Growth Strategies Alternatives Utilized by Amazon.com
Over the years, Amazon.com has been renowned for reinvesting a considerable percentage of its profits to the development of new products and acquisition of core products. This is due to the company strategy to pursue long-term growth. For instance, in the last five years, Amazon.com has acquired web companies like Zappos.com and Pets.com, both of which have led to the development of two new core products that are responsible for the growth of the company’s profit. Development of these and other new products has helped Amazon.com to increase its relevance as the most forward online retailer domestically as well as attract new customers domestically and abroad (DePamphilis, 2013).
Market Development and Diversification
From its inception in 1994, Amazon.com was solely an online retailer of books. However, the company has diversified to virtually every online retail product. The last five years have not been different as the company has pursued further diversification through exploitation of its core competencies to include all areas of online business. Notable businesses that Amazon.com has ventured into in the last five years include cloth retail business through Zappos.com and DVD sale through Lovefilm.com, which provides video through mail and live stream on demand. Lovefilm.com has specifically influenced the growth of profits from the United Kingdom where the company is a leading retailer of DVDs (DePamphilis, 2013).
In addition to diversifying and developing new products, Amazon.com has also made considerable investments to attract new customers to its already existing products. A good example of Amazon’s effort to attract more customers to its already existing products is the acquisition of Abebooks.com, BookFinder.com, LibraryThing.com with intent to boost its books sales which is its core business. The development of its already existing markets has contributed heavily to the company’s growth, especially in competitive markets such as the United Kingdom, Germany, and other European ones. Market development has also ensured that Amazon.com does not only retain but also increases its domestic market and spurs profits (DePamphilis, 2013).
The Financial Value of the Acquisitions and Investments
Amazon.com Inc. has increasingly made acquisitions of public companies for the last five years. Specifically, the company made acquisitions worth between 150 million dollars in the year 2008 and 800 million in 2012. Amazon.com has also made four acquisitions of undisclosed value over the same period of time. These include the acquisition of TenMarks Education Inc., Goodreads Inc., Liquavista B.V., and IVONA software Sp z.o.o. The company is also projected to make more acquisitions in the year 2013, more so because of the aggregate cash and cash equivalents balance of $ 7.46 billion that the company went to fourth quarter with and its policy of favoring acquisitions and investments over paying dividends.
The Influence of the Acquisitions and Investments on Profitability
The most significant acquisition made by Amazon.com that has an impact during the accounting period under review was the purchase of Kiva Systems Inc. The aggregate acquisition cost was $ 678 million. The company was consequently incorporated in Amazon’s financial statement in 2011. During the year ending 31st December 2012, Kiva Systems Inc. had a contribution of 2 million dollars loss to the Amazon’s financial statement. Additionally, Amazon made several acquisitions worth $ 771 million. The acquisitions were all immaterial to the Amazon’s financial statements because they were meant to expand customer base and increase sales channels of the company, including subscription entertainment services. As a result, the acquisitions had no significant direct effect on the profitability of Amazon.com. It is worth noting that this does not mean that the company did not gain any profit from the acquisition of these companies but rather that no profit or loss can directly be attributed to the contributions made by these companies.
The Effect of the Equity Investments and Impairments Resulting from the Acquisitions and Investments
In the period under review, goodwill attributable to investment in equity amounted to $ 560 million. This was specifically from the acquisition of Kiva Systems Inc. the previous year (U.S Securities and Exchange Commission, 2013). Given that the investment was not aimed at directly influencing the profitability of Amazon but rather increasing the experience at Amazon fulfillment centers, the investment had a short-term negative effect on the company’s financial statements. The company uses the Black-Scholes model which estimates the fair value of intangible assets using the income and costs approaches (Mirza & Nandakumar, 2013). The fair value identified was included in the balance sheet as ‘other assets’ and was amortized to the company’s operating expenses on a straight line method over the estimated life. The intangible assets acquired by Amazon were estimated to have a useful life of between 4 to 10 years. It is worth noting that for an online company, the effect of the equity investment and impairment was considerably small (Needles & Powers, 2010).
Why the Strategy Was Credible
Compared to most online companies that acquire and merge with other companies without taking into account the subsidiaries’ fair value, or purely based on competitive or strategic reasons, Amazon has made considerable efforts to ascertain the costs and attribute the goodwill or impairments in its financial statements. The use of the Black-Scholes model to ascertain the fair value gives the process credibility despite the fact that the company also made most of its acquisitions for purposes other than strictly profit. For instance, most of the acquisitions were meant to improve the customers’ experience by creating more channels or widening the scope of search and sales channels. Despite that, the impairment of the goodwill was kept at a minimum and in some instances was negligible.
The Growth in the European Market Can Have a Significant Impact on Current Earnings
The European market provides the best opportunity for Amazon to increase its profits. Unlike in the United States where the company already has a very significant market share and considerable competition offering lesser chances of growth, the European market has considerable opportunities for other investments. Given that the region has one of the biggest proportions of its population in the middle class, the market offers the best chances of improving Amazon’s earnings and profit. A good example of the impact of European investments on the company’s earnings and profit is the influence of subsidiaries such as Bookpages.co.uk and Telebuch.de on the company’s performance. There is a huge untapped market which is also growing in Europe compared to the United States, and consequently the growth of Amazon investments in Europe would have a considerable impact on the earnings and profitability of the company.
The main reason why growth in the European market will have a significant impact on the company’s earnings and profit is due to the fact that the region has one of the biggest proportions of middle class citizens and informed customers. They are Amazon’s major target customers, and as such, the availability of target market coupled with the fact that the market is dominated by smaller companies which can be easily acquired by Amazon makes the region a low investment high returns region.