amazon

9/13/2011

©Lynda M. Applegate, 2010 1

Building High Impact Businesses: Amazon com Case StudyAmazon.com Case Study

Lynda M. ApplegateMartin Marshall Professor of Business Administration Department Chair, Entrepreneurial ManagementHarvard Business School

Congratulations on your 10th Anniversary as OPM 30 Alumni

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OPM Enrollments

© Lynda M. Applegate

200

300

400

500

600

OPM Enrollments

* Slight decrease due to

capacity constraints

(Over 100 on waiting

list for OPM 43)

0

100

9/13/2011


The OPM Program: Today

Unit I: Analyzing Opportunities (April 2011 and May 2011) Understanding key concepts and frameworks

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Understanding key concepts and frameworks Recognizing and prioritizing opportunities

Between Sessions: OPM @Work (Toolkit introduced during Unit 1)

Unit II: Leading Growth & Transformation (March 2012 and April 2012) Evolving your strategy and organization Managing growth and complexity Executing strategy and managing change

Between Sessions: OPM @Work (Toolkit introduced during Unit 2)

Unit III: Planning Future Transitions (February 2013 and April 2013) Taking your business to the next level Defining and realizing your personal goals (Achievement, Significance, Legacy)

OPM Global Immersions and Alumni Programs

Part of the Owner-Managed Portfolio of Executive Education Programs at HBS

Business Owner Programs Related Programs

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Owner/President Management Program

OPM Key Executives Program: January 15 – 27, 2012

OPM Global ImmersionJune 2012

Private Equity and Venture Capital:Asia (June 2012)U.S. (October 2011)

Leading Professional Services Firms: June 2011 and March 2012

Real Estate (multiple programs): http://www.exed.hbs.edu/programs/pages/default.aspx?topic=Real+Estate

( )

Families in Business: November 6 – 11, 2011

Aligning Strategy and Sales: December 4 – 9, 2011

Launching New Ventures:India (June 2012) U.S. (February 19 – 24, 2012)

www.exed.hbs.edu/programs/?topic=Owner-Managed

9/13/2011


Business Models Frame Executive Decision Making and ActionKey “Integrating Framework” for OPM

A business model defines how your business

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A business model defines how your business

interacts with its environment to define a

unique strategy, attract the resources and

build the capabilities required to execute the

strategy, and create value for all

Business models frame:

How your current business makes, or loses, money

How to analyze and frame opportunities

The assumptions behind business plan forecasts

stakeholders.

Source: Applegate, L.M., Crafting Business Models, Harvard Business School Publishing #808-705.

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Launching Amazon.com

• Jeff Bezos—a tech-savvy investment banker who

had never worked in the retail or publishing

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p g

industries—searched for opportunities to use the

newly-commercialized Internet (a technology

disruptor) to create a new business model with

superior economic returns that would disrupt

traditional industry

What did Bezos see in 1993 that others

didn’t?

Source of data: Applegate, L.M, Amazon.com: 1994-2000, HBS No. 801-194.

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• Compared business models for various Internet retail

businesses and identified book retailing as being

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g g

ideally suited as an entry point

Why “books” as entry product?

What market was he targeting?


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• Named after the “World’s Biggest River,” Bezos had

great plans for evolving the business model after

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g p g

launch

Not Jeff’s Big Books


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HBS Definition of Entrepreneurship

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The relentless pursuit of opportunity without regard to

resources currently controlled

Not “reckless”Stop

& Think

How would you rate Jeff Bezos as an entrepreneur?

Leadership Roles

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Leading“Transforming”


Transforming

Internal“Organization”

External“Strategy”

MentorCapability Builder Innovator

Managing“Executing and Delivering Results”

PartnerRelationship

BuilderOperator

Stop &

ThinkWhat role(s) did Bezos play when Amazon.com was first founded?What type of people did he bring in for his Executive Team and when did he hire them?

9/13/2011


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What is innovation?

Innovation Lifecycle—Not just Creativity© Lynda M. Applegate

Design to Adoption to Leverage toId

Source: Applegate, L., Jumpstarting Entrepreneurial Innovation , HBS Publishing #1841C

Design to Launch

“Experiment”

Adoption to Sustainability

“Emerge”

Leverage to Exploit Options

“Grow”

Mature and Transform

Ideato Opportunity

“Explore”

Mapping the Lifecycle to Cash Flow12


Source: Applegate, L., Jumpstarting

Entrepreneurial Innovation , HBS Publishing

#1841C

Cre

ate

Val

ueC

reat

e V

alue

Grow

Mature & Transform

#1841C

Time Time

Inve

stIn

vest

Explore

Experiment

EmergeStop

& Think

Where is Amazon.com in January 2001?

What actions did Bezos take to evolve the Amazon business model from 1995 to 2001?

Payback PeriodTime to Cash Flow Positive

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Amazon.com Update

14Amazon.com responded early before the “dot-com” crash


If Amazon.com had not generated $318 million in cash from options exercises

(in late 1999) and had paid its suppliers in the same quarter as it sold its goods,

its cash balance would have been down to $115 million, which would have

proceeded to put the company in the poorhouse. With the buttressed cash level

of $706 million showing up on the balance sheet as of the end of 1999, the

company borrowed another $680 million in February of 2000. If the company

had not been able to borrow the money, the Amazon.com story might alreadyhad not been able to borrow the money, the Amazon.com story might already

have been over.

Lehman Brothers analysts in July 2000

What were most executives focused on in late 1999? What did Amazon.com execs see that others didn’t?

Stop &

Think

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Crisis-Driven Change: Survive (2001)• Cut costs and improved asset efficiency (1-31-01)

Headcount reduced by 15% (3200 jobs)


Closed distribution and call centers and limited others to

seasonal operating schedule

Exited unprofitable product categories: Kitchen, Furniture,

Toys, Jewelry, Auctions

• Increased revenues (“Bear Hug” the customer)

Expanded on Toys”R”us partnership to launch Fulfillment

Services Business (includes online retailing and inventory /

fulfillment services); Key partners: Borders Babys”R”Usfulfillment services); Key partners: Borders, Babys R Us,

Target, Virgin

Expanded online retail only partnerships with traditional

retailers (host online store; enable “in store” pick-up); Key

partners: All-Clad, Wustoff, Circuit City

Provided services to Small Business Marketplace

Partner with Ingram Micro and other IT distributors to

configure and sell IT systems

Partner with Office DepotSource: Applegate, L.M. Amazon.com Evolves, 2007

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• Increased revenues (continued)

Launched Digital Distribution business

Crisis-Driven Change: Survive (2001)© Lynda M. Applegate

g

Amazon eBooks

Software Download Store (e.g. TurboTax)

Movie Download Store; Key Partner: MGM

Music Download Store; Independent artists (Small

Business Marketplace) and “Try Before you Buy”

eDocuments Store: Investment reports, Market

Research, Business, Science, and Technology Articles

and Reports (including HBR)

Magazine Subscription Store Magazine Subscription Store

Digital Catalog Store

Price cuts and promotions (including Super Saver Shipping)

• Achieved profitability 4Q 2001

Source: Applegate, L.M. Amazon.com: Surviving and Thriving, 2007

9/13/2011


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Don’t just survive—thrive: Shifting to growth (2002)

Launched Amazon Services Subsidiary to connect retailers to


• Launched Amazon Services Subsidiary to connect retailers to

Amazon.com’s online retailing and fulfillment services platforms

Continued rapid penetration of traditional retailer markets

Launched new stores once critical mass of retail partners

was achieved (e.g., Jewelry, Sports)

Partnered with American Express to offer merchant

services to SMEs

• Launched Amazon Web Services

Provided tools for software developers (Open Innovation

• Accelerated digital distribution

CustomFlix / CreateSpace (custom DVDs)

Amazon Unbox (digital download TV and Movie;

partnered with TiVo)

Amazon Podcasts

Launch MP3 Store

• Launched All Business Center (one-stop-shop for SMEs)

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Don’t just survive—thrive: Managing complexity© Lynda M. Applegate

• Reorganized within three divisions:

Media (books, music, video, audio, magazines, digital

downloads etc.);

Electronics and General Merchandise;

Other (includes some services);

International

Opened software development centers in Scotland,

India, Russia

• Financial Performance

Revenue grew from $10 million in 1996 to over $10B+

in Q4 2010 ; 2010 Revenue = $34B (up 40%)

EBITDA grew from $35 million (1% margin) in 2001 to

$986 million in 2009

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• Continue to lead in online retail business model; buying popular general

Don’t just survive—thrive: Transforming the Industry


Continue to lead in online retail business model; buying popular general

merchandise and fashion sites (Zappos)

• 2009: Fulfillment by Amazon (over 1 million items stored in Amazon

warehouses); 30% of sales by 3rd party sellers; 6 of every 10 books are

sold through Kindle Store, available in 120 countries and 6 languages;

• 2010: Books/Music: Buy once / Read/Listen Anywhere

Amazon Cloud Drive (free storage for digital music + playlists/tools)

E t i Vi t l P i t Cl d ( t ibl t )Enterprise Virtual Private Cloud (extensible storage)

Amazon Virtual Relational Database (Oracle)

Did Apple iPad launch (April 3, 2010) threaten Amazon?

April 2, 2010: Amazon announces iPad app (available free on iTunes)

Will Amazon join the “Tablet Wars”?

Stop &

Think

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OPM Integrating Frameworks

9/13/2011


Business Models Frame Executive Decision Making and Action

A business model defines how an

21


organization interacts with its environment to

define a unique strategy, attract the resources

and build the capabilities required to execute

the strategy, and create value for all

stakeholders.

Business models frame:

How your current business makes (or loses) money

How to analyze and frame opportunities

The assumptions behind business plan forecasts


Linking Strategy and Capabilities to Value22


How do we leverage our position, platform and value to exploit strategic options?

Market

Value

What drives revenue growth?

What drives

Investor confidence?

What drives

investment

required? Value

What drives cost savings?

Stop &

Think

What drives cash flow in your businesses? What drives market value?(See supplements for sample metrics)


q

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Learning to PivotBusiness Models provide Analytics to Identify Opportunities Today and Levers for Future Growth

Business Model Analytics Levers for Growth

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Strategy Position (think “playing field”)Business Positioning Can I identify “white space” opportunities?Product-Market Positioning Can I leverage customers, product designs?Network/Value Chain Role Can I leverage suppliers, partners, channels?

Capabilities PlatformProcesses & Infrastructure Can I leverage operating processes, infrast.People & Partners Can I leverage operating expertise?Organization & Culture Can I easily integrate within existing organization?Leadership & Governance Do I have the capacity (leadership, talent, operating p p y ( p p g

model) to scale

Value Capital, Cash Flow, Strategic OptionsCustomer Loyalty, Retention, Engagement, Access Can I increase revenues and benefits for all stakeholders?Efficiency, Productivity Can decrease costs for all stakeholders?Cash Flow Can I fund growth opportunities?Employee/Partner Loyalty, Engagement Can I hire and retain top talent?Economies of Scale and Scope What is the value of strategic options including speed and

agility? 23© Lynda M. Applegate

What % of your time do you spend in each role? What % of time should you spend? Where are you most comfortable?

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Leading“Transforming”


g

Internal“Organization”

External“Strategy”

MentorCapability Builder Innovator

Managing“Executing and Delivering Results”

PartnerRelationship

BuilderOperator

9/13/2011


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How would you rate yourself as an entrepreneur? © Lynda M. Applegate

The relentless pursuit of opportunity without regard to

resources currently controlled

Not “reckless”

Where is your business in it’s lifecycle?26


Cre

ate

Val

ueC

reat

e V

alue

Grow

Mature & Transform

Time Time

Inve

stIn

vest

Explore

Experiment

Emerge

Payback PeriodTime to Cash Flow Positive

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Supplements

The Business Lifecycle: Explore

Key Activities• Opportunity scanning and idea generation

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pp y g g• Opportunity analysis and prioritization• Developing and pitching business plans

Key Decisions• Go vs. No-Go• Leveraging insights, capabilities, and assets to accelerate innovation and value

Transition Planning• Assemble resources and secure commitments needed to launch and develop market entry

product/service offering• Identify projects, appoint leaders, and build teamsIdentify projects, appoint leaders, and build teams • Define fit of new business within industry and organization (if appropriate

Tools• Idea Generation Tool• Analyzing and Prioritizing Opportunities Tool• Developing and Pitching a Business Plan

Cases• DSM Innovation Center; AT&T EDO and Innovation Pipeline; K-P Innovation Fund

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T h e B u s i n e s s L i f e c y c l e : E m e r g e

Key Activities• Complete legal and regulatory requirements to launch the business

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• Engage the market and industry partners and develop the entry product and establish entry position• Build capabilities needed for market launch and entry• Stage commitments and adjust market entry plans based on insights gained

Key Decisions• Go vs. No-Go (Is market adopting at a price and volume level needed to grow?; Can we scale?)• How to leverage insights, capabilities, and assets to accelerate innovation and value creation

Transition Planning• Create the organization structure, processes and controls needed to support growth and manage

complexity• Hire key leaders needed to build a professional business appropriate for type of business you are

building

Tools• Growing your Business Tool• Assessing Capabilities Tool

Cases• IBM EBO; Tennant:; K-P Garfield Innovation Center; Amazon.com

The Business Lifecycle: Grow

Key Activities• Grow the business to achieve profitability and scale

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• Evolve the organization to manage increased size and complexity• Establish governance and control systems that protect the rights and fulfill expectations of

stakeholders• Transition culture to growth and accountability while maintaining culture of innovation

Key Decisions• Have we developed the strategic plan needed to fully exploit growth options?• Have we invested appropriately in developing the infrastructure, organization, and controls needed to

manage complexity and size while also improving margins and asset efficiency• Are we continuing to look for opportunities to enhance our current business, expand into new

products and markets, and explore new businesses that might leverage our platform and position?p , p g g p p

Transition Planning• Recognize when a business is becoming mature and actively look for opportunities to leverage

platform and position to launch new businesses that transform the industry

Tools• Analyzing Business Models Tool• Building Innovation Capabilities Tool

Cases• IBM Transformation, Tennant Transformation, Medtronic, Nypro, Ducati, UCC

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Linking Strategy and Capabilities to Value:What drives revenue growth? (sample metrics)


Attractiveness of business context

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Attractiveness of business context• Industry rate of growth or decline• Competitive intensity• Changing power dynamics• Is the wind at my back or my face?

Market attractiveness• Market size and growth rate (overall and segments)• Buyer willingness to pay and user willingness to use to create value• Length of time to sell and adopt• Customer lifetime value

Product differentiation• Attractiveness of features• Ability to clearly differentiate

Effective revenue-generating processes• Product quality• Quality of demand-generation, order fulfillment and innovation processes

Linking Strategy and Capabilities to Value:What drives costs? (sample metrics)


32


Competitive intensity• #, size and power of suppliers, customers, competitors etc.• Supplier, partner, competitor that controls key resources• Changes in customer willingness to pay or supplier willingness to buy

Operating process efficiency (vis-à-vis other alternatives)• Cycle time of key processes • Operating costs by activity, product, customer etc.• Administrative costs• Inventory costsInventory costs

Product quality (vis-à-vis other alternatives)• Cost of poor quality• Administrative costs to maintain quality

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Enhance

Options for Evolving Your Business Model© Lynda M. Applegate

Incremental improvement to an existing strategy or capability

Expand

Launch new product categories OR enter new markets; Build on current capabilities

ExploreL h b i D l bilitiLaunch new businesses; Develop new capabilities

Exit

Exit a product or market; Outsource a core capability

Evolving Your Business Model

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Explore new

Radical InnovationDon’t forget EXIT


New

MarketsMarketsEnhance current products and/or

Expand into new markets

Enter new market segments or

geographies with same

products; Build capabilities to

enter new markets

Expand into new

Explore new businesses

Launch new products that are

sold to new markets or enter into

new industries; Build capabilities

needed to launch new

businesses or business models

EXIT

Same

Same New

ProductsProducts

products and/or markets

Improve products, add features

and/or improve sales or

channels; Build capabilities

execute current strategy

Expand into new product lines

Add services or solutions that

can be sold to same market;

Build capabilities to sell

solutions to current markets

Incremental

Innovation

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Amazon.com business model evolution

Market Expansions

New Business Exploration

Jan. 2001

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MarketsMarkets

New

Global Book, Music, Video

Auctions

Partner with Toys “R” Us

New

ProductsProductsSame

Product Expansions

Same

Current Business Enhancements


Cut Headcount by 15%

(3,200 jobs)

CloseWarehouses

when low demand


Market Expansions

New Business Exploration

December 2001

36


MarketsMarkets

New

Price Cuts and Super-Saver

Shipping

Launch Small Business

Marketplace

Partner with Ingram Micro, Office Depot and others to

offer Small Business Services

Expand Fulfillment ServicesToys”R”Us, Babys”R”UsBorders, Target, Virgin

New


Product Expansions

Same

Current Business Enhancements


Global Book, Music, Video Retail Stores

Launch Digital Distribution

StoresRetail Partner with All-clad,

Wustoff, Circuit City

Enhance Search to include

Marketplace

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Market

Expansions

New Business

Exploration

2002-2006

37


MarketsMarkets

New

p p

Launch Amazon Web Services (tools for

Software Developers)

Enhance Search to include

Marketplace

Small Business

Marketplace

New


Product

Expansions

Same

Current Business

Enhancements

Retail Services

Continue to ExpandFulfillment Services

Businesses

Why could Amazon.com respond so quickly to pursue so many new growth options?

Global Book, Music, Video Retail Stores

Expand Digital Distribution Offeringsand Launch Custom

DVDs

Stop &

Think

amazon

Documents

business plan

crafting business

jumpstarting

small business

current business

business models

drives revenue

hbs publishing