Team 1 Amazon - Final Paper and Presentation

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ReturnDrivenStrategyCaseStudyAmazon

SEV611–ReturnDrivenStrategy

Spring2016

TheCenterforStrategy,ExecutionandValuationKellstadtGraduateSchoolofBusiness

DePaulUniversityDr.MarkL.Frigo

TeamMembers

CassandraKulpa/[email protected]/[email protected]

MichaelMercado/[email protected]/[email protected]

MoriamOlowo/[email protected]/[email protected]/[email protected]/[email protected]

CarolineRiccolo/[email protected]/[email protected]

MichaelSmall/[email protected]/[email protected]/[email protected]

ScottWethy/[email protected]/[email protected]

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TableofContentsStoryboardfortheCase..............................................................................................................................4

OverviewofCompany.............................................................................................................................5

PerformanceProfile................................................................................................................................6

TheStrategyofAmazon..............................................................................................................................9

Overview.................................................................................................................................................9

TheCommitmentTenant........................................................................................................................9

Tenant1-EthicallyMaximizeWealth................................................................................................9

GoalTenants.........................................................................................................................................10

Tenant2-FulfillOtherwiseUnmetCustomerNeeds......................................................................10

Tenant3-TargetAppropriateCustomerGroup..............................................................................10

TheCompetencyTenants......................................................................................................................11

Tenant4-DeliverOfferings..............................................................................................................11

Tenant5-InnovateOfferings...........................................................................................................12

Tenant6-BrandOffering.................................................................................................................12

TheSupportingTenants........................................................................................................................13

Tenant7-PartnerDeliberately........................................................................................................13

Tenant8-MapandRedesignProcesses..........................................................................................13

Tenant9-EngageEmployeesandOthers........................................................................................14

Tenant10-BalanceFocusandOptions............................................................................................14

Tenant11-CommunicateHolistically..............................................................................................14

TheFoundationandCommitmentTenants.........................................................................................15

GenuineAssets..................................................................................................................................15

VigilancetoForcesofChange...........................................................................................................15

DisciplinedPerformanceMeasurementandValuation...................................................................16

ReturnDrivenStrategy-Pro/ConAnalysis..........................................................................................17

R&DEfficiencyAnalysis.........................................................................................................................19

StrategicRisks...........................................................................................................................................20

MarketRisk...........................................................................................................................................20

InnovationRisk......................................................................................................................................20

OperationsRisk.....................................................................................................................................20

EmployeeEngagementRisk..................................................................................................................21

Regulatory/GovernmentalRisk............................................................................................................21

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PartneringRisk......................................................................................................................................21

SummaryandConclusions........................................................................................................................22

Bibliography..............................................................................................................................................25

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StoryboardfortheCaseThepurposeofthiscasestudyistoprovideanoverviewoftheStrategy,Risk,R&DandLessonsLearnedwhilestudyingthecompanyAmazon.

Page 2© Copyright Dr. Mark L. Frigo 2015 - Do not copy or redistribute without express written consent of Dr. Mark L. Frigo


What do you get…



Amazon Strategy

Summary of Topics

Amazon Performance R&D and Risk Summary &

Conclusion

What it means to be

customer centric

How thestrategy aligns

with this mission

Innovating for customers and

the risks

Can Amazon keep getting it

right?

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OverviewofCompanyAmazonwasfoundedin1994byJeffBezos.Theorganizationwasoriginallyincorporatedas“Cadabra”,butwaslaterchangedtoitscurrentnomenclatureafteremployeesmisheardthenameas“Cadaver”1.ThecompanywasoriginallyfoundedinBezos’sgarageinBellevueWashingtonandwaslatermovedtoitscurrentheadquarteredlocationinSeattleWashington1

Thecompany’sname,Amazon,waschosenbyBezosbecausehefeltthatitconveyedcolorfulnessanduniqueness.Inaddition,italsobeginswiththeletter“a”which,inBezos’smind,ensuredthatthecompanywouldpopulateatthetopofanysearchconductedbyauserontheinternet1.

AmazonbeganasanonlinebookstorewhenthecompanybeganaccessingbooksatwholesalefromIngram,abookserviceprovider2.Afteroperatingfortwomonthsonline,thecompany’ssaleswerehoveringaround$20,000perweek.ThisrevenuewasadirectproductofAmazon’s‘limitless’bookofferings,asthecompanywasneverconfinedbyactualwarehousespacelikemanyofitscompetitors.Currently,AmazonisknownasthelargestinternetretailerintheUnitedStates3.

Amazon’sinitialbusinessplanwasuncommoninthatnoprofitsweregeneratedforthefirst5yearsofthecompany’sexistence,butthismeasuredgrowthmodeliswhatallowedthecompanytosurvivewhenthedot-combubblehitatthebeginningofthe21stcenturywhenmostothere-companieswerewrecked4.Ultimately,Amazonoutlastedmanyofitspeersduringtheearlyyearsofitsconceptionthroughaslowgrowthstrategy.NowAmazonisreapingrewardsandlappingitspresent-daycompetitorsthroughinnovativeserviceofferingsandstrongreinvestmentstrategies.InorderforAmazon’smissionstatement,“TobeEarth’smostcustomer-centriccompany,whereshopperseverywherecandiscoveranythingtheymightwanttobuyonline”,toholdtrueinthefuture,itwillneedtoremaindrivenwithitspursuitofunmatchedcustomerserviceandcontinuetopushtheenvelopewithtechnologyandpeople5.

1Woods,Ben."How21BigTechCompaniesGotTheirNames."TheNextWebRSS.N.p.,24Oct.2014.Web.02Apr.2016.2Ghemawat,Pankaj.LeadershipOnline:Barnes&Noblevs.Amazon.com(A).Boston,MA.:PresidentandFellowsofHarvardCollege,1998.HarvardBusinessReview.HarvardBusinessReview,4Dec.1998.Web.2Apr.2016.3BloombergNews."AmazonPassesWal-MartasBiggestRetailerbyMarketValue."InternetRetailer.InternetRetailer,24July2015.Web.2Apr.2016.4AuthorUnknown."AmazonStartupStory."Fundable.Startups.co,2Apr.2016.Web.5AmazonSupportStaff."AmazonFulfillmentHistory."Amazon-HistoryandCulture.Amazon,2Apr.2016.Web.2Apr.2016.

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PerformanceProfileFromitscreation,Amazon’sstockpriceremainedatarelativelyconstantlevel.In2007,Amazonbegantoseethestockpriceincrease.Throughouttherecession,theysawconstantgrowthinthemarketpriceandthenstartinginmid-2014,thestockpricestartedtoriseataquickerrate6

In2011,Amazonreportedatotalnetincomeof$643million.Overthenextcoupleyears,thenetincomedecreased,droppingto$116millionin2012andthento-$278millionin2014.In2015,itwentbackupto$618million7.Thesharpdeclinein2012-2014wasduetoAmazon’slargewarehouseexpansionaswellasthesteepdiscountsofferedonKindleFiretablets.Amazonaddedanadditional17warehousestotheexisting15inadditiontotakingalossoneverytabletsold.AllofthesefactorscontributedtoloweringAmazon’snetincomebyraisingexpenses8.

Amazon’sprofitshavebeengrowingatasteadypace.Startingin2011,thegrossprofitwas$11.9billionandhascontinuedtoincrease.In2012Amazonincurredaprofitof$17.3billion,andcontinuedtogrowthrough2015withprofitsof$41.6billion9.Theincreasedprofitshave6"Amazon.comInc."Amazon.comInc.Google,2Apr.2016.Web.2Apr.2016.<2)https://www.google.com/finance?q=amazon&ei=stb-VvjXKdbajAGNr57QBQ>.7"Amazon.comInc."Amazon.comInc.Google,2Apr.2016.Web.2Apr.2016.<2)https://www.google.com/finance?q=amazon&ei=stb-VvjXKdbajAGNr57QBQ>.8Streitfield,David."AmazonSuffersBigDropinIncome."TheNewYorkTimes.TheNewYorkTimes,25Oct.2011.Web.2Apr.2016.<http://www.nytimes.com/2011/10/26/technology/amazon-reports-a-sharp-decline-in-income.html?_r=0>.9"Amazon.comInc."Amazon.comInc.Google,2Apr.2016.Web.2Apr.2016.<2)https://www.google.com/finance?q=amazon&ei=stb-VvjXKdbajAGNr57QBQ>.


Amazon Corporation Snapshot

$591.43

Amazon.com operates the largest online retail marketplace in the US and provides cloud computing services to enterprises

Notable Development Timeline:2014: Launches Echo, a voice-activated information and home gadget device launches in the US

2015: Launches Dash Button, internet of things connected device for re-ordering household items.

2016: Launches Amazon Tap, a portable companion to Echo

Founded: July 5, 1994HQ: Seattle, Washington USA2015 Revenue: $107 billion USDCEO: Jeff Bezos

Amazon also purchased:

AMZN vs SPX 2012-2016

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providedtheinvestorswithmoreconfidenceintheirinvestment.Thestockpricehasfollowed

thetrendofthegrowthprofitstartingin2011at$171.40pershare,thestockpriceroseto

$673.57in201510.

InJanuaryof2016,Amazonreportedearningspersharetothestockholdersofonly$1

comparedtotheexpected$1.56.Eventhoughrevenuerose22%fromthepreviousyear,the

lowerearningspershareamountgreatlyaffectedtheirstockprice,andsharesplungedby

15%11.

AmazonPrimehasplayedabigpartinhelpingthecompany’srevenuerise.Membershipinthis

program,whichoffersfree2dayshipping,hasdoubledthepurchaseamountsofcustomers

throughAmazon.Atthestartof2011,therewereapproximately4millionmembersofPrime,

thisnumberalmostdoubledto7millionin2012.Itisexpectedthatby2017,therewillbeover

25millionmembers.ConsumershavedoubledtheirspendingonAmazon,duetothefree

shipping“perk.”Non-primeconsumersspendapproximately$505peryear,butaPrime

memberwillspendupwardsof$1,224annually.Thisismorethantwicetheamountmainly

becauseconsumersnolongerbuyatotheronlineretailstores,insteadtheywillshopon

Amazontoseeiftheproductischeaper,knowingthatshippingwillbefree12.

AmazonhasstartedtoaccommodatethegrowingPrimemembersandhasaddedwarehouses

totheirsupplychaintobetterfacilitateshipping.Between2010and2013theyspentatotalof

$13.9billiononfulfillmentexpansionswiththehopesofbetterservingtheircustomers13.The

willingnessofJeffBezostospendmoneytobetterservehiscustomersleadstoapositiveresult

inhighersalesandgreaterprofitsforAmazon.

10"Amazon.comInc."Amazon.comInc.Google,2Apr.2016.Web.2Apr.2016.<2)

https://www.google.com/finance?q=amazon&ei=stb-VvjXKdbajAGNr57QBQ>.11Pramuk,Jacob."AmazonEarnings:$1perShare,vsExpectedEPSof$1.56."CNBC.CNBC,28Jan.2016.Web.2

Apr.2016.<http://www.cnbc.com/2016/01/28/amazon-q4-2015-results.html>.12Tuttle,Brad."AmazonPrime:Bigger,MorePowerful,MoreProfitablethanAnyoneImagined."Time.Time,18

Mar.2013.Web.2Apr.2016.<http://business.time.com/2013/03/18/amazon-prime-bigger-more-powerful-more-

profitable-than-anyone-imagined/>.13Thau,Barbara."Amazon'sWarehouseExpansionGoesUnabatedAsAMeansToUnchallengedDominance."

ForbesRetail.16May2014.Web.2Apr.2016.<http://www.forbes.com/sites/barbarathau/2014/05/16/amazons-

warehouse-expansion-goes-unabated-as-a-means-to-unchallenged-dominance/#51dbec152421>.

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Amazon Company Performance Profile

Sell to Needs

Reinvest to Meet New

Needs

Shareholder Benefits


Competitive Life Cycle

Source: Madden, Bartley “Maximizing Shareholder Value and the Greater Good” (2005)Madden, Bartley “Guidepost to Wealth Creation: Value-Relevant Track Records” Journal of Applied Finance (2007)

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TheStrategyofAmazonOverviewAmazon seeks to be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators22. Amazon maintains a focus on long-term success and is willing to compromise short-term returns for a larger market share and customer base. Amazon works towards increasing its market share and the size of the customer base by expanding its ecosystem as much possible through innovation, brand awareness, and extraordinary customer service. The company’s mission and understanding the company’s focus provides the base for looking at how Amazon is positioned according to the Return Driven Strategy framework.

TheCommitmentTenantTenant1-EthicallyMaximizeWealthAmazonstrivestoincreaseitslong-termvaluethroughmarketleadershipandcustomer

growth.Amazonstatesonitssupplierrelationspagethatitisstronglycommittedtoconducting

itsbusinessinalawfulandethicalmanner,includingengagingwithsuppliersthatare

committedtothesameprinciples.“Werequiresuppliersinourmanufacturingsupplychainto

complywithourSupplierCodeofConduct*14Amazonalsoexpectsoursupplierstoholdtheir

suppliersandsubcontractorstothestandardsandpracticescoveredbyourSupplierCode.Our

productsmustbemanufacturedinamannerthatmeetsorexceedstheexpectationsof

AmazonandourcustomersasreflectedinourSupplierCode”.

Amazonusestheseethicalstandardsinadditiontotheircustomerfocustostriveforlong-term

returns.Theyarewillingtomakeinvestmentsandtakerisksintheshort-termtomaximize

long-termreturns.AsstatedinthetextofDriven“Inordertoachievewealth,management

mustfirstdefineitexplicitly.Thefirmshouldthenalignallofitsactivitiestowardthatgoalof

wealth-creationasdefined15”.Amazondefineswealthcreationas“Makeboldinvestment

decisionsinlightoflong-termleadershipconsiderationsratherthanshort-termprofitability

considerations.Thereismoreinnovationaheadofusthanbehindus,andtothatend,weare

committedtoextendingourleadershipine-commerceinawaythatbenefitscustomersand

therefore,inherently,investors--youcan'tdoonewithouttheother.Someofthesebold

investmentswillpayoff,otherswillnot,butwewillhavelearnedavaluablelessonineither

case”16.Amazongoesfurthertostatethattheyaremorefocusedonmaximizecashflowsthan

optimizingthebottomlineseeninGAAPaccounting.

14Amazon."SupplyChainStandards."SupplyChainStandards.02Apr.2016.Web.7Apr.2016.

<http://www.amazon.com/gp/help/customer/display.html?nodeId=200885140>.15Frigo, Mark L., and Joel Pitman. Driven Business Strategy, Human Actions and the Creation of Wealth. Strategy

& ExecutionLLC, 2007. Print. 162014LettertoShareholders."Letter.Amazon.comInc.24Apr.2015.Web.02Apr.2016.<http://phx.corporate-

ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual>.

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GoalTenantsTenant2-FulfillOtherwiseUnmetCustomerNeedsAmazonprovidesaccesstoeverythingacustomercouldpossiblyneedallinonelocationwithaquickreliablecustomerexperience.WhileAmazondoesnotdeliveranyuniqueproducts,thecustomerexperienceofutilizingalloftheiravailableservicesisunmatched.ThisunmatchedcustomerexperienceprovidesAmazonwithanexpansivecustomernetworkwhichitleveragesforfurthergrowth.ThesupplychainthroughAmazonhasbeenentirelyfocusedontheendcustomerandisunlikeanyothere-commercedistributor.Amazonhasinvestedheavilyinitssupplychainmakingitcapableofdeliveringtothemassesatthelowestpossiblecost.

Amazon.commaintainsadifficulttomatchcustomernetworkofconsumers,sellers,enterprises,andcontentcreator.Throughinnovations,patents,trademarks,andpartnershipAmazonisabletoprovideeachofthesecustomerswithextraordinarycustomerservice.Inaddition,itprovidesconsumerswithaonestopshopwithreliabledelivery.Sellersareabletoutilizethisonestopshoptoreachalargerconsumerbase.

ThroughAmazoncompaniesandenterprisessuchasNetflix,Amazon.comisabletogetcustomeranalytics,websitedesignassistance,andaccesstoAmazon’sdatabaseandstorageinfrastructure.

Tenant3-TargetAppropriateCustomerGroupAmazonappealstothemassesintryingtodeliverthebestpossiblecustomerservicetoeveryonetheyinteractwith.Theircustomersincludeconsumers,sellers,enterprises,andcontentcreators.AlthoughtheservicesAmazonoffersspansacrossnumeroustargetmarketsandsegments,itsmaincustomersegmentforAmazon.comaremiddleandupperclasspeoplewhodon’thavetimeorsimplywanttheconvenienceofshoppingonlineinsteadofatphysicalstores.ItalsoprovidesdifferenttypesofopportunitiesforthosewhowanttoselltheirproductsthroughAmazon.AlthoughwhenmostpeoplethinkofsellingproductsthroughAmazon,theyarelikelytalkingaboutAmazonMarketplace,italsoprovidesotherplatforms.Forexample,KindleDirectPublishingforwriterstopublishtheirbooksandAmazonAssociatesthatallowswebsitestolinkamazonproductsontheirwebsitesandmakemoneywhenproductsareboughtthroughthelink.Withthesedifferentservices,amazoncontinuestoidentifydifferenttargetmarketsandfindwaystomeettheirspecificneeds.

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TheCompetencyTenantsTenant4-DeliverOfferingsAmazondeliversonitscustomer-centricfocusthroughnumerousavenues.TheyareconstantlyevolvingandAmazonpositionsthemselvestocontinuedeliveringthebestcustomerservicepossible.BelowwehavelistedanumberoftheofferingsthatAmazonutilizestoexpanditsecosystemanddeliverexceptionalcustomerservice.

• Asimpleonlinemarketforbuyersandsellersofvariousgoodswithquickandreliabledeliverymethods.

• Dashbuttonordering• SubscribeandSave• PrimeTwo-DayShipping• PrimeNow• AmazonPublishing• FulfillmentbyAmazon-AllowssellerstoutilizeAmazon’sfulfillmentcenterstostore,

pack,andshiptheirproductsdirectlytocustomers.• AmazonWebServices:

o Broad&DeepCoreCloudInfrastructureServiceswithstorageandcontentdelivery,databasemanagement,andnetworking.

o RichPlatformServicessuchasanalytics,enterpriseapplications,mobileservices,andtheinternetofthings

o IncreasedDeveloperProductivityandOperationalEfficiencythroughdevelopertools,managementtools,securityandidentitytools,andapplicationservices


Focus on cash. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows.

Commitment & Goals

➢ Focus on the future○ Bold investments○ Cash is king

➢ Customer-centric○ Convenience &

Reliability➢ Targets

○ Mass Personalization

Describe the Strategy

Focus relentlessly on our customers.

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Tenant5-InnovateOfferingsAmazonisworkingtowardsbuildingservicesandproductsthatutilizetheInternetofThings.InternetofThingsisdefinedasinfrastructurefortheinformationsociety,enablingadvancedservicesbyinterconnecting(physicalandvirtual)thingsbasedonexistingandevolvinginteroperableinformationandcommunicationtechnologies17.AmazonservicesandproductsthatarealreadybeginningtoutilizethisincludeAmazonEchoandDashButtonordering.

AmazonWebServicesprovidesnumerousnewandevolvingservicesforcompanies.However,someoftheseservicesrequirelargedatawarehousesthathaveanegativecarbonfootprint.Ithasbegunutilizingwindandsolarfarmstohelpreducetheircarbonfootprintandiscommittedtoachieving100%renewableenergyusagefortheAWSglobalinfrastructurefootprint.AlthoughdronedeliveryhasnotbeenapprovedbytheFAA,Amazoncontinuestoresearchandtestforthepossibilityofdeliveringlightweightpackagesquicklytoconsumerswithoutneedingpersonneltoassistinthedelivery.

Tenant6-BrandOfferingAmazonisoftenthefirststopforsomeonewhoneedsaquickreliablesourceforastapleproductorauniqueproduct.Itcontinuestoprovidealargenetworkofcustomersandhaveareliabledistributionnetwork.Reliabilityisakeyfocus,asinthisrespect,Amazondependsonexecutiontomaintaintheirreputation,bridgingaconnectionbetweenthebrandandhighperformance.AccordingtoaYouGovindex,anauthoritativemeasureofbrandperception,Amazonisaccomplishingthisbridging.ItwasvotedasthemosthighlyregardedbrandintheUnitedStatesthroughmid-201518.

AmazonleveragesitsGenuineAssetstoaccomplishexecutioninfulfillingcustomerneedsandfurthersolidifyingthebrand.Thecompanycontinuestogrowhowever,andinexpandingAmazonofferings,itstrivesandplanstolinkthemallintoanAmazonecosystem.DesignedandmanufactureddevicessuchasAmazonKindleandAmazonEcho,drivecustomerengagementonotherfrontssuchasAmazonMarketplace,PrimeInstantVideoandPrimeMusic(Amazon2014LettertoShareholders).AmazonalsohasanumberofbrandsthatarenotasobviouslyundertheAmazonumbrella,forwhichthecompanycanfurtherutilizeitsGenuineAssetstoexpanditspresenceine-commerceandbeyond19.

17ITU-TRecommendations."ITU:CommittedtoConnectingtheWorld.15June2012.Web.02Apr.2016.<http://www.itu.int/en/ITU-T/gsi/iot/Pages/default.aspx>.182015-Mid-YearRankings:USTopBuzz."BrandIndex.2015.Web.02Apr.2016.<http://www.brandindex.com/ranking/us/2015-mid/top-buzz-rankings>.19Agarwal,Amit."CompaniesandBrandsOwnedbyAmazon.com."DigitalInspiration.23July2014.Web.02Apr.2016.<http://www.labnol.org/tech/amazon-owed-companies/19605/

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TheSupportingTenantsTenant7-PartnerDeliberatelyAmazonisconstantlylookingtoimprovethecustomerexperiencethroughpartnerships.Forexample,P&GandAmazonhavepartneredsothatwhenaP&GproductisorderedoffofAmazonitcanbedeliveredfromtheP&Gwarehouse.AmazonwasalsoabletoleveragethelargeconsumernetworkofPrimememberstogetHBO,Showtime,Starz,andothersubscriptionservicesmadeavailabletomembersforanadditionalmonthlyfee.ThishasincreasedthecontentprovidedthroughAmazonPrimewhichisfurtherhelpingmembershipgrow.

AnotherpartnershipthathashadastrongpositiveimpactatAmazonisitspurchaseofKivaSystemstohelpautomateportionsofthesupplychain.AndrecentlyAmazonhaspartneredwithAirTransportServicesGrouptofurtherreduceshippingcostsandensuringthereisadequatesupplychaincapacityforfurthergrowth20.

Tenant8-MapandRedesignProcessesContinuetomonitorsupplyweaknessandopportunitiesforexampleUPSandFedexwereunwillingtoexpandtheirairplanefleetsforAmazon,onecustomer,soAmazonleased20planestohelpcontinuereliablydeliveringgoodstocustomers.Continuingtoprovideinfrastructureneedsforonlineretailersandexpandingtheserver/cloudcomputingsupply(wsj.com).InordertodeliverthebestcustomerservicepossibleAmazonrequires24/7operations365daysayear.ToavoidtheexcessivestrainonemployeesAmazonpurchaseof

20BENSINGER,GREG."AmazonFindsAirFreightPartner."WallStreetJournal.09Mar.2016.Web.02Apr.2016.<http://www.wsj.com/articles/amazon-finds-air-freight-partner-1457538676>



➢Key Products▪ Marketplace▪ Prime▪ AWS

➢Continuous Innovation▪ Delivery▪ Products▪ IoT

Competency

➢Reliability▪ YouGov BrandEx

Highest Brand Perception

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KivaSystemshelpsautomatethewholepickingandpackagingprocessatlargewarehouses21.

Tenant9-EngageEmployeesandOthersOperationsisattheheartoftheAmazonexperienceandtheiremployeesareakeypieceinhelpingamazonachieveallroundexcellentcustomersservice.AmazonEmployeesaredescribedasdriven,hardworkingandhighlyefficientpeople.“Ifyoulovetobuild,toinvent,topioneeronahighperformanceteamthat'spassionateaboutoperationalexcellence-You’llloveithere.”

Sincetherecessionin2008,Amazonhascreatedmorethan100,000jobsandtheabilitytocontinuetoretaintalentfromacrossdifferentindustriesandbackgroundsisessentialforthefutureofthecompany.TheAmazonCareerChoiceProgramisavailabletofulltimehourlyemployeeswhohavebeenemployedforaslittleasonecontinuousyear.Theprogrampre-pays95%oftuitionandfeesforthosewhowantadditionallearningopportunities.Becauseofthenumberofinterestinthisprogram,Amazonisnowbuildingonsiteclassroomsfortechnicalclasseswhichmakestheprocessevenmoreseamlessfortheiremployees.AlthoughaNewYorkTimesarticleindicatedthatAmazonemployeeswerebeingworkedunderterribleconditions,Amazonhasnotcommentedonthisclaim.OneofthewaysAmazongivesbacktothecommunityisthroughAmazonSmile.Whenyoushopatsmile.amazon.com,Amazondonatesaportionofyourtoyourfavoritecharitableorganization6.

Tenant10-BalanceFocusandOptionsAmazonfocusesonbeingacustomercentriccompanyandhavingthatfocusispartlywhathasmadethecompanyassuccessfulasitis.Theflexiblenatureofthecompanyiswhatallowsittobuildoncurrentprocessesinordertofindmoreefficientandinnovativewaystobethecustomercentriccompanytheyhavealwaysbeen.Amazoncontinuallywatchesandstaysawareofsignificanttechnologicalchangesthatcouldenhancethefirm'sabilitytoexpandthewaystheymeettheunmetneedsoftheircustomers.Amazon’sstrategyforconnectingsmartappliancestoitse-commerceoperationswhichisgearedaroundtheeaseatwhichcustomerscanbuyproductsfromamazonisoneofthestrategiesthatshowsthattheyareplanningforthefuturefloodofconnecteddevicesinthehome.

Tenant11-CommunicateHolisticallyAmazon,throughcustomerreviews,continuestoprovethatitscustomerscomefirst.CustomerreviewsareacriticalpartoforderingfromAmazon.com.Itallowscustomerstoprovidefeedbackonproductswhichcouldbeusefultoothercustomerswhomayhavesimilarneeds.Amazonalsogathersinformationfromcustomerspastorderswhichinturnsuggestsfuturepurchasesandpossiblyidentifyingandfulfillingaonceunknownneed.

21Kim,Eugene."AmazonIsNowUsingaWholeLotMoreoftheRobotsfromtheCompanyItBoughtfor$775Million."BusinessInsider.22Oct.2015.Web.02Apr.2016.<http://www.businessinsider.com/amazon-doubled-the-number-of-kiva-robots-2015-10>

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TheFoundationandCommitmentTenantsGenuineAssetsTwoofAmazon’smostuniqueassetsareitscustomernetworkandreviewsonproductsfrom

consumers.Thecustomernetworkislargelysupportedbytheexcellentcustomerservice

whichkeepscustomershappyandreturning.Thecustomer-centricfocusalsoturnsthe

Amazonbrandintoanasset.PeoplerecognizethenameAmazonasaplacewheretheycan

quicklygetaccesstovariousproductsandreviewsofotherconsumers’thoughtsonsuch

products.Amazonalsohasalargenumberofotherintangibleandtangibleassets.Oneofthe

mostidentifiableassetsisthedistributioncenterandsupplychainmanagement.Inaddition,

Amazonstatesinits10-k“weregardourtrademarks,servicemarks,copyrights,patents,

domainnames,tradedress,tradesecrets,proprietarytechnologies,andsimilarintellectual

propertyascriticaltooursuccess”22.Amazonalsomentionstheiremployees,partners,and

othersasassetsofthefirm.WithAmazon’sfocusonincreasingthenumberofusersand

creatingthemostcustomer-centriccompanypossible,ithasalargenumberofnewinnovations

andstrategieswhichcomewithanumberoftrademarks,copyrights,andpatentscovering

proprietarytechnology22.

VigilancetoForcesofChangeAmazoncontinuestofocusonthecustomerandisworkingonmanyinnovationsforthefuture.

CurrentlyinvestigationfordronedeliverythroughPrimeAirisbeingconductedandAmazonis

lookingintohowregulationswillaffectthis.Amazoncontinuestolooktowardthefutureand

howgrowthmaybeconstrained.TherecentpartnershipwithAirTransportServiceGrouphas

alreadyhelpedprepareAmazonforfuturegrowthandhavingadequatesupplychaincapacity.

22Amazon,Inc.“Form10-K.”Amazon.com29January2016.Web.1April2016.


Supporting

➢ Partnering○ Third Party Sellers○ Acquisitions

➢ Map and Redesign○ Direction○ Kiva

➢ Communicate Holistically○ Platform


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WhileAmazoncontinuestopushgrowthandinnovatestheservicesandproductstheyprovidecustomerstherapidlyevolvinginformationsectorwillcertainlyposesomerisks.

DisciplinedPerformanceMeasurementandValuationAmazonbelievesthatafundamentalmeasureofitssuccesswillbetheshareholdervalueitcreatesoverthelong-term.ThisvaluewillbedrivenbyAmazon’sabilitytoextendandsolidifyitsstrongmarketleadership.GrowingandstrengtheningtheAmazonmarketsharewillmaketheAmazonecosystemmorepowerful.ThefirstmeasureofperformanceAmazonconsidersiscustomerandrevenuegrowth.ThisisthedegreetowhichAmazon’scustomersarerepeatingcustomersandAmazonbelievesthismeasuresthestrengthofitsbrand.Amazoncontinuestofocusrelentlesslyoncustomersandwillcontinuetomakeinvestmentdecisionsinlightoflong-termmarketleadershipconsiderationsratherthanshort-termprofitabilityconsiderations.Amazoncontinuestomeasureitsprogramsandtheeffectivenessofitsinvestmentsanalytically,todropthosethatdonotprovideacceptablereturns,andtostepupitsinvestmentinthosethatworkbest.Inthe2014LettertoShareholders,Amazonstatedthatitstrivestolearnfrombothoursuccessesandourfailures16.



➢ RapidFulfillmentProcess

➢ CustomerService/Satisfaction

➢ InnovationCulture

▪ CEO/Bezos

➢ AWS

➢Operations/Logistics

➢ CustomerAnalytics/CRM

Genuine Assets

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ReturnDrivenStrategy-Pro/ConAnalysisUsingtheKeyReturnDrivenStrategyDiagnosticsoutlinedin“ReturnDrivenStrategy–LessonsfromGoodtoGreat15”byDr.MarkLFrigo,werankedAmazon’sexecutionofeachtenetandfoundationonascaleofonetofive.InordertofurtherfilterAmazon’sbestandworststrategycomponents,wemadeuseofhalfpointswhenappropriate.Throughthisranking,weidentifiedthreetenetsthatpositivelystoodout(highlightedingreeninthetablebelow),andtwothatseemedtobeexceptionallylacking(highlightedinredinthetablebelow).

Identifier Tenant/Foundation StrategyDiagnosticRatingT1 EthicallyMaximizeWealth 4.0T2 FulfillOtherwiseUnmetCustomerNeeds 5.0T3 TargetAppropriateCustomerGroups 4.0T4 DeliverOfferings 5.0T5 InnovateOfferings 4.0T6 BrandOfferings 4.5T7 PartnerDeliberately 4.0T8 MapandRedesignProcesses 4.5T9 EngageEmployeesandOthers 2.0T10 BalanceFocusandOptions 3.0T11 CommunicateHolistically 4.0F1 GenuineAssets 5.0F2 VigilancetoForcesofChange 4.5F3 CommunicateHolistically 3.5

ThetwotenantswethoughtAmazonperformedwellatincludeTenet2:FulfillOtherwiseUnmetCustomerNeedsandTenet4:InnovateOfferings,bothofwhicharedonebyleveragingFoundation1:GenuineAssets.OnegreatexampleisAmazon’sDashbuttons.Thesearestandalonebuttonsthatareplacednexttowheretheitemisstored,andatthepushofabuttonplaceanorderforsaidproduct.“Amazondeliveriesareahugeadvantageforcollegekids,someofwhommaynothavecars,andmanyofwhomliveinplaceswhere,asidefromWalmart,therearen’talotofeasyshoppingoptions”23.Millennialsincollegetownsgenerallydon’thavethesameaccesstoshoppingoptionswhencomparedtotheircounterpartsinlargeurbanareas.TheDashbuttoncreatesvaluebyfulfillinganeedthatwouldotherwisegopartiallyortotallyunmet.ByinnovatingonhowAmazondeliverstheofferings,itisrespondingtochangingcustomerneeds.Thisisallpossiblethroughleveragingofthelogisticsandrapidfulfillmentgenuineassets.Amazonhaslongbeenaleaderincustomerserviceandspeedydelivery,whichformanyshoppershassetthestandardforonlineshopping.

23Whittaker,GClay.http://www.popsci.com/youve-been-looking-at-amazon-dash-all-wrong.1April2016.WebPage.2April2016.

18

WhileAmazondoesmanythingswell,thereareacoupleoftenetsinwhichAmazondoesnotexcel.Specifically,AmazoncouldfocusmoreonTenet9:EngageEmployeesandOthersandTenet10:BalanceFocusandOptions.Inregardstoemployeeengagement,therehavebeenvariousnewsstoriesreportingonAmazon’smistreatmentofbothcorporateandwarehouseemployees.WhileAmazonhascreatedmanyjobsinthepastfewyears,ifemployeetreatmentdoesnotchange,itishardtoseehowemployeeengagementcouldbeavaluablepartofAmazon’sstrategy.InaNewYorkTimesarticleonlifeattheAmazonheadquarters,itwasreportedthatwhitecollaremployeesarepushedtothemaxinanextremelycompetitiveenvironment,employeesarerankedyearlyandbottomemployeesareeliminated,andemployeeswithextremepersonalcircumstancessuchascancerorstillbirthareexpectedtokeepupextremelyhighperformance24.ALosAngelesTimesarticleonlifeattheBreinigsville,Pennsylvaniawarehousehighlightsrequirementsofworkinginextremeheatandmandatoryovertime25.IfAmazonfocusedontheemployeesasmuchasthecustomers,employeescouldbevaluablepartnersandAmazonwouldlikelybeevenmoresuccessful.

Asfarasbalancingfocusandoptions,Amazonisconstantlyinvestinginanddevelopingnewtechnology,bothrelatedandunrelatedtoitscorebusiness.AlthoughAmazoncurrentlyseemstobesucceedingatitscorebusinessofdeliveringitemsquicklytoitscustomers,ithasalotofinvestmentsindiversifiedbusinesses(i.e.Firephone,AmazonDestinations,etc.),soitmaybehardtosustainthefocus.IfAmazon’smanagementdoesnotkeepaneyeonthisgoingforward,itispossiblethatthecorebusinesscoulddecline.

24Kantor, Jodi, and David Streitfeld. “Inside Amazon: Wrestling Big Ideas in a Bruising Workplace.” The New York Times, 15 August, 2015. Web. 1 April, 2016.25 Soper, Spencer. “Amazon Warehouse Workers Complain of Harsh Conditions.” The Los Angeles Times, 1 October, 2011, 1 April, 2016.

19

R&DEfficiencyAnalysisSeeattachedAppendixdocument.



Return Driven Strategy: Pro/Con Analysis

Identifier Tenet/Foundation Rating

T1 Ethically Maximize Wealth

T2 Fulfill Otherwise Unmet Customer Needs

T3 Target Appropriate Customer Groups

T4 Deliver Offerings

T5 Innovate Offerings

T6 Brand Offerings

T7 Partner Deliberately

T8 Map and Redesign Processes

T9 Engage Employees and Others

T10 Balance Focus and Options

T11 Communicate Holistically

F1 Genuine Assets

F2 Vigilance to Forces of Change

F3 Disciplined Performance Measurement and Valuation




Positives

➢ Fulfill Otherwise Unmet Customer Needs○ Dash button appeals to college students

and those with fewer shopping options

➢ Innovate Offerings○ Amazon is constantly improving the way it

delivers what people want

➢ Genuine Assets○ Leveraging of logistics and rapid fulfillment

have allowed for increased delivery speeds and customer satisfaction

Negatives

➢ Engage Employees and Others○ Warehouse employees overheating○ No work life balance for corporate

employees

➢ Balance Focus and Options○ Tons of diversified innovation

BUT○ Could all of the new options take the

focus off of the core business?

20

StrategicRisksAmazonfacessixmajorstrategicbusinessrisksasidentifiedintheir10-KReport.Iftheserisksbecameareality,thecompanycouldfacenegativefinancialconsequences.Byidentifyingandmanagingtheserisks,Amazonwillbeabletoidentifyopportunitiestopreventtherisksfromoccurring.

MarketRiskInordertobesuccessful,organizationsneedtotargetacustomermarket.Theriskhoweveristhatthismarketwilldecreaseandtheywilllosethemajorityofthecustomerbase.WhileAmazon’scurrentmarketisbroadandtouchesalotofgenerations,theprimarybuyersarefocusedintheMillennialgenerationwhohavebusylivesandareunabletomakeittothestoreregularly.Amazonisatriskofnewtrendsoreventsthatcouldshiftthebuyingofthisgroupofpeopletoanotherweb-basedretailer.Individualsinthisgenerationtendtogravitatetothenewandtrendingthing.WithsocialmediabeingsuchavitalpartoftheireverydaylifetheycaneasilyhearaboutanewAmazon-likeprovider,shiftingtheirattentiontoanewcompanyandleavingAmazonwithasmallercustomerbase.

InnovationRiskTheinnovationcultureisagenuineassetofAmazon.Thisassethoweverintroducesanewrisktothecompanyaswell.Bycontinuouslyinnovatingtheirgoodsorservices,theyaresettingtheprecedentthattheywillcontinuetoinnovateinthefuture.JeffBazoshasbroughtthisculturetothecompanybutwillitcontinueifheleft?Appleisalsoconsideredaveryinnovatingorganization,howeverwhenSteveJobspassedinnovationcametoahaltandthecompanyissimplyupdatingthesamephonesandtabletsthathecreatedinsteadofbringingsomethingnewtothemarket.AmazonhasasimilarriskbecauseifanythinghappenedtoBazos,wouldthecompanyfindnewwaystomeetcustomerneedsorwouldtheycontinuetoimprovethecurrentones.

AnotherinnovationriskthatAmazonfacesisaroundtheirproducts.Whiletheirservicesaretheforefrontoftheirbusiness,theydocreateproducts.TheKindlewastheirbreakthroughinproducthoweversincethentheirinnovationshavebeenminimal.Theirnewestinnovation,TheEcho,hasimpressedcertainconsumerswithitsvoicerecognitionability.Inaddition,itconnectstootherhouseholdtechnologyitemssuchasfurnaceandairconditioningifthehousehasthoseproducts.Thisfilledaconsumerneedhoweveritcame8yearsafterthereleaseoftheKindleE-reader.Willittakethemanother8yearstoinnovateanewproduct?

OperationsRiskPredictingcustomerneedsallowsAmazontomanagetheirwarehousesappropriately.IfAmazondoesn’tsuccessfullypredictandfulfilltheordersitisnotonlyriskingitsreputationwithcustomersbutalsobringanoperationalriskthebusinesswhichcouldcauseexcessinventoryandadditionalcostsduetoimpairmentexpenses.Inaddition,failuretooptimizethefulfillmentprocesscouldcreateadditionalcostsforthecompany.

21

Amazonreliesonanumberofshippingcompaniestodeliverthegoodsconsumerspurchase.

TheyarerelyingonthosecompaniestomakethedeliveriesinthetimeAmazonguaranteedand

withoutanydefects.Iftheproductislateordamaged,Amazonitcouldnegativelyimpactthe

Amazonimageinadditiontoincurringadditionaltoexpensestoreplacethedamagedgood.

EmployeeEngagementRisk Amazonhascurrentlybeenunderfireforitstreatmentofstaff.Longhoursandunrealistic

expectationsarecausingstaffmemberstoleavethecompany.Staffretentionandtheabilityto

attracttalentisamajorrisk.Thelonghoursandtheenvironmentdonotnecessarilyconcern

Amazon,SusanHarker,describesitas“Thisisacompanythatstrivestodoreallybig,

innovative,groundbreakingthings,andthosethingsaren’teasy26”.IfAmazonwantsto

maintaintalentinordertosupporttheirinitiativesinthefuture,theywillneedtoadjusttheir

employeemodel.Amazonalsofacesthelossofkeypersonnel,suchastheirCEO,“Wedonot

have“key-person”lifeinsurancepolicies.Thelossofanyofourexecutiveofficersorotherkey

employeescouldharmourbusiness.”.

Regulatory/GovernmentalRiskAmazonservesnumerousmarketsandasaresultanychangeinregulationsorgovernmental

requirementswouldhaveasignificantimpactonAmazon’sbusiness.NotonlywouldAmazon

beimpactedbychangesinregulationsbasedonthemarketsitsservice,butalsothe

services/productsprovided.SinceAmazonofferservices/productsinanumberofforums(i.e.e-

commerce,electronicdevicesandotherservices)theirexposuretochangesinregulatorylaws

ishigherthanabusinessthatoffersonetypeofproduct/service.Aswithanybusiness

“Unfavorableregulationsandlawscoulddiminishthedemandforourproductsandservices

andincreaseourcostofdoingbusiness.22”Whiletheimpactisknown,thereisn’tmuchtodoto

mitigatethisriskduetoregulatorychangesbeingoutofthecontrolofthecompany.Their

innovativecultureisincreasingtheirvulnerabilityintheregulatoryenvironment.

PartneringRiskAsAmazoncontinuestogrowandacquirenewpartners,theymaybeexposedtoadditional

risk.Forexample,newpartnersmayhavedifferentaccountingtreatmentsorlogisticmethods

thatdonotblendwellwithAmazon.ThiscouldcauserisktoAmazon’sbusinessmodelthat

couldimpactcustomersatisfactionorthecompany'sreputation.

Amazonalsofacesriskwiththeircurrentpartnerships.Theircurrentpartnershipstrategyis

basedontheshort-termview,“Wedonothavelong-termarrangementswithmostofour

supplierstoguaranteeavailabilityofmerchandise,content,components,orservices,particular

26Kantor,Jodi,andDavidStreitfeld."InsideAmazon:WrestlingBigIdeasinaBruisingWorkplace."TheNewYork

Times.TheNewYorkTimes,15Aug.2015.Web.1Apr.2016.

<http://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-

workplace.html>.

22

paymentterms,ortheextensionofcreditlimits.22”Iftheirpartnerrelationshipschange,Amazon’sbusinesswillbesignificantlyimpactedandmaychangethenatureoftheirofferings.

SummaryandConclusionsAmazonhascreatedenormouswealthoverthepast22yearsandtodayhasamarketcapvaluationof$277B.CEOandfounder,JeffBezoshastakenAmazonfromanonlinebookretailertotheworld’slargestretailer,recentlysurpassingWal-Mart(NYSE:WMT).

Amazonhascreatedanextremelydiverseofferingofservicesandproducts,andcontinuestoinnovateathighrates,capturingmanymarketsegments.Althoughslowing,Primemembershipscontinuetorise,andAmazonseeminglyentersanewmarketeveryquarter.Acriticalorcautionaryanalysisofthecompanyissomewhatdifficult,becauseitissuchahighlyinnovativeorganization.Anorganizationthatisconstantlyevolving,experimenting,andtakingoncalculatedrisksisachallengingorganizationtocritique,sinceitspendsenormousresourcesonResearchandDesignandinnovation,itisoftenwellaheadofthecurve.

However,adeepanalysisofAmazonraisesafewconcernsaboutitsabilitytosustainhighinnovationandgrowth.TheInternetofThings(IoT)technologycontinuestoexpandandbecomeapartofconsumers’everydaylives.WhileAmazonisinvestinglargelyinthisareawithproductssuchasEcho,Dash,andothers,thefutureimpactofIoTislargelyunknownatthispoint.CurrentlyAmazonoffersasignificantcompetitiveadvantageintheirGenuineAssetofrapidfulfillment,buttheever-evolvingIoTdomaincouldchangethewayconsumerspurchaseproductsinthefuture.ItisunclearifAmazonwillcontinuetoevolvewiththischanginglandscape.Also,asconsumerpurchasingbehaviorchanges,itisunknownifrapidfulfillment

Page 15© Copyright Dr. Mark L. Frigo 2015 - Do not copy or redistribute without express written consent of Dr. Mark L. Frigo15

➢ Innovation Risk○ Sustainability of “hits”○ “Steve Jobs” effect

➢ Partnering Risk○ Inheriting risk of partners○ Volatility of short term strategy○ Tax Regulations

➢ Employee Engagement Risk○ Talent retention○ “But Google employees get…”

Amazon Strategic Risks

23

willberelevantinthelongterm.Ifconsumersembraceamodelinwhichproductsare

deliveredbeforetheyevenknowtheyneedorwantthem(anunmetneed,currently),howwill

Amazonrespondtothis?Weareseeingasmallemergenceofthistypeofbuyingbehaviorright

now,inthetrial-sizeboxdeliveryservicesthatarebecomingpopularsuchasBirchBox,Kiwi(for

children),BlueApron(preparedmeals)andothers.

TherearealsoconcernsaboutAmazon’slongtermabilitytoattractandretaintalent.Recent

mediacoverageofpoorworkingconditionsandaculturewhichreportedlydoesnotsupporta

work/lifebalancecouldmakeAmazonalessdesirableplaceofemploymentfornewgraduates

whoappreciateaculturethatsupportsahealthylifestyle.Iftoptalentisluredtocompetitors

suchasGoogleandApple,willAmazonsuffer?

Inconclusion,asweevaluatetherapidsuccessandhighinnovationofAmazon,thepotential

warningindicatorsseemtopaleincomparisontothegrowthopportunitiesahead.Amazonhas

beenabletoreinvestinitselfforthemajorityofitslife,andjustrecentlyin2015started

reportingrealprofitsforshareholders.Thislonghistoryofreinvestmentwillsurelypayofffor

Amazon,asitsinfrastructureandtechnologiesaresuperiortoitscompetitors,andpoisethe

companyforcontinuedgrowth.Also,asAmazonplaceshighimportanceoninnovationand

experimentation,thecompanywilllikelystayaheadofconsumerpreferences,andpotentially

modelandformconsumerbehavior.WiththeirinvestmentintheIoTtechnologies,Lab126,

androbotics,Amazonislikelytocontinuetoshapethewayinwhichretailandcloud

technologyevolve.Thereisalsogreatgrowthpotentialinemergingmarketsoutsideofthe

UnitedStates,andalsopotentialforgrowthinacquisitions.Forthesereasons,weexpect

AmazontostayonthehighinnovationphaseoftheCompetitiveLifecycle,andcontinue

growingforthenextfiveyears.

24


Lessons Learned and Future Outlook

+Opportunity➢ InternetofThings(IoT)➢ InnovationaPartofCulture➢ EmergingMarkets➢ Acquisitions

“Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the

interests of customers and shareholders align.”

- Jeff Bezos, 2014 Letter to Amazon Shareholders

- Caution➢ Forcefulchangeofconsumer

needs➢ Employeeengagement➢ Pre-emptivefulfillment

Team AmazonCustomer-centric focus & investment → Long term value & growth

25

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Agarwal,Amit."CompaniesandBrandsOwnedbyAmazon.com."DigitalInspiration.23July2014.Web.02Apr.2016.<http://www.labnol.org/tech/amazon-owed-companies/19605/

Amazon,Inc.“Form10-K.”Amazon.com29January2016.Web.1April2016.

"Amazon.comInc."Amazon.comInc.Google,02Apr.2016.Web.02Apr.2016.<.>.

Amazon."SupplyChainStandards."SupplyChainStandards.02Apr.2016.Web.7Apr.2016.<http://www.amazon.com/gp/help/customer/display.html?nodeId=200885140>.

"AmazonPassesWal-MartasBiggestRetailerbyMarketValue."BloombergNews.InternetRetailer,24July2015.Web.02Apr.2016.

"AmazonStartupStory."Fundable.Startups.co,2014.Web.02Apr.2016.

AmazonSupportStaff."AmazonFulfillmentHistory."Amazon-HistoryandCulture.Amazon,02Apr.2016.Web.02Apr.2016.

Frigo,MarkL.,andJoelPitman.DrivenBusinessStrategy,HumanActionsandtheCreationofWealth.Strategy&ExecutionLLC,2007.Print.

Ghemawat,Pankaj."LeadershipOnline:Barnes&Noblevs.Amazon.comLeadershipOnline:Barnes&Noblevs.Amazon.com."HarvardBusinessReview1998.Print

"ITU-TRecommendations."ITU:CommittedtoConnectingtheWorld.15June2012.Web.02Apr.2016.<http://www.itu.int/en/ITU-T/gsi/iot/Pages/default.aspx>.

Kantor,Jodi,andDavidStreitfeld."InsideAmazon:WrestlingBigIdeasinaBruisingWorkplace."TheNewYorkTimes.TheNewYorkTimes,15Aug.2015.Web.1Apr.2016.<http://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html>.

Kim,Eugene."AmazonIsNowUsingaWholeLotMoreoftheRobotsfromtheCompanyItBoughtfor$775Million."BusinessInsider.22Oct.2015.Web.02Apr.2016.http://www.businessinsider.com/amazon-doubled-the-number-of-kiva-robots-2015-10

Pramuk,Jacob."AmazonEarnings:$1perShare,vsExpectedEPSof$1.56."CNBC.CNBC,18Mar.2013.Web.2Apr.2016.<http://www.cnbc.com/2016/01/28/amazon-q4-2015-results.html>.

Streitfield,David."AmazonSuffersBigDropsinIncome."TheNewYorkTimes.TheNewYorkTime,25Oct.2011.Web.02Apr.2016.

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Thau,Barbara."Amazon'sWarehouseExpansionGoesUnabatedAsAMeansToUnchallenged

Dominance."ForbesRetail.N.p,16May2014.Web.2Apr.2016.

<http://www.forbes.com/sites/barbarathau/2014/05/16/amazons-warehouse-expansion-goes-

unabated-as-a-means-to-unchallenged-dominance/#51dbec152421>.

Tuttle,Brad."AmazonPrimeBigger,MorePowerful,MoreProfitablethanAnyoneImagined."

Time.Time,18Mar.2013.Web.2Apr.2016.<http://business.time.com/2013/03/18/amazon-

prime-bigger-more-powerful-more-profitable-than-anyone-imagined/>.

Woods,Ben."How21BigTechCompaniesGotTheirNames."TheNextWebRSS.N.p,24Oct.2014.Web.02Apr.2016.

AMZN-Amazon

ResearchandDevelopment(R&D)EfficiencyAnalysisReport

1

ReturnDrivenStrategyResearchQuestions–APPENDIX

TouseinR&DEfficiencyStudyAnalysisReportsbycompanies

Dr.MarkL.Frigo2016

Tenet1:EthicallyMaximizeWealth

● Executivecompensation,DEF14Ao Amazon’scompensationphilosophyisstock-basedthatvestsoveraperiodof

time.“Webelievegrantingstock-basedcompensationtoemployeesatalllevelsacrosstheCompanyresultsinmotivated,customer-centricpeoplewhothinkandactlikeownersbecausetheyareowners.”1Executivecompensationisprimarilystock-basedinordertotieintotalcompensationtolong-termshareholdervalue.

● LookathowR&Dimpactscompensationo Amazonhasafocusonmaximizingthepresentvalueoffuturecashflows,and

withthatfocusitcompensatesitsemployeeswithsignificantstockownershipratherthancash.Thistypeofcompensationmotivatestheemployeestodowellforthecompany,andisrewardedforthesuccessofthemselvesandultimatelythecompany.

1 Amazon, Inc. “Proxy Statement.” Amazon.com 10 June 2015. Web. 1 April 2016.

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Tenets2&3:GoalTenets-FulfillUnmetCustomerNeeds

● DescribewhatcustomerneedsaremetbyR&Do Consumers

§ RetailWebsitesandMobileApps

● ThemajorityofAmazon’scustomerneedsare fulfilled through its retail

website.

● Amazon claims “We serve consumers through our retail websites and

focus on selection, price, and convenience.We design our websites to

enablemillionsofuniqueproductstobesoldbyusandbythirdparties

acrossdozensofproductcategories.”2

● Amazon’smobileappsprovidecustomersaccess to the retail storeand

digitalcontentconvenientlyfromtheirmobilephoneortablet.

● AmazonR&Disconstantlyimprovingandrevisingthewebsite’sandapps’

layouts,content,andfunctionalitytooptimizethecustomer'sexperience

andfulfillallunmetneeds.

§ Consumptionofdigitalmedia

● Theamazonwebsite andappprovides aportal for customers to locate

andconsumedigitalmediaincludingmusic,movies,andebooks.

§ Devices

● Amazon devices, “including Kindle e-readers, Fire tablets, Fire TVs, and

Echo”3,providecustomersavarietyofoptionstoconsumedigitalmedia

and live a connected lifestyle.Devices range in functionality, price, and

targetaudience(e.g.kids,bookreaders,moviefanatics,etc.).

§ Price

● Aprimaryreasonformanyconsumers toshopatAmazon is lowprice.

Amazon is able to leverage its scale and reach tooffer prices that are

commonlylowerthanitscompetition.

● Asstatedinthe201510-Kreport,“Westrivetoofferourcustomersthe

lowest prices possible through low everyday product pricing and

shippingoffers,andtoimproveouroperatingefficienciessothatwecan

continuetolowerpricesforourcustomers.”4

2 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016. 3 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016. 4 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016.

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● R&DeffortsinAmazon’ssupply/valuechainallowittocontinuallydrivedownpricesandsatisfyconsumers’needs.

o Sellers§ Amazon’sR&Dfoundthattheneedsofsellerscouldbesatisfiedbyproviding

itsvaluechainasaservice.§ Amazon offers “programs that enable sellers to sell their products on our

websites and their own brandedwebsites and to fulfill orders through us.[Amazonis]notthesellerofrecordinthesetransactions,butinsteadearn[s]fixedfees,apercentageofsales,per-unitactivityfees,orsomecombinationthereof.”5

§ This serviceallows sellers to takeadvantageof someofAmazon’sGenuineAssetsincluding:● Reach/exposuretocustomers● Valuechain,infrastructure● E-commerceplatform(website)

o DevelopersandEnterprises§ The needs of developers and enterprises are fulfilled via Amazon Web

Services(AWS).AWSprovidescloudcomputingresourcesthatarecriticaltoitscustomers’successincluding:● Cloudinfrastructure● Storageandcontentdelivery● Databaseservices● Security● Analytics

§ AWSisacriticalareaforAmazonR&Dfor it isabletoservecustomers inaquicklygrowingmarketsegment.ThusfarAmazonhassuccessfullymettheseneeds,ashighlightedontheAWSwebsite:● “Proven Success: More than a million customers choose AWS, from

AirBnBtoGEtoMLB.● “Broad&DeepPlatform:70+productsandservicessupportalmostany

usecase.

5 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016.

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● “Secure: Comprehensive capabilities to satisfy the most demandingrequirements.”6

o ContentCreators§ Amazon R&D found it could further fulfill customer needs by providing

“authors,musicians, filmmakers,appdevelopers,andotherstopublishandsell content.”7 Customers can utilize this service by selling their contentdirectly on Amazon’s website (wherein Amazon pays a royalty) or bypublishingthroughAmazonPublishing.

§ This service provides an alternative to traditional publishing channels forthosewhodonothavetheresourcestopursuesuchendeavors.

● Howarethecustomerneedschanging?o Shorterdeliveryleadtimes

§ Lead time expectations for items ordered online are growing shorter.Customers are pushing e-commerce companies like Amazon to expeditedeliverynearlytothepointofinstantfulfillment.

§ AmazonR&Disaddressingthesechangesthroughnewproductsandserviceslike Amazon Prime Now (delivery within hours), Amazon Air (delivery bydrone),andAmazonRobotics(industrialautomation).

o Increasedconvenience§ Fewercustomersareplacingordersexclusivelythroughdesktopcomputers.

Asmore customers shift their primary engagement with Amazon to theirmobile phone, Amazon R&D must constantly innovate and improve itsmobileplatform.

o Broaderrangeofproducts§ Beginning as an online book retailer, Amazon has grown to provide

customerswith amyriad number of products. Amazon seeks to fulfill anyproductneedacustomermayhave,includingelectronics,householditems,consumerproducts,groceries,andrecentlylocalrestaurantdelivery.

o Expandingcloudservicesneeds§ AmazoncreatedAWSinresponsetothegrowingneedforcloudcomputing

and web service needs. These will continue to grow as more companiesrequirethisservicetoexpandtheirbusinessesintotheonlinerealm.

6 Amazon, Inc. Amazon Web Services. Web. 1 April 2016 https://aws.amazon.com/ 7 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016.

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o Internetofthings§ Connecteddevicesarebeginningtotakeholdinthemarket.AmazonR&Dis

aleadingforceinthistrendandisfindingmeanstoestablishAmazonastheindustrybenchmark.

● TowhatextentisR&Dcustomerdriven,suchasthesemiconductorindustry?o Amazon’s R&D is heavily customer driven. All initiatives are centered around

specific customer needs to ensure resources are not wasted on attempts toinnovateofferingsthecustomerdoesnotcarefor.

o Therolethat innovationplays inAmazon’sR&Dprocess isbest illustratedwithexamplesofcustomerneedsandrecentR&Dprograms:§ InternetofThings(connecteddevices,Echoandhomeautomation)§ Devicesforcontentconsumption(Kindle)§ Devicesforconvenience(Dash)§ AWSplatformservices§ AmazonRobotics(supplychainoptimizationtoreducecostandleadtime)

● WhatmarketsegmentsisR&Dtargeting?o Aslistedinitsfinancialstatements,Amazonhas“reportablesegmentstoNorth

America,International,andAmazonWebServices(“AWS”).”8Thissegmentationof sales gives insight into where themajority of Amazon’s revenue is located(NorthAmerica,morespecificallytheUS).ThisrevealsthereissignificantmarketopportunityoutsideofAmazon’scorecompetence.

o Amazonfurthertargetsthecustomergroupsoutlinedincustomerneedssection:“consumers,sellers,developers,enterprises,andcontentcreators”.9

o Within these broad market segments Amazon further segments based onspecific needs. In retail, for example, Amazon uses targeted marketing tocustomizesuggesteditems,emailblasts,andpromotionstocustomersbasedontheirbrowsingandpurchasehistory.

● Arethosemarketsegmentsincreasing,decreasingorstagnant?o AllmarketsegmentsthatAmazonistargetingareincreasingduetotheincreased

commonalityoftheinternetandworldwideconnectivity.§ Consumers:● More customers are embracing e-commerce to traditional brick-and-

mortarstores.

8 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016. 9 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016.

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§ Sellers:

● Brick-and-mortar store-owners are embracing e-commerce to recoupdwindlingsales.

§ DevelopersandEnterprises:

● Cloud computing is becoming the norm for nearly all businesses, thosewhodonotembraceitwillbeleftbehind.

§ ContentCreators:

● Usingtheinternetasanewplatformtosharecontentinallforms(music,video,print)thenumberofcontentcreatorsisrapidlyincreasing.

Tenets4,5&6:CompetencyTenets

● HowisR&Ddrivinginnovation?o AmazonBasics

§ AmazonBasicsisAmazon’shousebrand,offeringeverydayessentialstocustomers.“Westrivetobeabrandthatofferseverythingourcustomerswantwhenitcomestoselection,quality,andcost.Wemeasureoursuccessbyreadingcustomerreviewsandensuringourproductshavehighratings.”10

o DashButtons

§ AmazonhasmorethantripledtheamountofbrandsavailabletoitsPrimemembers.Memberscanchoosefromover100DashButtonsfromdozensofretailcategoriesandproducts.BrandsincludeBrawny,Charmin,Clorox,Doritos,Energizer,Gains,HonestKids,L’OrealParisRevitalift,Lysol,Peet’sCoffee,Playtex,Purina,RedBull,SeventhGeneration,SlimJim,Snuggle,Starbucks,Trojan,VitaminWater,andmore.“PrimemembersincreasinglyuseDashButtonstostaysuppliedwitheverydayessentials—DashButtonordershavegrownbymorethan75%inthelastthreemonthsandnowtakeplacemorethanonceaminute.”11

o EchoDot

§ EchoDotisavoicecontrolled,hands-freedeviceusingthesamevoicerecognitionasEcho.EchoDotcanbeconnectedtospeakers,allowingcustomerstoaddvoicecontroltotheirhomestereosystem.EchoDotcan

10 Amazon, Inc. AmazonBasics. Web. 1 April 2016 http://www.amazon.com/b?node=10112675011 11 Amazon, Inc. “More Than 100 Amazon Dash Buttons Now Available, Giving Prime Members the Easiest Way to Order Thousands of Products”, 31 March 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2152070

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alsobeusedforasmartalarmclock,orasavoiceassistanttocontrolsmarthomedevices.

o AmazonTap§ AmazonTapisanAlexa-enableportableBluetoothandWi-Fispeaker

offeringfull-rangesound.AllacustomerneedstodoistapthemicrophonebuttonandaskforanythingwiththeAlexaVoiceService.“AmazonTaphasdualstereospeakerswithDolbyprocessingthatprovidecrispvocals,extendedbassresponse,and360°omni-directionalaudio.”12

o Brita“Smart”Pitcher§ BritaandAmazonhavejoinedforcestokeeptheBritafilterasfreshas

possible.ThenewWi-Fi-enabledBritaInfinitypitcherisequippedwithabuilt-incounterthattrackstheamountofwaterthatpassesthroughthepitcher’sfilter.ThepitcheritselfwillautomaticallyorderanewfilterthroughAmazonDashReplenishmentwhentheoldfilternearsitscapacity.ThisnewpitcherwithAmazonDashReplenishmentgivesBritaownersthecapabilitytohaveanewfilterrightwhentheyneeditwithouthavingtogotothestoretopurchaseone.

§ “WesawanopportunitytoworkwithAmazontomakekeepingup-to-dateonfilterchangeseffortlessforBritausers.ByintegratingWi-FiconnectivityintothispitchersoitcanconnectwithAmazonDashReplenishment,we’vecreatedanelegant,simplesolutiontoeliminatethatmomentwhenyourealizeyoudidn’tre-orderyourfilter.”13

12 Amazon, Inc. “Amazon Introduces Echo Dot and Amazon Tap, Two New Alexa-Enabled Devices”, 3 March 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2143663 13 Amazon, Inc. “Brita, Amazon Team Up to Introduce First ‘Smart’ Pitcher” 29 February 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2144174

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● HowisR&Ddrivingoperationalefficiency?o AmazonRobotics

§ “At Amazon Robotics,we are continually reimaginingwhat now looks like.Weseethebigpicture,imagineabetterone,andmaketheconnectionsthatturn complex problems into elegantly simple solutions.Our drive toward asmarter,faster,moreconsistentcustomerexperiencefuelsAmazon-andtheindustry - forward,now.Witha fearless resolve toachieve the improbablewith real solutions, wemeet tomorrow’s challenges today.We ReimagineNow.”14

§ Amazon Robotics focuses on research and development to continuouslyexploreopportunitiestoexpandproductlinestoredefinewhat‘now’meanstoAmazon.

o Amazonleasingplanes

§ AmazonFulfillmentServicesisleasing20Boeing767freighterplanesforfiveto seven years with plans to complete a deal to lease planes to transportproductsandgettingthemtocustomerhomesfaster.Theplan istoensureair cargo capacity to support one to two-day delivery for customers. Thisallows Amazon to rely less on multinational shipping companies like UPS,USPS,andFedEx.

14 Amazon, Inc. Amazon Robotics. Web. 1 April 2016. https://www.amazonrobotics.com/#/

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§ “For Amazon, the main benefit of owning the shipping network could besignificant for its bottom line amid soaring shipping costs. The companyspent over $8.7 billion on shipping in 2014, up from $6.6 billion in 2013.Creatingalogisticsservicecoulddramaticallylowerthosecosts.”15

o AmazonWebServices(AWS)

§ AWSannouncedtheAWSDatabaseMigrationServiceisnowavailabletoallcustomers. “Customers, including global enterprises and startups from arange of industries, used the AWS Database migration Service preview tomovemorethan1,000databasestotheAWSCloudsinceJanuary1,2016.”16

§ AWS offers over 70 featured services for compute, storage, databases,analytics, mobile, Internet of Things, and enterprise applications from 12geographicregionsacrosstheworld.

o Expanding global operations, including product and service offerings andgrowing infrastructure to support Amazon’s retail and services businessesincreasesthecomplexityofthebusiness,includingmanagementandoperations.

● HowisR&Dimpactingabrand?o Technologycostsprimarilyconsistofresearchanddevelopmentactivities,which

includespayrollandotherrelatedexpensesforemployeeswhoareinvolvedinapplication,production,maintenance,operation,andplatformdevelopmentfornewandexistingproductsandservices.InvestinginmultipleareasoftechnologyandcontentallowsAmazontoenhancethecustomerexperienceandtoimprovetheprocessefficiency.“Weexpectspendingintechnologyandcontenttoincreaseovertimeaswecontinuetoaddemployeesandtechnologyinfrastructure.”17

o “For2015,2014,and2013,wecapitalized$642million(including$114millionofstock-basedcompensation),$641million(including$104ofstock-basedcompensation),and$581million(including$87millionofstock-basedcompensation)ofcostsassociatedwithinternal-usesoftwareandwebsitedevelopment.”18

15 Rao, Leena, “Amazon Is Leasing 20 Boeing Planes to Create an Air Cargo Network”, Fortune, 9 March 2016. Web. 1 April 2016. http://fortune.com/2016/03/09/amazon-boeing-jets/ 16 Amazon, Inc. “Amazon Web Services Announces that over 1,000 Databases Have Migrated to AWS since January 1, 2016” 15 March 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2148757 17 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016. 18 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016.

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Tenets7,8,9,10,11:SupportingTenets

● WhatpartneringisinvolvedinR&Do AmazonpartnersbothinternallyandexternallyforitsR&Dendeavors.

o Internalpartneringisfocusedprimarilyoncreationanddeliveryofitsdevicesandsupplychainimprovements.

§ Lab126

● DesignsandindustrializesAmazon'selectronicdevicesincludingKindlee-readersandtablets,Dot,Dash,Echo,etc.

● Havinganin-housedesignfirmallowsAmazontoensureR&Discloselylinkedtomarketingandsalesteams,thusaligninginnovationtocustomerneeds.

§ AmazonRobotics

● Designsandimplementsrobotsforindustrialautomation.ItimprovesoperationsinAmazon’sdistributioncenterstoeliminatewaste,reducedeliverytime,andreducecost.

o ExternalpartneringinR&DisprimarilyfocusedonAWS’skeycustomers.WhenAWSpartnerswiththesefirmsitisnotonlyforfinancialbenefit.AWSalsogainstheopportunitytofurtherdevelopandinnovateitsoffering.

§ Netflix

● “OnlinecontentproviderNetflixisabletosupportseamlessglobalservicebypartneringwithAmazonWebServices(AWS)forservicesanddeliveryofcontent.AWSenablesNetflixtoquicklydeploythousandsofserversandterabytesofstoragewithinminutes.”19

§ Comcast

● AmazonsupportedComcastintheimplementationofitsX1deliveryplatformwhendemandforthenewserviceexceededComcast’scapacity.“ByturningtoAWS,ComcastisabletoquicklyaddcapacitywithAmazonVPCandDirectConnect,expandingtheirdatacentersastheyscaletoprovideinteractiveentertainmentondemand.”20

19 Amazon Web Services, Inc. “Netflix Case Study”, Amazon Web Services, Inc. Web. 1 April 2016. https://aws.amazon.com/solutions/case-studies/netflix/?hp=tile 20 Amazon Web Services, Inc. “Comcast Case Study”, Amazon Web Services, Inc. Web. 1 April 2016. https://aws.amazon.com/solutions/case-studies/comcast/?hp=tile

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§ Here● Hereisacompanythatspecializesinelectronicmapping.Ithasrecently

beenpurchasedbyagroupofautomanufacturersincludingBMW,Audi,andDaimler.Theendgoalistocreateself-drivingcars.

● “AmazonissaidtobeinterestedinbecomingashareholderinHere,whichwouldensurethee-commercegiantbecomestheprimaryproviderofcloudcomputingtothecompany.”21

● HowisR&Dusedtomapandredesignprocesses?o AmazonRoboticsrevolutionizesthetraditionaldistributioncenterconceptby

reorganizingthewarehouselayoutanddeployingautomatedrobotstomovegoodsmoreefficientlythroughoutthefacility.Thisresultsinreducescostandleadtime.

o AmazonAirseekstoexpeditedeliveryleadtimebyeliminatingtheneedfortraditionalgroundshippingmethods.Unmannedairvehicles(UAV)ordronesaredeployedfromtheAmazonwiththecustomer’sorderonboard.Thedronethendeliversthepackagedirectlytothecustomer’srequestedpointofdelivery.

o LeasingAirplanes:Asdiscussedinprevioussections,Amazonhaschosentobypasstraditionaldistributionmethodswhereairshipmentswouldbebookedbyalargecarrier(specificallyFedEx).Amazoninsteadisredesigningitsvaluechaintoincludeleasedairplaneswithwhichitcandictateitsownflight/deliveryscheduleandpayloadrequirements.

● Employeeengagement:HowareemployeesengagedinR&D?o AmazonhasdisplayeditscommitmenttoR&Dbyincreasingbothspendingand

hiringinitstechnologygroup:“Weexpectspendingintechnologyandcontentwillincreaseovertimeasweaddcomputerscientists,designers,softwareandhardwareengineers,andmerchandisingemployees.”22

o Amazon’sLab126companyculturefurtherexplainshowemployeesarethebackboneoftheR&Dculture:“AmazonLab126isfilledwithpeoplewholovewhattheydoandtheproductswedesignandengineer.Ourteamsaresmart,inventiveandrolluptheirsleevestogetthejobdone.Westriveforingenuityandsimplicity,alwayskeepingthecustomerinmind.”23

21 Hawkins, Andrew J., “Amazon and Microsoft will reportedly invest in Here, the self-driving car mapping unit”, The Verge, 1 April 2016. Web. 1 April 2016. http://www.theverge.com/2016/4/1/11346710/amazon-microsoft-here-autonomous-car-tech-investment 22 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016. 23 Amazon Lab126. “Company Culture”, Amazon Lab126. Web. 1 April 2016. http://www.lab126.com/company-culture.htm

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● Balancefocusandoptions:Whatisthebalancebetweenacompany’sR&Dandtheircompetitors?Whatistherightbalanceintheindustry?o AcomparisonofAmazon’sspendingcomparedtocompetitorsrevealsthat

Amazonspent$10BonR&Din2014whichwassimilartootherlargetechnologyfirms.Ofparticularnote,thisvaluewasmuchhigherthanApple’sspendingof$6B.24

o ThetrendchartbelowshowshowAmazon’sR&Dspendinghasincreasedoverthepast5years25.Amazon’sR&Dspendingappearstobealignedwiththespendingofothertechnologycompanies.Thecompanyisinitsgrowthphaseanditssuccessisreliantuponinnovation,justifyingthelargeR&Dexpense.

o DespiteAmazon’sstrongfocusonR&D,ithasalsodemonstrateditsuseof

options.Severalproductsareindevelopmentatalltimestoutilizeallresources.Ifaproductfails,thecompanyisnothesitanttodiscontinuetheproductandmoveontosomethingelse.SuchisthecasewiththeFirePhone,whichwasdiscontinuedinAugustof2015,accompaniedbylayoffsoftheassociatedR&Dteam26.ThephotobelowdemonstratesAmazon’sbalanceoffocusandoptions.

24 Levy, Adam. “5 Tech Companies Spending More on R&D Than Apple Inc.”, The Motley Fool, 14 June 2015. Web. 1 April 2016. http://www.fool.com/investing/general/2015/06/14/5-tech-companies-spending-more-on-rd-than-apple-in.aspx 25 YCharts. “Amazon.com Research and Development Expense (Quarterly)”, YCharts. Web. 1 April 2016. https://ycharts.com/companies/AMZN/r_and_d_expense 26 Bensinger, Greg. “Amazon Curtails Development of Consumer Devices”, The Wall Street Journal, 26 August 2015. Web. 1 April 2016. http://www.wsj.com/articles/amazon-curtails-development-of-consumer-devices-1440632203

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● Communicateholistically:HowdoesthecompanycommunicatetheirR&D

internallyandexternally?o Amazonhasaconsistentcommunicationframeworkthatdeliversthesame

messageregardlessofwherethecompanyisaccessed.Amazon’swebsitelistsallpartnersandproductsatthebottomofitspage.Websiteconstructionofallsubsidiarycompaniesfollowscommonthemesandlayouts,allowingforacohesivedeliveryofAmazon’sR&Dinitiatives.

Foundations

● GenuineAssets:Patents,etc.o Amazon.comwebsiteandbrand

§ Amazon’swebsiteisitsmostvaluableasset.ThisistheprimarychannelthroughwhichcustomersengagewiththecompanyandisthusaprimarysourceforR&Dspending.

§ “Ourprimarysourceofrevenueisthesaleofawiderangeofproductsandservicestocustomers.Theproductsofferedonourconsumer-facingwebsitesprimarilyincludemerchandiseandcontentwehavepurchasedforresalefromvendorsandthoseofferedbythird-partysellers,andwealsomanufactureandsellelectronicdevices.”27

o IntellectualProperty§ Amazon’sIPmustbeprotectedtoensureitsbrand,devices,robots,

inventions,website,programming,infrastructure,andotheruniqueassetsarelegallyprotected.

27 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016.

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§ “Weregardourtrademarks,servicemarks,copyrights,patents,domainnames,tradedress,tradesecrets,proprietarytechnologies,andsimilarintellectualpropertyascriticaltooursuccess,andwerelyontrademark,copyright,andpatentlaw,trade-secretprotection,andconfidentialityand/orlicenseagreementswithouremployees,customers,partners,andotherstoprotectourproprietaryrights.Wehaveregistered,orappliedfortheregistrationof,anumberofU.S.andinternationaldomainnames,trademarks,servicemarks,andcopyrights.Additionally,wehavefiledU.S.andinternationalpatentapplicationscoveringcertainofourproprietarytechnology.Wehavelicensedinthepast,andexpectthatwemaylicenseinthefuture,certainofourproprietaryrightstothirdparties.”28

o Globalfootprintofdistributioncenters§ Amazon’sdistributionnetworkenablesthecompanytofulfillitscustomer

needsoftimelydelivery.Thephysicalwarehousesandtheirstrategiclocationsaredifficulttoimitate,givingAmazonauniquecompetitiveadvantage.

§ ThechartbelowdemonstratesthevastnessofAmazon’sdistributioncenternetworkintheUS.29

28 Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016. 29 Amazon, Inc. “Amazon in North America”, Amazon, Inc. Web. 1 April 2016.

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● Vigilancetoforcesofchange:WhatforcesofchangearedrivingR&D?Competitors?Customers?Technologicalchanges?○ Computingpower

§ “Webelievethatadvancesintechnology,specificallythespeedandreducedcostofprocessingpowerandtheadvancesofwirelessconnectivity,willcontinuetoimprovetheconsumerexperienceontheInternetandincreaseitsubiquityinpeople’slives.Tobesttakeadvantageofthesecontinuedadvancesintechnology,weareinvestingininitiativestobuildanddeployinnovativeandefficientsoftwareandelectronicdevices.WearealsoinvestinginAWS,whichoffersabroadsetofglobalcompute,storage,database,andotherserviceofferingstodevelopersandenterprisesofallsizes.”30

○ Internetofthings/smartdevices§ TheInternetofthings,whichAmazonisintroducingwithitsBrita“Smart”

Pitcher,givesthecompanyalotofopportunitiesforgrowth.ResearchanddevelopmentwillbediscoveringnewwaystobringtheInternettothings.

○ Globalcustomerbase(differentneeds,geographicdifferences)○ Expansionofe-commerceandsearchengine(competitors)

§ Thisisdonethroughcommercialagreements,strategicalliances,andbusinessrelationships.Thearrangementsarecomplexandrequiresubstantialinfrastructurecapacityandpersonnel,whichcanlimittheamountofserviceAmazoncanprovide.

○ Strategicalliancesandpartnerships(makingcriticalagreements) § Successfulpartnershipsareverybeneficialforbothparties,butthereare

sometimesunsuccessfulpartnerships.“Wemayinthefutureenterintoamendmentsonlessfavorabletermsorencounterpartiesthathavedifficultymeetingtheircontractualobligationstous,whichcouldadverselyaffectouroperatingresults.”31

● Disciplinedperformancemeasurementandvaluation:WhatperformancemeasuresareusedwithinthecompanyforR&Dperformance?Whichperformancemeasuresdotheyfocusonexternalreportsandcommunication?○ Researchanddevelopmentcostsareincludedintechnologyandcontentcosts.

Relatedexpensesincludesalariesforemployees,AWS,andothertechnologyinfrastructureexpenses,butalsoeditorialcontent,buying,andmerchandisingselection.


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○ “Weseektoinvestefficientlyinseveralareasoftechnologyandcontentsowemaycontinuetoenhancethecustomerexperienceandimproveourprocessefficiencythroughrapidtechnologydevelopmentswhileoperatingataneverincreasingscale.”32

○ IncreasedspendingintechnologyandcontentisrelatedtotechnologyinfrastructuremostlyallocatedtoAWSandanincreaseinpayrollandrelatedcostsassociatedwithexpandingproductsandservices.

○ “For2015,2014,and2013,wecapitalized$642million(including$114millionofstock-basedcompensation),$641million(including$104millionofstock-basedcompensation),and$581million(including$87millionofstock-basedcompensation)ofcostsassociatedwithinternal-usesoftwareandwebsitedevelopment.”33

Performance Summary


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Bibliography

Amazon, Inc. Amazon Web Services. Web. 1 April 2016 https://aws.amazon.com/

Amazon, Inc. “Amazon Web Services Announces that over 1,000 Databases Have Migrated to AWS since January 1, 2016” 15 March 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2148757

Amazon, Inc. AmazonBasics. Web. 1 April 2016 http://www.amazon.com/b?node=10112675011 Amazon, Inc. “Amazon in North America”, Amazon, Inc. Web. 1 April 2016. Amazon, Inc. “Amazon Introduces Echo Dot and Amazon Tap, Two New Alexa-Enabled Devices”, 3 March 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2143663 Amazon, Inc. Amazon Robotics. Web. 1 April 2016. https://www.amazonrobotics.com/#/

Amazon, Inc. “Brita, Amazon Team Up to Introduce First ‘Smart’ Pitcher” 29 February 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2144174

Amazon, Inc. “Form 10-K.” Amazon.com 29 January 2016. Web. 1 April 2016.

Amazon, Inc. “More Than 100 Amazon Dash Buttons Now Available, Giving Prime Members the Easiest Way to Order Thousands of Products”, 31 March 2016. Web. 1 April 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2152070

Amazon, Inc. “Proxy Statement.” Amazon.com 10 June 2015. Web. 1 April 2016.

Amazon Lab126. “Company Culture”, Amazon Lab126. Web. 1 April 2016. http://www.lab126.com/company-culture.htm

Amazon Web Services, Inc. “Netflix Case Study”, Amazon Web Services, Inc. Web. 1 April 2016. https://aws.amazon.com/solutions/case-studies/netflix/?hp=tile Amazon Web Services, Inc. “Comcast Case Study”, Amazon Web Services, Inc. Web. 1 April 2016. https://aws.amazon.com/solutions/case-studies/comcast/?hp=tile

Bensinger, Greg. “Amazon Curtails Development of Consumer Devices”, The Wall Street Journal, 26 August 2015. Web. 1 April 2016. http://www.wsj.com/articles/amazon-curtails-development-of-consumer-devices-1440632203

Hawkins, Andrew J., “Amazon and Microsoft will reportedly invest in Here, the self-driving car mapping unit”, The Verge, 1 April 2016. Web. 1 April 2016. http://www.theverge.com/2016/4/1/11346710/amazon-microsoft-here-autonomous-car-tech-investment

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Levy, Adam. “5 Tech Companies Spending More on R&D Than Apple Inc.”, The Motley Fool, 14 June 2015. Web. 1 April 2016. http://www.fool.com/investing/general/2015/06/14/5-tech-companies-spending-more-on-rd-than-apple-in.aspx

Rao, Leena, “Amazon Is Leasing 20 Boeing Planes to Create an Air Cargo Network”, Fortune, 9 March 2016. Web. 1 April 2016. http://fortune.com/2016/03/09/amazon-boeing-jets/ YCharts. “Amazon.com Research and Development Expense (Quarterly)”, YCharts. Web. 1 April 2016. https://ycharts.com/companies/AMZN/r_and_d_expense

© Copyright Dr. Mark L. Frigo 2015 - Do not copy or redistribute without express written consent of Dr. Mark L. Frigo


Analysis of the Strategy and Strategic RiskOf Amazon

SEV 611Return Driven StrategySpring 2016Dr. Mark L. FrigoThe Center for Strategy, Execution, and ValuationKellstadt Graduate School of BusinessDePaul University

© Copyright Mark L. Frigo 2015 - Do not copy or redistribute without express written consent of Dr. Mark L. Frigo

CASSANDRA KULPA JESUS MAGANA MICHAEL MERCADO JOSEY NIETO MORIAM OLOWO MEAGAN PADILLA KRYSTAL PERNELL-LITTLE JENNIFER PRINCE CAROLINE RICCOLO ANDREW SCHILLER MICHAEL SMALL ALEX SOLOMON JOSEPH VODZIAK SCOTT WETHY DANIEL WINTERNITZ



What do you get…



Amazon Strategy

Summary of Topics

Amazon Performance R&D and Risk Summary &

Conclusion

What it means to be

customer centric

How thestrategy aligns

with this mission

Innovating for customers and

the risks

Can Amazon keep getting it

right?



SEV Team Picture

(Picture Left to Right): Caroline Riccolo, Jennifer Prince, Scott Wethy, Andrew Schiller, Moriam Olowo, Michael Mercado, Dr. Mark Frigo, Alex Soloman, Michael Small, Joseph Vodziak, Dick Anderson, Jesus Magana, Krystal Pernell-Little, Megan Padilla, Cassandra Kulpa, Josey Nieto, Danny Winternitz


Amazon Corporation Snapshot

$591.43

Amazon.com operates the largest online retail marketplace in the US and provides cloud computing services to enterprises

Notable Development Timeline:2014: Launches Echo, a voice-activated information and home gadget device launches in the US

2015: Launches Dash Button, internet of things connected device for re-ordering household items.

2016: Launches Amazon Tap, a portable companion to Echo

Founded: July 5, 1994HQ: Seattle, Washington USA2015 Revenue: $107 billion USDCEO: Jeff Bezos

Amazon also purchased:

AMZN vs SPX 2012-2016



Amazon Company Performance Profile

Sell to Needs

Reinvest to Meet New

Needs

Shareholder Benefits


Competitive Life Cycle

Source: Madden, Bartley “Maximizing Shareholder Value and the Greater Good” (2005)Madden, Bartley “Guidepost to Wealth Creation: Value-Relevant Track Records” Journal of Applied Finance (2007)


Focus on cash. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows.

Commitment & Goals

➢ Focus on the future○ Bold investments○ Cash is king

➢ Customer-centric○ Convenience &

Reliability➢ Targets

○ Mass Personalization


Focus relentlessly on our customers.



➢ Key Products▪ Marketplace▪ Prime▪ AWS

➢ Continuous Innovation▪ Delivery▪ Products▪ IoT

Competency

➢ Reliability▪ YouGov BrandEx

Highest Brand Perception


Supporting

➢ Partnering○ Third Party Sellers○ Acquisitions

➢ Map and Redesign○ Direction○ Kiva

➢ Communicate Holistically○ Platform




➢ Rapid Fulfillment Process

➢ Customer Service / Satisfaction

➢ Innovation Culture

▪ CEO/Bezos

➢ AWS

➢ Operations/Logistics

➢ Customer Analytics / CRM

Genuine Assets




Identifier Tenet/Foundation Rating

T1 Ethically Maximize Wealth

T2 Fulfill Otherwise Unmet Customer Needs

T3 Target Appropriate Customer Groups

T4 Deliver Offerings

T5 Innovate Offerings

T6 Brand Offerings

T7 Partner Deliberately

T8 Map and Redesign Processes

T9 Engage Employees and Others

T10 Balance Focus and Options

T11 Communicate Holistically

F1 Genuine Assets

F2 Vigilance to Forces of Change

F3 Disciplined Performance Measurement and Valuation




Positives

➢ Fulfill Otherwise Unmet Customer Needs○ Dash button appeals to college students

and those with fewer shopping options

➢ Innovate Offerings○ Amazon is constantly improving the way it

delivers what people want

➢ Genuine Assets○ Leveraging of logistics and rapid fulfillment

have allowed for increased delivery speeds and customer satisfaction

Negatives

➢ Engage Employees and Others○ Warehouse employees overheating○ No work life balance for corporate

employees

➢ Balance Focus and Options○ Tons of diversified innovation

BUT○ Could all of the new options take the focus

off of the core business?



Describe the R&D Efficiency of this Company

➢ Expansion of Amazon Dash○ Buttons

■ 100+ buttons available■ Order growth >75% in last 3 months■ Orders occur >1X per minute

○ Brita “Smart” Pitcher■ Automatic replacement filter orders

➢ Fire phone discontinued in August 2015

➢ FY2015 Technology & Content Spending (R&D)○ $12.54B○ 35% growth over PY○ 11.7% of sales

© Copyright Dr. Mark L. Frigo 2015 - Do not copy or redistribute without express written consent of Dr. Mark L. Frigo15

➢ Innovation Risk○ Sustainability of “hits”○ “Steve Jobs” effect

➢ Partnering Risk○ Inheriting risk of partners○ Volatility of short term strategy○ Tax Regulations

➢ Employee Engagement Risk○ Talent retention○ “But Google employees get…”

Amazon Strategic Risks


Lessons Learned and Future Outlook

+ Opportunity➢ Internet of Things (IoT)➢ Innovation a Part of Culture➢ Emerging Markets➢ Acquisitions

“Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the

interests of customers and shareholders align.”

- Jeff Bezos, 2014 Letter to Amazon Shareholders

- Caution➢ Forceful change of consumer

needs➢ Employee engagement➢ Pre-emptive fulfillment

Team AmazonCustomer-centric focus & investment → Long term value & growth

Team 1 Amazon - Final Paper and Presentation

Documents

Transcript of Team 1 Amazon - Final Paper and Presentation