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 Case 12: Amazon.com Inc.: Retailing Giant to High-Tech Player? (Internet Companies)

Conduct a strategic analysis using the Executive Summary template.  Prepare and submit a three-page executive summary that discusses what strategic alternatives are available and provide a recommended strategy. 

************CASE STUDY FOR AMAZON IN THE FILES ATTACHED****************

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Writing a Textbook Business Case Analysis Executive Summary Comment by : To be eligible for grading: the assignment must follow APA formatting, Incorporate all prior feedback of APA/grammar errorsprovide an opening, employ discussion about the topics identified in the Syllabus by using the to the headings provided (Synopsis of the Case, Relevant Factual Information about the problem/decision the organization faced, Explanation of relevant concepts, theories and applications derived from the course materials, Recommendations and alternative recommendations), end with a conclusion, Supply an APA formatted reference page Contain appropriate in-text citation throughoutThe length of the paper should not exceed three pages.

Student Name

Park University

Writing a Textbook Business Case Analysis Executive Summary Comment by : This should be a restatement of your paper’s title. See the sample page at p. 41 of the Publication Manual Only provide the page number in the right hand corner. Do not provide a running header unless the item is for publication APA rule 8.03. See the sample paper starting at p. 41 of the Publication ManualDouble space, indent the first word of each paragraphs and use 12 point Times new Roman font justified to the left margin. See rule 8.03 (APA, 2009).

APA does not permit the use of the word introduction as a level heading (APA, 2009, Rule 3.03 p. 63) In fact, the opening does not even carry a heading, except for a restatement of the paper’s title. One is assumed by its placement at the beginning. Your opening should provide specific and meaningful information relevant to the business issue of the case. Appropriate in-text citation must be provided. The executive summary should be analytical in nature encompassing a forward thinking view. Comment by :

Synopsis of the Case Comment by : Us the topic headings and descriptions provided to draft the case analysis.

The content of the synopsis should present relevant background facts about the case under examination. The information provided should be supported by APA in-text citation. Provide only facts related to the business aspects of the case. Discussion of the background should be minimal (i.e., a paragraph, two at most), but still analytical.

Relevant Factual Information about the Problem or Decision the Organization Faced

State the precise problem or decision the organization faced. The section should include information that addressed the business issue under examination. This section should be no longer than a single paragraph.

Explanation of Relevant Concepts, Theories and Applications Derived from Course Materials

This section should be the bulk of your paper. Analysis of the business problem or decision in light of the course concepts must be presented, as well as the business lesson another organization could learn from this situation. Besides citation to the text, learners must conduct research in the University library related to the top. Citing the textbook only is not enough to demonstrate you understand and can apply the course objectives. Here is where comparative and contrasting positions should be considered and examples and illustrations provided.

Recommendations

Provide logical recommendations to address the business lesson identified above. The recommendations need not to be specific to the organization examined, but should consider how other organizations, if similarly situated, could lessen the impact of the problem or decision identified. Recall, that the organization under examination has already moved pasted this problem so any recommendations made, at this point, are fruitless. The focus of this section should be on what other companies should be aware of to address similar problems or decisions. Citation to the textbook alone is insufficient for analysis in this section. Learners should conduct research in the University’s library to support their positions. Depth of scholarship is not demonstrated by providing personal opinions alone, but by using examples, analogies, comparison and illustrations from the academic literature. Not only does this synthesize the material to assist the reader’s understanding, it is an effective way to present the academic sources and extend the discussion of your ideas. This section should be a paragraph or two.

Alternative Recommendations

This section is not a continuation of the prior. Provide suggestions for how to avoid the problem or decision the examined organization faced. Analysis here should be may be forward- thinking, predictive or, most likely, preventative in nature but tied to the thesis statement. Again, opinion is insufficient to provide the required academic analysis. Sources, other than the text, must be provided to sustain the statements made. This section should be a paragraph, at most.

Conclusion

End the assignment with a summary of the important points made in the document. No new information may be presented. Writing a conclusion can be done by rewording the opening or reformulation the topic sentences of each paragraph to make a summary for the reader. This section should be a paragraph, at most.

References Comment by : Please review reference list format starting at page 180 of the Publication Manual. Like the other portions of the paper, references should be double spaced; however, second and subsequent lines of a source are indented. The first line is not.

TEXTBOOK SEQ CHAPTER \h \r 1CASE ANALYSIS GUIDANCE (CAG)

This supplement to the syllabus is provided to assist you; HOWEVER, it is also a directive on how to adequately accomplish a case analysis. The case format guidelines MUST be followed.

CRITICAL THINKING AND ANALYSIS – As a business/management major, or other major for that matter, and soon to be college graduate, one of the most important skills/abilities you should possess is the ability to engage in critical thinking and analysis (using the skills and knowledge you have learned throughout your education and applying them). You will never have everything presented to you when you are a junior manager/executive, but you are expected to take what you have and use your knowledge and skills to make decisions and to arrive at valid and accurate conclusions, which may and should include “thinking outside the box”.

The information provided below is designed to assist you in case analysis.

Don’t make anything up; just take information from the case and the time frame of when the case was written. You are required to use problem solving and critical thinking skills in this analysis. If something isn’t specifically stated, then consider the likelihood of it being a possibility for this given firm considering the timeframe that the case is taking place in, and the type of industry that the firm operates in.

Also, DO NOT go on the Internet and look at where the firm is today. The only information about the company that I want you to use in your case analysis is what is contained in the textbook or in any approved outside sources specifically listed.

a. The case analysis will be based on the time frame of the case. For example, if the case was written in 2006, then students will use information from 2006 or earlier publications.

b. Students will use for references other sources of information as well as the textbook. These sources should include business magazines and professional journals. Online sites such as Wikipedia, Portable MBA, Quick MBA are not acceptable references for case analysis in this course.

c. Students should use any of the following magazines and publications as references:

Barron’s, Business Week, Fast Company, Forbes, Fortune, Harvard Business Review, Wall Street Journal. However, these aren’t the only outside sources that might be applicable, so don’t limit yourself to just these few. Using Google or other Search Engines can certainly assist you.

d. Make sure that you cite and reference the Case Authors, and NOT the Textbook authors when giving credit for information obtained from the case.

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Case 12 Amazon.com, Inc. Retailing Giant to High-Tech Player? Alan N. Hoffman Bentley University The authors would like to thank Barbara Gottfried, Jodi Germann, Lauren-Ashley Higson, Faith Naymie, Faina Shakarova, Jamal Ait Hammou, Muntasir Alam, Shaheel Dholakia, Xinxin Zhu, and Will Hoffman for their research and contributions to this case. Please address all correspondence to: Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 175 Forest Street, Waltham, MA 02452-4705, (781) 891-2287, ahoffman@bentley.edu. Printed by permission of Alan N. Hoffman. Overview Founded by Jeff Bezos, online giant Amazon.com, Inc. (Amazon), was incorporated in the state of Washington in July, 1994, and sold its first book in July, 1995. In May 1997, Amazon (AMZN) completed its initial public offering and its common stock was listed on the NASDAQ Global Select Market. Amazon quickly grew from an online bookstore to the world’s largest online retailer, greatly expanding its product and service offerings through a series of acquisitions, alliances, partnerships, and exclusivity agreements. Amazon’s financial objective was to achieve long-term sustainable growth and profitability. To attain this objective, Amazon maintained a lean culture focused on increasing its operating income through continually increasing revenue and efficiently managing its working capital and capital expenditures, while tightly managing operating costs.

The name “Amazon” was evocative for founder Jeff Bezos of his vision of Amazon as a huge natural phenomenon, like the longest river in the world. He envisioned the company to be the largest online marketplace on earth someday. By 2008, Amazon had become a global brand, with websites in Canada, the United Kingdom, Germany, France, China, and Japan, with order fulfillment in more than 200 countries.1 Its operations were organized into two principal segments: North America and International Operations, which grew to include Italy in 2010 and Spain in 2011. By 2012, Amazon employed more than 56,200 people around the world working in the corporate office in Seattle, and in software development, order fulfillment, and customer service centers in North America, Latin America, Europe, and Asia. Amazon Corporate Governance Jeff Bezos is the Chairman of the Board and CEO of Amazon and owns 19.4% of the company. Amazon has three board committees of which two are standard: the audit committee and the governance committee. The third committee, the Leadership Development and Compensation Committee, is uncommon. Most publicly traded companies have a compensation committee; however, it is unusual for the compensation committee to have leadership development as part of its mandate.

The Leadership Development and Compensation Committee “monitors and periodically assesses the continuity of capable management, including succession plans for executive officers.” Amazon’s board is not populated by CEOs or retired CEOs. It includes several venture capitalists, a number of senior-level executives from varied industries, an eminent scientist, and a representative from the non-profit sector. Amazon’s board has served together for a long time. This implies a deeper understanding of the company and increasing familiarity and even friendship amongst the group. This tends to discourage independent thinking and objectivity. All of it is further proof that Jeff Bezos is a strong CEO and runs the company. Retail Operations/Amazon’s Superior Website As people became more comfortable shopping on line, Amazon developed its website to take advantage of increased Internet traffic and to serve its customers most effectively.2 The hallmarks of Amazon’s appeal were ease of use; speedy, accurate search results; selection, price, and convenience; a trustworthy transaction environment; timely customer service; and fast, reliable fulfillment3—all of it enabled by the sophisticated technology the company encouraged its employees to develop to better serve its customers.

The site, which offered a huge array of products sold both by itself and by third parties, was particularly designed to create a personalized shopping experience that helped customers discover new products and make efficient, informed buying decisions. Key to Amazon’s success was continual website improvement. A huge part of the technological work done for Amazon was dedicated to identifying problems, developing solutions, and enhancing customers’ online experience. Jacob Lepley, in his “Amazon Marketing Strategy: Report One,” notes that, “when you visit Amazon . . . you can use [it] to find just about any item on the market at an extremely low price. Amazon has made it very simple for customers to purchase items with a simple click of the mouse. . . . When you have everything you need, you make just one payment and your orders are processed.”4 This simple system is the same whether a customer purchases directly from Amazon or from one of its associates.

Pursuing perfection, Amazon was aggressive in analyzing its website’s traffic and modifying the website accordingly. Amazon particularly excelled at customer tracking, collecting data from every visit to its website. Utilizing the information, Amazon then directed users to products that it surmised they might be interested in because the item was either related to a product that they had previously searched for or purchased by another Amazon customer looking for a similar product. Recommendations were also customized based on the information customers provided about themselves and their interests, and their ratings prior purchased. Amazon also collected data on those who had never visited any of its websites, but who had received gifts from those who had used the site. One of Amazon’s most distinctive features was the community created based on the ratings/reviews provided by private individuals to help others make more informed purchasing decisions. Anyone could provide a narrative review and rate a product on a scale of 1–5 stars, and/or comment on others’ reviews.

Individuals could also create their own “So You’d Like . . . ” guides and “Listmania” lists based on Amazon’s products offerings and post them or send them to friends and family. To streamline customer research, Amazon also consolidated different versions of a product (e.g., DVD, VHS, Blu-ray disk) into a single product available for commentary that simplified commentary and user accessibility.5 To further target potential customers, Amazon engaged in permission marketing, eliciting permission to e-mail customers regarding specific production promotions based on prior purchases on the assumption that a targeted e-mail was more likely to be read than a blanket e-mail. This strategy was hugely appreciated by Amazon customers, further contributing to Amazon’s success. In addition, Amazon purchased pay-per-click advertisements on search engines such as Google to direct browsing customers to its websites. The ads appeared on the left-hand side of the search list results, and Amazon paid a fee for each visitor who clicked on its sponsored link. At the same time, as “TV and billboard ads were roughly ten times less effective when compared to direct or online marketing when concerning customer acquisition costs”6, Amazon reduced its offline marketing. The strategy was simple: as customers shopped online, online marketing was key. However, in 2010, Amazon initiated a small television advertising campaign to increase brand awareness. Finally, to round out its customer care, Amazon expedited shipping by strategically locating its fulfillment centers near airports7 where rents were also cheaper, giving Amazon the two-pronged advantage of speed and low cost over its competitors.

Furthermore, in the United States, the United Kingdom, Germany, and Japan, Amazon offered subscribers to Amazon Prime the added convenience of free express shipping. Amazon Prime’s free next-day delivery endeared it to Amazon customers, again contributing to the customer loyalty that was key to Amazon’s success. Amazon Prime cost $79 annually to join and included free access to Amazon Instant Video. The overarching objective of the company was to offer low prices, convenience, and a wide selection of merchandise, a pared down, yet wide-reaching strategy that made Amazon such a huge success. Diversified Product Offerings Amazon diversified its product portfolio well beyond simply offering books, which in turn allowed it to diversify its customer mix. In 2007, Amazon successfully launched the Kindle, its $79 e-book reader, which offered users more than one million reasonably priced books and newspapers easily accessed on its handheld device. Competitor Apple, Inc., then introduced the iPad, the first tablet computer, in January 2010, sparking further development of mobile e-readers. E-book sales took off immediately, increasing by more than 100%, according to the Association of American Publishers.

Eager to compete in a market for which it was uniquely positioned, Amazon quickly developed its own low-cost tablet, the Kindle Fire, an Android-based tablet with a color touchscreen priced at $199, more than $300 lower than the iPad, sacrificing profit margins in search of sales volume and market-share gains. Other tech giants such as RIMM and HP were unable to compete with the iPad. Only the Sony Nook, the Amazon Kindle and Kindle Fire, and the Samsung Galaxy and Series 7 tablets challenged Apple’s consistent 60% of market share. Ultimately, however, Amazon’s huge growth derived not simply from the sale of Kindle hardware and the growth of e-book sales, but from its diversification and the continual expansion of the easy website access created by mobile devices.

By 2010, 43% of Amazon net sales were from media, including books, music, DVDs/video products, magazine subscriptions, digital downloads, and video games. More than half of all Amazon sales came from computers, mobile devices including the Kindle, Kindle Fire, and Kindle Touch, and other electronics, as well as general merchandise from home and garden supplies to groceries, apparel, jewelry, health and beauty products, sports and outdoor equipment, tools, and auto and industrial supplies.

Amazon also offered its own credit card, a form of co-branding that benefited all parties: Amazon, the credit card company (Chase Bank), and the consumer. Amazon benefited because it received money from the credit card company both directly from Amazon purchases and indirectly from fees generated from non-Amazon purchases. In addition, Amazon benefited from the company loyalty generated by having its own credit card the consumer sees and uses every day. The credit card company gained from Amazon’s high visibility, increasing its potential customer base and transactions. And the consumer earned credit toward gift certificates with each use of the card.

Partnerships

Amazon leveraged its expertise in online order taking and order fulfillment and developed partnerships with many retailers whose websites it hosted and managed, including (currently or in the past) Target, Sears Canada, Bebe Stores, Timex Corporation, and Marks & Spencer. Amazon offered services comparable to those it offered customers on its own websites, thus freeing those retailers to focus on the non-website, non-technological aspects of their operations. 8

In addition, Amazon Marketplace allowed independent retailers and third-party sellers to sell their products on Amazon by placing links on their websites to  Amazon.com  or to specific Amazon products. Amazon was “not the seller of record in these transactions, but instead earn[ed] fixed fees, revenue share fees, per-unit activity fees, or some combination thereof.” 9  Linking to Amazon created visibility for these retailers and individual sellers, adding value to their websites, increasing their sales, and enabling them to take advantage of Amazon’s convenience and fast delivery. Sellers shipped their products to an Amazon warehouse or fulfillment center, where the company stored it for a fee, and when an order was placed, shipped out the product on the seller’s behalf. This form of affiliate marketing came at nearly no cost to Amazon. Affiliates used straight text links leading directly to a product page and they also offered a range of dynamic banners that featured different content.

Web Services

As a major tech player, Amazon developed a number of web services, including ecommerce, database, payment and billing, web traffic, and computing. These web services provided access to technology infrastructure that developers were able to utilize to enable various types of virtual businesses. The web services (many of which were free) created a reliable, scalable, and inexpensive computing platform that revolutionized the online presence of small businesses. For instance, Amazon’s e-commerce Fulfillment By Amazon (FBA) program allowed merchants to direct inventory to Amazon’s fulfillment centers; after products were purchased, Amazon packed and shipped. This freed merchants from a complex ordering process while allowing them control over their inventory. Amazon’s Fulfillment Web Service (FWS) added to FBA’s program. FWS let retailers embed FBA capabilities straight into their own sites, vastly enhancing their business capabilities.

In 2012, Amazon announced a cloud storage solution (Amazon Glacier) from Amazon Web Services (AWS), a low-cost solution for data archiving, backups, and other long-term storage projects where data not accessed frequently could be retained for future reference. Companies often incurred significant costs for data archiving in anticipation of growing backup demand, which led to under-utilized capacity and wasted money. With Amazon Glacier, companies were able to keep costs in line with actual usage, so managers could know the exact cost of their storage systems at all times. With Amazon Glacier, Amazon continued to dominate the space of cold storage, which had first come into prominence in 2009, amidst competitors such as Rackspace (RAX) and Microsoft (MSFT) offering their own solutions.

By 2012, Amazon Web Services were a crucial facet of Amazon’s profit base, and Amazon was one of the lead players in the fast-growing retail ecommerce market. Seeing huge growth potential, Amazon made the decision to expand Amazon Web Services (AWS) internationally and invested heavily in technology infrastructure to support the rapid growth in AWS. Though its investments in ecommerce threatened to suppress its near-term margin growth, Amazon expected to benefit in the long term, given the significant growth potential in domestic and, even more so, in international ecommerce.

Amazon’s Acquisition of Zappos, Quidsi, Living Social, and Lovefilm

On July 22, 2009, Amazon acquired Zappos, the online shoe and clothing retailer, for $1.2 billion. At that time, Zappos was reporting over $1 billion in annual sales without any marketing or advertising. According to founder Tony Hsieh, the secret to Zappos’ success was superior customer service, from its 365-day return guarantee to the company tours with which it regaled visitors, picking them up at the airport, then returning them to the airport afterward. Zappos’ employees were also very well treated, earning it a place at the top of the list of the “best companies to work for.” Tony Hsieh felt that Amazon was the perfect partner to fuel Zappo’s sales growth going forward.

On November 8, 2010, Amazon announced the acquisition of Quidsi, the parent company of  Diapers.com , an online baby care specialty site, and  Soap.com , an online site for everyday essentials. Amazon paid $500 million in cash, and assumed $45 million in debt and other obligations. As Jeff Bezos explained, “This acquisition brings together two companies who are committed to providing great prices and fast delivery to parents, making one of the chores of being a parent a little easier and less expensive.” 12

On December 2, 2010, Amazon announced that it had invested $175 million in Groupon competitor LivingSocial, a site whose up-to-the-minute research offered users immediate access to the hottest restaurants, shops, activities, and services in a given area, while saving them 50% to 70% through special site deals.

On January 20, 2011, Amazon acquired Lovefilm for £200 million, a 1.6-million-subscriber-strong European Web-based DVD rental service based in London. Lovefilm had followed Netflix’s business model, offering unlimited DVD rentals by mail for a monthly subscription fee of £9.99, but planned to challenge Netflix and expand its digital media business by entering the live-streaming subscription business.

Competitors

Competition was fierce for Amazon on all fronts, from catalogue and mail order houses to retail stores from book, music, and video stores to retailers of electronics, home furnishings, auto parts, and sporting goods. Amazon’s Kindle contended with Apple’s iPad, among many lesser competitors. And Amazon’s competitors in the service sector included other e-commerce and Web service providers. The company faced direct competition from companies such as eBay, Apple, Barnes & Noble, Overstock.com, MediaBay,  Priceline.com , PCMall.com, and  RedEnvelope.com . Amazon had to compete with companies that provided their own products or services, sites that sold or distributed digital content such as iTunes and Netflix, and media companies such as The New York Times. Many of the company’s competitors had greater resources (eBay), longer histories (Barnes & Noble), more customers (Apple), or greater brand recognition (iTunes).

The companies offering the most direct threat to Amazon were eBay and Metro AG. Pierre Omidyar founded eBay in 1995, a website that connected individual buyers and sellers, including small businesses to buy and sell virtually anything. In 2010, the total value of goods sold on eBay was $62 billion, making eBay the world’s largest online marketplace, serving 39 markets with more than 97 million active users worldwide. 10  eBay and Amazon subscribed to similar growth strategies: each acquired a broad spectrum of companies. Over the 15 years from 1995–2010 eBay acquired PayPal,  Shopping.com , StubHub, and Bill Me Later, which have brought new e-commerce efficiencies to eBay.

Metro AG, headquartered in Dusseldorf, Germany, one of the world’s leading international retail and wholesale companies, was formed through the merger of retail companies Asko Deutsche Kaufhaus AG, Kaufhof Holding AG and Deutsche SB-Kauf AG. In 2010, the total value of goods sold by Metro AG was €67 billion. 11  Serving 33 countries, Metro AG offered a comprehensive range of products and services designed to meet the specific shopping needs of private and professional customers. Metro AG, like Amazon, focused on customer orientation, efficiency, sustainability, and innovation.

Amazon had to be vigilant, negotiating more favorable terms from suppliers, adopting more aggressive pricing and devoting more resources to technology, infrastructure, fulfillment, and marketing. To maintain competitiveness, Amazon also strengthened its edge by entering into alliances with other businesses (i.e., Amazon Marketplace). Nevertheless, growing competition from global and domestic players continually threatened to erode Amazon’s desired share of the market. Across the industries in which it competed, however, Amazon fought to maintain its edge based on its core principles of “selection, price, availability, convenience, information, discovery, brand recognition, personalized services, accessibility, customer service, reliability, speed of fulfillment, ease of use, and ability to adapt to changing conditions, as well as . . . customers’ overall experience and trust.” 12

Frustration-Free Packaging

To stay current, Amazon took the initiative to reduce its carbon footprint by implementing a “Frustration Free Packaging” program. Recyclable Frustration Free Packaging came without excess packaging materials such as hard plastic enclosures or wire twists and was designed to be opened by hand without a scissors or a knife. Amazon then went one further and worked with the original manufacturers to package products in Frustration Free Packaging right off the assembly line, further reducing the use of plastic and paper. Units shipped that utilized Frustration Free Packaging has increased very rapidly, from 1.3 million in 2009 to 4.0 million in 2010 13 . Amazon also utilized software to determine the right size box for any product the company shipped, achieving a dramatic reduction in the number of packages shipped in oversized boxes and significantly reducing waste.

Financial Operations

Amazon sales doubled from 2009 to 2011, growing from $24,509 million (2009) to $48,077 million (2011) (see  Exhibits 1a  and  1b ), growth attributable especially to increased sales in electronics and other general merchandise, and the adoption of a new accounting standard update, reduced prices (including free shipping offers), increased in-stock inventory availability, and the impact of the acquisition of Zappos in 2009. 14

ncome Statement

Income Statement Currency in (Millions of U.S. Dollars) as of:Dec 31 2008   Dec 31 2009   Dec 31 2010   Dec 31 2011   
Revenues19,166.024,509.034,204.048,077.0
Total Revenues19,166.024,509.034,204.048,077.0
Cost of Goods Sold14,896.018,978.026,561.037,288.0
Gross Profit4,270.05,531.07,643.010,789.0
Selling, General, & Admin
Expenses, Total2,419.03,060.04,397.06,864.0
R&D Expenses1,033.01,240.01,734.02,909.0
Other Operating Expenses29.051.0106.0154.0
Other Operating Expenses, Total3,481.04,351.06,237.09,927.0
Operating Income789.01,180.01,406.0862.0
Interest Expense−71.0−34.0−39.0−65.0
Interest and Investment Income83.037.051.061.0
Net Interest Expense12.03.012.0−4.0
Income (Loss) on Equity Investments−9.0−6.07.0−12.0
Currency Exchange Gains (Loss)23.026.075.064.0
Other Non-Operating Income (Expenses)22.0−1.03.08.0
Ebt, Excluding Unusual Items837.01,202.01,503.0918.0
Gain (Loss) on Sale of Investments2.04.01.04.0
Gain (Loss) on Sale of Assets53.0
Other Unusual Items, Total−51.0
Legal Settlements−51.0
Ebt, Including Unusual Items892.01,155.01,504.0922.0
Income Tax Expense247.0253.0352.0291.0
Earnings from Continuing Operations645.0902.01,152.0631.0
Net Income645.0902.01,152.0631.0
Net Income to Common Including Extra Items645.0902.01,152.0631.0
Net Income to Common Excluding Extra Items645.0902.01,152.0631.0
Report Data Issue

Amazon’s annual net income for 2009, 2010, and 2011 were $902 million, $1,152 million, and $645 million, respectively. The significant increase from 2009 to 2010 was due in large part to aggressive net sales growth and a large portion of its expenses and investments being fixed. Management explained that net income decreased from 2010 to 2011 as a result of: (1) selling Kindle hardware at a market price slightly below the cost of manufacture; (2) increased spending on technology infrastructure; and (3) increases in payroll expenses.

Challenges for Amazon

Amazon developed very quickly into a major player in the online retail market, yet challenges remained:

1. From its inception, Amazon was not required to collect state or local sales or use taxes, an exemption upheld by the U.S. Supreme Court. However, in 2012, states began to consider superseding the Supreme Court decision. 15  “If the states were to prevail, Amazon would be forced to collect sales and use tax, creating administrative burdens for it, and putting it at a competitive disadvantage if similar obligations are not imposed on all of its online competitors, potentially decreasing its future sales.” 16  Massachusetts and other states were motivated both by the desire (to tap into new sources of revenues for their state budgets and to protect local retailers.

In 2012, reports had it that Amazon was making deals to collect sales tax in all 50 states, so that they could open warehouses near population centers and provide same-day delivery, a major shift in its business model that would ratchet up competition with big box stores like Best Buy and Target as well as local retailers. However, there were no guarantees of the profitability of same-day delivery, given the added warehouse and delivery costs.

2. With the new social trend of “buying local,” Amazon faced the threat of some regular consumers preferring to buy from their local stores rather than from an online retailer. 17

3. Amazon always had to grapple with the threat of customer preference for instant gratification, the customer’s desire to get a product immediately in the store, rather than waiting several days for the product to be shipped to them.

4. Breaches of security from outside parties trying to gain access to its information or data were a continual threat for Amazon. 18  As of 2012, Amazon had systems and processes in place that were designed to counter such attempts; however, failure to maintain these systems or processes could be detrimental to the operations of the company.

5. As more media products were sold in digital formats, Amazon’s relatively low-cost physical warehouses and distribution capabilities no longer provided the same competitive advantages. In addition, Amazon had felt that its worldwide free shipping offers and Amazon Prime were effective worldwide marketing tools, and intended to offer them indefinitely, yet it began to suffer from soaring shipping expenses cutting into profits. In quarter three of 2011, Amazon’s shipping fees generated $360 million in revenue, which was dwarfed by $918 million in shipping expenses.

6. Amazon had to contend with absorbing losses from its unsuccessful ventures such as its A9 search engine, Amazon Auctions, and Unbox, Amazon’s original video-on-demand service.

7. Recent hires from Microsoft, Robert Williams, former senior program manager, and Brandon Watson, head of Windows Phone development prompted speculation that Amazon was developing a smartphone, possibly a Kindle-branded device. Bloomberg reported that Amazon had gone so far as to strike a manufacturing deal with Foxconn, the controversial Taiwanese company responsible for assembling Apple’s iPhone and Google Android devices. Amazon has not commented on the reports. A smartphone would have given Amazon another mobile device to sell, but some analysts felt it wouldn’t have made sense for Amazon to enter into the already crowded smartphone arena. “Since tablets skew more heavily toward media consumption than smartphones, they are a natural fit for Amazon’s commerce and media platform,” said Baird & Co. analyst Colin Sebastian, in a research note. “In contrast, smartphones require specialized native apps (e.g., maps, voice, search, e-mail) that would be costly for Amazon to replicate.” Sebastian also noted that hardware is a low-margin business. Amazon’s Kindle Fire sold for $199, a price that some analysts believed was below cost, suggesting Amazon hoped the Kindle Fire would more than pay for itself by boosting sales of e-books and other digital content. Thus, by 2012 Amazon had proved itself as a retail giant, yet as with any vibrant company, faced continual challenges, particularly regarding the overarching questions of whether to spend its money developing media products such as the Kindle Smartphone, or to stick with its strengths as an online retailer, perhaps acquiring more holdings such as Zappos, and pushing for same-day delivery despite the added cost to compete with other online retailers, and with the big box stores as well.

In 2012, Amazon was at a crossroads. It needed to decide if it should invest in the infrastructure for same-day delivery, and take on local retailers, or invest in high-technology and compete at a deeper level with Sony, Apple, and Samsung.

References

· Alexa.com . Amazon.com . 2011.  http://www.alexa.com/siteinfo/amazon.com