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Presented by: Amy Kakuk, Jessica Bourgoin, and Beth Theriault

April 14, 2005

Outline

History Where we Stand Today Vision Statement Mission Statements Actual Proposed Business Segments External Audit Opportunities Threats EFE CPM Internal Audit Strengths Weaknesses

IFE Matrix Analysis SWOT Matrix Space Matrix Grand Strategy Matrix BCG Matrix IE Matrix Matrix and SWOT Summary Financial Ratios QSPM Strategy Recommendations EPS/EBIT Analysis Future Goals/Objectives Amazon. COM in the News

Amazon was incorporated in the state of Washington on July 5, 1994. Before the company was renamed Amazon it was called Cadabra, Inc. The company was developed by Jeff Bezos and two associates in a garage converted into a shop. The company began selling to the public in July 1995. On May 15, 1997 the company went public with an opening price of $18 per share. In 1999, the company bought 46% of drugstore.com and launched its own auction site to challenge e-bay. In 2002, Virgin Entertainment Group and Amazon.com relaunched www.virginmega.com as a co-branded Web site. Also in 2002, Amazon.com launched Amazon.ca, bringing Canadians the selection, convenience, and the value of the Amazon shopping experience.

A little about us

Headquarters is located in Seattle, Washington. Amazons common stock is publicly traded on the NASDAQ under AMZN. Our web-site address is amazon.com

Where we stand today..


Amazon.com, Inc. is an internet-based company that offers books, music, videos, DVDs, electronics, software, toys, video games, electronic greeting cards, home improvements, online auctions, and a virtual mall called z-shops. Amazon has sites in France, Japan, Germany and the United Kingdom. Domestically, Amazon has experienced tremendous growth since its inception. However, that growth has not come without a cost. As the world economy worsens, Amazon faces pressure from stockholders as well as the entire financial community to realize a profit. Amazon has created a platform and customer base that many companies envy, but can they stay in business long enough to reach profitability.

Price and Volume


Recent Price Trade Date 52-Week High 52-Week Low Beta (5-Year) $34.60 04/11/05 $54.70 $32.82 2.37

Information from Amazon.com

Stock Chart

(May 2003 March 2005)

Chart from Amazon.com

Vision Statement (proposed)

To be the largest mass online merchandiser on earth.

Mission Statement
Actual
The company motto: Work Hard, Have Fun, and Make History. The companys six core values: customer obsession, ownership, bias for action, frugality, high hiring bar, and innovation.

Mission Statement Proposed


Our first responsibility is to service our worldwide (1) online customers. (2) We pledge to make every effort to improve the level of customer service throughout the e-commerce industry by using up-to-date hardware and software (3) and by listening to our customers. We will offer customers increased product Market selections (4) to fulfill their online shopping desires. Customer We strive to be the most used e-commerce portal on Technology the World Wide Web (6), while conducting operations Product or services in a highly ethical (5) manner to ensure the long-term Philosophy profitability and growth for shareholders.(7) We Self Concept Concern for survival, pledge to contribute to the economic strength of society and to function as an exceptional corporate growth, and citizen in all countries that we do business. (8) We profitability Concern for public vow to recruit, develop, motivate, reward and retain image personnel of exceptional ability, character, and Concern for dedication. In return, we will provide them good employees working conditions, superior leadership, short and long term compensation, and an opportunity for individual growth and employment security.(9)

1. 2. 3. 4. 5. 6. 7.

8. 9.

Business Segments
The North America segment consists of amounts earned from retail sales through www.amazon.com and www.amazon.ca, Syndicated Stores and mail-order catalogs, Merchant.com, marketing, and promotional agreements. This segment has seen a growth in net sales from $2.382 billion in 2000 to $2.74 billion in 2002
The International Segment consists of amounts earned from retail sales through www.amazon.co.uk, www.amazon.de, www.amazon.fr, and www.amazon.co.jp, Syndicated Stores, and international focused marketing and promotional agreements. This segment has seen a growth in net sales from $381million in 2000 to $1.17billion in 2002

External Audit
Opportunities 1. Pressure to permanently ban the Internet Tax 2. State of the economy is improving 3. Customer spending increased 4. Currency fluctuation (weak dollar) 5. Increased number of Internet users in the US 6. Broadband access technology 7. Increased number of Internet users worldwide Threats 8. Online sales predicted to increase 1. Taxes imposed for EU customers 9. Low interest rate 2. Unemployment level highest sine 1994 10. One European currency - Euro 3. Currency fluctuation 4. Failure to permanently ban Internet taxes 5. Aggressive competition 6. Identity theft 7. Terrorist attack, war 8. State of the economy, high inflation 9. Volatile stock market 10. High interest rate 11. Ease of entry into market

Key External Factors

Weight

Rating

Weighted Score

Opportunities
1. Pressure to permanently ban the Internet Tax 2. State of the economy is improving 3. Customer spending increased 4. Currency fluctuation (weak dollar) 5. Increased number of Internet users in the US 6. Broadband access technology 7. Increased number of Internet users worldwide 8. Online sales predicted to increase 9. Low interest rate 10. One European currency - Euro Threats 1. Taxes imposed for EU customers 2. Unemployment level highest sine 1994 3. Currency fluctuation 4. Failure to permanently ban Internet taxes 5. Aggressive competition 6. Identity theft 7. Terrorist attack, war 8. State of the economy, high inflation 9. Volatile stock market 10. High interest rate 11. Ease of entry into market Total 0.05 0.04 0.04 0.06 0.07 0.05 0.02 0.07 0.04 0.04 0.01 1.00 3 3 3 2 4 4 2 2 2 2 2 0.15 0.12 0.12 0.12 0.28 0.20 0.04 0.14 0.08 0.08 0.02 2.84 0.07 0.08 0.05 0.05 0.03 0.03 0.03 0.05 0.03 0.03 2 3 3 3 3 4 3 4 3 3 0.14 0.24 0.15 0.15 0.09 0.12 0.09 0.20 0.09 0.09

Competitive Profile Matrix


Amazon. COM Critical Success Factors Market Share Price Financial Position Product Quality Consumer Loyalty Global expansion Advertising Software technology Management e-commerce expertise Total Weight 0.05 0.10 0.15 0.10 0.10 0.15 0.15 0.05 0.10 0.05 1.00 Rating 4 4 2 3 4 4 4 4 4 4 Weighted Score 0.20 0.40 0.30 0.30 0.40 0.60 0.60 0.20 0.40 0.20 3.60 Barnes & Nobles Rating 3 3 4 3 3 3 3 3 4 3 Weighted Score 0.15 0.30 0.60 0.30 0.30 0.45 0.45 0.15 0.40 0.15 3.25 eBay Rating 4 4 3 3 4 4 4 3 4 4 Weighted Score 0.20 0.40 0.45 0.30 0.40 0.60 0.60 0.15 0.40 0.20 3.70

Weaknesses 1. Accumulated deficit of $3 billion 2. Operating losses 3. Interest payments on debt issued 4. High inventory risk - seasonality 5. Small number of vendors (suppliers)

Strengths 1. Strong management team

2. Strong customer service support


3. Up-to-date technology and software 4. High brand name recognition 5. Corporate culture

6. Breach of customer confidential information

6. Distribution centers
7. Strategic alliances 8. Increased revenue from international segment 9. High inventory turnover

IFE
Key Internal Factors Strengths 1. Strong management team 2. Strong customer service support 3. Up-to-date technology and software 4. High brand name recognition 5. Corporate culture 6. Distribution centers 7. Strategic alliances 8. Increased revenue from international segment 9. High inventory turnover Weaknesses 1. Accumulated deficit of $3 billion 2. Operating losses 3. Interest payments on debt issued 4. High inventory risk - seasonality 5. Small number of vendors (suppliers) 6. Breach of customer confidential information TOTAL 0.10 0.05 0.05 0.05 0.05 0.10 1.00 1 1 2 2 2 2 0.10 0.05 0.10 0.10 0.10 0.20 2.80 0.10 0.07 0.08 0.10 0.07 0.05 0.07 0.03 0.03 4 4 4 4 3 3 3 3 3 0.40 0.28 0.32 0.40 0.21 0.15 0.21 0.09 0.09 Weight Rating Weighted Score

SWOT Matrix

S-O Strategies Market penetration increase marketing expenditures to 5% of net sales (O3, O5, O9, S4, S2, S9)Lobby to permanently ban Internet Tax (O1, O7, S1, S4) W-O Strategies Concentric Diversification add new services/products to level seasonality- food & beverage (O1, O2, O5, O9, W4, W5)

S-T Strategies Lobby to permanently ban Internet Tax ( T4, S1)Horizontal Diversification create a Web search engine (T5, T11, S1, S2, S4). W-T Strategies Lower prices (T4, T5, T11, W4)

FS

Conservative

Aggressive

CA

IS

Defensive

ES

Competitive

Space Matrix

Quadrant II

Rapid Market Growth

Quadrant I

Grand Strategy Matrix

Weak Competitive Position

Strong Competitive Position

1.

Market Development

2.
3. 4. 5.

Market Penetration
Product Development Forward/Backward/Horizontal Integration Concentric Diversification

Quadrant IV

Slow Market Growth

BCG Matrix
Relative Market Share Position High 1.0
High +20

Medium .50
Stars Domestic

Low 0.0
Question Marks International

Industry Sales Growth Rate

Med 0

Cash Cows

Dogs

Low -20

Internal-External (IE) Matrix


The IFE Total Weighted Score
Average Weak

Strong 3.0 to 4.0 High I

2.0 to 2.99
II

1.0 to 1.99
III

3.0 to 3.99

International

Domestic

Medium The EFE Total Weighted Score 2.0 to 2.99

IV

VI

Hold and Maintain

Low 1.0 to 1.99

VII

VIII

IX

Matrix Analysis and SWOT Summary


Alternative Strategies Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development IE * * * * * SPACE * * * * * GRAND * * * * * COUNT 3 3 3 3 3

Product Development
Concentric Diversification Conglomerate Diversification Horizontal Diversification Joint Venture Retrenchment Divestiture Liquidation

*
* * * *

*
*

3
2 1 1 1

Financial Ratio Analysis (March 2004)

Company Valuation Ratios P/E Ratio (TTM) P/E High - Last 5 Yrs P/E Low - Last 5 Yrs Beta Price to Sales (TTM) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM) % Owned Institutions 559.59 NA NA 2.23 3.16 145.89 48.12 58.35

Industry

Sector

S&P 500

41.01 45.19 15.69 1.30 5.40 29.19 43.57 68.16

28.90 48.47 16.09 0.96 2.80 17.03 33.11 50.48

24.01 45.41 16.26 1.00 3.33 17.32 28.97 64.19

Financial Ratio Analysis (cont.)


Dividends Dividend Yield Dividend Yield - 5 Yr Avg Dividend 5 Yr Growth Rate Payout Ratio (TTM) Growth Rates % Amazon N/A 0.00 NM 0.00 Sector 1.17 0.22 7.00 2.12 Industry 2.14 1.43 -0.89 15.54 S&P 500 2.04 1.48 6.48 26.78

Sales (MRQ) vs Qtr 1 Yr Ago Sales - 5 Yr Growth Rate


EPS (MRQ) vs Qtr 1 Yr Ago EPS - 5 Yr Growth Rate Capital Spending - 5 Yr Growth Rate

36.20 53.89
2357.14 NM 10.16

24.97 35.47
27.30 43.79 15.62

14.39 17.25
15.43 15.23 2.61

13.40 9.30
28.69 12.15 4.06

Financial Ratio Analysis (cont.)


Financial Strength Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM) Profitability Ratios % Gross Margin (TTM) Gross Margin - 5 Yr Avg EBITD Margin (TTM) 23.88 23.23 5.19 42.23 41.08 13.65 42.84 42.06 22.32 47.32 47.01 20.79 Amazon 1.11 1.45 N/A N/A 2.08 Sector 1.22 2.19 0.66 0.73 16.81 Industry 0.93 1.47 0.74 0.82 7.84 S&P 500 1.26 1.76 0.68 0.85 11.86

Financial Ratio Analysis (cont.)


Amazon Operating Margin - 5 Yr Avg Pre-Tax Margin (TTM) -14.93 0.68 Industry 6.75 11.64 Sector 11.21 10.37 S&P 500 18.35 17.27

Pre-Tax Margin - 5 Yr Avg


Net Profit Margin (TTM) Net Profit Margin - 5 Yr Avg Management Effectiveness % Return on Assets (TTM) Return on Assets - 5 Yr Avg Return on Investment (TTM) Return on Investment - 5 Yr Avg Return on Equity (TTM) Return on Equity - 5 Yr Avg

-19.84
0.68 -19.84

7.27
7.76 3.74

11.77
7.54 7.62

17.54
13.12 11.59

1.94 -24.73 3.89 -40.89 N/A N/A

8.29 4.45 11.53 5.83 14.04 13.84

5.91 5.49 7.98 7.59 13.51 13.18

6.40 6.79 9.97 10.93 18.71 19.22

Financial Ratio Analysis (cont.)

Efficiency Revenue/Employee (TTM)

Amazon 674,833

Sector 393,351

Industry 479,338

S&P 500 622,866

Net Income/Employee (TTM)


Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM

4,579
N/A 18.39 2.86

29,688
26.71 6.48 1.91

90,606
17.23 17.53 1.17

81,707
9.76 10.46 0.92

Financial Information

Amazon.com had an increase in revenue of 2141.3 million from 2001 to 2003 In 2001 and 2003, Amazon.coms net income was in the negative, but in 2003 they had a positive net income of $35.3 million They have experienced a decrease in their total debt from 2001 to 2003 of $221.4 million

Key External Factors Weight Opportunities 1. Pressure to permanently ban the Internet Tax 2. State of the economy is improving 3. Customer spending increased 5. Increased number of Internet users in the US 6. Broadband access technology 8. Increased number of Internet users worldwide 9. Online sales predicted to increase 10. Low interest rate Threats 2. Unemployment level highest since 1994 4. Failure to permanently ban Internet taxes 5. Aggressive competition 6. Identity theft 8. State of the economy, high inflation 11. Ease of entry into market SUBTOTAL 0.04 0.06 0.07 0.05 0.07 0.01 1 1 4 1 1 3 0.07 0.08 0.05 0.03 0.03 0.03 0.05 0.03 AS 1 1 1 3 4 3 1 1

Create a web Search engine TAS 0.07 0.08 0.05 0.09 0.12 0.09 0.05 0.03 0.04 0.06 0.28 0.05 0.07 0.03 1.11

Start Gourmet food wholesaler AS 1 3 3 4 3 4 3 2 2 1 3 1 2 4 TAS 0.07 0.24 0.15 0.12 0.09 0.12 0.15 0.06 0.08 0.06 0.21 0.05 0.14 0.04 1.58

Key Internal Factors Weight Strengths 1. Strong management team 0.10

Create a web search engine AS 2 TAS 0.20

Start gourmet food wholesaler AS 4 TAS 0.40

2. Strong customer service support


3. Up-to-date technology and software 4. High brand name recognition 5. Corporate culture Weaknesses 1. Accumulated deficit of $3 billion 2. Operating losses SUBTOTAL Total Attractiveness Score

0.07
0.08 0.10 0.07 0.10 0.05 1.00

1
3 1 1 1 2

0.07
0.24 0.10 0.07 0.10 0.10 0.88 1.81

4
4 4 3 2 1

0.28
0.32 0.40 0.21 0.20 0.05 1.86 3.26

Strategy Recommendations and Implementation


Market penetration increase market share for present products in present markets through greater marketing efforts. Increase marketing expenses to 3% of net sales for the next three years compared to 2% in 2002. Reasons aggressive advertising from new competitors such as buy. COM, overstock. COM. Target the marketing campaign. Costs associated with this strategy increase in fulfillment costs and marketing costs. Fulfillment costs are 10% of net sales. For the period 2003 2005, these costs amount to $2,084,000,000. The 1% increase in marketing costs for the period 2003 -2005 amounts to $208,440,000.

Strategy Recommendations and Implementation


Concentric diversification add new but related products/services. Example start an online gourmet food and beverage store using a wholesaler such as Seattle Chocolate Co. Reasons take advantage of brand name recognition and customer loyalty. Because this strategy does not involve any inventory build-up, costs associated are relatively low. Horizontal diversification add new, unrelated products/services for present customers. Example develop a search engine to control the path to online merchants. Risk similar services are already available: Yahoo, Google.

Amount Needed Interest Tax Rate 0% Share Price Shares Outstanding

1,000M 5%

EPS/EBIT Analysis

$19 388M

Common Stock Financing Recession Normal Boom EBIT 500,000,000 1,000,000,000 1,500,000,000 Interest 0 0 0 EBT 500,000,000 1,000,000,000 1,500,000,000 Taxes 0 0 0 EAT 500,000,000 1,000,000,000 1,500,000,000 # Shares 440,631,579 440,631,579 440,631,579 EPS 1.13 2.27 3.40

Recession 500,000,000 50,000,000 450,000,000 0 450,000,000 388,000,000 1.16

Debt Financing Normal Boom 1,000,000,000 1,500,000,000 50,000,000 50,000,000 950,000,000 1,450,000,000 0 0 950,000,000 1,450,000,000 388,000,000 388,000,000 2.45 3.74
70 Percent Debt - 30 Percent Stock Recession Normal Boom 500,000,000 1,000,000,000 1,500,000,000 35,000,000 35,000,000 35,000,000 465,000,000 965,000,000 1,465,000,000 0 0 0 465,000,000 965,000,000 1,465,000,000 403,789,474 403,789,474 403,789,474 1.15 2.39 3.63

70 Percent Stock - 30 Percent Debt Recession Normal Boom EBIT 500,000,000 1,000,000,000 1,500,000,000 Interest 15,000,000 15,000,000 15,000,000 EBT 485,000,000 985,000,000 1,485,000,000 Taxes 0 0 0 EAT 485,000,000 985,000,000 1,485,000,000 # Shares 424,842,105 424,842,105 424,842,105 EPS 1.14 2.32 3.50

Net Worth Analysis


1. Stockholders Equity = $(1,355,900,000) 2. Net Income (12/31/2002) * 5 = $149,100,000 * 5 = $(745,500,000) 3. Share price / EPS * Net Income = $19/$(0.39)*$(149,100,000) = $(7,263,846,154) 4. Number of shares outstanding * Share price = 388,000,000*$19 = $7,372,000,000

Goals and Objectives


For the next 3-4 years, Amazon is hoping to have started their online gourmet food and beverage store. Also, Amazon want to increase their marketing expenses from 2% of net sales to 3%. This will give them more advertising and brand recognition. Amazon has recently launched their search engine called A9. Now they need to spend the next three year trying to get the name known and get in the competition with yahoo and google.

2005 Press Releases


Apr.04 Mar.11 Feb.15 Feb.08

Amazon.com Acquires BookSurge LLC Amazon.com to Webcast Investor Conference Presentation Amazon.com Announces New Award for Innovative Nonprofit Organizations Amazon.com Jewelry Sales Up More Than 120 Percent

Feb.02

Amazon.com Announces Record Free Cash Flow Fueled by Lower Prices and Free Shipping; Introduces New Express Shipping Program -- Amazon Prime
Amazon Web Services Gives Software Developers First-Ever Access to Data and Technology from Amazon.ca and Amazon.fr Amazon Services and Diane Von Furstenberg Studio Announce ECommerce Alliance for Online Apparel Offering Press releases form Amazon.com

Jan.21 Jan.17