Amazon's application of Blue Ocean strategy

Amazon has 45% of E-Commerce total market sales being 235.8 billion dollars[1]. They disrupted the retail industry and the company keeps finding paths to disrupt their own business model. The company values are described as customer focus, passion for innovation, operational excellence and long-term thinking. These values can be observed in Amazon's history.

Amazon was founded in 1994 by Jeff Bezos. He is a challenge hunter, graduated from Princeton with summa cum laude, went to Wall Street and became the youngest senior vice president on the hedge fund. He left the fund to start working in the garage of his parent's house in Seattle. With an initial investment of $250,000 [1] (corrected by the inflation: $421,192.59), he started what we know today as Amazon. Today the company is worth 858.94 billion dollars and is traded with a P/E ratio of 87.56

They eliminated the need for physical stores, which allows them to work with lower investments on expensive square-foot real estate because they do not need to be physically located in big urban centers. Moreover, they are open 24/7 to address their client’s needs.

However, the biggest challenge of e-commerce is the delivery time. Going in the opposite direction of the market, Amazon was able to reduce the delivery time and now you can purchase a product and get it delivered to your house in 2 days with no additional cost. This was achieved by Amazon Prime, which is a premium subscription service, it started in 2005 and charges U$119 of yearly subscription from its members. According to Jeff Bezos, on the yearly investor letter of 2018, they had more than 100 million members. This is almost 12 billion dollars of inflows that Amazon can invest in the supply chain.

Amazon rose customer satisfaction to a new standard, pioneered with one-click shopping, customer reviews, and fast receipt verification on email. Amazon is more convenient than Alibaba (Market cap 390728 $Mil and 43.7 P/E) and easier to use. Furthermore, the products come from China in which it takes a longer period of time to get to the US. The website is not clear with product quantities and prices. Therefore, Amazon is the market leader.

In 2000, they created a third-party marketplace with a start at 3% of total sales and in the last fiscal year (2018) it accounted for 58% of total sales[1]. Interestingly, Sun Tzu in the book Art of War gives the advice “keep your friends close and your enemies closer”. Thus, the market place concentrates the competition under its platform: rather than incurring the costs of having a website, any company can sell through Amazon and scale the sales through their supply chain.

The inflection point was hit last year (2018), from now on the yearly operations can break even. For example, AWS (Amazon Web Services), is a marketable product, with high demand, and Amazon can supply it at one-tenth of the cost of the competition. Because they spent years on R&D, they will see the result coming out now. This product is different from the used online sales segment; however, it recalls the letter that Bezos wrote to the shareholders in 1977.

In this letter, he says that Amazon is an internet business with the purpose to create real value for the customers and that they began serving them with books. That’s an important word: began. Because they have been actively looking for projects that can increase their profitability based on their large customer base.

Looking at AWS and making a projection that the net sales will grow at half the growth rate of the previous year and roll it over until 2023, it gives the result of 70,647 million. And many have been commenting on a possible IPO of AWS. This would be an incredible payoff for Amazon shareholders, and more money for investments in the database network, without compromising the cash flow of Amazon.

In conclusion, Amazon has created value innovation and for these reasons, they have a P/E ratio of 87.56 against Alibaba (36.32). Even though some might consider this P/E too high, we should look at the nature of Amazon innovation and their free cash flow. This P/E might drive skepticism on the investors' side; however, Amazon's core values are to make bold investments and jettison bad investments. In other words, Amazon is a trillion dollars startup. The question is: until what point will they be able to keep these profitability margins and if do so, will they pay dividends for the enthusiast investors that had believed in this philosophy along these twenty-five years history?

[1]Day, M and Gu, J. (March 2019) The Enormous Numbers Behind Amazon’s Market reach. Retrieved October 14, 2019, From