evaluating business models

big picture assessment: amazon.com

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Amazon.com’s main strengths and weaknesses in 2005:

Amazon.com provides a powerful illustration of implementing business model innovation based on an analysis of strengths and weaknesses. We’ve already described why it made sense for Amazon.com to launch a series of new service offers under the moniker Amazon Web Services (see p. 176). Now let’s examine how those new offers launched in 2006 related to Amazon.com’s strengths and weaknesses the previous year.

Assessing the strengths and weaknesses of Amazon.com’s business model circa 2005 reveals an enormous strength and a dangerous weakness. Amazon.com’s strength was its extraordinary customer reach and huge selection of products for sale. The company’s main costs lay in the activities in which it excelled, namely fulfillment ($745 million, or 46.3 percent of operating expenses) and technology and content ($451 million, or 28.1 percent of operating expenses). The key weakness of Amazon. com’s business model was weak margins, the result of selling primarily low-value, lowmargin products such as books, music CDs, and DVDs. As an online retailer, Amazon.

com recorded sales of $8.5 billion in 2005 with a net margin of only 4.2 percent. At the time, Google enjoyed a net margin of 23.9 percent on sales of $6.1 billion while eBay achieved a net margin of 23.7 percent on sales of $4.6 billion.

Looking to the future, founder Jeff Bezos and his management team took a twopronged approach to building on Amazon.com’s business model. First, they aimed to grow the online retail business through a continuing focus on customer satisfaction and efficient fulfillment. Second, they began growth initiatives in new areas. Management was clear on the requirements for these new initiatives. They had to (1) target underserved markets, (2) be scalable with potential for significant growth, and (3) leverage existing Amazon.com capabilities to bring strong customer-facing differentiation to that marketplace.

In 2006 Amazon.com focused on two new initiatives that satisfied the above requirements and which promised to powerfully extend the existing business model. The first was a service called Fulfillment by Amazon, and the second was a series of new Amazon Web Services. Both initiatives built on the company’s core strengths—order fulfillment and Web IT expertise—and both addressed underserved markets. What’s more, both initiatives promised higher margins than the company’s core online retailing business.

Fulfillment by Amazon allows individuals and companies to use Amazon.com’s fulfillment infrastructure for their own businesses in exchange for a fee. Amazon.com stores a seller’s inventory in its warehouses, then picks, packs, and ships on the seller’s behalf when an order is received. Sellers can sell through Amazon.com, their own Channels, or a combination of both.

Amazon Web Services targets software developers and any party requiring highperformance server capability by offering on-demand storage and computing capacity.

Amazon Simple Storage Systems (Amazon S3) allows developers to use Amazon.com’s massive data center infrastructure for their own data storage needs. Similarly, Amazon Elastic Compute Cloud (EC2), allows developers to “rent” servers on which to run their own applications. Thanks to its deep expertise and unprecedented experience scaling an online shopping site, the company can offer both at cutthroat prices, yet still earn higher margins compared to its online retail operations.

Investors and investment analysts were initially skeptical about these new long-term growth strategies. Unconvinced that the diversification made sense, they contested Amazon.com’s investments in even more IT infrastructure. Eventually, Amazon.com overcame their skepticism. Nonetheless, the true returns from this long-term strategy may not be known for several more years—and after even more investment

in the new business model.

Assessing your business model’s overall integrity is crucial, but looking at its components in detail can also reveal interesting paths to innovation and renewal. An effective way to do this is to combine classic strengths, weaknesses, opportunities, and threats (SWOT) analysis with the Business Model Canvas. SWOT analysis provides four perspectives from which to assess the elements of a business model, while the Business Model Canvas provides the focus necessary for a structured discussion.

The following pages contain non-exhaustive sets of questions to help you assess the strengths and weaknesses of each of your business model Building Blocks. Each set can help jumpstart your own assessments. Results from this exercise can become the foundation for business model change and innovation in your organization.

What are your business model’s . . .

10-1 evaluation of certainty

10-1 evaluation of certainty

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Infrastructure Assessment

10-1 evaluation of certainty

Customer Interface Assessment

10-1 evaluation of certainty

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assessing threats

We’ve described how business models are situated within specific environments, and shown how external forces such as competition, the legal environment, or technology innovation can influence or threaten a business model (see p. 200). In this section we look at threats specific to each business model Building Block, and provide a non-exhaustive set of questions to help you think about ways to address each threat.

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Value Proposition Threats

Infrastructure Threats

Customer Interface Threats