Detailed Cased Study of Amazon.com by Sigma Consultancy
Case Study of Amazon.com
[i:f058c4963e]Study performed by Sigma Consultancy[/i:f058c4963e]
Table of Contents
Physical Resource Sector
Human Resources Sector
Conclusions with Discussion
Recommendations with Discussion
Alternative Courses of Action
Introduction to 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 (E-Commerce, 2000). 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. 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.
Amazon.com is an organization that offers a broad range of services to consumers and is considered an online leader of pure-plays - pure online merchants. Amazon.com was founded in July of 1995 with a mission to fully utilize the Internet to make book buying fast, easy, and all in all, a very enjoyable experience. They currently have 29 million customers in 160 different countries, making Amazon.com one of the leading online merchants. It is rated third in business-to-consumer online revenue as of June 20, 2000 (Interactive Week 7, 2000). Amazon.com represents the ideal e-Commerce company. It was one of the first to demonstrate the potential for "virtual" upstarts and turned the market on end - even leading the "bricks and mortar" companies. In the book selling industry, Barnes & Noble has been the market leader with 1011 "bricks and mortar" stores with Borders a close second. Barnes & Noble has fought back vigorously on its own and Amazon.com's turf, while Borders has taken a go-slow approach.
The continued success of Amazon.com can be attributed to its diversity in terms of geography as well as it's diverse selection of merchandise, ranging from media such as books, CD's, and videos to online auctions and house wares. Amazon.com currently operates four international websites in France, Britain, Germany and Japan giving it global Internet exposure. One of several factors that has proven Amazon.com successful is that it has the first mover advantage (Thompson, 1998.) Not only was it first in its industry, it has also been successfully marketed. But as with any Internet site, the actual presentation and processing are seen as a result of the underlying technology and the way the company uses it (Sullivan, 1999).
Competition today in the online retail business is fierce, and Amazon.com has some of the toughest competition in the World. Among the most prominent competition are Barnes & Noble and Time Warner publishing which although is new to the scene, has an abundance of capital to back its venture into the online retail book business. "Independent bookstores are rapidly disappearing amid the dominance of superstores such as Borders and Barnes & Noble." (Magazine & Bookseller 56, 2000) As recent as five years ago, there were over 5,500 independent bookstores in the United States. Presently, there are only approximately 3,300 according to a Book Industry Study Group Inc. report.
In April of 2001, Amazon.com announced that it would be re-launching Borders.com - the second-largest bookseller in the United States - powered by Amazon.com's e-commerce platform. The deal will allow Borders to maintain an online presence without having to develop and maintain the eCommerce infrastructure and content itself. ``Amazon.com has worked hard to provide its customers with the best possible shopping experience, and we are incredibly pleased to power and manage the new Borders.com,'' said Jeff Bezos, CEO and founder of Amazon.com. ``This alliance allows Borders to offer our customers the convenience of an online shopping option with the added benefits that will emerge through our new association with Amazon.com, the world's recognized eCommerce leader,'' said Borders Group President and CEO Greg Josefowicz. Under the agreement, customers of the co-branded site will provide access to Amazon.com's editorial reviews, personalization features and recommendations, 1-Click ordering, and other Amazon.com features.
The company also reduced staff numbers and consolidated its fulfillment and customer service networks. But even though Amazon.com has taken these steps to streamline its operations, Steve Riggio of Barnes & Noble.com says that his company is gaining some of Amazon.com's market share.
Amazon.com also became embroiled in a legal battle against Wal-Mart who alleged that Amazon.com had stolen many of their trade secrets by hiring away Wal-Mart IT personnel in large numbers. This has relevance since Amazon.com must expand into other product lines in order to maintain the growth called for by its very high valuation. One example of this expansion is in pharmaceuticals, and Amazon.com had managed to hire two key Wal-Mart Executives from this area. (Information Week, February 22, 1999)
On October 25, 1999 Fortune did an in-depth review of Amazon.com that took a look at their global strategy. The article starts with: "Forget Amazon vs. Barnes & Noble, Amazon vs. eBay, even Amazon vs. Wal-Mart. This company has bigger plans. But when will it make money?" and ends by concluding that "Right now, there seem to be two possible conclusions to the Amazon story. Ending No. 1 goes like this: In ten years Amazon becomes so huge, so omnipresent, that it will be hard to imagine that it started out as a tiny bookseller way back in 1995. Ending No. 2, equally believable: Amazon is undone by its own ambitions and winds up as a footnote in the history of business." In the meantime, Amazon watchers await the next big move.
On January 28, 2000, Amazon.com shocked the business community by announcing cuts of 150 employees amounting to approximately 2% of its workforce. When Amazon.com released its 4th quarter 1999 results, there was an abundance of positive responses complemented by a deluge of skepticism. The upside: 17 million customers, $1.6 billion in annual sales, 99% on time holiday delivery rate, several profitable new lines of business, and so on. On the down side they took a $39 million write-off in inventory and had a $184.9 million loss in the fourth quarter, the largest ever. (Business Week: February 21, 2000)
The strategy that is followed by Amazon.com is complex. The traditional idea that "there is no new idea in business or strategy, only the redevelopment of older ideas" can be seen as interestingly faulty in terms of e-commerce. If we look to find a pattern in the way that the entire sector can be described then we need to look towards the more progressive and modern examples such as the use of emergent strategy as described by Michael Porter (Thompson, 1998). These fit into a pattern in which a deliberate, prior conceived strategy may not exist and then these patterns may develop intention. We can also apply the theories of value chains where the non-productive aspects of the chain can be cut down to a minimum by the facilitation offered by e-commerce (Mintzberg et al, 1998). When we consider the strategy for Amazon.com, we can firstly see how they have used the value chain, cutting out the unproductive sections and concentrating on the valuable parts of the chain. However, there needs to be a competitive advantage in order to compete - this needs to be either by way of price advantage or by differentiation. In terms of price advantage, Amazon.com has not yet started to make a profit, however differentiation is another story.
Michael Porter, a respected business guru, tells us that for a business to thrive and succeed the business must develop a competitive advantage. Without this, a business can be seen as no different from other businesses in the same sector (Thompson, 1998). Amazon.com has looked towards strategy and its technology to provide it with a competitive advantage, and this technology, comprised of both software and hardware, has enabled it to create this advantage. It is the use of technology that has enabled Amazon.com to be as successful as any store whose shop front is on the street. The influence of the Internet and its' importance is summed up by Jeff Bezos - Chief Executive; " Amazon.com can be as successful as any brick-and-mortar store. It's clearly a changed world." (McCausland, 1999; 36).
It is the application of the way technology is used as well as the underlying hardware and software that can make or break an organization. The Amazon program I-Click is a patented technology and the competitors system, although not the same, was considered an infringement of the patent (News Bytes, 2000). Amazon.com is also under attack for the way it has patented business models, such as single click purchasing, that some think should not be proprietary to Amazon.com. The complaints of the other companies have led the Patent Office to review its practices and a writ was granted against Barnes & Noble (News Bytes, 2000). The system is a real time payment system with which customers can pay immediately by credit card, which speeds up delivery, reduces administration and increases the efficiency of the site (News Bytes, 2000). This shows that Amazon.com tackles the competition head on, however this still does not give us an indication of the future performance of the company. But the way in which it protects its existing technological advantages so competitively is an aggressive tactic that may be attractive to an investor since it protects fiercely the technology that it uses.
One competitive advantage is the way the website works. The role of the site has become more than just selling; it has also become an informative medium where there are editorial reviews as well as customer reviews of the material. The customer can see this as an information forum as well as a shop front. The use of the site as a reference guide and not just one where a book can be purchased gives it a competitive advantage. Hopefully, a potential customer may think of Amazon.com as the first place to look for a specific type of book or a place to browse when they are unsure of what books to buy.
Amazon.com has also gained the status of attaining the first mover advantage; the question is can this be enhanced by a change of strategy. The first mover advantage is in place, and the differences are seen in the way the site is presented and informs, therefore more strategic marketing may enhance the strategy. There are already projections that forecast profits in the next two years, but there is also concern in some quarters regarding cash flow in the short term.
This strategy has allowed Amazon.com to compete not only against other Internet stores, but also against the major high street retailers of books and other goods, which they have now expanded into (Mann, 1997). There are still many households that do not have access to the Internet and to keep inline with the current strategy, it will be necessary to possibly other avenues of revenue. This would fit most nicely with the current plans and infrastructure, appealing to a wider audience, not requiring a major shift in policy, and fitting in with the wide range of categories of goods sold.
Since the cash flow can be read as being secure enough to see the company into profit, then the current strategy is already strong. It's possible that this additional strategy would incur greater expenses prior to a profit being shown and therefore, may not be desirable. Therefore, a change in strategy rather than increasing selling prices may reduce profits further by lessening confidence in the current strategy.
Legal & Political Sector
There is a set of profound issues already on the agenda today: competition policy, taxation, intellectual property rights, and privacy. But the most basic issues are about information - who owns it and what to do with it. At a minimum, these are questions about intellectual property and privacy.
Amazon.com takes the protection of its intellectual property very seriously. Trademarks, copyrights, proprietary technology and patents need to be protected in order to afford a company an advantage in a very competitive market. Amazon.com has or has applied for protection of these intellectual properties in the U.S. as well as foreign governments.
Privacy may yet be the largest issue to face eBusiness. The commotion over DoubleClick's effort to match cookie information with named profiles has led to calls for renewed attention to privacy rules. (Business Week, March 20, 2000) Recently, Amazon.com has come under fire for "engaging in deceptive privacy practices." (Information Week, 2001) These practices included the passing of consumer information from Alexa, an Amazon.com subsidiary, to Amazon.com. "Section 5 of the FTC Act prohibits unfair or deceptive acts or practices in or affecting commerce." (http://www.ftc.gov/opa/1998/9801/factshet.htm) Even though Alexa passed this information, the Federal Trade Commission dropped the case when Alexa modified its privacy statement to include wording such as "does not intentionally disclose personally identifying information...even to Amazon.com." (Information Week, 2001)
Amazon.com has quite a comprehensive Policy Notice. Amazon.com collects a fair amount of information about the consumer, but only information that the consumer enters on the website or supplies to Amazon.com by other means. In no way, shape, or form, does Amazon.com violate a consumer's computer and retrieve information that may be contained on the system. They may receive information from shippers or other sources, but this is only information to update things such as delivery and address information. Amazon.com also places cookies on your system to enhance the whole shopping experience. These are enabled to offer such things as 1-Click purchasing as well as to store items in your shopping cart between visits. The privacy statement explicitly states that Amazon.com does not share any information it receives from its customers. The only businesses they share this information with are their own subsidiaries.
Amazon.com also makes it clear that it does not market to minors. In their privacy statement, they state that they do not sell products for purchase by children, but sell products for children intended to be purchased by adults. You are allowed to use Amazon.com's website for purchases if you are under the age of 18, but you must do so in the presence of a parent or guardian.
Amazon.com uses SSL, or Secure Socket Layer software, to encrypt any information that is transmitted between the user and the server. Since 1994, there has been quite a bit of publicity about credit card fraud on the Internet. (Internet ScamBusters, 1998) But it is widely known that it is actually safer to give your credit card number over the computer than it is to someone in the store. Research has shown that the incident of credit card fraud incurred through the use of a cell phone is greater than that incurred over the Internet. (Internet ScamBusters, 1998) But it's not the consumer who is hurt in the end by these scams. There is protection in place for the consumer, but there is not as much protection provided to the merchant.
The following are eight steps to minimize credit card fraud according to Internet ScamBusters magazine (1998):
1. Make sure all information is filled out - do not accept partially filled forms.
2. Question orders that have different "bill to" and "ship to" addresses.
3. Be careful of orders placed through free email account systems.
4. Be wary of orders that far exceed your normal order amount.
5. Pay extra attention to foreign orders. Make every attempt to validate order.
6. If the order is questionable, call the customer to confirm the order.
7. Use software or services to fight credit card fraud such as Cybersource or Clear Commerce Corp.
8. If you have been a victim of credit card fraud, immediately inform the cardholder's bank, your bank, and the authorities.
One of the legal issues affecting this sector is that of Internet sales tax. In October of 2000, Active Research stated that most Americans would cut down on Internet purchasing if taxes were imposed upon them (E-Commerce Times, 2000). In March of 1997, Congress introduced the Internet Tax Freedom Act. This bill would impose a moratorium on states and localities directly or indirectly taxing Internet purchases (Journal of Internet Law, 2000). What the law would not stop would be the imposition of taxes on services provided over the Internet that were similar to those obtained through telephone, mail order, or other remote means. Even though less than one percent of purchases are made online currently, that is sure to grow in the next three to five years that the moratorium will be extended. (E-Commerce Times, 2000)
Though the numbers are still small, there is little doubt that a few years from now quite significant portions of commerce will take place over the Internet. The question of whether and how to tax purchases on the Internet will become ever more a debate about how and where to tax overall rather than a sideshow. Not having a sales tax is an unfair advantage to Internet retailers. Due to this fact, it's only a matter of time before that advantage is taken away. (E-Commerce Times, 2000)
Societal norms are those standards that mold the behavior, attitudes and values of those members who constitute a society. Norms come from laws, customs, religious teachings and common practice.
There are two cultures that Amazon.com lives within. The first culture is the external, the society within which Amazon conducts business. Thus Amazon conducts business in the American, English, German, and the Japanese cultures. The second culture is the organizational culture, the internal culture. The internal culture affects such things as styles of dress, manner, and conduct of negotiations. Organizational culture are norms, beliefs, assumptions ideology, values and stern perception held by members of the organization.
Business must monitor their environment to detect threats or opportunities from changing values, beliefs, norms and behaviors. Culture could be an important source of opportunity. (Hodge, Anthony, and Gales; 1996)
This new phenomenon of organizational culture was studied in the works of William Ouchi in "Theory Z" and by Thomas Peters and Robert Waterman in "In search of Excellence". Organization culture must be observed. Here are indicators of the unobservable characteristic of organization culture; the architecture, artwork, dress pattern, language, stories, myths, behavior, formal rules and rituals.
Focusing on the External Culture of Amazon.com, in the various countries, where Amazon.com operates, it is easy to compare the performances of other companies within that culture. Let us boundary span and collect some information that might help Amazon.com forecast her future.
According to the Wall Street Journal, September 27, 2001 daily paper,
1) The Bank of Japan is pumping millions into its economy to bolster confidence. An equivalent of $92.7 billion was pumped in.
2) Risk premium in investing in the U.S. dollar has increased panic selling of U.S. dollars assets for repatriation
3) Renaissance Cruise shut down due to drop in vacation travels
4) Major Airlines have invoked "force majeur", a contract provision to cut jobs without notice to employee, no severance pay.
5) Rental cars firms have problems with one-way trips.
These are few of the headlines in the news that affect the daily operations of Amazon.com directly or indirectly. For example, as more and more people get layoff notices from work, the fewer books they will buy on line. As more airlines go out of business, the more people loose their jobs. The purchase of secondary items, such as books, music, or toys, will slow down and cause companies like Amazon to go bankrupt.
Amazon.com must therefore be encouraged to expand within other cultures where the literacy rate is high and the use of the Internet is expanding. Some countries, which utilize the credit card, are Brazil, Spain, Switzerland, Holland and Nigeria.
Physical Resources Sector
The physical Resources Sector of organizational Environment contains all the physical resources an organization needs to operate. A prime feature of the physical resources sector is those raw material that serve as inputs to an organization. For example, the steel, plastic, rubber, electronic components, paint, and so forth that a car manufacture needs to build cars are part of the physical resources sector. Wild fluctuation in the cost and availability of crude oil has caused problems and a broad cross section of businesses indirectly involved as consumer of crude oil.
The physical conditions of organization faces are also a critical part of the resource sector. These may include climatic conditions and geography. In the highly competitive E-Business Retailing industry, a prime factor in the success of retailing is the climatic condition.
Before one can list these physical resources one needs to understand the operation of Amazon.com. Amazon .com is a virtual bookstore that sells many items via the web (Internet). Through the web it provides the most comprehensive retail experience. Amazon.com does not produce any product. It sells other company's products and then pays them. It is a retailer.
What then are the Physical Resources of Amazon.com?
1) A web page: AMAZON.COM
2) Publishing companies that supply the books, DVD's, CD'S, etc
3) Distribution Warehouses
a) 100,000 sq. ft. warehouse in Seattle Washington
b) 200,000 sq. ft. warehouse in New Castle, Delaware.
a) Two Digital Alpha Servers 2000 systems containing 64-bit processor with one gigabyte RAM
b) Net Perception intelligent agent software
5) Junglee, a company, whose core technology expertise is in its use of XML to provide the platform for next-generation electronic commerce.
6) Customer Experience
a) Read a synopsis or review from other readers.
b) "Readers who bought (this book) also bought" device
c) Lists three other titles in the same subject area or books by the same author.
d) Each book carries anticipated delivery time.
e) Virtual bookstore carries unlimited inventory. One can order books that are slated for publication but that haven't hit the stores
f) Amazon Publisher's Advantage program
g) Proactive order confirmation
h) Account Maintenance
1) billing information
2) shipping addresses
3) credit card information
4) list of every book he has ever bought
5) e-mail notification about things you are looking for.
6) Amazon's Recommendation center.
7) The 1-Click purchase option
-add or change profile
-see everything you've ever ordered
8.) Book Matcher game
9) 100,000 associates can add their own book review.
Some aspects of physical environment that could affect the sales of Amazon.com are the weather and physical disasters, like the Trade towers bombing. Even though it is an indirect effect on Amazon.com, the direct outcome of on other industries such as the Airlines industry have caused terrible consequences on the E-business. The economy as a whole has experienced a serious slow down. E-Business as a whole will continue stay slow down unit the fear of terror diminishes and the public begins to use the infrastructure of this great country. There is nothing Amazon.com can do about this disastrous event. A slow economy, high price of petroleum products, the airline industry shut down due to security reasons have practically brought Amazon.Com on its knees.
The general condition of the economy is of great importance to Amazon.com. The economic factors that have a direct impact Amazon.com include the unemployment rate, interest rate, rate of inflation, currency stability, currency exchange rates, the availability of capital, labor costs, and population demographics (i.e., age, sex, education levels, and the growth rate of Internet and online commerce). These factors directly affect many of the firm's organizational aspects, including the competitive advantages Amazon.com may enjoy in certain economies. Additionally, these factors affect managerial decisions about the amount Amazon.com invests in new business opportunities and the timing of those investments, customer spending patterns, the mix of products sold to the customer, risks of inventory management, and risks of distribution and fulfillment throughput and productivity. These risks and uncertainties could cause Amazon.com's actual results to differ significantly from management's expectations (Form 10-K, December 2000).
The latest GDP data released by the U.S. Department of Commerce indicate that the economic expansion which began more than ten years ago have continued right through the second quarter of this year, 2001Q2 (Hymans, Crary, & Wolfe, 2001). The pace of economic expansion has recently downshifted dramatically. Over the entire period since the expansion began, economic growth has proceeded at an average annual rate of 3.4 percent of real GDP, reaching as high as 4.8 percent in 1998. For the first half of this year the real growth of GDP increased a lethargic 1.0 percent. The growth rate has been far too weak to keep the unemployment rate steady. The unemployment rate has increased by one half percent since the beginning of the year to 4.5 percent and recently reached a nine year high. As the U.S. economic expansion weakens and the unemployment rate increases, this would indicate that there would be less disposable income available for the American public to purchase products offered by Amazon.com.
The major contributors to the current economic slowdown are following familiar trends. Part of the change in the economic sector is that economics have become more of a global issue and less restricted to local or national economics. Therefore, the trends include:
Oil Prices - The price of crude oil increased by $11 dollars a barrel or approximately 57 percent from 1999 into 2000. Considering that this country imports ten million barrels of oil a day, an $11 price increase drains our economy of about $110 million per day, or about $40 billion per year, a depreciable impact on Amazon.com's customers purchasing power. These increases in oil prices add to the distribution costs of Amazon.com, which puts further pressure on shipping and handling expenses for the firm's customer base.
Natural Gas Prices - The price of natural gas followed oil prices right up. From early 1999 to its peak in January of 2001, natural gas prices rose nearly 400 percent, adding depreciative effects on disposable income of the firm's customer base.
Monetary Policy - As the economic expansion continued to grow and with the labor market at a level considered to be full employment (4 percent unemployment), the Federal Reserve Board moved to a restrictive monetary policy. The Fed funds rate was raised up by 175 basis points in a series of steps, which moved it from 4 3/4 percent in mid 1999 to 6 1/2 percent in mid 2000, where it stayed for the rest of the year. These steps affect consumer-lending rates over the near-term and can have a stifling effect on consumer spending.
Financial Markets - From late 1994 to about mid 2000, security prices rose dramatically. The 5-1/2 year boom in stock prices sharply outpaced the corresponding rise in company's earnings. Among the companies in the S&P 500 stock index, the ratio of stock price to earnings per share (the P/E ratio) historically averaged 16.3 since 1954 and, at a level about 17 1/2 in late 1994. By mid 1999, the S&P 500 stock price had risen to an all-time high of more than 35 times earnings. This was an indication that the S&P 500 market was overvalued, the overvaluation was small compared with that in the NASDAQ market which had seen a far bigger run-up in prices among many high-tech and dot-com or dot-bomb companies with little or no earnings at all (Hymans, Crary, & Wolfe, 2001). Amazon.com trades its share on the NASDAQ exchange and recently was trading at $6 a share compared with prices well over $100 a share eighteen months earlier.
Although the factors mentioned above have failed to produce a single quarter of negative GDP growth, the very slow growth in the first half of 2001 could very well degenerate into an economic recession. The rises in energy prices and the slowdown in the U.S. economy have hurt the export markets of many other economies. If the global economic slowdown worsens, the strength of the U.S. export market could weaken further. That could contribute to yet another factor for the U.S. economy to contend with.
On September 11, 2001, a shocking terrorist assault of the United States of America occurred presenting another negative indicator to be factored into the economy of the United States and most other parts of the global economy as well. Since the terrorist attacks were deliberate with long-term security implications, the effects on consumer psychology could result in negative consumer confidence hindering buying patterns (Oakland Press, September 27, 2001). These acts will test the resilience of U.S. society and the U.S. economy. Substantial uncertainties and risks persist and a significant danger of a deeper and more prolonged slowdown exists since the assault on the fabric of U.S. society. Depending on the severity of the fallout from the attacks, the world's economic growth rate this year could turn out to be lower than initial projections. Amazon.com cannot ignore global economic conditions.
Consumer spending is key to the performance of the U.S. economy in the coming months. Past patterns suggest that consumer confidence will bounce back after an initial setback. The aftershocks of the terrorist attack are likely to depress economic growth during the second half of 2001, but the Fed probably will ease more than it would otherwise have done and fiscal policy will become more stimulative. As a result, a rebound in growth in the second half of next year will likely be stronger than most expect (Global Weekly, September 2001). The stock market was in a lengthy correction and was deeply oversold before the event of September 11. Those conditions could help to support the major averages during any further weakness that might develop, and they could act as a springboard for a recovery in the months ahead.
Right now, the level of uncertainty has risen, but past patterns show that periods of uncertainty have been followed by recoveries (Global Weekly, September 2001). The outlook for the consumer sector of the U.S. economy in the wake of the attack is a key uncertainty, one that has been compounded by the already fragile state of consumer confidence. A recession might develop if a decline in consumer spending is too negative. Benefits from the Federal Reserves continuance in reducing interest rates are likely to be positive influences on the economy in the months ahead. Further terrorist attacks could very well occur. New attacks might further depress consumer confidence and spending activity. They could also increase the degree of risk aversion in the U.S. economy undermining the effectiveness of U.S. monetary policy and eventually act as a drag on the dollar. Overall, GDP is likely to come in below previous expectations for the third and fourth quarters, but the rebound that is expected in 2002 is likely to be stronger due to the Fed's easing of interest rates (Global Weekly, September 2001).
With many economic factors indicating that the U.S. economy is heading toward a recession, there are reasons to be optimistic. The economic factors have to do with the fiscal and monetary policies under deployment by President Bush and with congressional cooperation. Under the current administrations fiscal policy, tax cuts promised on the campaign trail are being implemented. Part of the tax cut involves the creation of a new lowest tax bracket with a ten percent rate, compared with fifteen percent under the old law. The tax cut became effective in mid 2001 and are to be phased in over time. The new bracket was made to apply retroactively to all of this calendar year. As a special economic stimulus measure, all taxpayers who qualify for a tax cut due to the new rate are to receive a one-time payment of the full 2001 year's worth as much as $600. Over the first four years of the new law, the personal tax cut cumulates to more than $287 billion, which, in a forward-looking company such as Amazon.com, could variably result in increased sales.
Once the seriousness of the economic slowdown manifested itself, the Fed wasted little time and enacted a policy of adding liquidity to the economy. In a series of moves beginning in January 2001, the Federal Open Markets Committee (FOMC) reduced short-term interest rates by 350 basis points this year. That puts the key federal funds rate at 3 percent and the discount rate even lower.
The early months of next year should deliver increasingly more evidence that the economy is emerging from its growth recession and developing strength in ways that will continue its upward momentum. In response to the terrorist attack of September 11, 2001, the Fed is likely to continue to add to the degree of stimulus provided by monetary policy.
One of the potential positives of the attacks and related events that took place in the last part of the third quarter, when some 25 percent or more of annual sales are made, is a boost in Internet spending. Internet communications held up better than voice communications during the emergency. If people are afraid to congregate in large numbers publicly, such as shopping malls, they will be inclined to make their purchase online.
Amazon.com must position itself to access technological improvements that potentially provide greater efficiency, superior quality, or products or services to compete successfully (Hodge, Anthony, & Gales, 1996). Economics plays a critical role in making technological decisions. Factors such as capital requirements and economies of scale can be deterrents implementing technological innovations requiring extensive investments. Amazon.com must investigate new technologies to find the best methods for transforming inputs into sales. Failure to do so eventually results in inefficiencies and an inability to compete successfully.
Now that the Internet is upon us and the World Wide Web has captured the interest in booksellers around the world, it's time to reflect on what this fundamental shift in the business landscape means for the Amazon.com organization. It is time to take a comprehensive look at how Amazon.com can focus all of its information technology investments behind a single, winning strategy: make it easy for customers to do business with you (Seybold, 1998). With focus placed on this strategy, it should become easy to cut through organizational inertia and bureaucratic barriers. With this focus, Amazon.com can rationalize its information technology investments and avoid duplication of efforts. With this objective, you can marshal your employees, your suppliers, and your distribution partners into a seamless virtual organization with a shared vision and purpose: making it easy for the Amazon.com customers.
Internet merchants are still having trouble with one of the most basic retail fundamentals: turning visitors to the site into shoppers. Last year, only about 5 percent of people who looked at e-tailing sites actually bought a product (Wall Street Journal, September 24, 2001). They hold back for many reasons and Amazon.com must study these patterns made by potential customers. At many sites it is still too hard to get from the home page to the sales confirmation window. Customers complain about flashy graphics that slow the loading of Web content, about the difficulties returning unwanted goods and about exorbitant shipping and handling charges. As a result, online retailer's conversion rates of the percentage of visitors who actually buy something online remain a fraction of what brick-and-mortar retailers enjoy. The percentage rate of browsers who actually buy something in the books/CDs/video category as of 3Q 2000, was approximately 7.5 percent. As economic pressures depress the current market, e-tailers such as Amazon.com have to scramble for methods to turn browsers into buyers. Making the sales will become a challenge for the organization when choosing the right technologies to enhance the bottom line by increased sales.
As growth in the numbers of shoppers online slows, increasingly, the biggest opportunity for growth for online retailers is improving the conversion rates (Kassar, 2001). Amazon.com is attacking the problem with an array of marketing strategies and technological innovation. They are streaming their pages so they load faster, and shortening the checkout process with one-click checkout, to prevent shoppers from abandoning their shopping carts out of frustration. Amazon.com is using their technology to track shoppers so they can focus their sales pitches even more tightly. They have successfully replaced mass-appeal television and newspaper advertisements with e-mail promotions and online advertising campaigns that target existing customers offering them deals on their past purchases. Amazon.com has personalized their sites for each individual customer, showing you different products and pitches depending on your profile.
Personalization tools allow company's to dig deeper by linking tools with CRM (customer relationship management), and content-management, other IT systems. Personalization is about providing the right information to the right person at the right time. The goal: to make more efficient use of employee, partner, or customer time; increase the value of each interaction; and boost sales. As the tools for personalization have spread into other IT systems, such as marketing management, content management, and portals, businesses looking to build personalized relationships with customers, partners, or employees have more options than ever (Information Week, 2001). The challenge facing Amazon.com, however, is to determine when it is time to use personalization tools with which IT system.
There are four types of personalization tools used in portals which might be successfully deployed at Amazon.com to enhance the customer experience with each visit and to subsequently increase sales percentages per visit. Using customization tools allows users to create their own desktop workspace within the Amazon.com portal. The potential benefit using this tool would be enhances user experience by presenting them with content designed specifically for them based on previous purchases and interests. By providing topic areas within the Amazon.com portal allows users to build profiles in subportals used to retrieve and deliver relevant information from the Web. This information delivered to the user defines specifics to assist the customer in making the correct purchase the first time. Therefore, expenses incurred in returning merchandise are reduced. There are rules-based personalization that allows businesses to create rules to provide tiered access to information; for example, a platinum user has more access privileges than a silver user. These tiers could used to allow customer's privileges to different levels of discounts on purchases based on previous purchases expenditures or other criteria. There are observation engine personalization options, which recommends where to find information or help, based on traffic patterns of other users with similar profiles or surfing patterns. This personalization tool pulls stored customer data to serve up products specific to that customer. The easier each visit to the Amazon.com portal is for the customer/visitor, the more likely they will return to the site for product information and purchase.
By letting its customers to personalize the type of content delivered for each visit, Amazon.com is able to lower the costs. The portal market for information delivery is ripe for personalization tools that will create a competitive advantage. Online customers are more demanding of new features to maintain their interest and enhanced visitor experience. Basic personalization means letting the customer arrange the layout of their own screen and create an individual work environment. As mentioned earlier, customers are expecting rules-based personalization that lets Amazon.com customers access information or discounts based on their status within the Amazon organization. They are requesting observation engines that make recommendations where they can find the information they are looking for based on previous visitor experiences and profiles.
New technological innovations can result in increased sales and market share. Future plans at Amazon to leverage Adobe's relationships with publishing companies and its widely used PDF format to enhance adoption of e-books. As part of an agreement with Adobe, within the next twelve months Amazon.com should begin opening e-book sites in its online stores in globally diverse markets. By giving customers a choice in the format used to download e-books and by adding titles to the selection, Amazon.com would be poised to boost e-book sales, which are growing at a moderate rate (Informationweek.com, September 2001).
No one said making money by selling over the Internet was going to be easy. E-commerce is hard, but not impossible to show a positive cash flow. Persistence on the Web can lead to success. Amazon.com had not shown a profit as of 2Q 2001, but management is expecting to turn its first operating profit in the 4Q 2001. The carnage of companies attempting to profitably sell merchandise online continues. At least 435 Internet companies - of which 47 percent were e-commerce companies - have shut down since January 2001 as reported by Webmergers.com (2001). Of the 494 Internet-related businesses that went public during the last five years, only 11 percent trade at more than their offering price and nearly one-third trade at more than 80 percent below their offering price, according to Sandeep Varna, a vice president at the New York City-based consulting firm, Stern, Stewart, & Co. (2001).
Consumer e-commerce revenues hit $44.5 billion dollars in 2000 - a 66 percent increase over 1999 levels - and represents 1.7 percent increase of all U.S. retail revenue (CIO Magazine, September 2001). Those retailers and service providers who focused on profits from the beginning have demonstrated the e-tailing has more to do with old-fashioned business sense and the ability to ship boxes around the country than which company has the snazziest website or most innovative business model.
Human Resource Sector
Human resource sector is the source of human inputs. Key part of the definition of an organization is that it is made up of people. Organizations must go outside their boundaries to obtain these valuable human inputs. To a large extent nature of the organization is determines by the ability of potential workers. It's not just the mere availability of labor but, their level of training and education, local wages and benefit standards, presence or absence of labor unions and prevailing worker values or attitudes are a few examples of human resource sector variables. Organization must consider these variables in their human resources policies and their decisions on where to locate. Amazon employed approximately 9,000 full-time and part-time employees currently and employs independent contractors and temporary personnel on a seasonal basis. None of these employees represented by a labor union.
First, with the trends toward downsizing and a leaner, organizations are hiring more flexible workforce like part-timers and temporary staff. On January 30th of this year, Amazon announced 1300 layoffs and sources from Amazon saying the company is planning to cut 15 percent more of its workforce. Qualified and well-trained people are available through the temporary work force for Amazon. In US the temporary staffing industry, has become a $40 billion-a-year business. More Than 90 percent of companies use temporary workers each year to reduce the organization's overhead and reduced worker commitment. There are nearly 2.2 million temporary workers in the United States, about 2 percent of all jobs. That's upped from 708,000 in 1985, according to the National Association of Temporary and Staffing Services (NATSS), a Trade group in Alexandria, VA. While office-support and clerical positions still account for 40 percent of all temp jobs, technical and professional fields are the fastest-growing segment, making up 15 percent of the temporary work force, according to NATSS."
Amazon's customer service employees in Seattle had launched a union organized campaign seeking a collective bargaining agreement. Many employee union activists cited job security concerns as the reason for seeking union representation with WashTech, which is a local affiliate of the communications workers of America. In making range of strategic decisions, Amazon moved towards the contractors and 'temp-to-perm' employees to meet the demand and adding more to employee work ethics. Local wages and benefits for flexible workforce has attracted all age groups, genders and high-qualified people as well. Wages and benefits are the key factor of temporary workforce; temporary agencies within the US withhold income and social security taxes for their employees and pay premiums for unemployment insurance and workers' Compensation. Agencies now offering temps health insurance coverage, retirement plans and paid sick leave, vacation time and 401(k) tax-deferred retirement plan. More than a million people on the job each day in the US are temporary employees according to the National Association of Temporary Services (NATS). Higher the skill levels with higher education and training, the more likely a worker is to prefer being a temp.
Globalization and current marker conditions have driven the organizations to restructure. "Keeping costs low is a priority that is directly related to the new commitment to Amazon's forecast", says Amazon's CEO Jeff Bezos. Call it layoffs, downsizing, early retirement or "corporate rightsizing", it's no secret that pressures to improve profit levels have turned massive workforce reductions into a way of life for many American companies. But with this recent trend has come concern and a demand for higher levels of assistance to discharged workers. Companies have explored many different downsizing options without affecting the work demand. The number of temporary workers in the U.S. has nearly doubled over the past five years from 1.2 million to more than two million--a record of job creation that beats just about every other industry in the country, mostly because of organizations' restructuring. The growth and increasing sophistication of the temporary-employment industry is creating a national trading floor for talent. "It's a contingency spot market," says Jessica Sweeney, a research director at the Advisory Board Co., a management-consulting firm based in Washington, DC. Just as an exchange floor provides a fluid, efficient forum for clearing the market for stocks, gold, and pork bellies, the temp industry is becoming a clearinghouse for buyers and sellers of skills. The economic consequence of this phenomenon is a more flexible and efficient job market. It is also creating opportunities for workers and employers.
Global competition for higher qualified professionals has tremendously impacted the immigration laws. Immigration and Naturalization Services (INS) reported that, as of May 23, 2001, approximately 117,000 H-1B (technical labor visa type) workers had been approved against the 195,000 limit for FY 2001. This law certainly increases companies' access to new market for higher end professionals. Fastest-growing segments of the consulting market are in professional and technical fields. These high-skill areas already make up about 20% of the total temp payroll. Many companies, for their part, are turning to temp agencies to outsource the administration of their temporary workers. Tom O'Halloran, an analyst at Dillon Read, says that five or ten years ago companies would just call a local temp agency and order up workers a la carte. Now that they see how important flexible staffing is to their cost structure, and realize that more and more upscale positions can be filled by contract labor, they're hiring.
Table 1. Occupation and Industry Distribution of Employment by Work Arrangement
(In percentage) Agency Temporaries
Agency Temporaries On-call or Day Laborers Independent Contractors Contract Company Workers Other Direct Hire Temporaries OtherSelf- Employed Regular Employees
Occupation Percentage Percentage Percentage Percentage Percentage Percentage
Executive, Adm. 6.9 2.7 20.7 8.6 7.6 24.1
Professional 6.6 20.9 17.9 20.3 26.5 13.0
Technical 5.8 4.0 0.8 6.8 3.2 0.7
Sales 1.7 6.6 17.9 3.0 5.3 20.7
Administrative Support 34.1 8.6 3.9 5.5 20.2 5.4
Services 9.0 20.2 9.1 28.4 15.2 10.0
Precision Production 5.2 15.0 17.9 19.7 8.6 7.5
Operators 17.1 2.2 1.6 1.8 4.0 1.7
Transportation Occupations 3.5 8.5 4.4 2.5 1.6 1.6
Laborers 8.6 8.6 0.8 3.3 4.8 0.6
Farming & Forestry 1.6 2.8 5.1 0.2 2.9 14.7
Agriculture 0.0 3.3 5.7 0.0 2.3 15.3
Mining & Construction 4.0 16.3 20.9 6.0 9.1 5.8
Manufacturing 33.8 5.3 4.8 19.3 7.2 6.3
Transportation, Communication, Utilities 7.3 8.1 5.1 14.0 3.5 3.7
Trade 21.7 14.1 13.6 12.7 11.5 26.2
Finance Insurance & Real Estate 7.8 1.6 8.4 7.6 2.6 5.4
Services 25.5 47.5 41.1 24.6 57.5 37.1
Public Administration 0.0 3.8 0.2 13.8 6.2 0.0
Source: Author's tabulations from CPS Supplement on Contingent and Alternative Work Arrangements.
Consumer and Client Sector
Organizations are concerned with converting resources into products or services that are desired by consumers or clients. Marketplace success depends on careful analysis and a thorough understanding of market conditions. It is essential for organizations to identify characteristics of the consumer and client market that an organization serves. All marketing strategies aimed at bringing old customers back and enticing new customers. Organizations must also be aware of potential power of buyers and changing clients' preferences to serve their needs. Buyers who are the largest or most significant customers of an organization can exercise significant control. New market niches, advertising and promotional activity can be used to control the market place. Amazon.com seeks to be the world's most customer-centric company where customers can find and discover anything they want to buy on-line.
Amazon has slashed outlet prices on every thing from books that sell for under $10 to garden gear reduced by 70% or more. Good news for die-hard bargain shoppers. Amazon is more than a post-holiday clearance sale. It will be a permanent tab open for business 365 days a year. In short, the e-tailer is warming up the idea that people love bargains all year round. This strategy is been attracted by all kinds of consumers. Amazon served 20 million customers in 2000, up from 14 million in 1999. Sales grew up to $2.76 billion in 2000 from $1.64 billion in 1999. Besides on-line business, Amazon opened its outlet store on Dec 28, 2000 to handle excess inventory. With the deep discounts, they've hit upon a pricing strategy that's meant to move merchandise fast and pull the customers who wants to see and touch the product before buying. While Amazon.com previously offered bargains in each of its stores, the outlet store makes sniffing out deals easier by housing the items under one virtual roof. Average consumer spending in 2000 at Amazon was $134, up by 19%.
Internet Sales (NSA)
01 Q2 01 Q1 00 Q4 00 Q3
E-Commerce Sales ($ Bil) 7.46 7.59 8.88 6.90
Retail Sales ($ Bil) 807.4 728.7 817.7 772.8
E-Commerce % of Retail Sales 0.92 1.04 1.09 0.89
Amazon.com strengthened its brand by linking itself with a trusted off-line retail chain, boasting of 707 domestic stores and a 16.5% market share in 1999. Despite soft economy, fourth quarter results revealed the promise of the partnership, and perhaps of future partnerships like it. Gross profit grew to $656 million in 2000, from $291 million in 1999, up by 125%. International sales grew to $381 million in 2000, from $168 million in 1999. Amazon's focus on the customer was reflected in a score of 84 on the American Customer Satisfaction Index (highest score for service company in any industry).
Unfortunately, for most consumers, e-retailing remains a service-free business. Additional media whining will be heard about all the things that go wrong with Internet shopping. This will be particularly fertile ground, including, but not limited to such atrocities as delivery snafus, credit card fraud, kids stumbling into pornography sites, system failure, slow response times and customer unfriendly site designs. Unreliable online customer service is the leading barrier to consumer e-commerce success. Poor customer service was a major factor in the 32 percent of online shopping carts being abandoned prior to the completion of the transaction. Shoppers' fears that gifts would fail to arrive by the drop-dead deadline of Christmas Eve or wrong package arrived to front door. While the Internet users have been rising, Internet infrastructure may not expand fast enough to meet the increased levels of demand. Slow Internet connection and non-accessibility of Internet to the customer slows the Internet sales. As consumers learn how to block unwanted offers or insecure over Internet purchases, retailers will have to learn how to transform their information about consumers into knowledge that is desirable to the consumer.
In 1998, top 10 on-line retailers accounted for 43% of total on-line retail sales, putting Internet retailing smack in the middle compared with other retail channels (Super markets 41%, Home improve centers 37%, Electronics stores 44%). The dominance of large on-line retailers like Amazon will only increase as they leverage their scale and create switching costs through personalized offers and add-on services. In terms of over all consumers spending, on-line sales will definitely cannibalize store and catalog sales. Growth in online revenues continues to be at the expense of other traditional selling venues. The greatest migration is from catalog and phone orders. Senior citizens are rapidly becoming the second-largest customer base after minorities. Today, 16.4 million senior citizens are actively online in the US. By 2003, that number will grow to exceed 27 million seniors (or 43 percent of all US seniors).
Conclusions with Discussion
Sigma Consultancy has identified key areas within Amazon.com that we feel need to be addressed in order to remain competitive in the future. One area of concern deals with the Economic Sector. A slow economy and recent terrorist attacks have presented another negative indicator to be factored into the economy of the United States and most other parts of the global economy. Because these attacks were intentional with long-term security implications, the psychological effect on consumer psychology could negatively impact consumer confidence.
Total online sales declined 58% and sales for books alone declined 45% since the day of the attacks.
Sigma Consultancy has identified a Big Hairy Audacious Goal for Amazon.com. This goal would accomplish providing online shoppers the ultimate personalized one-stop shopping experience. Patricia Seybold, the CEO of a worldwide business and consulting group, was quoted as saying, "What if there were a single web destination that you could go to no matter what you needed to purchase? This personal store would save you lots of time (the most precious commodity of all). All of your and your family's personal profile information would already be stored on this site as a result of your earlier shopping expeditions."
Recommendations with discussion
It is the recommendation of Sigma Consultancy that a catalytic mechanism needs to be implemented as a quality control measure to improve performance and increase customer satisfaction. The catalytic mechanism could be a guarantee to the customer that the book will arrive on or before the date specified on the online confirmation page and invoice. And every invoice should read, "If the book doesn't arrive in the allotted timeframe, Amazon.com will refund all shipping and handling expenses to the customer."
Another recommendation would be to develop a relationship with a bricks-and-mortar bookseller that will help optimize online merchandizing, recognize cross-selling opportunities, build greater customer loyalty, and establish more profitable relationships. Amazon.com should expand the existing relationship with Borders.com and integrate the online business with Borders bricks-and-mortar stores.
While the number of Internet users has been rising, Internet infrastructure may not expand fast enough to meet the increased levels of demand. Slow Internet connection and non-accessibility of Internet to the customer slows the Internet sales. Our final recommendation would be to expand the business through catalog and mail order sales.
Alternative Courses of Action
Those retailers and service providers who focused on profits from the beginning have demonstrated the e-tailing has more to do with old-fashioned business sense and the ability to ship boxes around the country than which company has the snazziest website or most innovative business model. Amazon.com should integrate the new technologies with the old way of doing business.
An alternative recommendation would be to identify areas such as Brazil as well as all of South America where the literacy rate is high and the use of the Internet is expanding. Once identified, Amazon.com should tailor the portal to meet the needs of that culture and possible establish distribution centers in these areas of the world.
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Article name: Detailed Cased Study of Amazon.com by Sigma Consultancy essay, research paper, dissertation