Amazon.com is a 15-year old company established in 1995 by Jeffrey Bezos. Initially established as an online bookstore, it soon found itself in the trading business dealing with electronic commerce with a variety of product lines such as books, electronic items as well as an increasing number of varied consumer products. Based in Seattle, Washington and registered in Delaware in the United States, Amazon.com was launched in 1995 and has since made a number of forward as well as vertical integration strategic entries in its pursuit of accomplishing its mission stated as follows:
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…”We seek to be Earth’s most customer-centric company for three primary customer sets: consumer customers, seller customers and developer customers.”
(Amazon,com Home Page)
As of 2009, Amazon.com has established online ecommerce sites in Japan, China, United Kingdom and other key areas of the world further diversifying its product lines, employing about 24,500 employees and generating an impressive 28 per cent year-over-year average revenue growth hitting $24.51 billion ending in 2009 from a mere $1.64 billion in 1999. (Amazon.com Annual Report 2009)
As the firm continuously moves towards global business implosion, it is perennially confronted by a number of phenomena that may significantly impact the business continuity of the firm. These set of global risk pressures equally confront a great number of companies aiming to respond to the drastic changes in the global market place aiming to play key roles in the scramble for next decade.
In the case of Amazon.com, these pressures are provided with audit strategies designed to obviate the risks and threats as well as harness its resource capability potentials to benefit from the opportunities of the ecommerce industry which it has spearheaded since 1995. Here, an audit strategy program has been designed as risk management guide to thwart the threats and risks of big business Amazon.com is in.
The Strategic Foundation of Management & Governance at Amazon.com
In general, the board leadership of Amazon.com represents the core of control and direction for the company representing the firm’s shareholders. Its purpose is primarily
to build long-term shareholder value for the innovative enterprise. With the Chair selected by the board, he concurrently functions as the Chief Executive Officer (CEO) of the Company. Presently occupied by its founder, Jeff Bezos, the board firmly believes that this leadership structure appropriately fits Amazon.com considering his role in establishing the company and his controlling stake of the firm. Further, the Board believes that such organizational structure enhances its capability to concentrate on major corporate issues over the long term.
Amazon.com makes use of its lead independent board directors mandated to preside over executive meetings in the absence of the Chair. In this way, independent directors create a strong sense of fairness and balance for as long as these do not impair
their independence to create any form of conflict of interest. In assessing such directors’ independence, the Board ensures a form of ethical conduct in the form of a disclosure of interests. Thus, any form of risk oversight is periodically taken up as a component of risk management for the Company.
Thus, the Board assumes an overall responsibility for risk oversight, with certain delegated authorities to an Audit Committee and the Leadership Development and Compensation Committee with the former monitoring and overseeing risk management related to the Amazon.com’s financial reporting processes.
True to many audit committee functions, Amazon.com’s audit committee ensures the track record performance, qualifications and independence of the Company’s independent auditors, the performance of the Company’s internal audit processes, compliance system with legal and regulatory requirements as well compliance with International Financial Reporting Standards (IFRS) risks related to executive compensation including other share-based compensation plans. Here, a full Board periodically reviews management reports on various aspects of the company’s business and governance issues as defined in the company’s strategic plan. (www.amazon.com/ir,)
Amazon.com: The Strategic Drivers
This section summarizes the strategic issues for Amazon.com which can be monitored and evaluated by its internal audit system. Such issues represent the risk management targets of Amazon.com and are the subject of a strategic audit program as part of the risk oversight system.
Amazon.com competitive profile is an interesting play of industry strategy. Barnes and Noble, launched as an online retail store in 1997 I considered a threat considering the company to be the largest US book retailer with a larger volume of inventory while another competitor, Borders.com, is equally into books, compact discs, videos and other novelty items.
Similarly, this is considered a threat along the area of music retail where Amazon.com lately expanded into. This implies that as Amazon.com further expands and diversifies into other product lines, the band of competition widens. Ingram Micro, which began but hardly succeeded in experimenting with online retailing.
For Amazon.com, the retail difficulties encountered by Ingram served to become an opportunity for Amazon.com considering the former’s wholesale orientation resulting to maintaining huge inventories and consequently to significant overhead costs.
A significant part of the audit program for Amazon.com would include an audit objective of industry analysis outlining the market share of the competition in the sector, the accompanying trends and variance analyses to pinpoint the causes of deviations to provide appropriate management control of deviant activities. Such operating deviations from forecasts may serve to require managers some form of strategy shifts whenever necessary.
- Expansion involving new products, services technologies and geographic regions subjects this company to additional business, legal, financial and competitive risks.
An audit program for this issue would entail the audit objective of ensuring the inclusion of appropriate relevant project or product feasibility studies (PFS) to anticipate business, legal, financial and competitive risks appurtenant to the expansion and long-term viability projections.
The cost of research and development, initial production, distribution and product life cycle would be part of the audit documentation and control areas to ensure that the inherent and control risks are anticipated and appropriately provided with appropriate management control system. The kind of business Amazon.com is into would determine the extent of logistics planning and management required in the company value chain.
- They may not be successful in their efforts to expand into international market segments;
This issue will involve the audit objective of evaluating the documents comprising the market research studies, country risk analysis including the political, economic, social, technological as well as environmental risk profiling of the country where production and distribution are proposed to be undertaken. The audit procedures will include inspection and authentication of objective studies, validation of market data, the supply chain factors, the cost advantage, product differentiation and adaptation anticipated for the products and services to be introduced in the international market.
- If they do not successfully optimize and operate their Fulfillment Centers, their business could be harmed.
The audit program for this risk factor would include the audit objective of determining the competent staffing, resources level, strategic location of the Fulfillment Centers as determined by market studies and researches. The operating policy structures of the FCs and the performance management system that will prevail in the units. The optimization of these FCs must ensure the roles the FCs play either as cost, profit or investments centers to delineate their roles in the overall operations of Amazon.com. The logistics of maintaining the distribution system here will be dependent on the communication infrastructure of the host country.
- The seasonality of this business places increased strain on their operations.
The audit program in this regard would include accurate forecasts of seasonal market volatility to anticipate operating highs and lows against inventory levels as means to avoid high operating costs due to inventory handling and ordering costs. Amazon.com needs some form of accurate market forecasts to ensure that its supply and value chain corresponds to the seasonal needs of certain markets. Amazon.com’s flexibility in shifting markets would prove important in its objective of optimizing areas of operations.
- Amazon’s business could suffer if they are unsuccessful in making, integrating, and maintaining Commercial Agreements, Strategic Alliances, and Other Business Relationships.
An audit program for this issue would require a comprehensive value and supply chain in certain areas where institutions such as distributors and food chains can become important parts of the supply chain. This would require detailed evaluation and monitoring of contracts with the parties in the value chain. An independent confirmation of contracts, agreements, and alliances would check the management capability of managers handling this component. Likewise, Amazon.com must open new forms of alliances to enable it to tap the emerging changes in the way its mail order business is conducted to avoid obsolescence.
Our Business Could Suffer if We Are Unsuccessful in Making, Integrating, and Maintaining Acquisitions and Investments;
The audit program in this regard will require the adoption of management control over mergers and acquisitions as well as other investments where the returns are eagerly anticipated through market monitoring and evaluation of opportunities available in the area. The manager’s capability will require some form of inventory management to ensure that his capacity will sustain and any form of failure to tap available opportunities will constitute a deviation and variance subject to clarification and explanation by the managers of Amazon.com. The company would need resources to enable it to expand operations as well as confront competition over the long term.
We Have Foreign Exchange Risk.
The audit program for this issue would include a systematic evaluation and monitoring of currencies where Amazon.com maintains offices or deliveries. Foreign currency risks are avoidable if adequate information is obtained by Amazon.com financial and audit analysts. This would require training and implementation of strategies in handling foreign exchange transactions as this would require global shifts in investments and implementation of the supply as well as value chain.
Hedging may assist in managing a better foreign currency risk management system for Amazon.com. Although there are risks appurtenant to handling (purchasing and selling) various currencies where Amazon.com operates, an audit procedure of monitoring foreign currency investments would require periodic audit examinations, visits, analysis, counts and recording.
The Loss of Key Senior Management Personnel Could Negatively Affect Our Business; System Interruption and the Lack of Integration and Redundancy in Our Systems May Affect Our Sales.
This refers to the adoption of an integrated management and production processes for Amazon.com where the human capital must be motivated enough to sustain belongingness to Amazon.com by adoption of a reward and seniority system to retain good executives and decision makers for business continuity purposes. Audit procedures would require proactive review of employment contracts with key officers to avoid transfers and resignations due to policy issues.
We Have Outstanding Debt and May Incur Additional Debt in the Future;
The audit program in this regard would be to ensure that matching of debt with funds applications whether short, medium or long-term in nature. The cost of capital is a key factor in determining the profit margin of amazon.com considering the volatility of interest rates as well as the appurtenant foreign currency risks if the debt is foreign currency denominated. Trading on the equity and a monitored leverage system will ensure that entering into debt agreements may indeed be more strategic than using one own funds.
We Face Significant Inventory Risk
In the case of amazon.com, facing inventory risks may have to be encountered if it enters into the wholesale market like Ingram Micro. Amazon.com’s products are perishable in nature where obsolescence and technology shifts may play a critical role in valuing inventories. Entering into a global system of operations would require an audit program where inventory levels are monitored through the economic order quantity as well as inventory analysis of each area where Amazon.com operates. Likewise, a system of promotions, advertising as well wholesale incentives to buyers are to be monitored to ensure that inventory risks are reduced to the minimum.
The risks and threats brought about by the global expansion of Amazon.com remain as potent as ever. Competition will continue to pervade its market and put pressure into changing strategies to ensure that management control remains strong and effective for the global firm.
Here, Amazon.com, by the nature of its business may have to sustain a highly diversified line of products and services to remain innovative and relevant in a constantly changing market involving electronic commerce. Thus, new forms of risks and threats will litter the horizon wherever Amazon.com establishes its presence. Thus, a system of strategic audit and management control is necessary to bring the business to its next higher level. (Anthony & Govindarajan, 2004)
Amazon.com, Amazon investor relations, Web. 18 May 2010.
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Investigative Study. Department of Electrical Engineering, University of Maryland, College Park,
Dec.8, 1999, at website: http://www.rhsmith.umd.edu/faculty/jbailey/ents630/amazon.pdf
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