AMAZON.

COM

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 1 of 25
 A CEO speaks out
David Pottruck
President and Co-CEO
Charles Schwab, Inc.

Comments to executives at HBS,

October 1999
Its just an incredible time to be in business and have the rules of
business changing For many years we operated under a pretty
consistent set of rules. They evolved maybebut now they are
morphing and that presents a situation that challenges us to
figure out: Are these rules real,or are they temporary? Should we
respond to them?Do we create new rules? How do we run a
company in a world like this when we have 13,000 employees
trying to figure out where we are going and what we should do?

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 2 of 25
 Key ideas In Measuring Value
Traditional approaches to measuring value don't work.
Why? New economics are changing how we build
businesses and measure performance.
Understanding internal and external value drivers and
the link to share holder value forms the foundation for e-
business investment decision-making.
Scenarios capture uncertainty.
On-going analysis and update based on real-time
performance data is critical.
When operating as a virtuous cycle competitive
position and power can shift.
Unless complexity can be managedvirtuous cycles
can change to vicious cycles.

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 3 of 25
 Virtuous cicle

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 4 of 25
 Creating a value engine
Describe the
opportunity

Returns value
to investors
& other
stakeholders

Turns the concept

into reality

Network economies of scale cause the big to get bigger, the

strong to get stronger, and the weak to get weaker
Enable creation of network oligopolies
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 5 of 25
 Virtuous cycles can turn to vicious
cycles

At what point do we get network

diseconomies of scale?
How big is too big in the Internet Age?
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 6 of 25
 Questions to ask when evaluating
business value
Is the concept right?
What approach should I take
to evolve the business?

How much time do I have to

react and respond?

Am I maximizing
return to all
stakeholders?

Do I have the
resources & capabilities
required to execute?
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 7 of 25
 Industrial Age economies of scale

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 8 of 25
 Industrial Age economies of scope
were limited

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 9 of 25
 Traditional entrepreneurial process

Initial Public Offering

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 10 of 25
 Dot-com entrepreneurial process in
1999
Prove the Model
and
Get Big Fast When will value
be created?

Rapid increase in
business Leverage the infrastructure and
complexity launch new businesses
Grow the business to achieve scale

Develop the concept and launch

Time
IPO or Strategic Sale
Average time:
6 months or less (concept) Evolution: stages of growth
18 months or less (IPO or Strategic Sale) Revolution: transitional crisis
Average capital required:
$50 - 100 Million

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 11 of 25
 Entrepreneurial process in the 21st
century
Generate Increasing
Prove returns to scale
the
Model

Adapt
Leverage and
Grow the the continuously
business infrastructure evolve
Develop and & launch
the achieve new
concept scale business
Business and
Complexity launch

Time Evolution: stages of growth

Revolution: transitional crisis

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 12 of 25
 Jeff Bezos on "monetizing the platform"

Jeff Bezos
CEO & Founder
Amazon.com

The Amazon.com platform is comprised of brand,

customers, technology, deep e-commerce expertise,and
a great team with a passion for innovation and a passion
for serving customers well
We believe that we have reached a "tipping point" where
this platform allows us to launch new businesses
faster,with a higher quality of customer experience, a
lower incremental cost, a higher chance of success, and
a cheaper path to scale and profitability than perhaps
any other company...

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 13 of 25
 Evolving Amazon.com: Timeline of Events

Online Wish lists Market place ASP

bookstore Greeting cards small merchants Manage inventory
International Online retailers
Music,video, jewelry, cars

McFarlan, Corporate Information Strategy and Management

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren . Burr Ridge, IL:
McGraw-Hill/Irwin, 2002. Chapter 2 Figure -210
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 14 of 25
 Amazon.com in January 2001
E-Retail Exchange Marketplace ASP
Business Model Business Model Business Model Business Model
U.S. Books Amazon Auctions Drugstore.com Toys R Us
Focused Distributors

Music Sotheby's.com Della.com

Video/DVD Greenlight.com
Electronics Gear.com
Kitchen HomeGrocer.co
m
Lawn & Patio
IMDb.com
Home Improvement
Toys R Us
Amazon.com Europe
zShops
Technical Architecture and Know-How E-Commerce Know-How
Horizontal

Distribution, Order Fulfillment, Inventory and New Venture Development and Partnership
Portal

Customer Service Capabilities Know-How

Sophisticated/Patented Online Retailing Brand Awareness and Loyalty
Capabilities (e.g., 1-Click Shopping) Over 29M Loyal Customers and a Robust
People with a Passion for Innovation and Business Partner Network
Serving Customers
Note: The e-retailer, exchange, marketplace, and ASP business models are discussed in more depth later in
Overview of E-Business Models. ASP refers to the Application Service Provider business model. ASPs develop
the software and business infrastructure required to run a digital business and then host the business for
another company, in this case, Toys R Us.
Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 15 of 25
 A scenario-based approach to valuing e-
business
Define the purpose for the value assessment (e.g., seeking funding, buying a
company, investing in an established business).
Pick a point in the future when you expect your business strategy to deliver
value (e.g., 3-5 years).
Analyze the business concept and forecast what the opportunity should look
like at that future point. Work backward to define the current opportunity and
forecast revenue.
Analyze capabilities and community and forecast the company's (and
partners') operating performance at the future point. Work backward to define
current capabilities and community and forecast cost and margin.
Use this analysis to construct estimates of financial performance that reflect
the "most likely" scenario.
Factor in uncertainty in your assumptions by developing scenarios that
represent upper and lower bounds on key variables.
Discuss the value scenarios you have constructed with others and critique the
findings and assumptions - not just once - but on a regular basis.
Develop a broad-based performance measurement system.

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 16 of 25
 A business starts with a great idea but
it doesnt end there.

Lou Gerstner
Chairman and CEO IBM
Response to a reporter in 1995

The last thing IBM needs now is a

vision.

Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright 2000 President and Fellows of Harvard College Amazon.com Slide 17 of 25