Problem
Case Study: Amazon in 2019
In the 4th quarter of 2018, Amazon reported a record $72.4 billion in revenues, which beat analysts' expectations as well as its previous year's 4th quarter earnings of $60.5 billion.i Net income was $3 billion, which was also a record for a quarter, beating the previous year's 4th quarter by over 50%. Since it was opened to the public for business selling books in 1995, Amazon has expanded into other lines of business, blindsided retail stores of virtually all kinds, putting many stores and chains out of business. Amazon has also expanded into other lines of business, such as web services, groceries, and media production and distribution. Amazon is currently working on adding several different health-care services, creating "Amazon Go!" stores that require no check-out counters, and even building its own product delivery network.
It is easy to consider Amazon as a firm having instant success, but it began by targeting bookstores as "Cadabra" in 1994 in a Seattle basement, with initial funding from the parents of then 30-year-old CEO Jeffrey Bezos.vi Within a year, Bezos decided he had to rename the site due to some confusion about the name, and also because of his desire to reflect a strategic vision of Amazon.com becoming "Earth's Biggest Bookstore," just as Amazon is the Earth's biggest river. By the end of 1996, Amazon tallied almost $16 million in sales. After an IPO in 1997, Amazon shipped its 1 millionth order.
While this might not seem to dispel the "instant success," myth mentioned above, a deeper look is quite interesting. You might be surprised to learn that Amazon operated at a loss for just over 9 years.vii In fact, the losses increased as revenue increased, which was contrary to expectations at first glance. A deeper look reveals that the losses resulted from Amazon's reinvestment that focused on expansion and growth. But how did it eventually recover from what seemed at the time to be losses that appeared to be spiraling out of control? Is there a secret to its eventual success?
In 2012, Bezos was reported to have changed the vision from "Earth's Biggest Bookstore" to the "Biggest Store on Earth."Currently, Amazon boasts a more ambitious strategic vision of having "Earth's biggest selection and being the Earth's most customer-centric company."
Bezos has ascribed its success to using a "flywheel" strategy where lower prices stimulate sales, which allows fixed costs to be spread over more items, lowering costs in the long run. A flywheel is a heavy object, which takes great force to move it, but once it moves, it has inertia that makes it difficult to slow or stop it.
Bezos explains that feeding the movement of the flywheel can occur in many different ways besides merely lowering prices.xi Procuring the Whole Foods chain not only builds revenues but also provides potential for online grocery sales because the widely dispersed inventories in those stores can enable them to serve as additional distribution centers.
Task
I. How does Amazon's Flywheel strategy fits with its evolving vision statements over the years?
II. Focusing on online product sales, which of the generic strategies does Amazon appear to be using based on this case? Provide support for your choice.
III. How far could Bezos have gone in Amazon's evolution without using information technology?
IV. Assume that there is hypercompetition in product sales. How is Amazon responding to that environment?
V. Are the newly announced endeavors in health care, Amazon Go! stores, and shipping services consistent with Amazon's vision? Defend your position.