A CASE STUDY ON
Presented by
Nirmalya Fadikar
Roll no. – 15
1|Page
Contents
1. Case Abstract.
2. Introduction.
3. Amazon At A Glance.
4. History.
5. Amazon.com’s Situation Analysis.
6. Amazon.com's Inventory Management.
7. Optimizing The Customer Fulfillment Network.
8. Amazon.com In Europe.
9. SWOT Analysis.
10. Industrial Analysis.
11. Future Challenges.
12. Future Of Amazon.com .
13. Future Plan Of The Company.
14. Acquisitions And Spin Offs.
15. Recommendations.
16. Conclusion.
17. Bibliography.
2|Page
Abstract:
Amazon.com, the world’s leading online retailer had survived for nine long
years without annual profits because it was guided by a long-term vision that
put into place strategies for research, and the development of technology
infrastructure. The company finally turned the corner by posting profits for the
first time in 2003. The case provides an overview of Amazon.com's inventory
management. Jeffrey Preston Bezos the founder of Amazon.com launched the
company when he realized that Internet provided immense scope for online
trading. Although the site was originally launched as an online bookstore it
eventually offered several other products to keep abreast of the competition.
The case takes a look at the different products and features offered on the site.
The case also discusses Amazon's value propositions and its criteria for
choosing strategic partners. It then elaborates on the strategies adopted by
Amazon for managing its inventory.
With its history of not posting profits, and having turned the corner recently,
the big question was whether Amazon would survive the onslaught of major
competitors like E-bay, and continue to retain the No.1 position while at the
same time realize reasonable levels of earnings to satisfy shareholders. This
was the dilemma that founder Jeff Bezos and his team had to address.
3|Page
Issues:
» Examine the various facilities offered and the technologies adopted by online
shopping sites
Pedagogical Objectives:
• To study Amazon’s expansion and growth despite posting losses for many
years
• Make a SWOT analysis of Amazon and evaluate its strategy for the future.
Introduction
''The logistics of distribution are the iceberg below the waterline of online
bookselling,'' Jeff Bezos, founder and chief executive of Amazon.com.
The Internet has changed the way that we perceive business and the way that
we as consumers may make our purchases. In fact, the online consumer today
knows the convenience of purchasing a book online and having it delivered to
their door in a matter of a few days. There is no more need to fight crowds,
find a parking spot, and deal with traffic. The high street and mail order
systems still have a place in the mix of purchase routes; however it is no longer
the only method of making purchases. The Internet revolution has seen a
massive increase in the long distance purchases made by consumers, as
geographical barriers are no longer as important as they were.
4|Page
The lack of geographical importance has influenced the strategy of Internet
companies. One of the first companies that took advantage of this was the
online bookshop Amazon.com.
The case provides an overview of Amazon.com's inventory management.
Jeffrey Preston Bezos the founder of Amazon.com launched the company
when he realized that Internet provided immense scope for online trading.
Although the site was originally launched as an online bookstore it eventually
offered several other products to keep abreast of the competition. The case
takes a look at the different products and features offered on the site. The case
also discusses Amazon's value propositions and its criteria for choosing
strategic partners. It then elaborates on the strategies adopted by Amazon for
managing its inventory. It also explains Amazon's decision to outsource
inventory management to distributors. The case takes a look at Amazon's
decision to sell the products of competing retailers on its site. It concludes with
a brief note on the future challenges in Amazon's warehouse management.
5|Page
Amazon.com At A Glance :
Amazon.com, Inc.
6|Page
History
Amazon has grown admirably from its initial beginnings as a small online
bookseller to a giant superstore company. During this process of rapid growth,
it has incurred significant losses and it becomes more expose to a greater
competition and threats. Cutting costs and achieving profitability remain
Amazon’s greatest challenges. However, there are key factors such as a strong
brand, providing customers with outstanding value and a superior shopping
experience, massive sales volume and realizing economies of scale which
contribute a lot to the success of this company Founded as Cadabra.com by
Jeff Bezos in 1994, Amazon.com was launched in 1995. It is an American
electronic commerce company based in Seattle, Washington. It is one of the
first major companies to sell goods over the Internet and one of the most
recognized and respected online businesses. It has become the number one
online retailer by steadily building its reputation and brand, beginning its
operation in July of 1995.
Moreover, it has expanded from its existing business of selling books to selling
a wide variety of products such as DVDs, music CDs, computer software, video
games, electronics, apparel, furniture, food and more (Wikipedia 2006).
Similarly, Amazon aside from its domestically shared market also set up four
other separate online stores in the United Kingdom, France and Japan, thus
shipping globally on selected products.
7|Page
Amazon.com Situation Analysis
8|Page
Currently about 63% of Amazon’s business comes from repeat customers. The
last key process for Amazon is price. At Amazon.com, almost all books are
discounted. Bestsellers are sold at 30-40% discount and all other books are at a
10% discount.
Amazon is able to offer such discounts because they have a lower cost
structure than physical stores, and they turn their inventory over 150 times a
year. All four key core processes have lead to the success that Amazon has
experienced in its young six years of operation. People would visit amazon.com
whenever they wanted to buy a book because it would be the most likely
store, (physical or online) to have a particular title. After becoming satisfied
customers, people would return to amazon.com to buy more books and would
eventually stop looking elsewhere. In 1998, amazon.com began selling music
CD’s and videotapes. The websites software can track a customers purchases
and recommend similar book, CD, or video titles. In fact, the site can
recommend related products in a variety of product categories now sold on
amazon.com. these product categories include consumer electronics,
computers, toys, clothing, art, tools, hardware software, house wares,
furniture, and car parts. Amazon.com now generates significant revenue by
supplying other sellers of consumer goods with tae technology to sell those
goods online.
Amazon.com opened its virtual doors in July 1995 with a mission to use the
Internet to transform book buying into the fastest, easiest and most enjoyable
shopping experience possible. Today, Amazon.com seeks to be the world’s
most customer-centric company, where millions of customers in more than
220 countries can find and discover anything they might want to buy online.
The Operations Division at Amazon.com is composed of fulfillment and
customer service centers. It has six fulfillment centers nationwide totaling
more than 3,000,000 square feet and four international centers totaling more
than 1,200,000 square feet. Amazon.com built its fulfillment infrastructure to
meet projected long-term growth, provide customers with fast, reliable
shipping, and manage the amount of merchandise kept on hand for shipment
to customers. Amazon.com also has three customer service centers nationwide
totaling more than 70,000 square feet and three international centers totaling
9|Page
more than 22,000 square feet. Amazon.com designed its customer service
centers to enable customers worldwide to reach a customer service
representative 24 hours a day, seven days a week.
Value Proposition
Amazon built a four-fold value proposition that indicated its priorities in the
establishment of the online venture. The four dimensions it focused on were
convenience, selection, price, and customer service. The online venture was
convenient as it was open for business all the time. The site was so designed as
to keep the download time at a minimum. The site also offered its users
various facilities such as reviews, e-mail notifications, reference from a
previous search and product recommendations. It also provided the users with
a wide range of product options, which they could select from. Amazon had an
inventory consisting of millions of items which was roughly about 100 times
that of a typical physical store.
Strategic Alliances
10 | P a g e
Inventory Management
Now, the company wanted to concentrate on its main activities and outsource
inventory management in order to earn more profits. However, Amazon was
apprehensive that this move would damage the hard-earned reputation of the
company. Nevertheless, it decided to go ahead with the decision to outsource
its inventory.
Amazon did not stock every item offered on its site. It stocked only those items
that were popular and frequently purchased. If a book that was not too
popular was ordered, Amazon requested that item from its distributor who
then shipped it to the company.
In the company, the items were unpacked and then shipped to the respective
customers. So, Amazon basically acted as a trans-shipment centre and ensured
11 | P a g e
that the entire process of shipping from the distributor to the customer was
done very efficiently.
The main distributors of Amazon included Ingram Micro and Cell Star handled
cell phone sales while Ingram Micro, a whole sale distributor, handled
computers and books. Amazon had external distributors for most of its
products except the bestsellers. Further Amazon entered into contract with
Ingram Micro Inc. for distribution of desktops, laptops and other computer
accessories. Drop shipment model was very successful so Amazon decided to
extend this model to all categories too. The major disadvantage of this model
was if the customers ordered only a single item at a time the drop shipment
model was extremely helpful, but if a single ordered had several items such as
a book stocked by Ingram and a game stocked by Amazon, then the following
procedure was adopted: Ingram sent book to Amazon, Amazon added the
game then forwarded the whole box to the customer. Since almost 35 percent
of orders placed at Amazon were of different categories the drop shipment
model was not very effective.
In 2001, Bezos came up with the idea of including the products of competing
retailers and some used items on their website. Amazon earned almost the
same profit selling on commission as it earned on retail. An advantage of this
feature was customers could now verify the prices of Amazon’s products vis a
vis those of other retailers. So the company did not need to advertise its low
price.
14 | P a g e
Finally they relied on national postal service carriers in Europe to
deliver its domestic as well as international orders which was offering
excellent coverage .
SWOT Analysis
Analysis
Strengths
1. Customer Relationship Management (CRM) and Information Technology
(IT) support Amazon's business strategy. The company carefully records
data on customer buyer behavior. This enables them to offer to individual
specific items, or bundles of items, based upon preferences
demonstrated through purchases or items visited.
2. Amazon is a huge global brand. It is recognizable for two main reasons. It
was one of the original dotcoms, and over the last decade it has
developed a customer base of around 30 million people. It was an early
exploiter of online technologies for e-commerce, which made it one of
the first online retailers. It has built on nits early successes with books,
and now has product categories that include electronics, toys and games,
DIY and more.
3. Product diversification from books and CD/DVD markets has provided
additional customers in other product areas and indicates strategic
movement to grow the business through new customer bases.
4. Strong distribution channel.
5. Leader in use of technology to delivery targeted content.
6. Negative cash cycle.
7. Has moved away form being a low price supplier of books toward a focus
on delivering outstanding service at a price.
15 | P a g e
Weakness
16 | P a g e
Threats
1. Increasing transportation costs will directly impact delivery charges to
customers - as these costs are not absorbed into the direct business but
paid to a third party it is assumed these will be directly passed onto the
consumer which can have a negative impact to brand perception from
the consumer viewpoint.
2. Competition will increase due to the low barriers to entry in the market:
offline companies are coming online.
3. Low economic performance of world economy.
Industrial Analysis
Analysis
Five forces model which was proposed by Michael Porter, provides a robust
and time-tested framework for analyzing any industry, reflected in the strength
of the five forces (industry competitors, potential entrants, and threat of
substitutes, power of buyers and power of suppliers). The collective strength of
the five forces determines the ultimate profit potential in an industry.
17 | P a g e
Threat of
substitutes
Supplier’s power
Buyer’s power
Inter firm
rivalry
Barriers to entry
Michael Porter’s
Porter’s five forces model
Barriers to Entry
Threat of entry is considered medium to low. Being the first mover in online
bookstore industry, Amazon would be the best example of what amateur firms
would be faced. The factor that separates Amazon from the inexperienced
firms is its 8-year capital intensive and continuous upgrade of services through
acquisitions and alliances, nurturing the commission-based associate websites,
and endless technology development and innovation. Imitating such would
also require relationship building which is difficult when relationship is already
established by the first mover, or in the case of untapped technology partners,
18 | P a g e
requires significant capital and strategic plan proposals to move the other
party. In both cases, known industry players would be the benchmark
requiring the deal a considerable amount of time and money impractical for
the new player.
The book retail industry has very high barriers to entry. The capital
requirements necessary to establish a bricks and mortar bookstore would be
virtually impossible for a newcomer. Consumers know the big name players.
High product awareness and large marketing budgets make it very difficult for
new entrants to enter into this industry.
19 | P a g e
Buyer Power
Power
Buyer power is higher when buyers have more choices. Businesses are forced
to add value to their products and services to get loyalty. Many loyalty
programs include excellent services that customers demand on-line.
Customers want to solve their problems and many times they are more
successful on-line than on-phone. Also, we see internet savvy businesses
springing up offering more valuable goods and services at lower costs. Now
with the advent of eBay, many people are assuming roles as drop shippers.
Individuals can have a thriving business selling goods of larger companies
without having to carry inventory.
Supplier Power
Power
Supplier power is higher when buyers have fewer choices from whom to buy.
As mentioned earlier, drop shipping has increased the amount of suppliers
available. All an individual has to do is form an agreement to sell products for
the company. The company takes care of all the logistics. The same is true of
associates programs that amazon.com and google.com offer. Associates allow
a webmaster to earn money by recommending products from others. This
increases supplier offerings.
Threat Of Substitute
Substitute
Threat of substitute products or services is high when there are many product
alternatives. This is different than having many suppliers. Examples of
alternatives are exchanging brand names, substituting credit card capabilities,
and looking at better values from cheaper sources. The internet allows this
with the "global economy". We can substitute product by purchasing from
companies overseas where labor, services and products are cheaper, but of
comparable quality.
20 | P a g e
Future Challenges
Although online shopping has become popular over the years, Amazon had to
struggle to make profits. One of the reasons was the variable costs incurred by
multiple delivery attempts and reverse logistics-the return of products by the
customers. Multiple delivery attempts cost the company about 20-30 percent
of the total costs for home deliveries.
This was due to the additional shipping charges which had to be borne by the
company. Several incidents of thefts and product damage were reported as the
shipped goods were at times left at the customer's doorstep. All these
incidents also led to a lot of frustration among customers. The expenses on
reverse logistics and multiple delivery attempts ate into Amazon's profits and
hence it had to find a solution to this problem.
Analysis
What It Means
21 | P a g e
Action
The company’s oft-stated goal is sacrificing short-term profits for building long-
term growth, market share, and increased shareholder value. Amazon’s
internal goals were to focus on increased market share, expand product
offerings, and overall sales growth. Promotional activities, including
promotional alliances and advertising is also important.
Corporate Governance
According to Amazon’s corporate team the followings are their plans for the
company.
22 | P a g e
Acquisitions And Spin
Spin Offs
• In April 1998, Amazon bought the Internet Movie Database (IMDb).
• In August 1998, Amazon bought Cambridge, Massachusetts-based Planet
All for 800,000 shares of Amazon stock. PlanetAll operated a web-based
address book, calendar, and reminder service. In the same deal, Amazon
acquired Sunnyvale-based Junglee.com, an XML-based data mining
startup for 1.6 million shares of Amazon stock. The two deals together
were valued at about $280 million at the time.
• In June 1999, Amazon bought Alexa Internet, Accept.com, and
Exchange.com in a set of stock deals worth approximately $645 million.
• In 2003, Amazon purchased the rival online music retailer CD Now.
• In 2004, Amazon purchased Joyo.com, a Chinese e-commerce website. It
also debuted A9.com, a company focused on researching and building
innovative technology.
• In March 2005, Amazon acquired BookSurge, a print on demand
company, and Mobipocket.com, an eBook software company.
• In July 2005, Amazon purchased CreateSpace.com (formerly CustomFlix),
a Scotts Valley, California-based distributor of on-demand DVD.Since the
acquisition, CreateSpace has expanded its online services to include on-
demand books and CDs, as well as video downloads.
• On July 30, 2007, the National Archives announced that it would make
thousands of historic films available for purchase through CreateSpace.
• In February 2006, Amazon acquired Shopbop, a Madison, Wisconsin-
based retailer of designer clothing and accessories for women.
• In May 2007, Amazon acquired dpreview.com, a London-based digital
photography review website created by Phil Askey as his personal hobby
website and Brilliance Audio, the largest independent publisher of
audiobooks in the United States.
• In January 2007 created Endless.com, a separate e-commerce brand
focusing on shoes.
• In January 2008, Amazon announced that it would acquire audiobook
provider Audible.com for $300 million in cash.
• In June 2008, Amazon announced that it had acquired Fabric.com, an
online fabric store.
• In July 2008, Amazon's IMDb subsidiary purchased Box Office Mojo, a
site that tracks movie sales in theatres.
• In August 2008, Amazon announced it had an agreement to purchase
Victoria, B.C. based AbeBooks, seller of new, used, out-of-print and rare
books.Later that month Amazon announced that it would acquire
23 | P a g e
Seattle-based Shelfari, a book-based social network site, for an
undisclosed sum.As part of its acquisition of Abebooks Amazon also got
an additional stake in Shelfari's competitor LibraryThing, which
AbeBooks had previously purchased a 40 percent stake in, and whole
ownership of Bookfinder.com, Gojaba.com, and listing-management
service FillZ, all owned by AbeBooks at the time of acquisition.
• In October 2008 acquired Reflexive Entertainment, a casual video game
development company.
• In July 2009 Amazon agreed to acquire Zappos, an online shoe and
apparel retailer. The deal is expected to close in fall 2009.
• In January 2010 is said to buy Touchco.
Recommendations
In order to overcome the hurdles currently facing Amazon.com, I offer the
following recommendations:
24 | P a g e
Conclusion
Amazon has grown admirably from its initial beginnings as a small online
bookseller to a giant superstore company. During this process of rapid growth,
it has incurred significant losses and it becomes more expose to a greater
competition and threats. Cutting costs and achieving profitability remain
Amazon’s greatest challenges. However, there are key factors such as a strong
brand, providing customers with outstanding value and a superior shopping
experience, massive sales volume and realizing economies of scale which
contribute a lot to the success of this company. These factors and the people
around the company help Amazon.com to face the threats pose by other
online bookstores. Essentially, the company should aim to maintain its gross
margins in its existing business and in future product lines such as music CDs
and videos. In order to do this, Amazon.com should develop strategic
partnerships with all of its main suppliers.
Although online shopping has become popular over the years, Amazon had to
struggle to make profits. One of the reasons was variable costs incurred by
multiple delivery attempts and reverse logistics- the return of products by the
customers. Despite all difficulties Amazon maintained its large inventory in a
very efficient way. In the late 90s, 12% of the inventory at Amazon was stored
at wrong places leading to delayed orders and lost time; by 2002 this was
reduced to 4 percent because of better software and storage facilities.
Despite all measures that Amazon took to manage its inventory more
efficiently, logistics experts still opinioned that Amazon’s warehouses were
working less than 40 percent capacity. According to experts Amazon should
either reduce the number of warehouses or increase their sales. With so much
of competition and problems one thing is for sure that Amazon is truly an
example of how to manage inventories effectively.
25 | P a g e
Bibli
Bibliography
1. Designing and Managing the Supply Chain. By Simchi-Levi ,
Kaminsky, Ravi Shankar .
2. www. wikipedia.com
3. www. amazon.com
4. www. google.com
5. Harvard Business Review.
26 | P a g e