Chapter 7: Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
Why Study Amazon?
Amazon is the largest online retailer and has expanded to dozens of categories beyond
books. As much of the firm’s media business (books, music, video) becomes digital, the
Kindle business (which has expanded to tablet, set-top box, and smartphone) is a
conduit for retaining existing businesses and for growing additional advantages. And the
firm’s AWS cloud computing business is one of the largest players in that category.
Amazon takes a relatively long view with respect to investing in initiatives and its
commitment to grow profitable businesses. The roughly seven-year timeline is a difficult
one for public companies to maintain amid the pressure for consistent quarterly profits.
Amazon’s profitability has varied widely, and analysts continue to struggle to interpret
the firm’s future. However, studying Amazon will reveal important concepts and issues
related to business and technology.
The Emperor of E-Commerce:
o Amazon’s sophisticated fulfillment operations speed products into and out of
inventory, reinforcing brand strength through speed, selection, and low prices.
o The Flywheel
Three pillars driving growth:
Customer Experience (convenience)
o Amazon Warehouse Robots
o Rapid inventory turnover and long payment terms enable Amazon to
consistently post a negative cash conversion cycle. The firm sells products and
collects money from customers in most cases before it has paid suppliers for
o Cash Conversion Cycle:
Period between distributing funds and collecting cash for a given
o Amazon has a NEGATIVE CCC because it collects cash from customers BEFORE
distributing funds to its suppliers.
o The cost structure for online retailers can be far less than that of offline
counterparts that service similarly sized markets. Savings can come from
employee costs, inventory, energy usage, land, and other facilities related
o Offline vs. Online Retail Efficiencies
o 3 times / year o avg. book in store 121 days
o Book on shelf 68+ days after paying suppliers
o shelf & warehouse stock
o 30% returns
o 16 times / year
o avg. book in house 22 days
o avg. 28 days of float / title
o all warehouse stock
o few returns
Size and Scale
o Amazon’s scale is a significant asset. Scale gives Amazon additional bargaining
leverage with suppliers, and it allows the firm to offer cheaper prices in many
categories than nearly every other firm, online or off. Scale through multiple
warehouses allows Amazon to offer more products, a greater product selection,
and same-day delivery for urban areas near warehouses. Amazon financials
suggest that the firm is deferring profitability due to its increased investment in
capital expenditures such as its warehouse and data center buildout.
o Around 40 percent of products sold on Amazon are offerings sold through
Amazon Marketplace by third parties. Amazon gets a cut of each sale, maintains
its control of the customer interface, and r