AMAZON.COM
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 1 of 25
A CEO speaks out
David Pottruck
President and Co-CEO
Charles Schwab, Inc.
Comments to executives at HBS,
October 1999
It’s just an incredible time to be in business and have the rules of
business changing… For many years we operated under a pretty
consistent set of rules. They evolved maybe…but now they are
morphing and that presents a situation that challenges us to figure
out: Are these rules real,or are they temporary? Should we
respond to them?Do we create new rules? How do we run a
company in a world like this when we have 13,000 employees
trying to figure out where we are going and what we should do?
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 2 of 25
Key ideas In Measuring Value
 Traditional approaches to measuring value don't work.
 Why? New economics are changing how we build businesses
and measure performance.
 Understanding internal and external value drivers and the link
to share holder value forms the foundation for e-business
investment decision-making.
 Scenarios capture uncertainty.
 On-going analysis and update based on real-time performance
data is critical.
 When operating as a “virtuous cycle” competitive position and
power can shift.
 Unless complexity can be managed—virtuous cycles can
change to vicious cycles.
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 3 of 25
Virtuous cicle
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 4 of 25
Creating a value engine
Describe the
opportunity
Returns value
to investors
& other
stakeholders
Turns the concept
into reality
Network economies of scale cause the big to get bigger, the
strong to get stronger, and the weak to get weaker
Enable creation of network oligopolies
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 5 of 25
Virtuous cycles can turn to vicious cycles
At what point do we get network
diseconomies of scale?
How big is too big in the Internet Age?
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 6 of 25
Questions to ask when evaluating
business value
Is the concept right?
What approach should I take
to evolve the business?
How much time do I have to
react and respond?
Am I maximizing
return to all
stakeholders?
Do I have the
resources & capabilities
required to execute?
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 7 of 25
Industrial Age economies of scale
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 8 of 25
Industrial Age economies of scope
were limited
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 9 of 25
Traditional entrepreneurial process
Initial Public Offering
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 10 of 25
Dot-com entrepreneurial process in 1999
Prove the Model
and
“Get Big Fast”
Rapid increase in
business
complexity
When will value
be created?
Leverage the infrastructure and
launch new businesses
Grow the business to achieve scale
Develop the concept and launch
Time
IPO or Strategic Sale
Average time:
6 months or less (concept)
18 months or less (IPO or Strategic Sale)
Average capital required:
$50 - 100 Million
Evolution: stages of growth
Revolution: transitional crisis
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 11 of 25
Entrepreneurial process in the 21st century
Generate Increasing
returns to scale
Prove
the
Model
Business
Complexity
Adapt
Leverage
and
the
continuously
Grow the
business infrastructure evolve
& launch
Develop
and
new
the
achieve
business
concept scale
and
launch
Time
Evolution: stages of growth
Revolution: transitional crisis
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 12 of 25
Jeff Bezos on "monetizing the platform"
Jeff Bezos
CEO & Founder
Amazon.com
The Amazon.com platform is comprised of brand,
customers, technology, deep e-commerce expertise,and
a great team with a passion for innovation and a passion
for serving customers well…
We believe that we have reached a "tipping point" where
this platform allows us to launch new businesses
faster,with a higher quality of customer experience, a
lower incremental cost, a higher chance of success, and
a cheaper path to scale and profitability than perhaps
any other company...
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 13 of 25
Evolving Amazon.com: Timeline of Events
Online
bookstore
•Wish lists
•Greeting cards
•International
•Music,video,…
•Market place
small merchants
•Online retailers
jewelry, cars
Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan , Corporate Information Strategy and Management . Burr Ridge, IL:
McGraw -Hill/Irwin, 2002.
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
•ASP
•Manage inventory
Chapter 2 Figure 2 -10
Amazon.com Slide 14 of 25
Focused Distributors
Amazon.com in January 2001
E-Retail
Business Model
Exchange
Business Model
Marketplace
Business Model
ASP
Business Model
U.S. Books
Amazon Auctions
Drugstore.com
Toys R Us
Music
Sotheby's.com
Della.com
Video/DVD
Greenlight.com
Electronics
Gear.com
Kitchen
HomeGrocer.co
m
Lawn & Patio
Home Improvement
Amazon.com Europe
IMDb.com
Toys R Us
Horizontal
Portal
zShops
• Technical Architecture and Know-How
• Distribution, Order Fulfillment, Inventory and
Customer Service Capabilities
• Sophisticated/Patented Online Retailing
Capabilities (e.g., 1-Click Shopping)
• People with a Passion for Innovation and
Serving Customers
• E-Commerce Know-How
• New Venture Development and Partnership
Know-How
• Brand Awareness and Loyalty
• Over 29M Loyal Customers and a Robust
Business Partner Network
Note: The e-retailer, exchange, marketplace, and ASP business models are discussed in more depth later in
Overview of E-Business Models. ASP refers to the Application Service Provider business model. ASPs develop
the software and business infrastructure required to run a digital business and then host the business for another
company, in this case, Toys R Us.
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 15 of 25
A scenario-based approach to valuing e-business
• Define the purpose for the value assessment (e.g., seeking funding, buying a
company, investing in an established business).
• Pick a point in the future when you expect your business strategy to deliver
value (e.g., 3-5 years).
• Analyze the business concept and forecast what the opportunity should look
like at that future point. Work backward to define the current opportunity and
forecast revenue.
• Analyze capabilities and community and forecast the company's (and
partners') operating performance at the future point. Work backward to define
current capabilities and community and forecast cost and margin.
• Use this analysis to construct estimates of financial performance that reflect
the "most likely" scenario.
• Factor in uncertainty in your assumptions by developing scenarios that
represent upper and lower bounds on key variables.
• Discuss the value scenarios you have constructed with others and critique the
findings and assumptions - not just once - but on a regular basis.
• Develop a broad-based performance measurement system.
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 16 of 25
A business starts with a great idea but it
doesn’t end there.
Lou Gerstner
Chairman and CEO IBM
Response to a reporter in 1995
The last thing IBM needs now is a
vision.
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College
Amazon.com Slide 17 of 25