How Amazon Survived Thrived and Turned a Profit - Case Study Example

A brief overview of the Company: Amazon.com has enjoyed a strong presence in the scene right from the evolution of e-commerce as a business concept. The Seattle, WA based company evolved from bookseller to “virtual Wal-Mart of the Web”, dealing in everything from cookware, CDs, toys and games to computers and related items. The company had its beginnings in 1994 after Jeff Bezos, a Princeton alumnus with qualifications in computer science and electrical engineering came across exciting information about the internet growing at 2300%. In order to capitalize on this opportunity, he set up shop in Seattle with its large pool of technical talent. Another advantage was that one of the largest book wholesalers was located in nearby Rosenberg, Oregon. Amazon.com began with an initial collection of 200,000 titles, which no other online bookstore could claim to have at that time. The company’s shares were offered at an IPO price of $18.00 on NASDAQ (Symbol AMZN), after going public in May, 1977. Amazon grew steadily but slowly in the late 1990s, and comparisons with the faster growth of similar dotcom companies of the period created initial resentment among investors. Amazon was implementing a unique strategy of not expecting profits for five years, which paid off when the dotcom bubble burst and Amazon came out as one of the few survivors. The company recorded profits for the first time in the last quarter of 2002, a meager but symbolically crucial $5 million or 1 cent per share. Amazon diversified its product lines and expanded overseas, making profits of $35 million in 2003, $558 million in 2004 and $359 million in 2005. Shareholders received reasonable returns on investment, and following the merger with SBC Communications, the company’s shares entered the S&P 500 index in the place of AT&T on 21st November, 2005. Business model of Amazon.com throughout 1995-2006 and how it has changed and evolved: “In the most basic sense, a business model is the method of doing business by which a company can sustain itself -- that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.” (digitalenterprise.org). Amazon.com began its business at a time when the internet has just started to entrench its roots into the economy by capitalizing on the enormous opportunity it provided to remove the twin obstacles of time and distance. Amazon’s business model is based on pampering the customer to the status of a king by tracking their tastes and using this information to create a unique customer experience. Thus they have succeeded in cultivating a relationship where the customers liked and trusted them. Their model has proven to surpass the most brilliant technology in use today. Starting as an online bookstore, the company’s product lines expanded to include all types of home supplies, entertainment and sports goods, personal care products, industrial, and scientific goods. Initially Amazon didn’t intend to make immediate profits and wanted to grow on a steady pace. Subsequently, by focusing on its business model of developing a unique e-business and by controlling the product line, it could establish a strong presence in the field. Its business model also accommodated introduction of new products on a regular basis and providing easy and reliable payment methods like credit card, Paypal accounts etc. It further offered a feature that enabled the user to submit reviews of each product to the website. This gained much popularity and became an effective tool in making Amazon’s business a success. As part of their review, users could rate the product on a scale from one to five stars, which provided a basic idea on the quality of the product to prospective buyers. Thus Amazon’s innovative model, where customer feedback was visible to future buyers, worked as an effective tool in promoting their business. As evident, like the word of mouth advertisement, this was a very effective method of product promotion. Amazon began a series of acquisitions, partnerships and dealerships in 1998, adding a whole new range of products, services and features to the company’s offerings. The Web-based address book, calendar, and reminder service operator PlanetAll and Junglee.com with data-mining operations were the first to be acquired at a cost of about $280 million. The community-focused features of the Amazon website, Amazon.com Auctions, Amazon.com Marketplace, Friends & Favorites, and Purchase Circles resulted from the contribution of the employees of these two companies most of whom were absorbed by Amazon. Exclusive rights to market the Segway Human Transporter were an outcome of Bezos’ early support to its development. Other significant additions to the Amazon group were Joyo.com, the Chinese e-commerce website in 1998 and BookSurge, a ‘print on demand’ company in 2005. Addition of a wiki feature in 2005 allowed any buyer to edit a section of the product page and partnership with travel meta-search company Sidestep in 2006 enhanced the search capabilities of Amazon’s travel store. Several innovative services and features were introduced, like the AmazonS3 which allowed storage of data objects upto 5 GB in size using HTTP or BitTorrent. Following the launch of Amazon Grocery in 2006 for vending non-perishable food and household items, Amazon offered free shipping for purchases above a threshold under the Super Saver Shipping facility. Product wikis and discussion forums were introduced in 2006. The highly reliable Amazon infrastructure was made available to users to run diverse applications like running simulations and web hosting under the EC2 (Elastic Compute Cloud) label. September 2006 witnessed the launch of Amazon Unbox, a digital video downloading service offering a host of media resources and products. Amazon became a one of the leading on-line store through a mix of unparalleled customer service, advertising and offers. Eventuation of the harvest stage that CEO Jeff Bezos promised: Right from the stage of Amazon’s inception CEO Jeff Bozos wanted to focus not on immediate profits but on steady growth and long term benefits. The current status of Amazon.com as a leader in e-commerce business validates the relevance of his stand. From the financial data in the overview of the company, it could be seen that Amazon had been able to sustain its growth and provide the investors a steady return on investment though the ratio is a bit low. However, considering that the company has been able to provide returns on a steady pace and it is still continuing, the low rate doesn’t seem like a concern. It is also a fact that the company’s growth had been exponential both by way of acquisitions or meaningful alliances and diversification. Some may argue that the company stands at a critical stage today and the profits have proven to be indefinable. However, the fact remains that the company still retains a good rate of profitability and it has definitely gained great mileage in terms of expansion. Jeff Bezos contended from the outset that if the company aimed at making profits it would be failing to achieve growth. This, he thought, would hamper the company’s interest in the long run. According to Bezos the situation has changed a lot, and it is a right time to focus on fundamental strategic economics of the company and he forecasted that the company will turn an operating profit in the fourth quarter of 2001. As is evident from the data discussed in this paper earlier, the company had delivered on that promise. Once he proved that he could stand up to his promises he then stated he would remain focused more on growth the following year. One challenge the company faced along its evolution was the paucity of funds due to excessive investments in online firms. A major handicap to the company was that it was short of funds to invest for over a long duration due to its vast deficit. However, it didn’t influence much on acquiring more new companies or forming fresh partnerships. Its track record remained one of assertive expansion into fresh areas of business and a wide range of products. However, it has to take cognizance of the dwindling customer base which could be a cause of concern. This seems to be mainly due to the fact that competitors like Barnes & Nobles had found a stronger footage in the online business. However, from the past history of the company it becomes evident that it can withstand such adversities by its active and domineering presence in web services. The company has now employed another feature where developers can extract content from Amazon’s site and incorporate it into their own. This innovative strategy, for example, facilitates the user to search Amazon’s database using a third party site. American Online has decided to invest $ 100 million in Amazon which triggered the speculation on a possible merger. Further there also exists a perception that the company may embark upon a new role as technology provider in the future. This seems to result from the fact of its alliance with Toys R Us wherein Amazon will support an online storefront while Toys R Us will control the inventory and logistics. Thus the company still looks forward to further diversification and a better future. There is no doubt that this will instill confidence in its customers and help attract new customers. One cannot also overlook the fact that the company has been making profits at a steady albeit slow pace. Considering all the pros and cons, it still appears that the company has entered its harvest stage that CEO Jeff Bozos promised. 3. Is Amazon.com a natural acquisition target for Wal-Mart? “Wal-Mart Stores, Inc. (NYSE: WMT), an American public corporation founded by Sam Walton in 1962, first incorporated on October 31, 1969, and listed on the New York Stock Exchange in 1972, is the largest retailer in the world and the second largest corporation in the world, behind Exxon mobile, based on revenue as of 2006.” (Fortune Global 500). The operations of Wal-Mart International comprise 2,700 stores in 14 countries outside the United States. Their wholly owned operations are also located in Argentina, Brazil, Canada, Puerto Rico and the United Kingdom. Wal-Marts business model is based on selling a wide variety of general merchandise and marketing, at "always low prices." The company refers to its employees as "associates." All Wal-Mart stores in the United States and Canada also have designated "greeters," whose general role is to welcome shoppers at the store entrance, as well as playing a role in loss prevention. Unlike many other retailers, Wal-Mart does not charge a slotting fee to suppliers for their products to appear on the store. Alternatively, they focus on selling more popular products, and often pressure store managers to drop unpopular products in favor of more popular ones, as well as manufacturers to supply more popular products. (www.wikipedia.org) Usually acquisition takes place between a bigger corporate body with strong asset base and a smaller corporate body with weak structure with an objective to have more capital investment, corporate growth, market coverage, new product or technology addition. In this particular case Wal-Mart is a much bigger corporate body than Amazon. Com. The latter requires the funds that the former can provide. On the other hand, the former can use the latter’s expertise in the business for generating profitability. Thus the acquisitions of Amazon.Com will help the Wal-Mart to broaden its business, product and customer base. So Amazon.com is a natural acquisition target for Wal-Mart. Is the Amazon.com business model, the right model looking ahead 5 or more years? Unfettered by the rules of the old economy -- that ‘profits drive stock value’ -- Amazon.com Inc. was the poster child for the new Internet economy with its dynamic, young chief executive and highly valued stock. But when the technology bubble burst, the company quickly morphed from poster child into punching bag, an example of Internet economics and excess. Unlike many of its e-commerce counterparts, however, Amazon survived. And yesterday the company posted its first annual profit, a milestone that many analysts and observers never thought it would reach.” (www.seattlepi.nwsource.com) The main visions of Jeff Bezos were to build the world’s most customer-centric company and to establish a place where customers could buy anything. As discussed earlier, he believed in long term objectives rather than short time fast profitability. The operations of the company were focused on these objectives. It also gained great mileage in the industry by diversifying the product line and meandering into innovative areas. In this context, Amazon.com recently launched a “Your Store” service, which again translates Jeff Bezos’ vision into a reality. He had put in a lot of efforts to comprehend the complex pattern of the internet’s working in creating a service that is customer-oriented. The track record of the company shows slow but steady profitability coupled by fast paced growth. Bezos’ vision had paid off in terms of the large customer base and loyalty rate that the company enjoys now. The company registered significant increase in the percentage of customers from 64 in 1998 to an impressive 78 by the year 2000. During the last quarter of the next year Amazon was in a position to spare $7 to attract a new customer while an average customer spent $123. Jeff Bezos adopted another strategy by making Amazon an ideal place to order any product online and get delivered promptly. Though entered business as a big seller of books, its mission evolved into being known as the world’s biggest store in the near future. If definitely had gained remarkable mileage towards this direction by diversifying its product line into an array of materials like cookware and tools, and also by including new services such as auctions. However, Bezos made it clear that he intends to achieve this over a long period of time. According to the current business model and structure of Amazon.com, coupled with the possibilities of emerging trends, it looks like the company’s current model is to its advantage. They are likely do better in the next five or more years. Works Cited Home Page of Digital Enterprise: : Accessed on November 24, 2006. Journal article: staff writer, Fortune Global 500, CNN/Fortune, July 24, 2004 Home Page Seattlepi: Frey, Christine; and Cook, John: How Amazon.com survived, thrived and turned a profit : Accessed on November 23, 2006. Home Page, Wikipedia : Accessed on November 24, 2006 Read More