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Homework answers / question archive / When Amazon
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.
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
INTERESTING FACTS
Amazon is the No. 1 selling e-tailer in the world – Amazon’s 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 it’s first week of trading, Amazon took orders for $12,438 worth of books
• It took eight years for Amazon to turn a profit
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.
ORGANIZATIONAL CULTURE
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
OPEARTION 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 fulfilment centres around the world which encompass more than eight million square metres.
Amazon’s distribution and fulfilment 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.
HUMAN RESOURCE MANAGEMENT
Amazon currently employs more than 51,300 people around the world. Employees work in corporate offices, fulfilment 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)
KEY SUCCESS STRATEGIES
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!
2. Focus on value-adding for customers:
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’
3. 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.
4. Use of acquisitions, alliances and strategic partnerships to grow and bring in new customers. Each new partnership brings more customers to Amazon’s site.
‘Amazon gives the customers what they want:
low prices, vast selection and extreme convenience’
- Jeff Bezos (at a shareholders’ meeting in 2009)
QUESTIONS
1. Give reasons why people may have thought an online bookstore was
‘doomed to fail’. [12 marks]
2. Amazon’s vision statement is very general. To what extent do you
think this is achievable? [12 marks]
3. Why do you think it took Amazon eight years to make a profit? [16 marks]
1. The major reason for those doubted about the success of Amazon model of book selling in its initial phase was its very unique and novel nature. Back in 1996 when the very concept of being online was new the idea of selling the old world commodity of books via the medium and that too on a massive scale was shocking. The company offered over a million book titles to its customers back then which was unheard for a company without physical presence. Amazon did not have single store for its customers to walk into. Most of consumers were only familiar with idea of going to a book store, sifting through the titles before making the purchase decision. The conventional wisdom in such scenario dictates that when the customer is not much familiar to your product or if you are introducing a new service it is always better to start small, educate the customers and then go for expansion. Jeff Bezos however decided to offer wide choice to his clients in the introduction stage itself. When customers were made comfortable and convinced of the benefits of an online book store in terms of wide choice the business took off. The company managed to foray into new areas also.
2. The very reason that the vision statement has been kept in general and relatively vague offers insight into mind of the entrepreneur behind it. It indicates that the goals of the company and its founder are ambitious and sky is the limit. The statement indicates that it considers the entire planet as its customer base and would like to be a global entity with capability and skills to serve customers across borders. It has managed to expand the portfolio of its products from initial venture of books to groceries, electronics, toys and practically anything under the sun. Its footprint also has grown across the world with operations in major markets across continents. The rise of globalization and opening up of markets like China has enabled Amazon to source products for its customers at cheapest price but maintaining the quality. It has expanded into new product segments and countries such that there are only limited areas not touched by the entity at present. Hence the vision of the company is achievable within limited period of time.
3.Amazon began its operations on a small scale with initial funding raised from promoter savings and borrowings from his family. Next set of funding came from angel investors who identified the potential and chose to invest in it. Since the nature of business involved creating infrastructure to collect merchandise and transport them from warehouses to customer place the level of initial investment was also high. Large part of the funding thus had to be financed by debt which had interest and other servicing cost. This delayed the profitability of the company since huge amounts of debt were being coming into the company which had to be paid back. Dot com crash and recession of 2001 also would have impacted the finances of the company. Huge investments were required in warehouses and fulfillment centers which had lot of automation element in it.
