214 logistics partners affi liates fulfi llment it infrastructure & software development & maintenance online retail shop customized online profi les & recommendations global consumer market (north america, europe, asia) it infrastructure & software global fulfi llment infrastructure amazon.com (& overseas sites) affi liates marketing technology & content fulfi llment sales margin VP CR CH CS KP KA KR R$ C$ Amazon.com provides a powerful illustration of implementing business model innova- tion 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 fulfi llment ($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, low- margin 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 two- pronged 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 effi cient fulfi llment. Second, they began growth initiatives in new areas. Manage- ment was clear on the requirements for these new initiatives. They had to (1) target underserved markets, (2) be scalable with potential for signifi cant growth, and (3) leverage existing Amazon.com capabilities to bring strong customer-facing differentia- tion to that marketplace. big picture assessment: amazon.com relatively low value items relatively capital sensitive low margins cost effi ciency economies of scope large reach fulfi llment excellency IT infra excellency large product range Amazon.com’s main strengths and weaknesses in 2005: bmgen_final.indd 214 6/15/10 5:44 PM