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Amazon Com The Brink Of Bankruptcy Case Solution

Solution Id Length Case Author Case Publisher
1784 2157 Words (10 Pages) Lynda M. Applegate Harvard Business School : 9809014
This solution includes: A Word File A Word File

Amazon had been underperforming with having faced loses of over a billion dollars in 2000 and having seen a decline in its share price. The company had to achieve growth and reduce its costs. An analysis of the company shows that it had high margins. The environment that it operated in, has potential growth in the market due to increasing internet usage. The competitive rivalry was high. Amazon had the advantage of well-established infrastructure and excess capacity. Amazon is recommended to use this capacity and infrastructure to penetrate into the music, videos and books market, which is expected to grown in the future.

Following questions are answered in this case study solution

  1. Executive Summary

  2. Introduction

  3. The central issue

  4. Analysis

  5. Options

  6. Recommendations

Case Analysis for Amazon Com The Brink Of Bankruptcy

2. Introduction

The famous online retailer was not as well performing in 2001, as it is today. The company had a net loss of over a billion dollars by the end of 2000. The aim of this report is to analyse the situation that Amazon is in and recommend possible strategic options that it can pursue to solve the main issues at hand. The report first analyses the symptoms and the main issue being faced. It then carries out an analysis of the company’s performance and its current strategy. The external environment of Amazon is analysed using the PEST analysis and Porter’s 5 forces model. Amazon’s internal competencies and capabilities are analysed using the VRIO framework. Based on this analysis, possible strategic options for Amazon are reviewed and recommendations are made for the best option to pursue. This report is based on Amazon in the global context and in the year 2001. 

3. The central issue

The symptoms faced by Amazon include the company’s rising fulfilment costs. These were 11% of the sales in 1998 but had risen to about 14% of sales by 1999. The stock price of the company was not as high in value as it was before. This had fallen drastically from its highest price of $113 in 1999. The market value of the company in the stock market had fallen as a result. The falling of stock prices has implications as the company would not be able to generate capital if wanted in another round of funding. The company had cash flow problems with low levels of cash showing on the balance sheet in the end of 1999. These were higher in 2000 due to the company borrowing money to keep itself in operation. 

The company had been facing loses as seen from its income statements. The income statement showed a loss of about $719 million in 1999 and a loss of $1.4 billion in 2000. The reason for these high losses were the high cost of operations. The cost of sales were also high. The issue in lack of profitability lied in the costs being too high for the company and the sales being too low.  

Another problem for Amazon was that it had invested heavily in infrastructure, which made it have excess capacity while having low scale of operations. The company invested about $429 million in infrastructure for its digital business leading to overcapacity of about 70% to 80%. The problem being that the company had capacity but no business to utilize this capacity. This and even the problems mentioned before, point out to two central issues. The first of these was that the company needed to grow but wasn’t able to. The second was that the costs of the company were too high. The following sections will analyse how the company can go about achieving this growth and reducing these costs.

4. Analysis

i. Performance

The gross margin on the financial statement tells about the company’s efficiency in sales of products. The costs of sales in relation to the sales are known this way. For Amazon, the gross margin was increasing when compared from 1999 to 2000. It was 17.7% in 1999 and 23.7% in 2000. This shows that the company has improved in terms of reducing its costs of sales. This margin, however, was very low when compared to its competitor e-bay. 

The operating margin tells about a company’s operating expenses. For Amazon, when 1999 is compared with 2000, the operating expenses have increased in terms of value. However, when the operating margin is looked at. This has improved from -22% to -11%, which shows that a greater operating profit has been generated as a percentage of sales than in 1999. This shows that the company has improved in terms of reducing its operating expenses. This margin, too, was very low when compared to its competitor e-bay. 

ii. Current Strategy

The current strategy of Amazon will be analysed using the strategy triangle in this section. The strategy triangle states that there are three components of the strategy, which are customers, company and competitors. 

The customers for Amazon are young people who use the internet. These people belong to the upper income classes. In psychographic terms, these customers are tech savvy people. These customers have a need for convenience and that is why they prefer to shop online rather than at physical retail. The company has a growth strategy, where it aims to achieve this growth through innovation. The competitive strategy for Amazon is differentiation as it tries to be different from other online retailers through its better service and fulfilment.

iii. Environment

The PEST analysis tells about the external macro environment that the company operates in. The PEST analysis for Amazon is included below.

In the US, presidential elections were held in the year 2000 in which the democratic party one. This had implications for businesses and Amazon in the form of government policies that would follow. For example, in June 2000 a regulation was passed that allowed consumers online to have the same rights and protection as that of paper transactions.

The economy of the United States had started to slow by the end of the year 2000. In the year 2001, the economy was expected to drop from a growth rate of over 5.2% to 3.2%. Inflation in the USA was rising from under 3% to over 4% by the end of the year 2000. This showed that the United States’ economy was expected to slow down in 2001.  

The demographics of USA in the 2000 census showed that the population under the age of 18 years amounted to 26% of the population. Majority of the population was aged between 18 and 64. These made 62% of the population.

The internet penetration in the United States was over 43% and this figure was increasing rapidly. The increased usage of internet amongst the population of USA was a positive thing for an online retailer like Amazon. This brought opportunities for the company to sell online and also use the internet to reach out to its target audiences. 

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