evolution of its processes, the issue of pricing and product selection was solved by programming bots that searched the web for competitors’ prices, creating automated tools that allowed buyers to order products based on many variables, especially demand. Amazon’s obsession with increasing offerings for customer led to violations of exclusivity contracts and deal breaks with big retailers such as Toys R’Us . 32
Another good example of Amazon’s resilience and drive to be ahead of the competition can be depicted by the Kindle venture and its disruption of the book industry. In 2004, Amazon did not have the technical capabilities to produce hardware for an electronic device, so they had to develop it from scratch. It received extensive resources from its parent firm and benefited from the efforts of Silicone Valley’s brightest engineers. Concomitantly, Amazon was working on how to increase the offer of digital titles, convincing publishers to bet once again on the e-book endeavour. Amazon was able to offer publishers the service of cheap book digitalization, tying them to Kindle’s format as a consequence. At a standardized price of $9.99 per e-book and a catalogue of over 90 thousand e-books, Amazon managed to combine a large and convenient
offer of products with a sleek and seamless device designed specifically for the purpose of providing a good reading experience. After three years of development, Kindle was launched in 2007 at a starting price of $399, and its first 25 thousand units sold out33, changing industry norms forever.
Later, Amazon would try to repeat the feat in the smartphone industry. In 2014, it launched the Fire Phone, an attempt to compete against Apple and Samsung on the high-end mobile market.
It had already experienced success developing hardware with the Kindle and entering this highly profitable industry would help send a message to rivals and establish a foothold as a big tech innovator. Amazon’s device sold for $199, the same price as the iPhone and, using a customized Android version, it did not possess key apps such as Gmail and Google Maps. In conclusion, it was too expensive and incipient in an extremely competitive environment. In 2015, Amazon withdrew Fire Phone from the market, absorbing a $170 million loss with the venture.34
Strategic acquisitions
After its experiences with tech startups in the past century, Amazon kept for years without making any major acquisitions. The money wasted previously on failed acquisitions made the e-commerce giant become extremely cautious when considering buying a new company.
After structuring its processes, Amazon began to grow through acquisitions again in a frugal and objective manner. Negotiations were hard and often brutal, with executives trying to get the best deals for Amazon. Moreover, it was much clearer whether the new purchase could add some important benefit for the corporation. Buying companies such as Zappos and Quidsi, both also online retailers, served the purpose of helping Amazon establish a strong foothold on key product categories while shutting down strong competitors at the same time. French start-up Mobipocket provided the technology to enable e-books to be read in a different number of
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11 improve its delivery infrastructure.36 One of the latest acquisitions, Annapurna Labs, an Israeli chip maker, aided AWS in maintaining its technology ahead of Google and Microsoft in the cloud systems market37, and establish itself as the most successful cloud infrastructure company on the planet having more than 30 percent of the market share (Exhibit 4).
Set for success
In 2007, Amazon’s Q1 sales surpassed $3 billion for the first time, a 32% increase from the previous year and well above the e-commerce’s standard 12% annual growth.38 Profits were also high at $476 million, up from 2006’s $190 million.39 Amazon had successfully developed a self-reinforcing business model with complementary businesses. The top-notch distribution infrastructure financially enabled Prime’s two-day shipping subscription at affordable prices, stimulating adoption by new clients. An efficient subscription program, subsidized by AWS, fed Amazon with information to improve customer service. A better program leads to more customers and sales on the e-commerce platform. More customers mean more sellers and the best prices.40
Physical Stores
A common tale from inside Amazon’s office tells how every executive meeting had an empty chair, a metaphor for the client’s voice echoing in each decision made inside the firm. As soon as it became clear that offline retail was not something to be easily overcome by technology, and customers appreciated the convenience of shopping nearby, Amazon did what it does best:
adapt and conquer.
Going down memory lane, Amazon’s first physical store was a bookstore in Seattle that opened in 2015. The store was not like other traditional stores, since there were only about 3000 titles, relatively less than in traditional bookstores. When choosing the books to stock they used a combination of pre-orders, sales, customer ratings, and curator’s assessments. The upside of this model was the existence of books people would not normally see, which attracted more
customers. It also got a central aisle of electronics with some of the company’s own products like Kindle, Kindle Fire and Fire TV. Moreover, it provided 50% discount for Prime members and the prices varied a lot.41 Now Amazon has a total of 24 bookstores across major cities in the U.S and. According to Amazon’s CFO Brian Olsavsky: “Amazon’s bookstores are a really great way for customers to engage with our devices and see them, touch them, play with them”
(Exhibit 5).42
In 2017, Amazon completed its biggest acquisition to date: Whole Foods Markets, the largest organic food grocery chain in the world. The $13.5 billion purchase landed Amazon 460 stores overnight, solving the issue of selling groceries online, a category where Amazon had been trailing to succeed over the past years. This announcement was taken as a colossal blow in the grocery industry. The fear was not about what Amazon would do with Whole Foods, but the fact that the disruptive Amazon was finally entering the market.43 Now Amazon customers could decide whether they want to buy online, offline or buy online and pickup at the store. No demand is left uncatered.
Amazon is revolutionizing physical retailing by pioneering in cashier-less stores with the Just Walk Out technology. In 2017 it started testing Amazon Go prototypes in the U.S. (Exhibit 6), where customers could simply enter by scanning the Amazon Go app on their smartphones, pick up their products and walk out of the stores. It opened its doors for the public in 2018, in Seattle, and now has 30 stores with a size around 450 to 2,700 square feet.44
Still in the grocery segment, Amazon decided to open Amazon Go Grocery (Exhibit 7) on February 25, 2020, as a larger version of the company’s Amazon Go convenience stores. It is its first full-sized store, which similarly to the smaller ones, does not contain checkout lines or cashiers, and displays over 5,000 unique items. Despite the full force entry, Amazon eventually rebranded Amazon Go Grocery and renamed it as Amazon Fresh.45
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13 Amazon Fresh already existed since 2007 and started as a grocery delivery service accessible only to Prime members containing thousands of items. Customers can simply sign into the Fresh app or sign into their Amazon Prime account and select the items they want to purchase. In addition to the online and, as said previously, Amazon Fresh grocery store was announced in 2020, offering a seamless experience between online and offline.46
Amazon is also present in the physical retail of non-food products, with two different kinds of stores. The first one is Amazon 4-Stars, created in the fall of 2018 with the end-goal of selling products that have 4 stars reviews and above. They have around 4,000 square feet, offer every product category, and intends to reflect what Amazon customers are buying online. Currently, there are 32 stores in total.47 The other model is the Amazon Pop-Up stores (Exhibit 8), focused on specific themes for each Pop Up which differentiates them from the 4-star stores. They are stand-alone kiosks often opened in malls.
Finally, Amazon’s next step is to develop its own department stores. The move is expected to increase the company’s reach in categories such as clothing, electronics and household items.
As always, Amazon won’t lose the opportunity to differentiate itself, and stores are expected to have 1/3 of the regular size of department stores and include high-end brands.
The stores will likely not have the usual department store experience and will be aligned with Amazon’s main strategy of customer-centrism, with a modern approach. It will revolve around technology with stores utilizing robots, QR codes and other gadgets.48 These department stores will add a new layer of information over each customer, for example, collecting information on how long they spent looking at certain items or what areas are they visiting the most. This will contribute to make personalized campaigns for customers more effective.49 Amazon will bring some of the experience from its other physical shops to the department stores, using a strategy similar to the Amazon 4-star store, featuring only high-performing sought after products.
Additionally, it will use the technology used for Amazon Go with no cash registers, thus
disrupting the industry. It will also focus primarily on Amazon’s clothing brands while offering less products from retailers that sell on the e-commerce platform. For a long time, people have been forecasting the collapse of brick-and-mortar retail, however, Amazon’s move to physical department stores shows in-store shopping is still alive and doing well.
Andy Jassy’s mission
Now it’s time for Andy Jassy to take accurate decisions. He needs to look back at Amazon's track record and consider the challenges that lie ahead with the offline retail expansion. Andy will be asking himself fundamental questions such as “What are the main factors that influenced Amazon’s sustained success throughout two decades?”, and “What should Amazon continue doing and what shouldn’t it do anymore?”. Eventually, it will all come down to one major enquiry: “Is it really a sound strategy to shift pure e-commerce to mixed retail?”.
Jassy will have a tough mission in his hand to keep up with Amazon’s outstanding numbers.
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15 Endnotes:
1Galloway, Scott. 2017. “Amazon” The Four: The Hidden DNA of Amazon edited by Bantam Press, 17
2 “Amazon physical stores locations”, Amazon. Accessed December 12, 2021.
https://www.amazon.com/find-your-store/b/?node=17608448011
3 Andria Cheng, “Two Years After Amazon Deal, Whole Foods Is Still Working To Shed Its
‘Whole Paycheck’ Image” , Forbs. Aug 28, 2019.
https://www.forbes.com/sites/andriacheng/2019/08/28/two-years-under-amazon-whole-foods- still-has-its-work-cut-out-to-erase-the-whole-paycheck-image/?sh=1321e4b84227
4 Annie Palmer, “Jeff Bezos to formally step down as Amazon CEO on July 5, Andy Jassy to take over”, CNBC, May 26 2021. https://www.cnbc.com/2021/05/26/jeff-bezos-to-formally- step-down-as-amazon-ceo-on-july-5.html
5 MIKE STARLING, “ Amazon’s new boss: who is Andy Jassy?”, The Week, Febuary 3 2021 https://www.theweek.co.uk/951864/amazon-new-ceo-andy-jassy-jeff-bezos
6 Matt Barker, “Amazon retains crown as world’s most valuable brand”, Marketing Week, June 21 2021. https://www.marketingweek.com/brandz-top-100-brands-2021/
7 Stone, Brad. 2013. The Everything Store” Jeff Bezos and the age of Amazon. Random House,
8 Ibid
9 ibid
10 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 22.
11 Stone, Brad. 2013. The Everything Store” Jeff Bezos and the age of Amazon. Random House,
12 Caroline Cakebread,” Amazon launched 22 years ago this week — here's what shopping on Amazon was like back in 1995”, Insider, July 20 2017,
2021https://www.businessinsider.com/amazon-opened-22-years-ago-see-the-business-evolve- 2017-7#1995-books-and-more-books-1
13 Scott Steinberg, “How to think like Jeff Bezos and become a digital powerhouse, from a former Amazon exec”, CNBC, March 15 2020.
https://www.cnbc.com/2020/03/13/how-to-think-like-amazon-ceo-jeff-bezos.html
14 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 48-49.
15 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 55-56.
16 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 54.
17 Galloway, Scott. 2017. “Amazon” The Four: The Hidden DNA of Amazon edited by Bantam Press, 34.
18 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 55-56.
19 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 76.
20Stone, Brad. 2013. “Fever Dreams”. In The everything store: Jeff Bezos and the age of Amazon. Random House, 53-78.
21 Amazon.com, Inc. - Press Room. “Amazon.com Announces Profitability In U.S.-Based Book Sales, Financial Results for Fourth Quarter 1999”. Febuary 2 2020.
https://press.aboutamazon.com/news-releases/news-release-details/amazoncom-announces- profitability-us-based-book-sales-financial/>
22WallStreetMojo, "Dotcom Bubble." Accessed December 12, 2021, https://www.wallstreetmojo.com/dotcom-bubble/.
23 Amazon.com, Inc. - Press Room. “Pets.Com Raises $50 Million From Amazon.Com, Bowman Capital, And Hummer Winblad Venture Partners”. June 14 1999.
https://press.aboutamazon.com/news-releases/news-release-details/petscom-raises-50-million- amazoncom-bowman-capital-and-hummer/.
24 (23) The New York Times. "Amazing Amazon: Losses Grow As They Seem To Shrink (Published 2001)". Febuary 2 2001. https://www.nytimes.com/2001/02/02/business/amazing- amazon-losses-grow-as-they-seem-to-shrink.html.
25 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 79
26 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 85-90.
27 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 94-100.
28
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17
29 Harvard Business School Online. "How Amazon Survived The Dot-Com Bubble | HBS Online". April 3 2018. https://online.hbs.edu/blog/post/how-amazon-survived-the-dot-com- bubble.
30 The New York Times. "A Surprise From Amazon: Its First Profit (Published
2002)". January 23 2002. https://www.nytimes.com/2002/01/23/business/technology-a- surprise-from-amazon-its-first-profit.html
31 Stone, Brad. 2013. “Chaos Theory”. In The everything store: Jeff Bezos and the age of Amazon. Random House, 123-147.
32 (30) Stone, Brad. 2013. “A Technology Company, Not a Retailer”. In The everything store:
Jeff Bezos and the age of Amazon. Random House, 148-170.
33 Stone, Brad. 2013. “Fiona”. In The everything store: Jeff Bezos and the age of Amazon.
Random House, 171-195.
34 CNBC. “Jeff Bezos to exec after product totally flopped: ‘You can’t, for one minute, feel bad’”. May 22 2020. https://www.cnbc.com/2020/05/22/jeff-bezos-why-you-cant-feel-bad- about-failure.html
35 Stone, Brad. 2013. “Fiona”. In The everything store: Jeff Bezos and the age of Amazon.
Random House, 171-195.
36 Business Insider. "Amazon Is Now Using A Whole Lot More Of The Robots From The Company It Bought For $775 Million". October 22 2015.
https://www.businessinsider.com/amazon-doubled-the-number-of-kiva-robots-2015-10.
37 Forbes. "How An Acquisition Made By Amazon In 2016 Became Company's Secret Sauce". March 10 2019. https://www.forbes.com/sites/janakirammsv/2019/03/10/how-an- acquisition-made-by-amazon-in-2016-became-companys-secret-sauce/?sh=31c9ba312f67
38 Stone, Brad. 2013. The everything store: Jeff Bezos and the age of Amazon. Random House, 198.
39 Macrotrends.Net. "Amazon Net Income 2006-2021". Accessed December 13, 2021 https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-income
40 Aversa, Paolo, Stefan Haefliger, and Danielle Giuliana Reza. "Building a winning business model portfolio." MIT Sloan Management Review 58, no. 4 (2017): 49-54.
41 Jake Swearingen, “Why Is Amazon Building Brick-and-mortar, Bookstores?”, June 1, 2017, https://nymag.com/intelligencer/2017/06/why-is-amazon-building-bookstores.html
42 Eugene Kim, “Amazon’s bookstores aren’t just for selling books, according to CFO Brian Olasavsky”, Business Insider, February 3, 2017, https://www.businessinsider.com/why-amazon- is-opening-bookstores-2017-2
43 Seth Stevenson, “It’s Finally Clear Why Amazon Bought Whole Foods”, Slate, June 28, 2021, https://slate.com/business/2021/06/why-amazon-bought-whole-foods-groceries-online.html
44 Maggie Tillman, “Amazon Go and Amazon Fresh: How Just Walk Out Technology Works”, Pocket Lint, March 4, 2021, https://www.pocket-lint.com/pt-
br/gadgets/noticias/amazon/139650-o-que-e-amazon-va-onde-esta-e-como-funciona
45Kurt Schlosser, “Inside ‘Amazon Go Grocery’: Tech giant opens first full-sized store without cashiers or checkout lines”, Geek Wire, February 25, 2020
https://www.geekwire.com/2020/amazon-goes-bigger-first-amazon-go-grocery-new-seattle- store-using-cashierless-technology/
46 Jeff Helbing, “Introducing the first Amazon Fresh grocery store”, Amazon.com, August 27, 2020.https://www.aboutamazon.com/news/retail/introducing-the-first-amazon-fresh-grocery- store
https://www.investopedia.com/articles/personal-finance/052015/how-amazon-fresh-works.asp
47 Paul Skeldon, “Amazon 4-Star store opens as the marketplace giant hits the UK high street”, Internet Retailing, October 6, 2021, https://internetretailing.net/location/location/amazon-4- star-store-opens-as-the-marketplace-giant-hits-the-uk-high-street-23811
48 Instore Staff, “Amazon’s New Department Stores: Robots and 4 More Things to Expect”, INSTORE, October 10, 2021, https://instoremag.com/amazons-new-department-stores-robots-and- 4-more-things-to-expect/
49 Blake Morgan, “Amazon Disrupts Retail (Again) With New Department Stores”, Forbes, August 24, 2021, https://www.forbes.com/sites/blakemorgan/2021/08/24/amazon-disrupts- retail-again-with-new-department-stores/?sh=578335ba3752
Case Study
19 Exhibit 1- Percentage of America households in 2016 (a)
Source: Galloway, Scott. 2017. “Amazon” The Four: The Hidden DNA of Amazon edited by Bantam Press, 18,
Exhibit 2 – The original Amazon website (August 1995)
Source: Anne Quito, “This is what Amazon’s homepage looked like when it launched 25 years ago”, QUARTZ, Accessed December 12, 2021,
78% Decorated Christmas tree 55% Voted in 2016
54% Have Amazon Prime 51% Go to Church
44% Own a gun
Percentage of American households activities in 2016
Exhibit 3 – Example of Amazon’s Cash Conversion Cycle (2017)
Source: Adapted from Gennaro Cuofano, “What is Cash Conversion Cycle? Amazon Cash Machine Business Strategy in a Shell”, FourWeekMBA, Accessed December 10, 2021, https://fourweekmba.com/cash-conversion-cycle-amazon/
Exhibit 4 – Cloud infrastructure market share
Source: Data from Kimberly Mlitz, “Cloud infrastructure services vendor market share worldwide from 4th quarter 2017 to 3rd quarter 2021”, Statista, Accessed December 13, 2021, https://www.statista.com/statistics/967365/worldwide-cloud- infrastructure-services-
Case Study
21 Exhibit 5 – Amazon Bookstore
Source: Jacob Kastrenakes, “Amazon is opening its first physical bookstore today”, The Verge, November 2, 2015, Amazon is opening its first physical bookstore today - The Verge
Exhibit 6 – Amazon Go
Source: Melanie Weir, “How to shop at Amazon Go, the cashierless store where you can take your items and ‘just walk out’”
December 6, 2019, https://www.businessinsider.com/how-to-shop-at-amazon-go
Exhibit 7 – Amazon Go Grocery
Source: Kurt Schlosser, “Inside ‘Amazon Go Grocery’: Tech giant opens first full-sized store without cashiers or checkout lines”, February 25, 2020, Inside ‘Amazon Go Grocery’: Tech giant opens first full-sized store without cashiers or checkout lines - GeekWire
Exhibit 8 – Amazon Pop up
Source: Eugene Kim, “Amazon is doubling down on retail stores with plans to have up to 100 pop-up stores in US shopping malls”, Business Insider, September 9, 2016, Amazon Plans Big Expansion of Retail Pop-up Stores (businessinsider.com)
Teaching Note
Synopsis
In 2021, Jeffrey Bezos officially stepped down from his lifelong position as Amazon’s CEO. A symbolic moment and interesting opportunity to analyze how Amazon managed to become the giant we know today. The case will portray an historical background of the company’s founding and evolution into today’s e-commerce behemoth. Moreover, it also provides an opportunity to deliberate over strategic decisions that led to the company’s growth. Finally, the reader will be familiarized with Amazon’s physical stores initiative, including its most recent decision to open department stores. The counter-intuitive move will be used to argue if it is in accordance with the company’s profile given the overview and analysis made throughout the class. Based on it, students are expected to make predictions grounded on objective elements about how Amazon’s recent strategy will develop over the next few years.
Teaching/Learning Objectives
This case was written with the goal of creating a relevant and engaging class discussion between Management students in their final year of bachelor’s program and master's students during a core Strategy course. It will be particularly helpful throughout a corporate strategy class, highlighting key business decisions such as Make x Buy x Ally and business strategy (sustaining competitive advantage in different segments). The case intends to use the historical perspective of Amazon’s development to give students an overview of its corporate strategy evolution. It illustrates how Amazon progressively built a fit of activities between its multiple business units and learned by trial and error how to sustain growth. Finally, the case proposes a discussion about Amazon’s most recent strategy: opening physical stores. The rich overview of the firm’s business model and its evolution should give students the appropriate tools to critically discuss the topic of its new venture, understanding its reasoning and debating over the strategic factors that led to it.
The list below shows the teaching objectives we focused on in building and examining the case:
- Evaluate Amazon's diversification into different businesses, and how it became a successful multi-business model company.
- Understand how important it is that the different business units are interconnected and that the company has a coherent strategy to grow properly, focusing on the role of synergies as a key element in the success of multinational companies.
- Perceive how powerful network externalities can be in terms of scaling the business and achieving competitive advantage and how it can become an important source of synergies across the business’ ecosystem.
- By the end of the case study, students should be able to critically evaluate Amazon's expansion strategy into offline retailing based on the company's historical development, understanding the reasons behind their past successes and failures, and what led the company to pursue this new venture.
Assignment Questions
The following questions can be used to provide guidance to students throughout the reading:
• What are the main factors that influenced Amazon’s sustained success throughout two decades?
• Assess the strategic actions taken by Amazon in terms of growth throughout the years. What did it do wrong and what they did to correct it?
• How did it manage to take control of its ecosystem?
• Is shifting from pure e-commerce to mixed retail a sound strategy for Amazon?
Instructor preparation and supplementary materials
This teaching note presents several sources. For the instructor to have full knowledge of the case it is important to visit Amazon’s website and recent news about the company. To go a step
Teaching Note
3 further the instructor could read “The Everything Store” by Brad Stone and “The Four” by Scott Galloway. Both books can also be made available online for students before the class.
Teaching Approach
The first part of the teaching plan is focused on recalling Amazon’s business model, pointing out its major business units and sources of revenue. The objective of the introduction is to make sure Amazon’s present model is clear in students’ minds as they draw links between these businesses and understand how they all contribute to the ultimate goal of serving the customer.
The second part of the class should provide an insightful overview of the firm’s background., pointing ups and downs over the course of the years and stimulating students to explain what were the reasons for those. It will be focused on Amazon’s diversification strategies, sustainability of competitive advantage, synergies, network effects, and customer focus.
The last section should be dedicated to discussing Amazon’s apparently counter-intuitive decision of expanding to physical stores. Students will be offered the opportunity to discuss the reasons for this endeavor based on the previous debate over the firm’s past strategies. The purpose of this task is to critically assess how can this expansion work in terms of sustaining competitive advantage and reinforcing Amazon’s core value of serving its customer. Moreover, understanding the firm’s business model will help visualize how it has established a structure that fits with its current resources and capabilities and extend its reach of customers and market leadership.
Following this general structure, and for a 90-minute class, this teaching note will be divided and structured in the subsequent way:
Section 1 – Amazon: a multi-business model platform
15 minutes 1.1. Analysis of Amazon’s business model: Online Marketplace
1.2. Complementarities between BUs 1.2.1. AWS – Amazon Web Services
1.2.2. Notable examples of synergies - Amazon subscriptions services Section 2 - Outlining Amazon’s growth strategy
2.1. Growth Strategies 35 minutes Section 3 – New business model: Offline retail
30 minutes 3.1. Amazon’s present moment
3.2. How does this endeavour complement Amazon’s core business 3.3. Possible Tradeoffs
Wrap up 5 minutes
• Section 1 - Amazon: a multi-business model platform (20 minutes): Amazon and its multiple business models: How do they complement each other and help Amazon to establish dominance over competitors.
• Section 2 – Outlining Amazon’s Growth Strategy (40 minutes): A breakdown of Amazon’s key moments, understanding how it successfully expanded to other businesses.
• Section 3 – New Business Model: Offline Retail (30 minutes): The future of Amazon and physical stores. Debate over how it fits (or not) the firm’s current strategy. Synergies x tradeoffs.
Detailed Teaching Plan and Analysis
Section 1 – Amazon: a multi-business model platform
Start by asking students how many of them have ever used Amazon to shop. In a class with international students, the high number of hands raised will speak for itself in terms of Amazon's global reach. Students are then asked to list some of Amazon's main competitors. eBay and Walmart will usually come up as the most relevant, but hardly as popular as Amazon in terms of purchase history. This exercise serves as an example of Amazon's dominance as a global e- commerce platform and sets the stage for further discussion of how the company has achieved this position.
1.1. Analysis of Amazon’s business model: Online Marketplace
The idea in this segment is to analyze Amazon’s most relevant business unit, Amazon
Teaching Note
5 Business Model Innovation explaining Amazon’s Marketplace Novelty, Lock in, Complementarities, and Efficiency led by answering the questions What?, How?, Who? And Why?.
To keep the conversation going, instructors should record students' comments on each topic by using the center board 1 (see Exhibit 1) and to see further details on the model, Exhibit 2 is advised.
What: The Amazon Marketplace is an e-commerce platform that enables third-party sellers to display their products together with Amazon’s regular offerings, which allows the user to access a much wider product catalog.1 Currently the world’s largest marketplace, it has two ways of selling. It is possible to buy directly from Amazon, with the company retaining all profits, or through Amazon, where third-party sellers would then have to share profits with the e- commerce. In both cases, the value proposition is the same: low prices, quick delivery, and product diversity. Amazon built a sustainable flywheel revolving around enduring customer needs, such as low prices, big set of options, and convenience, constantly enhancing value for customers and feeding the flywheel.2
How: To go deeper, it is important to explain how the selling process on Amazon is done. When vendors sell directly to Amazon (traditional e-commerce), the platform holds all the inventory costs and controls the distribution process, delivering the products directly to the customers’
doorstep. In this case, vendors can be Amazon’s private labels or independent brands. When products are delivered through Amazon (marketplace), it matches buyers and sellers collecting data along the way. Amazon does not carry inventory costs and sellers pay transaction fees and other costs to the company to secure, distribute, handle returns, and control general customer service. This is called Fulfillment by Amazon (FBA).3 However, every process revolves around customer obsession. Everything is meant to improve the consumers’ shopping experience, providing that ordering and delivery is fast and hassle-free, and data personalization help customers choose products in real time based on their browsing behavior and purchase history.
Why: This business model benefits both transaction parties. From the seller's perspective, it allows small businesses to grow, enabling individuals and businesses of all sizes to reach hundreds of millions of customers instantly. From the buyers’ perspective, it is possible to buy every product from one platform, satisfying all needs. Moreover, it brings them the choice of purchasing items in a large selection of price points helping them to find and discover new products that they may have been hesitant to experiment at first. Overall, the goal is to help customers make buying decisions. Enabling reviews for the entire product range on the site is an example of how Amazon does it, allowing for a more transparent e-retail space and providing knowledge to help customers make purchasing decisions.
Who: The Marketplace is a big part of Amazon as a company since it generates most of its revenue. It runs itself despite having some processes that are used in other business units.
Furthermore, when shopping at Amazon, not a lot of people notice that there are two parts of the website working as one entity: Amazon.com and Amazon Marketplace. Since the marketplace is so seamlessly integrated, customers do not realize that they are buying products from third-party sellers and not Amazon.4
1.2. Complementarities between BUs
After outlining Amazon's main business model, students should be challenged to explain how the company's other businesses complement its core strategy and provide a solid foundation for fulfilling its goals of providing premium customer service and competitively priced products in a variety of categories as efficiently as possible. The instructor may start the discussion by asking students what synergies are and how companies benefit from them.
1.2.1. AWS – Amazon Web Services
Turn students to thinking about AWS. Briefly recall its background about how it was developed
Teaching Note
7 - Amazon Web Services’ economies of scale help business units manage their data in the most agile and cost-efficient way possible. The simple fact that they do not have to pay for hosting expenses for other Amazon services, such as music and video streaming, already represents significant cost savings that would justify AWS’s existence on itself.
- The use of AWS’s clouding services in various areas of the firm represents a good example of economies of scope. Sharing access to the same capability, clouding system, across different business units generates cost savings when compared to the cost of using it separately due to the efficiency boost of its shared utilization.
- AWS can also be a source of financial synergies. The business represented 52% of Amazon’s operating profit in 2020.5 This extra capital can be reinjected into different businesses, helping to develop other areas of Amazon’s ecosystem without depending so much on investors’ money.
1.2.2. Notable examples of synergies - Amazon subscriptions services
After looking at AWS, students should do the same with Amazon’s subscription services, recalling its background and how it was crucial to improve customer service.6 The instructor should lead the discussion to find out how Amazon used the loyalty program to provide synergies, enhance its core strategies and grow (see Exhibit 3):
- Amazon Prime benefits from the company's cost-efficient structure - Prime subscriptions as a multichannel model.
- Prime stimulates consumption by customer convenience.
- Multiple offer and perks of being a Prime member.
Students should understand how crucial locking-in subscribers is to the company's success.
Prime drives more sales and provides information about consumer habits that allow Amazon to continue improving its customer experience.
Section 2 – Outlining Amazon’s growth strategy 2.1. Growth Strategies
To get a grasp at the company’s trajectory and understand how it shaped itself into the Amazon we know today, the instructor may go through a historical perspective of the firm, pinpointing defining moments that led to managerial decisions that were key for Amazon’s development.
The chapter is an opportunity to contemplate concepts such as different growth options and directions, as well as the necessary factors to fulfill them. Amazon gives us plenty of room to talk about horizontal diversification, vertical integration, product innovation, and other corporate strategy decisions towards growth.
It is recommended that this section is divided in three parts that could be considered crucial in terms of Amazon’s corporate development and growth strategies.
1st phase – Get Big Fast (1998-2000)
The lecturer can open the section by asking about Amazon’s early years, more specifically, about the explicit path took by the company to grow. The idea is to conduct the student through a timeline of events, and decisions that eventually led to its first big crisis in the beginning of the new century.
• Get Big Fast: Debate the rationale behind the firm’s early motto. Hindsight bias may lead students to criticize it because they already know that the result was negative, but the professor can argue that it is a valid point since many companies after Amazon bet on the same strategy with success.
• Exogenous factors: Comment how the euphoria inside capital markets around tech startups allied to financial incentives contributed to generate speculation around dotcoms. As soon as these financial incentives reduced and investors realized they weren’t going to get any short-
Teaching Note
9
• Bad investment decisions: Mention the companies bought by Amazon that did not have much to do with its business model, such as PlanetAll. It is possible to use these examples to teach about Porter’s three sequential tests that companies must undergo to properly evaluate if a firm should diversify itself. According to Porter, many companies suspend the attractiveness test because they have a vague belief that the industry “fit” very closely with their own businesses.7 The firms bought by Amazon didn’t have a sound business model, and the merger process was too fast for it to properly absorb their infrastructure, leading to executives’ withdrawal.
• Growing without structure: Amazon invested in numerous warehouses to serve as distribution centers for its products, but they lacked the expertise to efficiently organize the delivery process. They used software and equipment that were not tailored for Amazon’s specific demands, creating a big gap between orders and shipping.
The case offers a range of possible discussions in terms of diversification strategies. As the debate deepens, the lecturer can focus on one or many of them depending on the type of class and content that he desires students to have contact with (see Exhibit 4).
2nd phase – Dot.com Burst and Loss of Faith (2000-2002)
After understanding the reasons why Amazon’s early strategy went wrong, the lecturer can ask students what were the main steps took by the firm to shift gears and restructure itself. The main point to be addressed is the establishment of a different business logic to guide the firm’s efforts, using profitability as a measure of success instead of growth. This decision helped Amazon repurpose its resources and capabilities to focus on solving internal matters before it could start growing again.
• Amazon’s restructuring: No more money to be allocated to acquisitions. Definition of the flywheel to better understand the business and where it should focus its efforts to reach profitability. The lecturer can draw Amazon’s virtuous cycle to help students understand how a reinforcing business model looks like (see Exhibit 5). Moreover, the restructure would serve
to reach operational efficiencies and enable Amazon to develop new competencies, such as 2 day-shipping delivery and FBA services.
• Network externalities: Network effects played a big role in Amazon’s growth and the reinforcement of its core values. Thus, it is important for the lecturer to go deeper into its key elements:
- The Amazon effect: The e-commerce platform serves as an intermediary between customers and merchants. These two sides nourish each other through Amazon. As soon as the number of consumers increase, more third-party sellers are attracted to the platform, which essentially sustains Amazon’s reinforcing virtuous cycle. More vendors will be using Amazon’s service to fulfill their product deliveries, allowing the firm to save costs. Broader product selection also enhances Amazon’s customer experience turning shopping into an easy and convenient activity.8
- Benefits from having various business units: Amazon benefits from synergies across its multiple business models. Online stores operate at tight margins and high volumes, making it difficult to grow reinvesting profits. The marketplace is the foundation for the creation of other businesses, such as Amazon Prime and AWS, which run at high margins, making more profit and enabling the company to be more lucrative on the long run. Consumers do not buy Prime because of the number of members, but the latter allows Amazon to improve its service, attract more subscribers, and consequently more buyers, boosting the network effect in the online platform. Finally, different sources of revenue allow Amazon to invest in distribution, increase the speed of deliveries, enhance customer experience, and feed its flywheel.9
• Increasing revenues: Using existing businesses (zShops and Amazon Auctions) to create the marketplace for fee-paying third-party sellers. By enabling vendors to bring new categories to the platform, Amazon would collect fees and, on the meantime, observe how they work, learn,
Teaching Note
11 product offering and provide quick cash injections to sustain its expensive operations. These solutions also served the purpose of increasing the benefit for the customer (greater product selection). Here the lecturer can mention deals with Toys R Us (Hasbro relationship, selected toys), and Circuit City (carry inventory for them). Those partnerships provided Amazon with a much-needed industry know-how, such as supplier relationship and product expertise.11
• Focused expenditure - building customer loyalty: Amazon bet on spending money on ways to create bonds with its customers. Free-shipping initiative and promotional offerings on specific products, such as Harry Potter’s Quidditch broom, marked the beginning of Prime and helped enhancing brand image, customer loyalty and sales volume.
• Cost reduction: Reduction of personnel (mention the expensive call center in the Netherlands inside The Hague, a diplomatic building), closing poorly thought warehouses like Georgia’s, shutting down the centralized Marketing department and building brand image through word- of-mouth.
Exhibit 6 offers a range of question that the lecturer can propose to engage students focusing on why Amazon used those approaches given the critical times it was facing.
3rd phase – Growing with Structure
The professor then moves on to after the dot-com crash. Pinpoint how Amazon became cautious in terms of acquisitions, opting to develop its own competencies rather than buying them out. A strategy shift that marked Amazon’s transformation into a top tech developer, innovating across multiple businesses and disrupting industries. It is advised that the lecturer benchmarks Amazon’s approach towards growth between eras to help students visualize the shift in corporate strategy.
• Efficiency - the evolving of fulfillment centers: A lot of Amazon’s efforts and resources was dedicated to creating its own software and algorithm to streamline its fulfillment centers and expand worldwide. Why was it important to vertically integrate distribution logistics? The fact
that the e-commerce controlled the supply chain, website, and distribution, allowed the algorithm to calculate the best way for a specific product to reach its destination as fast and cheap as possible. All of which served to enhance customer experience and feed the flywheel.
The lecturer can wrap up this section raising the question to why it was crucial for Amazon to reach a big scale. Increasing the extent of its business helped Amazon tip the balance of the industry to its favor, pushing suppliers’ margins down to offer more value to customer.12 Moreover, it enabled the e-commerce giant to offer its expertise in logistics (FBA) to sellers, a classic case of operating leverage: getting more out of its assets and increasing the profit margin by stocking and distributing third-party vendors’ products.
• Strategic acquisitions and partnerships: Discuss how Amazon shifted into a “building culture”
instead of buying out resources.
- Punctual alliances eventually had issues with Amazon’s core strategy of offering customers a wide range of products for the best available price. Eventually, exclusivity deals, such as the Toys R’Us one, were not beneficial for Amazon as they develop the competencies thrive by themselves.
- Amazon started to buy firms that could provide unique intangible assets that would otherwise take years to develop.
- New businesses fit the purpose of providing competitive advantage in key areas such as microprocessor (hardware) manufacturing and robotics engineering expertise. Among the different options, students might cite Mobipocket and the use of its technology to develop Kindle; Kiva Systems and the fulfillment center’s equipment’s evolution; Annapura Labs and the microprocessor technology for AWS.
- Purchases such as Zappos and Quidsi, can be mentioned as strategical to expand Amazon’s horizontal scope, tapping new product categories, and shutting down potential competitors
Teaching Note
13
• Product Innovation (Kindle, AWS, Fire Phone): Another way in which Amazon managed to diversify its business portfolio was through product development. The lecturer can mention the importance for the company to establish itself as a tech innovator: develop unique R&C that could be spread across its businesses and maintain its competitive advantage.
AWS: The lecturer can depict how the cloud computing web service became crucial to accelerate Amazon’s flywheel.
- The expertise in IT infrastructure allied to the development of data management capabilities enabled Amazon to fine tune its online platform and enhance the shopping experience.13
- Expertise in online platform development and data management led to the creation of other businesses, such as music and video streaming, which were further offered to customers to increase the adoption of loyalty programs.
- AWS provided the technology for Amazon to efficiently manage its fulfilment centers, organizing orders and deliveries, and achieving operational leverages as a consequence.
In case the lecturer decides to focus on this concept, AWS presents a good opportunity to apply Porter’s 3 sequential tests for a successful diversification move (see Exhibit 7).
Kindle: One of Amazon’s boldest initiatives to date, the Kindle venture offers a solid ground for discussing diversification attempts. Comparing its success to Amazon’s attempt to join the smartphone industry with the Fire Phone can be helpful to pointing key factors for diversification strategies’ success. Some questions that can be posed to startle students are:
- In both cases, Amazon did not have hardware manufacturing capabilities, but why were the outcomes different? Explain the importance of analyzing the industry you are entering and the complementarities that it may or may not have with your current business. Amazon already had dominance over the book industry and managed to leverage its advantages,
such as bargaining power and capital resources, to create the proper conditions to the introduction of its reading apparel.
- Why did it choose to make the apparel instead of outsourcing the development or even allying with another tech firm to create it? Developing the device allowed Amazon to control the whole customer experience, combining easy to use e-books digital store and sleek and seamless hardware for reading.
Exhibit 8 illustrates some points that can be discussed in class to help figure why did Kindle work out for Amazon as opposed to Fire Phone.
Section 3 - New business model: Offline retail 3.1. Amazon’s present moment
The idea in this section is to focus on Amazon’s existing physical stores models, explaining what their strategy and purposes are. The section will be divided in three main topics (1) Why Amazon decided to invest in physical stores? (2) What types does it have now and what are the advantages for the customer? and (3) The entry in department stores.
(1) Why did Amazon decide to invest in physical stores?
There are a few different factors students must be mindful off when analyzing Amazon’s entry in the in-store retail sector.
• Amazon wants to provide customers with a variety of options when it comes to their shopping preference, whether online, in person, with checkout experience or without. Also, the company understood what customers love the most: choice. Very few people shop solely in one channel.
• Another reason for expanding into physical stores is the need to grow its ecosystem and showcase its own products, especially gadgets. The more Amazon products are exposed,