Case Study 1
- 1. Schultz1 A Case Study By Jordan Schultz Bsns 490 Policy & Strat 10/25/16
- 2. Schultz2 Table of Contents Cover………………………………………………………………………………………….....1 Case Overview…………………………………………………………………………………..3 Statement of Key Issues and Problems………..………………………………………………..9 Tools of Analysis…..…………………………..……………………………………………….15 Alternative Generation…………..…………………….………………………………………..28 Alternative Strategy Justification and Implementation…………………………..………….….31 Conclusion…..……………………………………………………………………..……………38
- 3. Schultz3 Case Overview Company Founding Amazon was founded by Jeff Bezos (1964-present) in 1995, its origional name was actually cadabra but was changed when Bezos lawyer miss herard him and thought the companys name was cadaver. (D’onfro) Amazon was originally intended to be an online book store, before it turned into a one stop shop for everything you may need and even some things you don’t. The story about how a small book sale company run from inside a garage to one of the worlds largest online retailer. Begins with Bezos who had just become the youngest senior vice president in company history at D.E. Shaw in 1990 after four short years when he decided that he wanted to launch Amazon an online bookstore. (Biography) What caused him to eventaully leave his position with the hedge fund and jump into the new exciting world of the internet was a statistic he read that stuck with him “In the year 1994 the internet had grown 2,300% in just one year, Bezos could see the potential in the internet and knew that he wanted to take advantage of it (Business Insider). Bezos started Amazon from his garage with a few employees, it was an extremely risky choice on Bezos’s part because he already had a great job at a hedge fund D.E. Shaw, and at the time the only business expperience Bezos had was running a summer camp with his girlfriend. Bezos worked with a few employees whom he expected a lot out of, often working long hours usually around sixty a week and in a very intense work enviroment which is somehting that is still a part of Amazon’s company today (D’onfro).
- 4. Schultz4 Company Development Amazon has what seems like an endless aray of products available, they didn’t start with this they worked their way towards it by adding products and services as they went. Amazon started with an initial investment of a few hundred thousand dollars from Bezos parents, Bezos quickly made Amazon a profitable business. Amazon took off from the start and within Amazon’s first two months the company was making over $20,000/week much of which was put back into the company for growth which caused concern for investors who saw that profits werent really the main focus of the company at the time. In 1997 when the company was first publically introduced shares were going for around eighteen dollars, in 2016 shares for Amazon are going for as much as seven-hundred and seventy dollars a share and is still growing. Amazon’s initial success as well as its continuous success has largely been dependent on the growth of the internet. While Bezos expected the internet to continue growing in 1995 there is no way he could of predicted the magnitude to which it did. By the time Amazon was publicly released to be traded in 1997 the amount of internet users had increased by over fifty four million users, which was 1.3% of the worlds population at the time. An increase of shoppers meant an increase in the demand for websites like Amazon. Amazon announced that between
- 5. Schultz5 March 31, 1997 and March 31, 1998 the number of cumulative customer accounts grew from 340,000 to 2,260,000 which was an increase of 564% (PRNewsWire). The growth of the internet isnt the only thing that helped to contribute to Amazon’s massive growth, they went from being an online book store to a complete store for music, clothing, and much more. In 1998 Amazon purchased Junglee corporation which was an online service that ofered a wide variety of products to people (Hansell). Amazon would start using Junglees software to start connecting people to online stores that had what they were looking for, in an interview with the new york times Bezos said ''Our focus has always been to help people find and discover things they want to buy''. Which is why Amazon did not stop at acquiring Junglee, in 1999 they also purchased the tool crib of the north which was a catalog company that specialized in home improvement. This acquisition allowed Amazon to enter into the home improvement market a year ahead of their potential competition of Lowes and Home Depot who at the time were still a year away from selling their product online (Gaw).
- 6. Schultz6 Amazon continued to diversify by adding more and more products to its inventory, offering everything from jewelry which was offered for the first time in 2003 to fresh groceries which was apart of Amazon Fresh which launched in 2006. However, one of Amazon’s biggest additions was Amazon.com web services or “AWS” which was released in 2002. AWS allowed developers to incorporate features from Amazon.com into their websites, such as allowing developers to feature items found on Amazon.com on their own websites. These featured products include a link that allowed people viewing these sites to add items to their Amazon cart. It was integrated with Amazon’s associates program which allowed websites an opportunity to make up to 15 cents on a purchase made through the link on their website. Since then Amazon has stuck with this approach to bring in new customers however they have increased the incentive for joining the program offering up to 10% of the revenue earned, depending on the category of the item (Amazon). The Amazon’s associates program allows Amazon to have thousands of websites to promote and market for them while only having to pay the ones that are producing. Amazon We Services also offers data storage to large companies so they don’t have to dedicate large areas for their servers, another positive is you only have to pay for what you use with the Amazon servers, which is why Amazon Web services has reached 10 Billion in annual sales. (Annual Report 2) Companies Current Standing Amazon has grown immensely from being a small business in a garage that focused on selling only books. Now Amazon is extremely large, with over 80 distribution centers it has at least one distribution center in thirteen countries around the world, 50 of which are here in the United States. They have also expanded their product line. Going from offering just books to being a one stop shop or everything from your daily house hold essentials such as toilet paper
- 7. Schultz7 and cleaning supplies to a 105 inch LG electronics smart TV worth over $35,000. Which is why Amazon’s sales have soared through the roof, according to their annual report they became the fastest company to reach $100 billion. (Annual Report 2) One thing that hasn’t changed over the years is Amazon’s willingness to be innovative, according to Forbes it was #11 on the list of most innovative companies. Amazon’s latest innovation is working on shipping its packages with the use of drones, it hopes to have packages arrive within 30minutes depending on the distance (Collins). Amazon already features 1-hour shipping in some areas and free 2-day shipping for most items with its Amazon prime membership. Amazon is able to offer different shipping deals because they use both the united postal service and FedEx to meet their shipping needs. Amazon’s rapid growth has led them to a point where their demand is greater than what UPS and FedEx can supply. Amazon’s Innovations come at a cost, although their total net sales are rapidly increasing going from $74,452 million in 2013 to over $107,006 million in 2015. An increase of over $32,554 million in 3 short years. However, Amazon’s operating cost have been raising at the same steep rate, going from $73,707 in 2013 to over $104,773 in 2015. Which was a profit of only 745 million in 2013 however they are trending in the right direction because in 2015 they recorded an income from operations of $2,233 million. Out of the total operating expense over $71,651 million was from the cost of sales expense, which is largely due to shipping costs. Amazon can expect to continue to have large shipping bills with the rapid increase in orders and the increased money spent in new technology such as drones. The internet retail business provides Amazon with tough competition, there are plenty of competitors that are working to take business away from Amazon. The reason that Amazon is able to continue its dominance with online retail is the fact that they are a customer centric
- 8. Schultz8 business, they use their willingness to use any resources necessary and their desire to be innovative allows them to stay ahead of the competition. An example of this is their no extra charge delivery on Sundays in certain areas. (Manjoo) It’s a feature that gets people talking about Amazon and attracts new customers to them for the convenience of being able to receive a package on non-business days. This is something that other online retailers aren’t able to offer due to the increased cost of shipping. Amazon’s strategy can be depicted in a simple flow chart, everything Amazon does leads to more cash flow which leads to better value for the customers.
- 9. Schultz9 Statement of Key Problems and Issues Issue Importance Salesvs Profits 1 Culture Concerns 2 Shipping 3 Intense Competition 4 Innovation/Diversity 5 Amazon is seen as a massive online retailer that we don’t think of as having many problems, that simply isn’t the case. Many of Amazon’s problems are centered around “Innovation” which may seem like a strange concept because we often see innovation as a positive thing. However, when you focus to much on innovating instead of perfecting your current processes/ideas it can lead to negative results. Sales vs Profits As previously talked about Amazon’s large sales haven’t necessarily translated into large profits. There are multiple reasons for this the first that Amazon frequently pours their profits back into the company to promote growth which has provided Amazon with a bright future however stockholders are eager to see some of that growth translate into increased profits. As the flow chart above shows Amazon uses its cash flow to be more innovative providing customers with better products at lower prices, they have also been investing heavily in renewable energy for their AWS infrastructure, they plan to reach 100% renewable energy and are already on track to reach 40% this year (Annual Report 7). Another reason for the lack of profits is their high operating expenses in 2015 it reached 104,773 Million, which was a 31,066 million increase from 2013. A bulk of it is the 71,651
- 10. Schultz10 million from cost of sales which is roughly 68% of the expense cost. It Mostly consisted of shipping cost, purchase prices for consumer products, and digital media content cost. The next highest expense is the Fulfillment expense when costs around 13,410 million which was about 13% of the total expense amount. and primarily pays for the fulfillment centers inside the US and overseas, it also pays for any packaging cost that are incurred and transition/payment fees associated with their transactions. Culture Concerns Although Amazon has been recognized as one of the top companies in terms of growth and potential its faced criticism, “They do pride themselves on being a tough culture" (Ryssdal). Jeff Bezos often says that his culture is for the incredibly hard working, Amazon’s culture does seem to generate success they are after all the largest retailer in the country. However, it is a bit discouraging to some employees that feel like they are constantly being ranked and have to compete with their coworkers. They are constantly having to watch their backs to see how well everyone around them is doing to make sure they are up to par. Employees are also able to send secret feedback about their coworker to their bosses, the employees who are being reported aren’t notified who filed the complaint against them. (Kantor and Streirfeld). This system of allowing Amazon employees to criticize each other without having to face any sort or repercussions, leads to conflicts with the employees. Amazon allows this because conflict often leads to innovation. Amazon’s culture is designed to influence innovation with its employees, there isn’t much “Red Tape” for employees to go through in order to get their innovative ideas seen/heard. This allows newer employees that in other companies would never be taken seriously when introducing innovative ideas to have them actually be looked at and taken seriously (Ryssdal).
- 11. Schultz11 However, this adds to the pressure that employees feel because there is always a desire to be the one that thinks of or finds a way to implement the next big thing. Amazon’s innovative cultures has led to them doing things a different way than most companies. Jeff Bezos is famous for his dislike of power point, one of his lesser liked innovations is instead of power point presentations he has employees present their new ideas with a six-page paper. This is something that sets Amazon part from other companies, it’s also something that can cause people to stress out and can cause them to lose interest in coming to Amazon. Although this may seem like a cruel and unusual punishment for some of Amazon’s brightest minds it does help both themselves and their audience understand the topic with much deeper knowledge. Since the writer is forced to present their idea using only six pages they must have a deep understanding of the idea so they know what is worth mentioning and what is not, it also allows the reader to soak up this information in 30 minutes and be fully informed on the matter. Shipping Amazon uses both FedEx and the United Postal Service to deliver packages to keep up with their increased demand. Even this however is not enough to handle all of their orders, Amazon is estimated to sell over 7.2 billion items this year. This has caused Amazon to turn to other forms of shipping such as Amazon flex which is an app like Uber that allows people with free time to log on and deliver packages, or their bike delivery in 1999 they invested 60 million in Kozmo which was a bike delivery company that eventually imploded (Leonard). These part time deliverers add to shipping expenses, but not as much as the 20 767 Boeings that the company recently purchased in order to help support their 1 to 2 day shipping they offer.
- 12. Schultz12 A majority of Amazon’s shipping cost come from their innovative approach to shipping, it gives customers a higher convenience factor but costs the company a lot of money. They rely on convenience to draw customers to them, if shipping took too long to get there or was too expensive then customers would turn somewhere else for their shopping needs. Which is why Amazon is having to spend big money on various shipping plans, such as free shipping on Sunday, free two-day shipping for prime members, and even two-hour shipping in some locations at an added price (Leonard). Amazon Prime has a lot to do with the companies shipping costs, for just $99 dollars a month you can receive free 2-day shipping on millions of products. As of July 2016 Amazon has an estimated 63 million Amazon prime members, which accounts for about half of Amazon’s customers. (Shi) So it’s easy to see how the two-day free shipping cost can add up quickly, however the reason why Amazon still offers this program is for the simple fact that Amazon prime members spend more. Studies estimate that the average prime user spends about $1,200 dollars a year which is about $700 more than the average non-prime member who spends around $500 a year on Amazon (Shi). The company’s newest and possibly most expensive shipping innovations is the use of drones to ship products to customers. As you can imagine there has been millions of dollars spent on research with millions more to go still. The initial plans are for drones to allow Amazon to offer 30-minute delivery on certain items that are under 5 pounds. This added convenience could make ordering from Amazon faster than going to the store at an added cost of course. Intense Competition
- 13. Schultz13 Jeff Bezos wasn’t the only one to see the potential of the internet back in 1994, many companies have gone into the online retail business. Every day Amazon’s competitors grow in numbers some are individuals that are just trying to get a customer base going while others are huge physical store retailers such as Walmart or Barnes and Noble. Not only does Amazon have to worry about other online retailers, they also have to compete with physical retailers who are able to offer products to consumer’s now without the need to have it shipped. Amazon’s involvement with so many industries leads to them having to compete with all of the top players in each of these industries, some of them specialize specifically in that one area. For example, Amazon’s video and music streaming services have to compete with Netflix, Hulu, and HBO Now all of them focus specifically on media streaming. They also have to compete with Verizon, Google, Microsoft, and IBM are all companies that Amazon has to compete with in their web services division that offers cloud computing to individuals and businesses. This heavy dose of competition forces Amazon to rely on its innovations to separate them and make them stand out from other retailers. This is why they feel the constant need to be innovative in all aspects of their business including their culture, shipping, introducing new ideas, and just in general in regards to the company. They are looking for that edge that keeps them separated from their competitors, however it’s only a matter of time before their competition takes Amazon’s innovations and starts using them for themselves. Increased Diversity Amazon’s desire to be a part of multiple markets has cost them a lot of money, products such as the Fire Phone which is Amazon’s attempt at a smart phone has received poor reviews
- 14. Schultz14 and has produced poor sales for the company. “Three months after the launch, Amazon took a $170 million charge to wipe out the lost value of its unsold Fire Phones, adding that it still had $83 million in inventory at the end of that period.” (Rubin & Cheng) Or Amazon’s attempt to get into the hotel booking business with Amazon destinations that was unsuccessful (Kim). When you invest in as many industries as Amazon has you are bound to have some that don’t pan out, however the bigger concern is being spread out as much as they are has prevented them from them improving their processes on the industries they are successful in.
- 15. Schultz15 Tools of Analysis Financial Analysis Profitability Ratios 12/31/2015 12/31/2014 12/31/2013 Return on Equity % 4.5% (2%) 3% Return on Assets % 1.7% (.08%) 1.1% Return on Investment % 15.2% (8.4%) 7.2% Operating Margin % 1.1% 8% 7% Effective Tax Rate % 60.6% - 31.8% Liquidity Indicators Quick Ratio X 0.71 0.74 0.67 Current Ratio X 1.08 1.12 1.07 Working Capital/Total Assets X .028 .059 .041 Debt Management Current Liabilities/Equity X 2.53 2.62 2.36 Total Debt to Equity X 3.84 4.07 3.12 Long term Debt to Assets X .127 .229 .129 AssetManagement Revenues/Total Assets X 2.99 2.84 3.02 Revenues/ Working Capital X 58.8 27.5 45.3 Source CNBC.com The first thing that pops out to you when you look at Amazon’s financial reports is their sales numbers, when you see $88,988 Million in sales you would expect to see a company that is turning a hefty profit. In Amazon’s case, however they posted these sales numbers in 2014 but still ended up losing around 241 Million dollars due to their massive investing and free shipping policy’s that cost them vast amounts of money. Recently however Amazon has been able to turn it around posting sales of $107,006 Million in 2015 and securing a 596-Million-dollar profit. How could a company flip a 241-Million-dollar loss for a profit that fast? Amazon relied heavily on their services revenue primarily their AWS and prime on demand services to help add a profit, the company added $8,830 in services sales between 2014 and 2015 (annual Report 39.
- 16. Schultz16 Another thing you will notice is Amazon’s lack of long term investing, the company focuses on primarily investing short term. They prefer to focus on short term investing in case they need to liquidate the investments quickly in order to get cash for the business. Amazon puts its extra cash into fixed income securities, and AAA rated money market funds (Annual Report 48-49). In 2015 Amazon had a total of 3,918 Million invested into short term investments an increase of $1,059 Million from the 2014.
- 17. Schultz17 SWOT Strengths High Net Sales Diverse Product Line Years of E-commerce Experience Customer Centric Superior Logistic System Strong Brand Recognition Ranked 11th Most Innovative Company Increasing Global Sales Effective Leadership Able to Order Anytime Weaknesses High Operating Cost Shrinking Margins Lack of Physical Presence Intense Competition High Shipping Expenses Lack of Focus on Specific Industry Harsh Corporate Culture Opportunities Expanding World of Online Retail Exponential Growth Less Third Party Sellers Its Own Distribution System Introducing Even More Products Online Increased Success of AWS Innovations Waiting to be Discovered Untapped Potential in Foreign Markets Renewable Energy Acquisitions Threats Identity Theft Cyber Crime Growth of Competitors Possibility of Imitation Low Barriers of Entry for Online Retail Life After Bezos Leaves Potential Lawsuits
- 18. Schultz18 Strengths High Net Sales- Amazon has produced extremely high net sales numbers in recent years, the most recent and most impressive is their net sales number in 2015 of 107 billion, Best Buy for comparison posted a net sale of 39.5 Billion. Diverse Product Line- Amazon offers over 480 million products for sale, their product line continues to grow every day on average Amazon gains 485 Thousand new products a day (Grey). Years of E-Commerce Experience- Amazon has been in the Online retail business for over a decade now. This has allowed them to learn many lessons that new online retailers may have not yet. Customer Centric- Amazon’s number one focus is to make sure that their customers are taken care of that’s why they offer shipping on Sundays, and two hour shipping they want their customers to be happy. Superior Logistic System- Their efficient logistic system gives them an advantage over other online retailers. Strong Brand Recognition- Amazon benefits largely from their brand being recognized they are able to achieve this because of their customer centric approach that results in satisfied customers spreading the word to their friends and family. Ranked 11th most innovative company- Amazon isn’t afraid to be innovative which helps them discover new ways to do things, that may be cheaper or more efficient. Increasing Global Sales- Amazon has posting increasing sales numbers in markets outside of the US. In 2014 they posted an increase of over 12% in international markets (D’onfro). Effective Leadership- You can say a lot of things about Jeff Bezos, he might work his employees too hard or expect too much from them, but one things for sure he knows how to lead. He knows when to delegate and when to do something himself, his leadership is a large reason why Amazon has achieved the success that they have. Able to Order Anytime- With everyone’s busy schedules many people don’t have time to stop at the store, so Amazon allows people to shop without having to go to the store to do so they can simply place the order while on the train or while they are waiting in line to get food and have it show up at their house. Opportunities Expanding World of Online Retail- As mentioned earlier in the strengths section Amazon is benefiting from an increase the total amount of online shopping being done internationally. Exponential Growth- Amazon has largely focused itself in promoting growth within the company many times at the cost of potential profits. As these investments for growth start to pay off Amazon will be very well off for the future.
- 19. Schultz19 Less Third Party Sellers- Amazon is starting to build their own brands and will soon have the opportunity to focus more on selling their own products rather than on third party sellers, which would increase their profits. Its Own Distribution System- Currently Amazon relies on UPS and FedEx but have been trying to rely less on them and more on their own distribution ever since the 2013 holiday season that caused an overload for them. Introducing Even More Products Online- Even though Amazon already offers Over 480 Million online, customers still want more whether it’s the newest fashion trend or the latest toy to hit the market and Amazon is happy to provide it for them. Increased success with AWS- Amazon Web Services has been growing faster than anyone could have predicted, AWS actually reached $10 billion in annual sales last year and did so faster than Amazon.com did. Innovations Waiting to be Discovered- As shown in the flow chart above Amazon uses a lot of the money it makes to invest in innovations that may improve their business. One of Amazon’s main focuses is to find these innovations which is why they will find them and implement them. Untapped Potential in Foreign Markets-Even though Amazon has increased their sales in foreign markets there is still more potential for them to do even better in foreign countries. Renewable Energy – Amazon has made it a point of emphasis to have their AWS data centers run off of power supplied from their wind farms. They currently supply 40% of the power to AWS from renewable energy and hope to supply 100% of their power to all Amazon facilities in the future (Annual Report 7). Acquisitions – Below is a chart with Amazon’s main acquisitions from 1998-2009, Amazon in many cases can take over a company and use its infrastructure that is already in place to better the company. Weaknesses High Operating Costs- High Cost of Goods Sold and high Fulfillment costs contribute to Amazon’s high operating costs, this takes away from Amazon’s potential profits. Shrinking Margins - Due to the high costs Amazon incurs and the price wars Amazon often finds itself in with other major retailers can reduce the profit Amazon makes on their sales. Lack of Physical Presence- Amazon has little to no physical presence where customers can shop in person rather than online. This hurts Amazon with the customers that need things now and don’t have time to wait for it to be shipped. Intense Competition- Amazon has to face competitors on many different fronts because they are involved with so many businesses. It can be hard to deal with all of the competition at once and still trying to innovate with the rest of the business.
- 20. Schultz20 High Shipping Costs- As mentioned before Amazon deals with high shipping cost due to their free shipping offers, such as the two-day free shipping for Amazon prime members. Amazon can continue to expect high shipping costs with the addition of Drone shipping that they are hoping to implement soon. Lack of Focus in Specific Industry- Amazon as I mentioned earlier has to face competition on multiple fronts, which makes it hard for them to focus on one area. This can be difficult when you are facing industry leaders for competition. Harsh Corporate Culture- Amazon’s corporate culture can be seen as a weakness because it could potentially scare away future employees that don’t want to work in conditions like that. Threats Identity Theft- This is always one of the risk when using an online retailer, because when someone’s identity is stolen and they have their credit card information. The culprit can purchase items online with someone else’s credit cards. A common way for criminals to do this is to put card readers on ATM’s or cash registers. Cyber Crime – Cyber crime is becoming more prevalent in todays society there have been multiple instances of this recently one of the big ones is when Targets Web Site was hacked and lost the information of millions of their customers. Amazon’s security is much more than just payment information from their customers. Their AWS offers cloud storage for businesses that can contain information about their customers but also business strategies, emails, and persona information. Growth of Competitors- Amazon isn’t the only company that has been growing Walmart one of Amazon’s largest retail competitors saw its sales rise 1.6% which translated to 478.61 billion dollars. Netflix which is one of Amazon’s biggest streaming competitors saw a 23.2% increase and saw their sales reach 6.78 billion. Possibility of Imitation – Amazon runs the risk of having a competitor coming and trying to imitate their structure that has proven to be so successful. Low Barriers of Entry for Online Retail – It doesn’t cost a lot of capital to get into the business of selling things online. There are people that use E-bay instead of Amazon to sell their items, and only pay a small fee to E-bay and shipping (when it isn’t covered by the buyer). Life After Bezos Leaves – As I mentioned earlier Bezos is a key factor in Amazon’s success, he is able to get the most out his employees and is skilled at delegating when he needs to. There may be a harmful effect when Bezos decides to retire, it may be similar to the problem apple had when Steve Jobs was fired. Potential Lawsuits – Amazon like all companies is always at risk for a potential lawsuit, we’ve seen large companies have to deal with lawsuits in the past. So if Amazon’s engineers take a page out of Samsung’s book or take the Fire Tablet and phones names to literally they may end up with a lawsuit.
- 21. Schultz21 Five Forces Model Scale of 1-10 (1=Weak Force, 10=Strong Force) Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitutes Risk of Entry by Potential Competitors Intensity of Rivalry among Established Firms 85 3 6 4
- 22. Schultz22 Bargaining Power of Buyers- 3 I gave Amazon a rating of 3 which symbolizes a weak force, I gave this rating in part because of Amazon’s sheer volume of customers. With over 304 million accounts Amazon has a large enough customer base that the buyers hold little to no power. The little power that they do hold is due to the intense competition that is online retail. However, Amazon is set up to deliver customers with the lowest price when they can which leads customers to choosing them more often than not. Amazon also offers more products to the consumers, according to Monsoon Commerce “Amazon sells around 339.7 million of stock keeping units (SKU’s) in its Amazon.com Marketplace. In comparison, Walmart offers only 8 million SKU’s in its online shop, or just 2.35% of the number of products that Amazon offers.” (Jurevicius). Another reason why buyers hold little power is because Amazon is offering services that other companies just can’t compete with. As I mention earlier an Amazon offers shipping on Sundays which is something that not many of their competitors are offering. This serves as an added value to customers because they are getting their product that they need earlier than they would if they were to use another website. Depending on where you live you could be eligible for same day delivery and if you are an Amazon Prime member it could be free. All of these offers sway customers to choose them limiting the buying power they have by offering confidence to online shoppers which is one of the main things they are looking for when shopping online. Risk of Entry by Competitors-4 Amazon’s risk of entry by competitors is a 4 which is a modest force that does require Amazon to monitor frequently. The reason why this force is so high is because of the ease a company can go into business selling goods online. Although many of the companies that enter
- 23. Schultz23 the market in online retail are going to be small and may not seem to pose a great threat to Amazon, Amazon must remember that they themselves started in a garage selling books. When you combine a great idea for a business with a leader that is determined to grow their company to be successful there isn’t much they can’t accomplish. The reason why this number isn’t higher is because although there may be relatively low barriers to entry on online retail, they would need a large amount of capital and resources to contend with Amazon for a large share of the market. Also if Amazon does sense that a company has found a niche they weren’t serving they or seems to be gaining traction, Amazon may decide to acquire the company like they did with the companies listed in the chart above. This allows them to not only prevent more competition but also allows them to pick up a new portion of the market. For example, when Amazon acquired Zappos it did so for a few reasons, one it was largely a customer centric business which agrees with Amazon’s views. Zappos also had a huge opportunity for growth which intrigued Amazon because they thought they would be able to accelerate this growth. Lastly it allowed Amazon to acquire the competition before they really became competition, although Zappos was only in shoes and apparel they would have taken away sales from Amazon in those areas. The acquisition not only prevented that but it allowed Amazon to gain those additional sales giving them a larger part of the shoe and accessory market. Bargaining Power of Suppliers-5 I gave Amazon a 5 in this category which is a modest force because they currently rely on three delivery services for a majority of their current shipping needs. UPS which handled 20%-25% of Amazon’s deliveries, FedEx received 15%-20%, and USPS about 40% handle a bulk of Amazon’s shipping so it would be easy to demand that Amazon pay a higher fee,
- 24. Schultz24 although it would be extremely risky for them because Amazon is such a large customer of theirs (Bowman). Amazon has been experimenting with their own delivery system that would keep them in control of the shipping cost and allow them to rely less on other shipping companies. Which would help to lower the force of bargaining power of suppliers, as well as maintain customer loyalty by providing customers the great customer service that they are accustomed to when purchasing on Amazon but may not have experienced when receiving their packages from shippers. The only problem for Amazon is the cost that is necessary for them to produce a shipping service that is capable of supporting Amazon’s heavy shipping needs. Amazon has recently said they plan to use their own shipping service as a complement to the UPS, FedEx, and USPS shipping services it already uses which would lower the force considerably. Threat of Substitutes-6 Amazon faces a huge force with its threat of substitutes which is why I gave them a 6 force rating. The reason they face so many substitutes is because they are in a lot of markets that are very competitive the online retail business especially offers customers potential substitutes to using Amazon. Walmart, Target, BestBuy, and Barnes & Noble are just a few of the companies that offer websites where customers can purchase goods found on Amazon. Third party sellers on Amazon may also use other online retailers to sell their goods, which gives consumers other options to where they purchase that product. Amazon’s other industries such as its streaming service that lets users watch Tv shows and movies has to compete with the streaming giants Netflix and HBO which gives consumers plenty of other options for their streaming needs making the power of the force grow. AWS
- 25. Schultz25 Amazon’s other major money maker has a threat of substitutes as well with companies such as Google, IBM, and Microsoft all of them are companies that people might tend to think of for cloud computing and other computer applications before thinking of Amazon which may cause people to choose the substitute option. Intensity of Rivalry Among Established firms -8 This is Amazon’s highest rated force with an 8, the reason why is because of the large companies that Amazon has to deal with. These companies are highly established and able to take business away from Amazon if they slip up or lose focus on what they are trying to accomplish. This is why Amazon focuses on being innovative so that they can stay ahead of other companies that are working to take sales away from them. Amazon’s innovations come at a cost though, they eat into the profit of Amazon and prevent them from posting the revenue numbers that many stockholders would love to see.
- 26. Schultz26 Life Cycle of Amazon . I would catagorize Amazon as being in between the Growth stage of the business life cycle. I believe this because Amazon is continuing to grow their sales numbers, they are doing this by offering new products and features and also by acquiring other companies that allow them to sell more, offer new things, and be more efficient in the things that they already do. Last year Amazon grew at a little under 17% in total net sales (Annual Report 39). Amazon’s innovation practice will help these numbers continue growing and maybe even grow at a faster rate. Amazon
- 27. Schultz27 One of the big reasons why Amazon’s growth will continue is Amazon Web Services its growing at a fast rate, as I mentioned earlier they reached 10 Billion annual sales last year and they did it at a faster rate than Amazon.com. This is an example of one of Amazon’s investments that paid off, Amazon has plenty of innovations that are being worked on currently and that could cause another huge growth stint. One that has recently received a lot of attention is their Drone delivery program that could offer people delieveries faster and Amazon could charge a lot of money for it. Another reason I believe Amazon is in the growth stages is their in members and prime members. There is an estimated 63 Million Prime members in 2016, which was an increase of 19 Million from the year before.One of the reasons is the increase in international prime users, It is estimated that by the year 2018 that there will be 100 Million prime users that are on Amazon. The reason this is a big deal is because the average prime users spends more than 2 times the
- 28. Schultz28 average Amazon users. So as the number of prime users grows Amazon can expect to see their sales numbers grow as well. Alternative Generation The biggest issue that Amazon is currently dealing with is that they need find a way to manage innovations, expenses, and acquisitions with their revenue to maximize their profits. I have developed three methods that could help Amazon maximize their profits while keeping their costs in check. In these solutions I will attempt to keep Amazon’s corporate structure in mind and make solutions that Amazon can use in their current situation. The first solution I would suggest is for Amazon to further develop their delivery services, while Amazon already has a delivery service to help combat the added rush during the
- 29. Schultz29 holidays they have shown the potential to be self sufficient with their shipping needs. They have plenty of reasons why this would make sense for them, one is they would be able to control the customers service level of the delivery, another is it would provide Amazon with the power to control the delivery time which would allow them to honor their 2 day shipping promise to Amazon prime members. Amazon spent nearly 11.5 billion on shipping in 2015 which was roughly 10 percent of the total sales for Amazon. If Amazon stopped using UPS, FedEx, and USPS and started using their own delivery service. Its estimated that they would save around $3 dollars per package which would equal about $1.1 billion annually and would only grow the more efficient the longer they did their own shipping (Palladino). The second solution I would suggest is for Amazon to limit the amount of money spent on innovations. While its important for Amazon to stay ahead of the curve with their innovations its also important for them to remember that innovations don’t always pay off and that some of their investments actually lose money for them. One of the current investments that seems to be quite expensive is Amazon’s drone program, Amazon has spent nearly 10 million on lobbying efforts to try to get permission to use drones for delivery. Amazon also spent $15.4 billion on R&D in 2014 alone much of this was spent on Amazon prime air this was an increase of nearly 136% from the 2013 total. This is not to say Amazon should not invest in innovations just that they should be cautious in doing so to prevent diasters such as the Fire Phone that cost the company $170 million dollars (Rubin and Cheng). Bezos however has his own opinion on investing on innonvations which has shaped Amazon’s thought process when it comes to innovations “A few big successes compensate for dozens and dozens of things that didn't work. Bold bets... pay for a lot of experiments. - Jeff Bezos”. As long as Bezos is able to keep hitting on big investments Amazon’s investing can be justified, but when he
- 30. Schultz30 leaves/retires the company will have to choose if they want to trust the next leader with all of the investments as well. The third and final solution is to stay cautious and conservative when it comes to acquisitions, Amazon is constantly acquiring smaller companies in order to use their pre existing technology, customers, and products. A lot of these companies are smaller startups that offer huge growth potential and a huge risk of failure. If Amazon were to limit these acquisitions to ones that benefited their current industries such as the online retail and AWS, they would be able improve these core industries increasing the profit they make. Opposed to Amazon’s current method of handling acquisitions, they currently focus on acquiring companies to get into a new industry. When they do this it causes them to get involved in that new market which may seem like a good thing but it also gives them new competition to deal with, and causes Amazon to spend more on R&D so Amazon can compete with the established firms of the industry.
- 31. Schultz31 Alternative Strategy Justification and Implementation Overview Of the Implementation In order for Amazon to successfully implement their own delivery syestem which would save the company money and also provide the customers with a better customer service which is one of the biggest concerns of Amazon, however at this current time I think it’s in Amazon’s best interest to focus on a domestic delivery service with an international service in the future. They will need to set up a system and infrastructure for the delivery system to use as well as the trucks, planes, drones, and other equipment needed to deliver the packages. If Amazon can successfully transitition from using UPS, USPS, and FedEx to deliver their packages to using their own delivery system including Amazon Flex they will be able to maximize their profits making their stock holders very happy. Why Amazon Should Do It Amazon’s main focus ever since they came into business has been to make things easier on their customers, its why they have invested so much into speeding up delivery times, to lowering prices, even making the interface for the website simple and easy to use. They even feature a one click ordering for return customers who know what they need and are in a hurry. It’s a premise that has allowed Amazon to have great success, but one that is threatened by the use of delivery companies that don’t place the same importance on it. When these delivery companies are late or don’t make the deliveries to the right address they not only tarnish the Amazon reputation. They also cost Amazon money, when Amazon prime members don’t receive their package within their promised 2 days’ Amazon will often repay customers with Amazon prime credits that often results in a free month of prime for members, which would equal around $8.25 ($99 annual membership fee / 12 months =$8.25). If
- 32. Schultz32 each Amazon prime member gets just one free month due to late shipping or an address mix-up and don’t receive their products it would cost Amazon around $519.75 million (63 million x $8.25= $519.75 million). Amazon on average pays between $2-$8 dollars per package shipped, this adds up fast with the millions of orders they have each year, these rates are expected to rise as UPS and FedEx have annually increased their shipping costs by 2% every five years. What Amazon Would Need In order for Amazon to set up their delivery service they would need to have the delivery trucks, planes, delivery men, and possibly even trains or boats. This would not be a cheap shopping list for Amazon, Delivery trucks can cost around 50-60 thousand dollars each and that doesn’t include the gas cost that will add up quickly. Amazon’s other option is getting electric/hybrid delivery trucks that would help reduce the cost of gas needed for the fleet, this would also fit together with Amazon’s stated goal of using renewable energy for its distribution centers and AWS centers. In 2015 UPS was able to purchase 125 hybrid-electric delivery trucks and 18 E100 all electric trucks for only 7 Million (Hawes). If we can estimate Amazon needing around 35,000 to start their domestic delivery service, the cost for Amazon to purchase their starter fleet would be around $1,713,286,713 (143 trucks divided by 7 million * 35,000). Amazon would need to purchase more trucks as their delivery service expanded to give a comparison UPS’s truck fleet is roughly 55,000 trucks but Amazon would be able to get by with less because of their Amazon Flex program. These trucks unlike the drones wouldn’t be able to drive themselves, truck drivers for other delivery companies such as UPS and FedEx on average make around $50,000 if Amazon were to hire 35,000 drivers to operate their newly acquired trucks it would cost them $1,750,000,000 through the year (35,000 * 50,000). As well as the cost to pay the Amazon Flex
- 33. Schultz33 drivers which make around $18 to $25 dollars an hour. The use of Amazon flex drivers would also cut back on the price of gas as flex drivers are contractors who must pay for their own gas and insurance but are allowed to receive tips. If Amazon is able to implement their trucks for longer distance shipping (more rural areas) they would then be able to rely primarily on their Flex program for larger urban cities (an added bonus to this would be larger city deliveries would often use more gas and have a higher likelihood of the driver getting into an accident which Amazon would not be responsible for). Amazon would also need to purchase planes to move large quantities of inventory across the country. In March Amazon leased 20 Boeing 767 air craft carriers between5-7 years to help fill this need (Weise). The big advantage to having their own aircraft carriers is that they are able to move items across the country in a short amount of time, it would also help them to expand their delivery service into Europe and other parts of the world if they choose to do so. The price to purchase a new Boeing 767 aircraft carrier is around $199.3 Million, if you wanted to lease one instead it would be around $600,000 to $650,000 a month (Ausick). In Amazon’s case, it would be better to lease used planes which are much cheaper and can be around $150,000 to $480,000 a month depending on how old the plane is. If Amazon were to lease 10 more 767 freighters at a mid-level price they would have a fleet of 30 767 Boeing Freighters and be able to effectively ship products across the country. It would cost them roughly $3,900,000 ($150,000+$480,000/2*10) The total cost of purchasing the necessary trucks and planes for Amazon would be around $1,717,186,713 which may seem like a huge cost and not worth it for Amazon to invest in this delivery system, however if you consider these are initial cost that will result in long term assets. If we were to say that thee planes and trucks would last for 15 years it would only equal out to
- 34. Schultz34 around $114,479,114 a year which still is a large number but is much more manageable for Amazon. Lastly would be Amazon’s drone fleet that would be used t help delivery drivers get packages to houses that may be a few miles off their route and help to reduce the amount of time drivers are on their routes, which would decrease the cost of delivery. It is unclear when Amazon and other companies will be allowed to complete needed tests that the FAA or Federal Aviation Administration has prohibited at this current time. Some of the new rules that pose a problem for Amazon’s testing are the drone must stay under 400ft, drones can weigh no more than 55 pounds, and drones must stay within the sight of the operator (Statt). While drones are still a way off for Amazon and other delivery companies they will be a major part of Amazon’s delivery system in the years to come, that will allow for faster delivery and more satisfied customers. The cost for these drones is unknown at this time because the final versions have not been created yet but it could offer the lowest rate for Amazon on short distance deliveries.
- 35. Schultz35 With Amazon’s side of the delivery process covered I would like to discuss how the Amazon Flex program would contribute to the shipping process. Flex drivers much like Uber or Lyft drivers would log onto an app when they wanted to work, they would sign up for a shift of 4 hours where they would be given a territory where they would deliver packages to customers before returning to the distribution to pick up another batch. I would start newer drivers in slower areas with less deliveries and have customers rate the timeliness and overall customer service provided by the driver. Once drivers reach a high enough review score they would then be moved into a higher traffic territory where they have a higher chance of making tips due to the increased deliveries. Drivers would be placed into tiers depending on their delivery scores, efficiency, and time within the program, drivers in higher tiers would have priority over drivers in lower ones which may give them access to higher traffic territories, higher wages, as well as priority when requesting to work a specific territory. During the holiday season or when Amazon was offering a deal such as the Prime day where prime members had multiple deals offered to them the Flex drivers would play an important role in keeping Amazon up to speed with deliveries. How Amazon Would Do It Now that we’ve discussed what Amazon would need in terms of vehicles and employees to deliver the products, and how Amazon flex will work, I will now discuss how Amazon would put it all together so that they could run the delivery service efficiently and most important profitably. My belief is that if Amazon were to use their distribution centers as they do for the Flex program it would provide a starting point for the shipping process where the trucks Amazon hypothetically purchased earlier would load products and leave their destinations. Amazon currently has 83 distribution centers in the united states with another 19 expected to be built
- 36. Schultz36 shortly they would have a good starting point for their delivery system. Although in order to maintain efficiency these new distribution centers would need to be spread out so that they could each cover areas without much overlap. Currently there are 33 states without a distribution center (Many of them in the western part of the country). So I believe it would be in Amazon’s best interest to hold off on offering its delivery service to the north western states (Montana, Idaho, Wyoming, North and South Dakota, and Minnesota) until Amazon had established its delivery system in other parts of the country, so that they aren’t needing to build distribution centers to support these large areas that for the most part are underpopulated compared to the North East, and South West states. Much like my proposed foreign delivery policy I think Amazon should allow companies like FedEx, UPS, and USPS to deliver packages to these smaller markets until Amazon is ready to take over the delivery
- 37. Schultz37 services. This would allow Amazon to focus on the markets of areas of the country where they receive most of their orders from, which would allow Amazon to maximize the efficiency of their services meaning they will be making the most off their investment. Once Amazon sets up their infrastructure with the delivery system they could potentially sell their delivery service to other online retailers, because they would have the already needed equipment and employees. Amazon would be able to sell its delivery service to companies currently using FedEx, UPS, USPS. By offering the same level of customer satisfaction that they give their own customers, they could persuade companies to switch to their service to ship orders. If Amazon were to start doing this, it would help alleviate the costs of the delivery system and give Amazon a revenue stream from their delivery service.
- 38. Schultz38 Conclusion In conclusion, the retail giant Amazon was started by Jeff Bezos in his garage, it’s a company that relies largely on their innovative culture to help provide customers with the best experience possible. They have relied heavily on their Amazon Prime program to get customers to make more purchases online that they may otherwise went to a store, as well as Amazon Web Services which has been growing even faster than Amazon.com did and has multiple uses for individual customers as well as other businesses to produce revenue. Amazon Prime gives customers free access to streaming videos, and more importantly free two-day shipping. However, while these innovations and added services such as Amazon add Amazon’s customer service it cost the company heavily with shipping costs. I choose their top concern as shipping cost contributing to a lack of profit for the company due to the expense for shipping growing just as much as the net sales. I offered a solution of creating their own delivery service to help combat these high shipping cost, I went into detail as to what Amazon would need to make the service successful. As well as how they could set up the service to maximize the benefits of the delivery service to initially only offer the service to areas with a high shipping demand and then branching out after they successfully implement it and even make money from allowing other companies to use their delivery service that utilizes Amazon’s innovation and allows companies to give their customers the customer service that has made Amazon such a successful company.
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