The primary subject matter of this case concerns making an online retail business profitable. Secondary issues include (a) assessing the long-term attractiveness of pure online retail industry, (b) understanding and comparing strategy elements and competitive advantages in e-commerce with traditional firms, and (c) evaluating growth strategies. The purpose of this case is to provide students with enough information about Amazon's business situation, to be able to chart the course of action the company should take at a given point in time. The case has a senior or second year graduate level difficulty. The case is designed to be taught in three class hours and three hours of outside preparation by students.
Jeff Bezos opened his Amazon's virtual book store in 1995 in Seattle, Washington. Amazon's online store was a big hit, with about $5 million in the first year of operations. To expand on his success, Jeff introduced other products, including DVD, and electronics. In 2002, Amazon was the world largest online retailers. Unfortunately, the business had not yet made any profit. After four years of single-minded focus on growth, in year 2000, Amazon focused exclusively on increasing its efficiency. Beginning late 2001, Amazon shifted its focus on growth prospects again. Jeff believed that Amazon had reached a point where it could afford to balance growth and cost improvement. This balance began to pay off in the fourth quarter of 2002, where the company generated $198 million in free cash flow for the first time. After falling out of favor along with the Internet sector in 2000 and 2001, Amazon's stock staged a rebound in 2002 as investors bought back into the idea that Amazon would be around for a long time and would start generating real profits. However, it seemed that survivability was still an issue for those investing in Amazon due to massive negative operating cash flow, excessive debt, significant payments for its suppliers and bondholders, intense competition, and the slow economy.
As a low-margin retailer, the case opens with Jeff facing the dual challenge of trying to improve margins and service a large amount of debt. Numerous efforts by Jeff to advertise online and traditional media, lower prices, and free delivery had failed to attract more new customers. Jeff and some of his top level managers had different opinions on the solutions to their problems.
After receiving his B.S. in Electronic Engineering and Computer Science from Princeton University in 1986, Jeffrey Bezos joined FITEL, a high-tech start-up company in New York. Two years later, he moved to the Bankers Trust Company and helped manage more than $250 billion in assets. He became the bank's youngest vice president in February 1990. From December 1990 to June 1994, Bezos helped build a hedge fund for D.E. Shaw & Co. In 1994, he was the youngest Senior Vice President in the history of D.E. Shaw & Co. During the summer of that year, one statistic about the Internet quickly caught his attention. The statistic revealed that Internet usage was growing at 2,300 percent a year. That was his wake-up call.
He quit his job and drew up a list of twenty possible products that could be sold on the Internet, and quickly narrowed the prospects to books and music. He thought both books and music had potential advantages for on-line sale. There were about 1.5 million English-language books in print and 3 million books in all languages worldwide. There were about 4,200 US book publishers and the two biggest bookstores, Barnes & Noble and Borders Group Inc. accounted for less than 12% of total market share, and each had only 175,000 titles. In contrast, the music industry had only six major record companies. They controlled the distribution of records and CDs and had the potential to lock out a new business, threatening the traditional record-store format. …