AMAZON.COM
In May 1997, AMAZON.COM, a young American company, applied for a listing on the stockexchange by offering 3,000,000 shares...
develop themes related to those of interest to customers. Furthermore, by indicating one’sinterests, it is possible to rec...
privilege of the bookstores, who rarely give the publisher feedback on readers’ tastes andrequirements.AMAZON.COM has deve...
Simon & Schuster (which belongs to VIACOM Inc.) opened a Website in April 1997 andBORDERS GROUP Inc. has announced its int...
-   Jeffrey P. Bezos: founder of AMAZON.COM, of which he is currently President, Chief    Executive Officer and Chairman o...
-   Joel R. Spiegel: a biology graduate, he previously worked on various development    programmes at Hewlett-Packard, Vis...
high growth of the superstores, on account of which many of the smaller sales outlets have had toclose down. According to ...
ATTACHMENT 1 - CONDENSED PROFIT AND LOSS ACCOUNT (inthousands of $US)                        FROM JUN 5         YEAR      ...
ATTACHMENT 2 - CONDENSED BALANCE SHEET (in thousands of$US)                              YEAR 1995    YEAR 1996    MAR 31 ...
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Amazon case study

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Amazon case study

  1. 1. AMAZON.COM
  2. 2. In May 1997, AMAZON.COM, a young American company, applied for a listing on the stockexchange by offering 3,000,000 shares with a nominal value of $0.01 each. The shares were puton the market at the price of $18. The capital thus raised served to cover the enormous financialneeds incurred by the extremely rapid growth experienced by the company in just over 2 years.With the sale of 3,000,000 shares, 51% of the share capital remained in the hands of the founderand his family.ORIGINSAMAZON.COM was established in July 1994 in Seattle (USA) by 30-year-old Jeffrey P. Bezos.His idea was to sell books over the Internet: books, Bezos held, are in fact one of the fewproducts that consumers are willing to buy on-line and AMAZON.COM offers them thepossibility of doing it round-the-clock, whatever part of the world they are in. The company’sultimate ambition is to become “leader in the on-line sale of products and services with a highinformation content” (entering, for example, the video and music business). AMAZON.COM,“Earth’s biggest bookstore”, started sales in 1995. Its first year of life was spent setting up thenecessary infrastructure as well as planning and developing its activities and opening a Website.In May 1997, AMAZON.COM had about 2,500,000 titles in its catalogue (or rather, on itsvirtual shelves), i.e. 10 times the number of titles that can be found in the largest “physical”bookstore in the world. When shopping, the customer who accesses the AMAZON.COM site can“fill up” a shopping cart with books that interest him, just like in any bookstore, deciding at theend what he wants to buy. And all this sitting comfortably in front of a screen. Once the decisionhas been made, all he needs to do is click a button, thus starting up the procedure forcommunicating his credit card data. As far as delivery is concerned, there are various options,also for international customers; one is to have the books gift-wrapped. Some titles are availableimmediately, whilst others are delivered in the course of 48-72 hours. Out-of-print titles aregenerally available within 2-6 months. If a rare book is available at a higher price than thatinitially communicated to the customer, the latter is contacted for authorization of the purchase.As far as best-sellers are concerned, customers are offered discounts of up to 40% on the coverprice; for all other books the discount varies from 20%-30%. This means that AMAZON.COMcan undercut the prices of traditional competitors even when the price is inclusive of shippingexpenses. In March 1997, AMAZON.COM’s Website could reckon with 80,000 visits a day,compared to 2,200 the previous year. The electronic bookstore may be consulted by author, titleor subject. Furthermore, it is possible to use a number of keywords, to get profiles of best-sellingauthors and to read book reviews made by customers themselves. The AMAZON.COM Websitealso provides information on other books written by a given author or recommends books which 1
  3. 3. develop themes related to those of interest to customers. Furthermore, by indicating one’sinterests, it is possible to receive reading suggestions plus previews of soon-to-be-released titles.By creating an “on-line community”, the company hopes to provide its customers with a pleasantand familiar experience they will want to repeat. If this occurs, it means they can count oncustomers who are loyal and repeat purchasers. Today customers already have at their disposal 9E-mail addresses to get in touch with the company, request information, and make suggestions.Furthermore, there is a freefone customer service department for those clients who are unwillingto communicate their credit card number via computer.According to AMAZON.COM, the “ace up the sleeve” of an on-line bookstore is the number oftitles it can offer. The space on virtual shelves being unlimited, it is possible to include all thosetitles which a physical bookstore cannot afford to keep in stock. As its target market is enormousand without geographic confines, a virtual bookstore can − thanks to its centralized management− reduce a number of costs and gain a competitive edge over traditional bookstores. In spite ofthe extremely high number of publications offered, AMAZON.COM has very small stocks(estimated at about 400 titles). Books which are not immediately available are ordered fromnearby distributor INGRAM BOOK, one of America’s foremost distributors. Closeness to thisdistributor is so important that it was the determining factor in choosing the location ofAMAZON.COM. In fact, the company’s founder chose to set up his business in Seattle preciselybecause of the presence of INGRAM BOOK. A second important supplier is Baker & TaylorInc. There are no long-term agreements with these suppliers. AMAZON.COM is, instead, linkedwith them by computer, thus allowing the company to make searches and order books withoutwasting time.AMAZON.COM has a staff of 256 persons (they numbered 11 on 31st December 1995): most ofthose who occupy key positions joined the company in 1997 and therefore it is too early to speakof their full integration in the organization. The entire structure is concentrated in rented officespace occupying only two floors: on one work the editorial staff who write the book reviews andthe programmers who oversee the correct functioning of the software. On the other, in a room fullof computers, there are a number of operators who provide different kinds of customer services:from the search for books about which the customer does not recall the information needed foron-line retrieval, to the correction of the personal data of a customer who realizes that he hasgiven incorrect information about himself. Despite the fact that these services are very costly,they offer important returns: in addition to customer satisfaction, every direct contact affords thepossibility of acquiring personal information, addresses, and customer preferences. These arethings publishers would give anything to have. Customer knowledge, in fact, has always been a 2
  4. 4. privilege of the bookstores, who rarely give the publisher feedback on readers’ tastes andrequirements.AMAZON.COM has developed its own system for the management of its Website, a searchengine and all the rest of its software for the management of customer transactions (for examplefor the handling of orders, the use of credit cards, purchases, management of stocks, andshipping), encountering no small difficulties in finding software specialists. At present thesesoftware systems are not linked to its management information systems (such as those used forperformance measurement, planning and management control): this creates some problems andthe need to intervene “manually” when there is a need to produce reports of an economic andfinancial nature. All the hardware is concentrated in the company’s headquarters in Seattle. Thereare no company-owned premises.AMAZON.COM’s business, defined by the founder himself as “information brokerage”, saw anexceptional boom in sales in the three-year period 1994-1996, when income rose from 0 in 1994to $15.7 million in 1996. Sales referring to the period January 1 - 31 March 1997 amounted toover $32 million. AMAZON.COM can at this point reckon with 340,000 customers located inover 100 countries. Sales abroad amount to about 35%, whilst regular customers account for40% of orders.As far as operating results are concerned, in 1995 the company showed a loss of $303,000 and in1996 a loss of $5.8 million. A good percentage of the expenses sustained so far (39% of netsales) can be put down to marketing efforts made and include costs of advertising, publicrelations and promotions, not to speak of the salaries of persons engaged in marketing and salesactivities. As the company is bent on taking an aggressive approach to the market, marketingcosts are bound to grow in the coming years. Product development costs have also carriedsignificant weight, especially in 1995 (when they were the equivalent of 33% of net sales). Thesecosts, especially those relating to salaries and fees for personnel and consultants and to thepurchase of telecoms systems, are considered strategic and thus destined to grow considerably, atleast in absolute terms.In the near future the company expects to see a further and significant worsening of its operatingresults. In order to evaluate the performance of AMAZON.COM, we must consider that out ofabout 100,000 operators currently carrying out business activities on the Internet, those who upto now have achieved profits and a reputation can be counted on the fingers of one hand.AMAZON.COM, on the contrary, is already well known and highly reputed among a vastnumber of Internet navigators. The competition is also showing great interest in this business: 3
  5. 5. Simon & Schuster (which belongs to VIACOM Inc.) opened a Website in April 1997 andBORDERS GROUP Inc. has announced its intention to do the same. In mid-May, moreover,BARNES & NOBLE Inc., using America Online, opened a virtual bookstore with more than 1million titles. It aims, however, to open its own site in a very short time and offer customers adiscount of 30% off the cover price of books.THE FUTUREAMAZON.COM’s strategy is based above all on customer loyalty. The company’s aim is toincrease customer value through the use of technologies, by offering services which are alsopersonalized, and by setting very cheap prices. In order to increase brand awareness,AMAZON.COM will attempt not only to offer top-level services, but also to use differentmarketing channels. These include already planned advertising investments in the main Websites(ads currently appear on CNET, Yahoo!, Pointcast, Excite, Lycos, Quote.com and CNN) andother media (such as The New York Times Book Review and Wired), public relations campaigns(thanks to which AMAZON.COM has already been publicized in a number of TV and radioprogrammes and newspaper articles), and the development of alliances with partners who canhelp publicize the brandname.The two cornerstones of the company’s strategy for the future are the consolidation ofrelationships with distributors and publishers and investment in staff, considered the company’skey resource. In order to improve company results it is furthermore not excluded that its range ofaction will be broadened by means of the opening of other Websites, the sale of other productsand the acquisition of complementary products and technologies. Last, but not least, is theobjective of selling advertising space on its own site which, considering the high number of dailyvisitors, represents an excellent business.Company strategy envisages the use of commercial software when this is available. Nevertheless,a great deal of investment has been made (and will be made in the future) to develop software thatis unique in this business. Internally developed software allows the company to accept and verifycustomer orders, to pass orders to suppliers, to manage purchased products and assign them tothe customer who has ordered them, and to handle the shipment of books. All this using differentguiding criteria.PROFILES OF KEY PERSONS 4
  6. 6. - Jeffrey P. Bezos: founder of AMAZON.COM, of which he is currently President, Chief Executive Officer and Chairman of the Board. Aged 33 and with a degree in engineering and computer science obtained magna cum laude from Princeton University, Jeffrey Bezos worked with the Bankers Trust Company between 1988 and 1990 (becoming Vice President in 1990) and with D.E. Shaw & Co. from 1990 to 1994 (becoming Vice President in 1992).- Rick R. Ayre: has been with AMAZON.COM since 1996 as Vice President and Executive Editor. A sociology graduate, he previously worked for PC Magazine where he held various positions.- Mark L. Breier: is an economics graduate from Stanford University, where he was subsequently awarded an MBA. After gaining experience with Parker Brothers (parlour games manufacturer), Kraft (food sector) and Cinnabon Rolls, he joined AMAZON.COM in January 1997 as Vice President of Marketing.- Joy D. Covey: graduated magna cum laude in Business Administration from California State University, subsequently obtaining an MBA from Harvard Business School. Before joining the firm in 1996 as Chief Financial Officer and Vice President of Finance and Administration, she worked for two companies operating in the information technology sector: Digidesign and Avid Technology. Before that she was a partner of Wasserstein Perella & Co. and had worked also for Arthur Young & Company.- Oswaldo F. Duenas: joined the firm in January 1997 as President of Operations. His previous work experience was gained with the Latin American division of International Service System, with National Vision Associates and with Federal Express.- Mary E. Engstrom: joined AMAZON.COM in February 1997 as President of Publisher Affairs. She holds an economics degree from the University of California and an MBA from the Anderson Graduate School of Management in Los Angeles. Her previous managerial work experience was gained with Symantec Corporation (software) and Microsoft.- Sheldon J. Kaphan: a mathematics graduate, since March 1997 he has been Vice President and Chief Technology Officer of AMAZON.COM. His previous work experience was gained with Compaq and with a joint venture between Apple Computer and IBM.- Scott E. Lipsky: joined the firm in July 1996 as Vice President of Business Expansion. His previous experience was with Barnes & Noble Inc. (bookstore chain), Barnes & Noble College Bookstore Inc., Omni Information Group (software developer and system integrator) and Babbage’s (chain of software retailers).- John D. Risher: graduated magna cum laude in comparative literature from Princeton University, subsequently earning an MBA from Harvard Business School. After gaining work experience with Microsoft, he joined the firm in February 1997 as Vice President of Product Development. 5
  7. 7. - Joel R. Spiegel: a biology graduate, he previously worked on various development programmes at Hewlett-Packard, Visicorp and Apple Computer and, subsequently, at Microsoft. Since March 1997 he has been with AMAZON.COM as Vice President of Engineering.- Tom A. Alberg: a graduate of Harvard University, he has worked for Perkins Coie, McCaw Cellular Communications Inc., LIN Broadcasting Corporation, and Madrona Investment Group (private merchant bank). He has been a Director of AMAZON.COM since 1996. He currently sits on the boards of various enterprises: Active Voice Corporation, Emeritus Corporation, Mosaix Inc., Teledesic Corporation and Visi Corporation.- Scott D. Cook: graduated in mathematics and economics from the University of Southern California, subsequently earning an MBA from Harvard Business School. He has been Brand Manager at Procter & Gamble and a consultant with Bain & Company. He is co-founder of Intuit Inc., a software house. At present he is a Director of Broderbund Software Inc. and of Intuit. He has been sitting on the board of AMAZON.COM since January 1997.- L. John Doerr: After obtaining an MBA from Harvard Business School, he worked for Intel Corporation (for 5 years) and then, as partner, for Kleiner Perkins Caufield & Byers (venture capital company). He sits on the boards of various firms including Netscape Communications Corporation, Intuit Inc., Macromedia Inc., Platinum Software Inc., Shiva Corporation and Sun Microsystems. Since June 1996 he has been a Director of AMAZON.COM.- Patricia Q. Stonesifer: A graduate from Indiana University, she worked first for Que Corporation and then for Microsoft, concerning herself with the company’s investments in new on-line and Internet-based products (including the Microsoft Network). Today she is a free-lance consultant whose clients include companies like DreamWorks SKG. Since February 1997 she has been a Director of AMAZON.COM as well as of Kinko’s Inc.- Board members do not receive monetary considerations, but are only refunded their expenses for attending board meetings. Jeffrey Bezos draws an annual salary of $64,333.THE SECTORInternationally speaking, the sector is characterized by its considerable size, its fast growth rateand relatively high degree of fragmentation. According to Euromonitor, by the year 2000 booksales in the US will amount to $30 billion. It is further estimated that worldwide sales, whichamounted to $82 billion in 1996, will climb to about $90 billion in 2000. A number of analyseshave shown that there is a certain amount of correlation between customers who buy a largenumber of books and people who use the Internet.Publishers, who number about 50,000, sell their books directly to retailers and to a network ofdistributors. These distributors are the main suppliers of most retailers. The two principalAmerican distributors, who together cover 25% of the US market, have wagered above all on the 6
  8. 8. high growth of the superstores, on account of which many of the smaller sales outlets have had toclose down. According to AMAZON.COM the superstores stock on average 130,000 titles, withthe larger ones carrying as many as 175,000. The small bookstores, which today are sufferingstrong competition from the superstores, concentrate, instead, on a much smaller number ofbooks. Stock investments are very high for all these bookstores and premises and staff generallyhave high costs.As the publishers allow bookstores to return most of their unsold books, the bookstores orderlarge quantities of books, thus forcing the publishers to run the risks of their sales forecastingerrors. Neither the distributors nor the publishers, on the other hand, are in a position to gatherdata on the behaviour, tastes and characteristics of readers, and this prevents them fromsupplying personalized services or resorting to direct marketing. The competition is varied andpotential entrants numerous, all of which extremely aggressive: in January 1997, for instance,Barnes & Nobles alleged that AMAZON.COM was guilty of dishonest advertising in that it isnot a bookstore and does not have in stock most of the titles offered on the market.ON-LINE SALESThe company’s business and growth potential depend to a large extent on the use its customerswill make of the Internet. According to IDC (International Data Corporation), users of theInternet numbered 35 million at the end of 1996 and should reach 163 million by the year 2000.This expansion has been made possible thanks to the diffusion of the personal computer, to theimproved performance of PCs and modems, to improved infrastructure and to a more widespreadunderstanding of the Internet’s potential. Again according to IDC estimates, in 1995 on-line salesof goods and services amounted to $318 million and will reach $95 billion by 2000. 7
  9. 9. ATTACHMENT 1 - CONDENSED PROFIT AND LOSS ACCOUNT (inthousands of $US) FROM JUN 5 YEAR YEAR FROM JAN 1 TO DEC 31, 1995 1996 TO MAR 31, 1994 1997NET INCOME 511 15,746 16,005COST OF GOODS SOLD 409 12,287 12,484GROSS PROFIT MARGIN 102 3,459 3,521SELLING ANDMARKETING EXPENSES 200 6,090 3,906PROD. DEVELOPMENTCOSTS 38 171 2,313 1,570GENERAL AND ADMIN.EXPENSES 14 35 1,035 1,142PROFIT (LOSS) FROMORDINARY ACTIVITIES (52) (304) (5,979) (3,097)INTEREST RECEIVED 1 202 64NET PROFIT (LOSS) FORTHE PERIOD (52) (303) (5,777) (3,033) 8
  10. 10. ATTACHMENT 2 - CONDENSED BALANCE SHEET (in thousands of$US) YEAR 1995 YEAR 1996 MAR 31 1997CASH IN HAND AND WITH BANKS 996 6,248 7,162INVENTORIES 17 571 939ACCRUED INCOME AND PREPAIDEXPENSES 14 321 937TOTAL CURRENT ASSETS 1,027 7,140 9,038NET FIXED ASSETS 57 985 2,491GUARANTEE DEPOSITS 146 193TOTAL ASSETS 1,084 8,271 11,722TRADE ACCOUNTS PAYABLE 99 2,852 5,650OTHER SHORT-TERM DEBTS 8 2,018 3,309TOTAL CURRENT LIABILITIES 107 4,870 8,959TOTAL SHAREHOLDERS’ EQUITY 977 3,401 2,763TOTAL LIABILITIES ANDSHAREHOLDERS’ EQUITY 1,084 8,271 11,722 9

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