Case Study: Amazon

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Case study : Amazon

1. What is the business model for Amazon.com? How does their business model differ from that of Barnes and Noble or Borders? How would you value Amazon.com?

Amazon is a relatively small player in the bookstore industry, and its main competitors are Barnes & Noble and Borders. Despite the difference in scale, the company shows great promise, because its business model overcomes many of the competitors’ drawbacks.

Amazon operates using a web-based platform to sell books. The web-based model targets a global market, has reduced overhead costs and a shorter operating cycle as compared to brick and mortar businesses such as Barnes & Noble and Borders. Amazon’s online model has a superior inventory management system, low occupancy cost and high sales per employee. Amazon can reach large, global groups of consumers with minimal cost, which make the business model very scalable .

Another fundamental of the company is its distinctive, lean operating cycle. The average payables time is 58 days after a book enters inventory. However, due to the very fast inventory turnover, the average receivables is 17 days after a book enters inventory. The difference leads to a 41-day gap between payables and receivables. Such a long cycle allows large cash reserves and profitability in any business, and all the more so in the bookstore industry. Traditional brick and mortar bookstores have a negative cycle, where payables are executed 90 days after entering inventory, but average receivables come in at 168 days after entering inventory. Thus, a -78 days gap exists between receivables and payables, draining cash from the company. The faster payables period (58 vs 90 days) is also a competitive advantage for Amazon relative to publishers and other suppliers.

Opposite to this business model we find the traditional bookstores. They have the advantage to be well known and established in the market. On the downside, bookstores like B&N or

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