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9/13/2011
©Lynda M. Applegate, 2010 1
Building High Impact Businesses: Amazon com Case StudyAmazon.com Case Study
Lynda M. ApplegateMartin Marshall Professor of Business Administration Department Chair, Entrepreneurial ManagementHarvard Business School
Congratulations on your 10th Anniversary as OPM 30 Alumni
2
OPM Enrollments
© Lynda M. Applegate
200
300
400
500
600
OPM Enrollments
* Slight decrease due to
capacity constraints
(Over 100 on waiting
list for OPM 43)
0
100
9/13/2011
©Lynda M. Applegate, 2010 2
The OPM Program: Today
Unit I: Analyzing Opportunities (April 2011 and May 2011) Understanding key concepts and frameworks
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© Lynda M. Applegate
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 Related Programs
4
© Lynda M. Applegate
Owner/President Management Program
OPM Key Executives Program: January 15 – 27, 2012
OPM Global ImmersionJune 2012
Private Equity and Venture Capital:Asia (June 2012)U.S. (October 2011)
Leading Professional Services Firms: June 2011 and March 2012
Real Estate (multiple programs): http://www.exed.hbs.edu/programs/pages/default.aspx?topic=Real+Estate
( )
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)
www.exed.hbs.edu/programs/?topic=Owner-Managed
9/13/2011
©Lynda M. Applegate, 2010 3
Business Models Frame Executive Decision Making and ActionKey “Integrating Framework” for OPM
A business model defines how your business
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© Lynda M. Applegate
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
Business models frame:
How your current business makes, or loses, money
How to analyze and frame opportunities
The assumptions behind business plan forecasts
stakeholders.
Source: Applegate, L.M., Crafting Business Models, Harvard Business School Publishing #808-705.
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Launching Amazon.com
• Jeff Bezos—a tech-savvy investment banker who
had never worked in the retail or publishing
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© Lynda M. Applegate
p g
industries—searched 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
didn’t?
Source of data: Applegate, L.M, Amazon.com: 1994-2000, HBS No. 801-194.
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©Lynda M. Applegate, 2010 4
7
Launching Amazon.com
• Compared business models for various Internet retail
businesses and identified book retailing as being
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© Lynda M. Applegate
g g
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
• Named after the “World’s Biggest River,” Bezos had
great plans for evolving the business model after
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© Lynda M. Applegate
g p g
launch
Not Jeff’s Big Books
Source of data: Applegate, L.M, Amazon.com: 1994-2000, HBS No. 801-194.
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©Lynda M. Applegate, 2010 5
HBS Definition of Entrepreneurship
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© Lynda M. Applegate
The relentless pursuit of opportunity without regard to
resources currently controlled
Not “reckless”Stop
& Think
How would you rate Jeff Bezos as an entrepreneur?
Leadership Roles
10
Leading“Transforming”
© Lynda M. Applegate
Transforming
Internal“Organization”
External“Strategy”
MentorCapability Builder Innovator
Managing“Executing and Delivering Results”
PartnerRelationship
BuilderOperator
Stop &
ThinkWhat 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?
9/13/2011
©Lynda M. Applegate, 2010 6
11
What is innovation?
Innovation Lifecycle—Not just Creativity© Lynda M. Applegate
Design to Adoption to Leverage toId
Source: Applegate, L., Jumpstarting Entrepreneurial Innovation , HBS Publishing #1841C
Design to Launch
“Experiment”
Adoption to Sustainability
“Emerge”
Leverage to Exploit Options
“Grow”
Mature and Transform
Ideato Opportunity
“Explore”
Mapping the Lifecycle to Cash Flow12
© Lynda M. Applegate
Source: Applegate, L., Jumpstarting
Entrepreneurial Innovation , HBS Publishing
#1841C
Cre
ate
Val
ueC
reat
e V
alue
Grow
Mature & Transform
#1841C
Time Time
Inve
stIn
vest
Explore
Experiment
EmergeStop
& Think
Where is Amazon.com in January 2001?
What actions did Bezos take to evolve the Amazon business model from 1995 to 2001?
Payback PeriodTime to Cash Flow Positive
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©Lynda M. Applegate, 2010 7
13
Amazon.com Update
14Amazon.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 alreadyhad not been able to borrow the money, the Amazon.com story might already
have been over.
Lehman Brothers analysts in July 2000
What were most executives focused on in late 1999? What did Amazon.com execs see that others didn’t?
Stop &
Think
9/13/2011
©Lynda M. Applegate, 2010 8
15
Crisis-Driven Change: Survive (2001)• Cut costs and improved asset efficiency (1-31-01)
Headcount reduced by 15% (3200 jobs)
© Lynda M. Applegate
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 Toys”R”us partnership to launch Fulfillment
Services Business (includes online retailing and inventory /
fulfillment services); Key partners: Borders Babys”R”Usfulfillment services); Key partners: 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 DepotSource: Applegate, L.M. Amazon.com Evolves, 2007
16
• Increased revenues (continued)
Launched Digital Distribution business
Crisis-Driven Change: Survive (2001)© Lynda M. Applegate
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 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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©Lynda M. Applegate, 2010 9
17
Don’t just survive—thrive: Shifting to growth (2002)
Launched Amazon Services Subsidiary to connect retailers to
© Lynda M. Applegate
• Launched Amazon Services Subsidiary to connect retailers to
Amazon.com’s 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)
18
Don’t just survive—thrive: 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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©Lynda M. Applegate, 2010 10
19
• Continue to lead in online retail business model; buying popular general
Don’t just survive—thrive: 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)
E t i Vi t l P i t Cl d ( t ibl t )Enterprise Virtual Private Cloud (extensible storage)
Amazon Virtual Relational Database (Oracle)
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”?
Stop &
Think
20
OPM Integrating Frameworks
9/13/2011
©Lynda M. Applegate, 2010 11
Business Models Frame Executive Decision Making and Action
A business model defines how an
21
© Lynda M. Applegate
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.
Linking Strategy and Capabilities to Value22
© Lynda M. Applegate
How do we leverage our position, platform and value to exploit strategic options?
Market
Value
What drives revenue growth?
What drives
Investor confidence?
What drives
investment
required? 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.
q
9/13/2011
©Lynda M. Applegate, 2010 12
Learning to PivotBusiness Models provide Analytics to Identify Opportunities Today and Levers for Future Growth
Business Model Analytics Levers for Growth
23
© Lynda M. Applegate
Strategy Position (think “playing field”)Business Positioning Can I identify “white space” opportunities?Product-Market Positioning Can I leverage customers, product designs?Network/Value Chain Role Can I leverage suppliers, partners, channels?
Capabilities PlatformProcesses & Infrastructure Can I leverage operating processes, infrast.People & Partners Can I leverage operating expertise?Organization & Culture Can I easily integrate within existing organization?Leadership & Governance Do I have the capacity (leadership, talent, operating p p y ( p p g
model) to scale
Value Capital, Cash Flow, Strategic OptionsCustomer Loyalty, Retention, Engagement, Access Can I increase revenues and benefits for all stakeholders?Efficiency, Productivity Can decrease costs for all stakeholders?Cash Flow Can I fund growth opportunities?Employee/Partner Loyalty, Engagement Can I hire and retain top talent?Economies of Scale and Scope 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?
24
Leading“Transforming”
© Lynda M. Applegate
g
Internal“Organization”
External“Strategy”
MentorCapability Builder Innovator
Managing“Executing and Delivering Results”
PartnerRelationship
BuilderOperator
9/13/2011
©Lynda M. Applegate, 2010 13
25
How would you rate yourself as an entrepreneur? © Lynda M. Applegate
The relentless pursuit of opportunity without regard to
resources currently controlled
Not “reckless”
Where is your business in it’s lifecycle?26
© Lynda M. Applegate
Cre
ate
Val
ueC
reat
e V
alue
Grow
Mature & Transform
Time Time
Inve
stIn
vest
Explore
Experiment
Emerge
Payback PeriodTime to Cash Flow Positive
9/13/2011
©Lynda M. Applegate, 2010 14
27
Supplements
The Business Lifecycle: Explore
Key Activities• Opportunity scanning and idea generation
28
© Lynda M. Applegate
pp y g g• 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 teamsIdentify 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
Cases• DSM Innovation Center; AT&T EDO and Innovation Pipeline; K-P Innovation Fund
9/13/2011
©Lynda M. Applegate, 2010 15
T h e B u s i n e s s L i f e c y c l e : E m e r g e
Key Activities• Complete legal and regulatory requirements to launch the business
29
© Lynda M. Applegate
• 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
Cases• IBM EBO; Tennant:; K-P Garfield Innovation Center; Amazon.com
The Business Lifecycle: Grow
Key Activities• Grow the business to achieve profitability and scale
30
© Lynda M. Applegate
• 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
products and markets, and explore new businesses that might leverage our platform and position?p , p g g p p
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
Cases• IBM Transformation, Tennant Transformation, Medtronic, Nypro, Ducati, UCC
9/13/2011
©Lynda M. Applegate, 2010 16
Linking Strategy and Capabilities to Value:What drives revenue growth? (sample metrics)
Source: Applegate, L.M., Crafting Business Models, Harvard Business School Publishing #808-705.
Attractiveness of business context
31
© Lynda M. Applegate
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)
Source: Applegate, L.M., Crafting Business Models, Harvard Business School Publishing #808-705.
32
© Lynda M. Applegate
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-à-vis other alternatives)• Cycle time of key processes • Operating costs by activity, product, customer etc.• Administrative costs• Inventory costsInventory costs
Product quality (vis-à-vis other alternatives)• Cost of poor quality• Administrative costs to maintain quality
9/13/2011
©Lynda M. Applegate, 2010 17
33
Enhance
Options for Evolving Your Business Model© Lynda M. Applegate
Incremental improvement to an existing strategy or capability
Expand
Launch new product categories OR enter new markets; Build on current capabilities
ExploreL h b i D l bilitiLaunch new businesses; Develop new capabilities
Exit
Exit a product or market; Outsource a core capability
Evolving Your Business Model
34
Explore new
Radical InnovationDon’t forget EXIT
© Lynda M. Applegate
New
MarketsMarketsEnhance current products and/or
Expand into new markets
Enter new market segments or
geographies with same
products; Build capabilities to
enter new markets
Expand into new
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
EXIT
Same
Same New
ProductsProducts
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
Incremental
Innovation
9/13/2011
©Lynda M. Applegate, 2010 18
Amazon.com business model evolution
Market Expansions
New Business Exploration
Jan. 2001
35
© Lynda M. Applegate
MarketsMarkets
New
Global Book, Music, Video
Auctions
Partner with Toys “R” Us
New
ProductsProductsSame
Product Expansions
Same
Current Business Enhancements
Source of data: Applegate, L.M, Amazon.com: 1994-2000, HBS No. 801-194.
Cut Headcount by 15%
(3,200 jobs)
CloseWarehouses
when low demand
Amazon.com business model evolution
Market Expansions
New Business Exploration
December 2001
36
© Lynda M. Applegate
MarketsMarkets
New
Price Cuts and Super-Saver
Shipping
Launch Small Business
Marketplace
Partner with Ingram Micro, Office Depot and others to
offer Small Business Services
Expand Fulfillment ServicesToys”R”Us, Babys”R”UsBorders, Target, Virgin
New
ProductsProductsSame
Product Expansions
Same
Current Business Enhancements
Source of data: Applegate, L.M, Amazon.com: 1994-2000, HBS No. 801-194.
Global Book, Music, Video Retail Stores
Launch Digital Distribution
StoresRetail Partner with All-clad,
Wustoff, Circuit City
Enhance Search to include
Marketplace
9/13/2011
©Lynda M. Applegate, 2010 19
Amazon.com business model evolution
Market
Expansions
New Business
Exploration
2002-2006
37
© Lynda M. Applegate
MarketsMarkets
New
p p
Launch Amazon Web Services (tools for
Software Developers)
Enhance Search to include
Marketplace
Small Business
Marketplace
New
ProductsProductsSame
Product
Expansions
Same
Current Business
Enhancements
Retail Services
Continue to ExpandFulfillment Services
Businesses
Why could Amazon.com respond so quickly to pursue so many new growth options?
Global Book, Music, Video Retail Stores
Expand Digital Distribution Offeringsand Launch Custom
DVDs
Stop &
Think
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