4.7 Summary of Amazon.com

As you have learned item 1A of the 10-K usually provides a clear statement of a firm’s business model.  We have seen that for the case of Amazon that the modern concept of a dynamic value chain, embracing both physical and virtual links, is required to accurately describe its business model.  Amazon’s business strategy can now be described relative to this chain in the way described earlier.  That is, recall the concept of a business model can be classified as follows:

The first two of these apply to Amazon’s strategy.  First, the embracing of virtual activities and the inclusion of dynamic links on the chain are examples performing different activities from rivals.  That is, initially Amazon’s rivals were Barnes and Noble and Borders and by choosing a web storefront compared to a bricks and mortar storefront Amazon’s business strategy was to perform similar activities in different ways.  The range of goods were then extended to the lofty objective for offering “Earth’s Biggest Selection…” and so Amazon’s rivals ultimately became the Wal-Marts, K-Marts, Targets and other retailing chains as opposed to the Barnes and Nobles and Borders..   

A second major pillar of Amazon’s strategy was to be “Earth’s most customer centric ….”   This was feasible with a web based model with real time database access to each of the primary links on the value chain. Customers could receive immediate support both in terms of fulfillment related questions, product information/ratings issues and even product suggestions.  If Amazon was successful at offering earth’s largest selection of products then amazon could draw to the attention of its customers products that they never previously knew existed.

Combined in this way Amazon’s business strategy was largely built upon the objective of “Get Big Fast” (GBF) using a value chain that was internally linked so that it was difficult for a competitor to attack any specific link.  This strategy created large amounts of shareholder value for Amazon in the 1990’s as the stock price chart below reveals.

However, you can observe from the above that after an initial phase of phenomenal price appreciation problems started to emerge for Amazon as revealed from Amazon’s Return on Equity which was becoming increasingly negative (1998 ROE = -.90, 1999 ROE = -2.70).