1. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 1 of 25 AMAZON.COM

2. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 2 of 25 A CEO speaks out Comments to executives at HBS, October 1999 It’s just an incredible time to be in business and have the rules of business changing… For many years we operated under a pretty consistent set of rules. They evolved maybe…but now they are morphing and that presents a situation that challenges us to figure out: Are these rules real,or are they temporary? Should we respond to them?Do we create new rules? How do we run a company in a world like this when we have 13,000 employees trying to figure out where we are going and what we should do? David Pottruck President and Co-CEO Charles Schwab, Inc.

3. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 3 of 25 Key ideas In Measuring Value Traditional approaches to measuring value don't work. Why? New economics are changing how we build businesses and measure performance. Understanding internal and external value drivers and the link to share holder value forms the foundation for e-business investment decision-making. Scenarios capture uncertainty. On-going analysis and update based on real-time performance data is critical. When operating as a “virtuous cycle” competitive position and power can shift. Unless complexity can be managed—virtuous cycles can change to vicious cycles.

4. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 4 of 25 Virtuous cicle

5. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 5 of 25 Creating a value engine Network economies of scale cause the big to get bigger, the strong to get stronger, and the weak to get weaker Enable creation of network oligopolies Describe the opportunity Returns value to investors & other stakeholders Turns the concept into reality

6. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 6 of 25 Virtuous cycles can turn to vicious cycles At what point do we get network diseconomies of scale? How big is too big in the Internet Age?

7. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 7 of 25 Questions to ask when evaluating business value How much time do I have to react and respond? Is the concept right? What approach should I take to evolve the business? Am I maximizing return to all stakeholders? Do I have the resources & capabilities required to execute?

8. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 8 of 25 Industrial Age economies of scale

9. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 9 of 25 Industrial Age economies of scope were limited

10. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 10 of 25 Traditional entrepreneurial process Initial Public Offering

11. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 11 of 25 Dot-com entrepreneurial process in 1999 When will value be created? Prove the Model and “Get Big Fast” Rapid increase in business complexity Leverage the infrastructure and launch new businesses Grow the business to achieve scale Develop the concept and launch IPO or Strategic Sale Average time: 6 months or less (concept) 18 months or less (IPO or Strategic Sale) Average capital required: $50 - 100 Million Evolution: stages of growth Revolution: transitional crisis Time

12. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 12 of 25 Entrepreneurial process in the 21st century Evolution: stages of growth Revolution: transitional crisis Prove the Model Generate Increasing returns to scale Business Complexity Time Develop the concept and launch Grow the business and achieve scale Leverage the infrastructure & launch new business Adapt and continuously evolve

13. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 13 of 25 Jeff Bezos on "monetizing the platform" The Amazon.com platform is comprised of brand, customers, technology, deep e-commerce expertise,and a great team with a passion for innovation and a passion for serving customers well… We believe that we have reached a "tipping point" where this platform allows us to launch new businesses faster,with a higher quality of customer experience, a lower incremental cost, a higher chance of success, and a cheaper path to scale and profitability than perhaps any other company... Jeff Bezos CEO & Founder Amazon.com

14. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 14 of 25 Evolving Amazon.com: Timeline of Events Source: Applegate, Lynda M., Robert D. Austin, and F. WarrenMcFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002. Chapter 2 Figure 2-10 Online bookstore Wish lists Greeting cards International Music,video,… Market place small merchants Online retailers jewelry, cars ASP Manage inventory

15. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 15 of 25 Amazon.com in January 2001 E-Retail Business Model Exchange Business Model Marketplace Business Model ASP Business Model Focused Distributors Horizontal Portal Technical Architecture and Know-How Distribution, Order Fulfillment, Inventory and Customer Service Capabilities Sophisticated/Patented Online Retailing Capabilities (e.g., 1-Click Shopping) People with a Passion for Innovation and Serving Customers Drugstore.com Della.com Greenlight.com Gear.com HomeGrocer.co m IMDb.com Toys R Us zShops Amazon Auctions Sotheby's.com U.S. Books Music Video/DVD Electronics Kitchen Lawn & Patio Home Improvement Amazon.com Europe Toys R Us Note: The e-retailer, exchange, marketplace, and ASP business models are discussed in more depth later in Overview of E-Business Models. ASP refers to the Application Service Provider business model. ASPs develop the software and business infrastructure required to run a digital business and then host the business for another company, in this case, Toys R Us. E-Commerce Know-How New Venture Development and Partnership Know-How Brand Awareness and Loyalty Over 29M Loyal Customers and a Robust Business Partner Network

16. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 16 of 25 A scenario-based approach to valuing e-business Define the purpose for the value assessment (e.g., seeking funding, buying a company, investing in an established business). Pick a point in the future when you expect your business strategy to deliver value (e.g., 3-5 years). Analyze the business concept and forecast what the opportunity should look like at that future point. Work backward to define the current opportunity and forecast revenue. Analyze capabilities and community and forecast the company's (and partners') operating performance at the future point. Work backward to define current capabilities and community and forecast cost and margin. Use this analysis to construct estimates of financial performance that reflect the "most likely" scenario. Factor in uncertainty in your assumptions by developing scenarios that represent upper and lower bounds on key variables. Discuss the value scenarios you have constructed with others and critique the findings and assumptions - not just once - but on a regular basis. Develop a broad-based performance measurement system.

17. Source: Applegate, L.M. and Green, D.; Amazon.com Series Teaching Note, HBS No. 800-431. Copyright © 2000 President and Fellows of Harvard College Amazon.com Slide 17 of 25 A business starts with a great idea but it doesn’t end there. The last thing IBM needs now is a vision. Lou Gerstner Chairman and CEO IBM Response to a reporter in 1995