ESSEC BUSINESS SCHOOL

prepared by Nhung T. H. Hoang, Ioana Lupu and Seamus Duffurena

CASE STUDY

AMAZON.COM, Inc.

(sources: google courtesy)

1. From online bookstore to … ‘everything-store online’

“1-Click” technology, Amazon Prime, star-review, “Best-Seller” rank, Kindle reader, Amazon Fire
tablet, and Echo smart speaker are some of the things Amazon, one of the world’s largest
companies by market capitalization1 is best known for. Founded in 1994 in Seattle, US by Jeff
Bezos, Amazon has grown from an online bookstore based in a house garage to an ‘everything
store online’12. The company has been growing at the rate of 20% - 30% for years. Its revenue and
net income reached about US$386 billion and $21 billion, respectively, in the fiscal year of 2020
(exhibit 1). Over about 20 years, its stock price went up from US$1.96 at Initial Public Offering
(IPO) in May, 19971 to above US$3,250 in December, 20203. This case unveils Amazon’s strategy
and its management control system behind this extraordinary success.
Amazon maintains competitive advantage against its rivals, such as e-commerce giant Ebay
or traditional retailers such as Walmart, Target, and Costco by creating the superior value of trust
and convenience to customers, i.e. friendly return policy and reliable ‘user-generated review’ 4.
Product review, which allows past customers to rate the product and the seller, is key to orient
shoppers towards which new goods to buy, as buying new products poses many concerns and
questions to buyers and new users. Since the early years, product review represented one of
Amazon’s competitive advantages. However, their authenticity was not attained until product
reviews were generated by real buyers.

1 https://edition.cnn.com/interactive/2018/10/business/amazon-history-timeline/index.html
2 https://medium.com/@shahmm/how-did-amazon-build-its-sustainable-competitive-advantage-88cfee7fe2c8
3 https://finance.yahoo.com/quote/AMZN/
4 https://medium.com/@shahmm/how-did-amazon-build-its-sustainable-competitive-advantage-88cfee7fe2c8
Case study – Management Control at Amazon

Moreover, recognizing that credit card owner's private information is another issue holding
back online shoppers, Amazon employs Secure Sockets Layers (SSL) software to encrypt
customers’ credit card numbers, requiring two ‘keys’ to decode the encryption5. If a user’s credit
card information is hacked, the card holder is only liable for up to US$50. To protect its customers’
credit card information from independent third-party sellers, Amazon allows its customers to
charge, pay, and recharge their self-developed virtual wallet, called Amazon Payments.
Lastly, Amazon works inclusively to improve client experience by introducing the “1-click”
purchase option, shortening delivery time, developing a real-time product recommendation system,
and offering free shipping. The “1-click” technology, once launched, was a big game changer for
Amazon to attract more hassle-free online buyers and to alleviate shopping-cart abandonment --
one of the biggest challenges of e-retailers6.
Amazon has secured a leading position in the race of fast delivery by applying artificial
intelligence in its demand forecasting. By replacing time-series forecasting with artificial
intelligence’s algorithms, the ‘anticipatory shipping’ technology pattern helps Amazon not only to
store sufficient inventories in its warehouses but also to half-way deliver orders by the time
customers actually click the buy button7. The technology is a major innovation that supports
Amazon in moving from two-day shipping Amazon Prime to two-hour shipping Prime Now.
Prime members in 50 cities globally, e.g. New York, Paris, and London, are able to get their
household goods within two hours8.

2. Employee performance measurement & incentives

To keep growing fast for years, Amazon fosters a high challenge culture, which reflects in its data-
driven employee performance measurement. Amazon is one of the last tech companies to move
away from stack-ranking (or ‘rank and yank’) performance review systems9, in 2017. In this system,
the company ranks employees on a curve to reward top performers and to lay off the bottom ones.
This system has been much criticized for its negative effects on employees’ morale. Moreover,
Amazon’s attitude towards employees’ performance measurement resulted in a high turnover rate
and employee disengagement.

5 https://smallbusiness.chron.com/using-credit-card-amazon-safe-66518.html
6 https://knowledge.wharton.upenn.edu/article/amazons-1-click-goes-off-patent/
7 https://www.npr.org/2018/11/21/660168325/optimized-prime-how-ai-and-anticipation-power-amazons-1-hour-deliveries
8 https://www.amazon.com/primeinsider/tips/prime-now-qa.html
9 https://www.etsplc.com/blog/replacing-performance-ratings-how-amazon-deloitte-and-google-do-it/

2
Case study – Management Control at Amazon

Another tool Amazon used was an “Anytime Feedback Tool” for constantly channelling
feedback (both praise and criticism) between employees and their respective managers. The content
of feedback was known by the employee’s manager, but unknown to the recipient. This dreaded
stack-ranking system has been criticized as “purposeful Darwinism” and “bruising” work culture,
creating an unnecessary ambiance of hate and anger10. The work-life unbalance was portrayed as
employees crying at their desks amid demanding work requirements. Subsequently, public criticism
as well as strong competition to attract and retain talent with other giant tech companies, i.e.
Microsoft, Facebook, Google, and start-ups, made Amazon abandon the ‘rank and yank’ system11.
In 2017, Amazon launched a new system called “Forte” which centres on employees’
strengths instead of weaknesses. Also, to increase employee engagement among its workforce of
more than a half-million workers, Amazon also rolled out a new feedback program, called
“Connections” 12. In the new Q&A feedback program, employees are asked daily to answer a
question popped up on their screen, ranging from their manager’s leadership and the length of
meetings, to mundane questions such as how crowded the bathroom was12. Data collected from
these answers are analysed closely by its Human Resource People Science team12. Employees’
feedback on the “Forte” is quite positive, but their reaction to the “Connections” is mixed due to
concerns about the confidentiality of their answers 12.
One of the mechanisms that Amazon uses to drive employee ‘constant learning,’ employee
reward, and organizational innovation is called “white paper process”13. To propose any idea of a
new product or service, employees are asked to write a paper which is later read and discussed by
a team. Constant performance feedback plays a key role to retain talented workers and ‘nudge’
people toward optimal work ethic behaviors14. Also, this white paper process aligns with the bonus
recognition. When managers want to promote anyone, they are asked to prepare a concise white
paper about the employee’s ‘superpowers.’
In spite of these improvements in HR management, Amazon still had a poor reputation in
terms of diversity, being a male-dominated organization.
Amazon executives have relatively modest salaries plus stock. Amazon avoids individual
or team-based bonus structures and keeps salaries low relative to market. Why is that? People
game the system. It’s human nature to optimize those functions for which we are measured and
rewarded, Bezos seems to think.

10 https://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html?smid=tw-bna#story-
continues-18
11 https://www.seattletimes.com/business/amazon/amazon-says-it-will-change-performance-reviews-focus-on-staffers-strengths/
12 https://www.cnbc.com/2018/03/30/amazon-employee-reaction-to-hr-programs-connections-forte.html
13 https://www.payscale.com/compensation-today/2018/08/performance-management-techniques

3
Case study – Management Control at Amazon

In 2017, Jeff Bezos, Amazon’s CEO received $1,681,840 in compensation, but a

statement said that $1,6 million represented the cost of providing for his security. He received the
rest of the balance, $81,840, as salary. Amazon’s disparity between CEO and average worker pay
stood at 59-to-1, a relatively narrow gap compared with many other companies. Bezos owned
16% of the company’s shares, a stake which made him the world’s richest man with a net worth
of $127 billion.

5. Budgeting14

Amazon’s approach to planning and budgeting is unorthodox. Rather than adapt organizational
objectives to fit conventional planning and budgeting tools, Amazon adapts these tools to serve
their primary organizational objectives. These objectives are to increase work efficiencies and,
perhaps more importantly, to increase value for customers.
Budgeting, one of several planning processes, at Amazon is referred to as OP1. This process is
understood in terms of activities, and these activities are evaluated according to the amount of
value generated for customers.

“For in the months of July, August, and September, while also doing all the preholiday
work before the retail peak season hits, you are spending your time meeting, debating,
writing, and reviewing your next year’s operating plans and ideas for scaling and
innovating.”

Traditional budgeting in most organizations seeks to provide business units and centers with a
certain amount of money to perform a certain amount of output on an agreed upon cost. This
money is often allocated with reference to past performance by, for instance, using recent budget
period costs and outputs as a baseline for determining future budget costs and outputs. Amazon,
however, focuses on activities rather than units and centers and draws a direct link between these
activities and their performance according to operational efficiencies and other customer-
centered metrics. By collecting and analyzing data on these metrics, Amazon is able to assess the
impact of each activity on efficiency and customer objectives and thus allocate money
appropriately. So, rather than conduct budget discussions on the basis of which business units
get how much money, Amazon plans its budgets according to which activities are generating the
most benefit for customers and streamlining work for the company.

14
Source: https://www.forbes.com/sites/stevedenning/2019/06/02/how-amazon-tames-the-budget/#3a20d2d36c04

4
Case study – Management Control at Amazon

So, on the surface, Amazon’s organizational structure is quite similar to other organizations.
Nonetheless, it’s budgeting process is quite different. Money flows to activities, rather than units;
and amounts vary based on actual impact, rather than past performance.

“The OP1 process enables a holistic review of the value of each team’s business or
service and its overall fit within the company’s strategy. It also forces every team to think
through and outline the road map necessary to support the overall growth objectives of
the company.”

In many organizational settings in which funding is allocated to business units or centers, money
is often allocated on a periodical basis, such as quarters or years. This methodology can
encourage business units to spend what they are given, even if they don’t necessarily need to,
because otherwise their funding would have to be returned for non-use. This approach might be
detrimental to Amazon’s performance, given its emphasis on efficiencies and delivering value to
customers. Were Amazon to adopt the traditional approach of “spend it or lose it”, they would
likely end up spending more money than necessary to achieve their objectives.

Covid 19 and Amazon’s management controls

During the Covid-19 outbreak, Amazon’s overall performance and growth as an organization
have only improved. The company has been uniquely positioned to deliver goods to customers
while they quarantine at home. Meanwhile, and early in the pandemic, grocery stores ran out of
stock of critical items and other retailers suffered from decreased sales15. Amazon, however,
made up the difference and took market share from its competitors and reported record revenues
and profits to the tune of $386 billion and $21 billion, respectively. This has allowed Amazon to
further invest in its supply chain and logistics and to improve delivery times to customers, further
reinforcing its commitments to customer value.
Amazon’s financial success during Covid-19 has been overshadowed to some degree by
accusations of poor and unsafe working conditions, however. While Amazon was ramping up
operational capacity and to meet increased demands for its goods and services, this necessitated
the hiring of many more workers. In fact, Amazon reportedly increased its workforce by 34%
(year over year) in 2020, bringing its total number of employees to 876,80016. However, during
this time there were an increased number of complaints of unsafe working conditions for lower-

15 https://www.reuters.com/technology/amazon-first-quarter-sales-beat-expectations-2021-04-29/
16 https://www.cnbc.com/2020/09/29/how-amazon-managed-the-coronavirus-crisis-and-came-out-stronger.html

5
Case study – Management Control at Amazon

level workers, particularly logistics and warehouse workers. Some claimed that Amazon did not
adequately protect employees from the virus with personal protective equipment and improved
safety measures.
Amazon implemented a number of measures in its supply chain to address safety during the
pandemic. At warehouses and fulfillment centers, for instance, regular temperature checks are
performed, social distancing and masking is enforced, and some paid leave is offered to
employees who get sick. Employees who repeatedly violate these new norms are terminated.
In spite of these improved safety measures, many workers have been disheartened by what they
perceive to be an inadequate response to employee safety and wellbeing and there have been
attempts to organize labor to improve conditions. One such attempt was a proposal in a
warehouse in the state of Alabama, which was hotly contested by Amazon corporate. In this
case, employee complaints extended to how work was too tightly monitored, to the point that
their managers could know precisely how many seconds were not dedicated to their tasks. ‘Time
off task’, or time that an employee is considered not to be working, is a metric used by
management to assess workers and their (lack of) productivity and is measured through
employees’ phone data. Employees are instructed to download an Amazon app that enables
management to know when employees have begun and ended work shifts, as well as when they
are performing their tasks and when they are away from their workstations – in which case, time
would be recorded as ‘time off task’17. If workers have accumulated too much time off task, they
may be confronted by management. While some workers have appreciated this system for
formally acknowledging their productivity relative to their coworkers with more time off task,
others have argued that it unfairly penalizes their reputation in the company and that they risk
reprimand for taking regular breaks, whether that be to eat or even just use the restroom, for
example.
The attempt to unionize at the Alabama warehouse ultimately failed when a majority of workers
voted against the proposal18.

Assignment questions

Question 1: What are Amazon’s strategy and competitive advantage? (if not enough information
in the case study, please refer to other sources)

Question 2: How does its management control system enable Amazon to execute its strategy?

17 Source: https://www.nytimes.com/2021/04/01/podcasts/the-daily/amazon-union-vote-alabama.html?showTranscript=1
18 Source: https://www.npr.org/2021/04/09/982139494/its-a-no-amazon-warehouse-workers-vote-against-unionizing-in-historic-election

6
Case study – Management Control at Amazon

Question 3: What types of management controls do they implement?

Question 4: What are the pros and cons of the rank-and-yank system?

Question 5: What are the advantages of Amazon’s planning and budgeting over traditional
budgeting?

Question 6: What effects might the Covid-19 pandemic have on Amazon’s management control
systems?

Question 7: What are the advantages and disadvantages of the ‘time off task’ concept for lower-
level workers?

Exhibit 1: Amazon’s consolidated statements in 2020

(Source: Amazon’s 2020 annual report19)

19 https://ir.aboutamazon.com/annual-reports