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9/13/2011

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


Lynda M. Applegate Martin Marshall Professor of Business Administration Department Chair, Entrepreneurial Management Harvard Business School

Congratulations on your 10th Anniversary as OPM 30 Alumni


OPM Enrollments
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Lynda M. Applegate

500

* Slight decrease due to capacity constraints

400

(Over 100 on waiting list for OPM 43)

300

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100

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The OPM Program: Today


Lynda M. Applegate

Unit I: Analyzing Opportunities (April 2011 and May 2011)


Understanding key concepts and frameworks Recognizing and prioritizing opportunities

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

Unit II: Leading Growth & Transformation (March 2012 and April 2012)

Evolving your strategy and organization Managing growth and complexity Executing strategy and managing change

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

Unit III: Planning Future Transitions (February 2013 and April 2013)

Taking your business to the next level Defining and realizing your personal goals (Achievement, Significance, Legacy)

OPM Global Immersions and Alumni Programs

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


Business Owner Programs
Owner/President Management Program OPM Key Executives Program: January 15 27, 2012 OPM Global Immersion June 2012 Private Equity and Venture Capital: Asia (June 2012) U.S. (October 2011) ( ) Families in Business: November 6 11, 2011 Aligning Strategy and Sales: December 4 9, 2011 Launching New Ventures: India (June 2012) U.S. (February 19 24, 2012)

Lynda M. Applegate

Related Programs
Leading Professional Services Firms: June 2011 and March 2012 Real Estate (multiple programs): http://www.exed.hbs.edu/programs/pag es/default.aspx?topic=Real+Estate

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

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Business Models Frame Executive Decision Making and Action


Key Integrating Framework for OPM
A business model defines how your business interacts with its environment to define a unique strategy, attract the resources and build the capabilities required to execute the strategy, and create value for all

Lynda M. Applegate

stakeholders.
Business models frame:
How your current business makes, or loses, money How to analyze and frame opportunities The assumptions behind business plan forecasts

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

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Launching Amazon.com

Lynda M. Applegate

Jeff Bezosa tech-savvy investment banker who p g had never worked in the retail or publishing industriessearched for opportunities to use the newly-commercialized Internet (a technology disruptor) to create a new business model with superior economic returns that would disrupt traditional industry

What did Bezos see in 1993 that others didnt?

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

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Launching Amazon.com

Lynda M. Applegate

Compared business models for various Internet retail g g businesses and identified book retailing as being ideally suited as an entry point

Why books as entry product? What market was he targeting?

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

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Launching Amazon.com

Lynda M. Applegate

Named after the Worlds Biggest River, Bezos had g great p plans for evolving the business model after g launch

Not Jeffs Big Books

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

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HBS Definition of Entrepreneurship

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The relentless pursuit of opportunity without regard to resources currently controlled


Stop & Think

Not reckless
How would you rate Jeff Bezos as an entrepreneur?

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Leadership Roles
Leading Transforming Transforming Mentor Capability Builder Internal Organization Operator Partner Relationship Builder

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Innovator External Strategy

Stop & Think

Managing Executing and Delivering Results


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

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What is innovation?
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Innovation LifecycleNot just Creativity


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Idea Id to Opportunity Explore

Design to Launch Experiment

Adoption to Sustainability Emerge

Leverage to Exploit Options Grow

Mature and Transform

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

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Mapping the Lifecycle to Cash Flow


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

Create Value

Mature & Transform

Grow

Invest

Explore Emerge Experiment


Stop & Think

Where is Amazon.com in January 2001? What actions did Bezos take to evolve the Amazon business model from 1995 to 2001?

Time to Cash Flow Positive Payback Period

Time

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Amazon.com Update

14 Amazon.com responded early before the dot-com crash Lynda M. Applegate

If Amazon.com had not generated $318 million in cash from options exercises (in late 1999) and had paid its suppliers in the same quarter as it sold its goods, its cash balance would have been down to $115 million, which would have proceeded to put the company in the poorhouse. With the buttressed cash level of $706 million showing up on the balance sheet as of the end of 1999, the company borrowed another $680 million in February of 2000. If the company had not been able to borrow the money, the Amazon.com story might already have been over. Lehman Brothers analysts in July 2000
Stop & Think What were most executives focused on in late 1999? What did Amazon.com execs see that others didnt?

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Crisis-Driven Change: Survive (2001)

Lynda M. Applegate

Cut costs and improved asset efficiency (1-31-01) Headcount reduced by 15% (3200 jobs) Closed distribution and call centers and limited others to seasonal operating schedule Exited unprofitable product categories: Kitchen, Furniture, Toys, Jewelry, Auctions Increased revenues (Bear Hug the customer) Expanded on ToysRus partnership to launch Fulfillment Services Business (includes online retailing and inventory / fulfillment services); Key partners: Borders BabysRUs Borders, Babys R Us, Target, Virgin Expanded online retail only partnerships with traditional retailers (host online store; enable in store pick-up); Key partners: All-Clad, Wustoff, Circuit City Provided services to Small Business Marketplace Partner with Ingram Micro and other IT distributors to configure and sell IT systems Partner with Office Depot

Source: Applegate, L.M. Amazon.com Evolves, 2007

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Crisis-Driven Change: Survive (2001)


Lynda M. Applegate

Increased revenues (continued) Launched Digital Distribution business g Amazon eBooks Software Download Store (e.g. TurboTax) Movie Download Store; Key Partner: MGM Music Download Store; Independent artists (Small Business Marketplace) and Try Before you Buy eDocuments Store: Investment reports, Market Research, Business, Science, and Technology Articles and Reports (including HBR) Magazine Subscription Store Digital Catalog Store Price cuts and promotions (including Super Saver Shipping) Achieved profitability 4Q 2001

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

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Dont just survivethrive: Shifting to growth (2002) Lynda M. Applegate


Launched Amazon Services Subsidiary to connect retailers to Amazon.coms online retailing and fulfillment services platforms Continued rapid penetration of traditional retailer markets Launched new stores once critical mass of retail partners was achieved (e.g., Jewelry, Sports) Partnered with American Express to offer merchant services to SMEs Launched Amazon Web Services Provided tools for software developers (Open Innovation Accelerated digital distribution CustomFlix / CreateSpace (custom DVDs) Amazon Unbox (digital download TV and Movie; partnered with TiVo) Amazon Podcasts Launch MP3 Store Launched All Business Center (one-stop-shop for SMEs)

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Dont just survivethrive: Managing complexity Lynda M. Applegate


Reorganized within three divisions: Media (books, music, video, audio, magazines, digital downloads etc.); Electronics and General Merchandise; Other (includes some services); International Opened software development centers in Scotland, India, Russia Financial Performance Revenue grew from $10 million in 1996 to over $10B+ in Q4 2010 ; 2010 Revenue = $34B (up 40%) EBITDA grew from $35 million (1% margin) in 2001 to $986 million in 2009

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19 Dont just survivethrive: Transforming the Industry Lynda M. Applegate

Continue to lead in online retail business model; buying popular general merchandise and fashion sites (Zappos) 2009: Fulfillment by Amazon (over 1 million items stored in Amazon warehouses); 30% of sales by 3rd party sellers; 6 of every 10 books are sold through Kindle Store, available in 120 countries and 6 languages; 2010: Books/Music: Buy once / Read/Listen Anywhere Amazon Cloud Drive (free storage for digital music + playlists/tools) Enterprise Virtual P i t Cl d ( t E t i Vi t l Private Cloud (extensible storage) ibl t ) Amazon Virtual Relational Database (Oracle)

Stop & Think

Did Apple iPad launch (April 3, 2010) threaten Amazon? April 2, 2010: Amazon announces iPad app (available free on iTunes) Will Amazon join the Tablet Wars?

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OPM Integrating Frameworks

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Business Models Frame Executive Decision Making and Action


A business model defines

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Lynda M. Applegate

how

an

organization interacts with its environment to define a unique strategy, attract the resources and build the capabilities required to execute the strategy, and create value for all

stakeholders.
Business models frame:
How your current business makes (or loses) money How to analyze and frame opportunities The assumptions behind business plan forecasts

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

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Linking Strategy and Capabilities to Value


Lynda M. Applegate

How do we leverage our position, platform and value to exploit strategic options? What drives revenue growth?

What drives investment required? q

What drives Investor confidence?

Market Value

What drives cost savings? Stop & Think

What drives cash flow in your businesses? What drives market value? (See supplements for sample metrics)
Source: Applegate, L.M., Crafting Business Models, Harvard Business School Publishing #808-705.

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Learning to Pivot

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Business Models provide Analytics to Identify Opportunities Today and Levers for Future Growth M. Applegate Lynda
Business Model Analytics
Strategy
Business Positioning Product-Market Positioning Network/Value Chain Role

Levers for Growth


Position (think playing field)
Can I identify white space opportunities? Can I leverage customers, product designs? Can I leverage suppliers, partners, channels?

Capabilities
Processes & Infrastructure People & Partners Organization & Culture p Leadership & Governance

Platform
Can I leverage operating processes, infrast. Can I leverage operating expertise? Can I easily integrate within existing organization? Do I have the capacity ( p y (leadership, talent, operating p p g model) to scale

Value
Customer Loyalty, Retention, Engagement, Access Efficiency, Productivity Cash Flow Employee/Partner Loyalty, Engagement Economies of Scale and Scope

Capital, Cash Flow, Strategic Options


Can I increase revenues and benefits for all stakeholders? Can decrease costs for all stakeholders? Can I fund growth opportunities? Can I hire and retain top talent? What is the value of strategic options including speed and agility? 23
Lynda M. Applegate

What % of your time do you spend in each role? What % of time should you spend? Where are you most comfortable?
Leading Transforming g Mentor Capability Builder

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Lynda M. Applegate

Innovator

Internal Organization Operator Partner Relationship Builder

External Strategy

Managing Executing and Delivering Results

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How would you rate yourself as an entrepreneur?

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Lynda M. Applegate

The relentless pursuit of opportunity without regard to resources currently controlled

Not reckless

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Where is your business in its lifecycle?


Lynda M. Applegate

Create Value

Mature & Transform

Grow

Invest

Explore Emerge Experiment

Time to Cash Flow Positive Payback Period

Time

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Supplements

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The Business Lifecycle: Explore


Lynda M. Applegate

Key Activities

Opportunity scanning and idea g pp y g generation Opportunity analysis and prioritization Developing and pitching business plans

Key Decisions

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

Transition Planning

Assemble resources and secure commitments needed to launch and develop market entry product/service offering Identify projects, appoint leaders, and build teams Define fit of new business within industry and organization (if appropriate

Tools

Idea Generation Tool Analyzing and Prioritizing Opportunities Tool Developing and Pitching a Business Plan DSM Innovation Center; AT&T EDO and Innovation Pipeline; K-P Innovation Fund

Cases

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T h e B u s in e s s L ife c y c le :E m e rg e
Lynda M. Applegate

Key Activities

Complete legal and regulatory requirements to launch the business Engage the market and industry partners and develop the entry product and establish entry position Build capabilities needed for market launch and entry Stage commitments and adjust market entry plans based on insights gained

Key Decisions

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

Transition Planning

Create the organization structure, processes and controls needed to support growth and manage complexity Hire key leaders needed to build a professional business appropriate for type of business you are building

Tools

Growing your Business Tool Assessing Capabilities Tool IBM EBO; Tennant:; K-P Garfield Innovation Center; Amazon.com

Cases

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The Business Lifecycle: Grow


Lynda M. Applegate

Key Activities

Grow the business to achieve profitability and scale Evolve the organization to manage increased size and complexity Establish governance and control systems that protect the rights and fulfill expectations of stakeholders Transition culture to growth and accountability while maintaining culture of innovation

Key Decisions

Have we developed the strategic plan needed to fully exploit growth options? Have we invested appropriately in developing the infrastructure, organization, and controls needed to manage complexity and size while also improving margins and asset efficiency Are we continuing to look for opportunities to enhance our current business, expand into new p products and markets, and explore new businesses that might leverage our p , p g g platform and p position?

Transition Planning

Recognize when a business is becoming mature and actively look for opportunities to leverage platform and position to launch new businesses that transform the industry

Tools

Analyzing Business Models Tool Building Innovation Capabilities Tool IBM Transformation, Tennant Transformation, Medtronic, Nypro, Ducati, UCC

Cases

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Linking Strategy and Capabilities to Value:


What drives revenue growth? (sample metrics)

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

Attractiveness of business context


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

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

Product differentiation
Attractiveness of features Ability to clearly differentiate

Effective revenue-generating processes


Product quality Quality of demand-generation, order fulfillment and innovation processes

Linking Strategy and Capabilities to Value:


What drives costs? (sample metrics)

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

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

Operating process efficiency (vis--vis other alternatives)


Cycle time of key processes Operating costs by activity, product, customer etc. Administrative costs Inventory costs

Product quality (vis--vis other alternatives)


Cost of poor quality Administrative costs to maintain quality

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Options for Evolving Your Business Model


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Enhance
Incremental improvement to an existing strategy or capability

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

Explore
Launch new b i L h businesses; D Develop new capabilities l biliti

Exit
Exit a product or market; Outsource a core capability

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Evolving Your Business Model


Dont forget EXIT Expand into new markets
Enter new market segments or geographies with same products; Build capabilities to enter new markets

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Radical Innovation

Explore new businesses


Launch new products that are sold to new markets or enter into new industries; Build capabilities needed to launch new businesses or business models

New

Markets

Enhance current products and/or markets


Improve products, add features and/or improve sales or channels; Build capabilities execute current strategy

Expand into new product lines


Add services or solutions that can be sold to same market; Build capabilities to sell solutions to current markets

Same

Incremental Innovation

Same

New

Products

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Amazon.com business model evolution


Jan. 2001
Market Expansions New Business Exploration
Partner with Toys R Us

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New

Markets
Global Book, Music, Video Auctions

Same

Cut Headcount by 15% (3,200 jobs)

Close Warehouses when low demand

Current Business Enhancements

Product Expansions

Same

New

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

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Amazon.com business model evolution


December 2001
Market Expansions
Expand Fulfillment Services ToysRUs, BabysRUs Borders, Target, Virgin Lynda M. Applegate

New Business Exploration

New

Markets
Price Cuts and Super-Saver Shipping

Launch Small Business Marketplace

Partner with Ingram Micro, Office Depot and others to offer Small Business Services

Same

Enhance Search to include Marketplace Retail Partner with All-clad, Wustoff, Current Business Circuit City Enhancements

Global Book, Music, Video Retail Stores

Launch Digital Distribution Stores

Product Expansions

Same

New

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

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Amazon.com business model evolution


2002-2006
Market p Expansions New Business Exploration p
Launch Amazon Web Services (tools for Software Developers)

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New

Markets
Enhance Search to include Marketplace

Small Business Marketplace

Same

Continue to Expand Expand Digital Fulfillment Services Distribution Offerings Current Business Businesses and Launch Custom Enhancements DVDs

Global Book, Music, Video Retail Stores

Retail Services

Product Expansions

Stop & Think

Same

New

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

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