Posted: March 30th, 2022
There are many firms that exist and operate within the capital management realm. Some companies operate and expand via their internal income and operations. There are other firms that are not currently self-solvent. However, the latter is commonly able to expand through capital investment and fundraising. The goal with such firms, of course, is to ramp up business levels, pricing structures and so forth so as to get to a profit at some point, even if it takes a few years. Indeed, many firms start off relying on capital investment and resource allocation at first and then become able to expand organically with no outside support, budgeting or investment. While firms like Amazon are a behemoth right now, there was a time where their operations and capital structures were quite thin internally and thus they needed a lot of investment and support through the capital investment and budgeting process.
There are definite variations and differences when it comes to capital budgeting and resource allocation. Amazon typifies one of the outliers that exists. Of course, that would be the valuation and other fiscal perceptions related to internet companies. The “dot-com bubble” that happened around 2000 proves that there has been some blowback and static when it comes to the proper valuation of internet companies. It is much more of a refined art nearly a generation removed from that bubble. However, Amazon faces a lot of questions and challenges to their capital spending and budgeting. Perhaps that skepticism is not as present as it was when Amazon was much more of a nascent and non-solvent company. However, it does persist to this very day. For example, Amazon has mostly hit proverbial home runs when it comes to their business decisions. Like other internet firms like Apple and Google, they have their tentacles in a lot of different markets. They monopolize none of them yet they do very strongly in most situations. Even so, they sometimes do not do as well as they would hope (e.g. the smartphone they issued a few years ago) and many anlysts and more than willing to bring out the proverbial long knives when that comes to pass. Even with the perceived volatility when it comes to internet stocks, Amazon still does very well overall because their revenue is strong, their growth rate is quite high and the other financial metrics that are assessed by analysts, internet company or not, show a firm that is in a very good position. The market and industry paradigm in which a firm operates is important. After all, an operation like Amazon that is mostly online in nature will operate differently than a firm like Wal-Mart, which is mostly a ground-based operation. However, the lines between these firms is blurring as many firms, including both Amazon and Wal-Mart, realize that a blended approach that deals with both online and ground-based operations is necessary. This means that the capital structures and budgeting involved, regardless of the source of funds, needs to address both front concurrently and in a way that is effective (Doffou, 2014).
Because of the increasingly complexity of firms and how they often have to operate in both online and ground-based ways, it is important to understand that capital budgeting and resource allocation must consider the scope and performance of the firm as a whole. It is not unwise to consider that a firm may be stretching itself too thin by working on several fronts of operations at the same time. In this case, that would be online and in physical stores. As noted already, however, this is a necessary part of doing business in some industries. Retail would obviously be one of those industries. Online shopping is become larger and larger. At the same time, there are still people that prefer to buy certain goods in physical stores, for whatever reason. Further, there are some goods that are hard to purchase online. Perishable food and other groceries would be a good example. Regardless of the marketing and retail mix in question, the characteristics of the assets involved, how they are allocated and how all of this aligns with the strategic management plans of the firm is all important to consider. Since the presence of online-dominant firms is still fairly new in many ways, pinning down what is healthy what is going to be problematic and the long-term prospects of any given firm, even a firm like Amazon, is not unfair to consider or ponder. Even so, there are some firms that are clearly doing better than others. Firms like Amazon, not to mention the aforementioned Google and Apple, are great exmaples. There are other firms that have been around a long time in the ground-based sphere that are now having to shift to more of an online presence due to changes in the market and society. Wal-Mart, as was mentioned before, is a good example. That company has a substantial amount of resources and capital capabilities. However, those resources are very much still invested in the ground-based capital structures of the past. This will have to change as the market shifts, as it has been for years. While those other changes are going on, it must be understood that the proper budgeting for, deployment of and leveraging of information technology and information services assets is growing more important by the day (Ray, Ling & Barney, 2013).
Concurrent to that is the fact that Amazon is seemingly doing the same thing as Wal-Mart, albeit in reverse. This is easily proven when it is noticed that Amazon is slowly entering the ground-based retail sphere after being a mostly online operation in the past. Bookstores and their recent acquisition of Whole Foods are just two examples. Amazon seemingly knows that while their capital investments and budgeting in the online sphere is paying huge dividends for them, the online shopping sphere is not completely dominant of the whole market. Further, this will likely not change. As mentioned above, there will always be situations where shopping in person and in a physical location is preferred or even necessary. Amazon, in addition to shifting to a blended model, is themselves working to keep the online frameworks they have in full effect as they shift to a blended model. As noted above, they are very much doing what Wal-Mart is doing, but in the reverse direction. There is some skepticism about the Whole Foods purchase in that the new Amazon subsidiary is not as present in all of the markets of the United States like Wal-Mart happens to be. At the same time, it allows Amazon to enter the relevant markets immediately and at a high level rather than starting from scratch. Rather than having to develop their own capital budgeting and resource structures, they instead acquired an existing apparatus and started using it to accomplish their own goals. Inorganic growth and resource allocation can be hard to pull off in many ways. Whole Foods surely had at least somewhat of a different plan when it came to their capital structures and budgeting process. Now that Amazon is in control, they are surely shifting those structures and resources into forms that are more useful to Amazon. If this evolution and correcting of capital structures can be done adeptly, however, it will clearly be a boon to Amazon. It remains to be seen just how effective their efforts shall be. However, the progress thus far is encouraging and it makes sense that Amazon would enter the ground-based store market the way that they did (“Grocery Game-Changer”, 2017).
Whether it is Amazon, Wal-Mart or other firms, it must be understood that the amount of resources in play is finite in nature. This is something that is true for Amazon (and others) not only in the United States, but also around the world. For example, there is a competition for internet resources and bandwidth that is referred to as a “battle” by some pundits and authors. Indeed, South America as a continent and Amazon are in a bit of a battle together. The governing body in question is known as ICANN. The allocation of the addresses and resources in question are being considered in light of the Amazon methodology, approach and design. Who gets the resources, who does not get the resources and why is something that is up for a lot of debate. Some hold that Amazon is the firm that can do the most with the resources and for humanity in general. Others hold that Amazon is a bully that should not be allowed to run roughshod over countries and other firms with their wealth and resources. It is a question without an easy answer. Regardless, it is a lot of money, effort and other capital-related maneuvers that Amazon must consider carefully. Doing things in a half-hearted way leads to bad outcomes. However, trying to win at all costs is also something that is not going to work well. In making capital budgeting and resource allocation decisions, they will need to comply with the law, comply with the desires and intentions of shareholders/stakeholders and also adhere to the proper minimum ethical standards. The last of those might be hard to define as different people have different ethical worldviews. This is even more true when considering companies and people from different continents (Vargas-Leon & Kuehn, 2015).
The more important consideration would be achieving “optimal” resource allocation. There are always going to be people that criticize what firms like Amazon does. There are always people that throw around words like “monopoly” or “oligopoly” when it comes to Amazon. Ultimately, Amazon needs to do what is best for them when it comes to their capital budgeting and resource allocation. So long as the company is complying with the law and so long as they are allocating their capital and resources in the best and most optimal way, that is what matters most. When it comes to the internet companies of today in particular, the monolithic systems and frameworks of the past is gone. The internet-based systems that Amazon employs now are complex, and this is by design and necessity. Making things too complex just for the sake of it and without a business reason is less than wise. After all, there are those that insist on “keep it simple, stupid”. However, Amazon cannot thrive if they go by the standard. It is clear from their capital budgeting and resource allocation that they know this full well. Because Amazon has a rather diversified business portfolio, simplicity is not possible. However, they currently have the proper resource allocations and capital budgeting structures in place. Striking the right balance between centralization/decentralization and so forth is something that Amazon will need to meter, measure and track at all times as the business expands and grows. They are spending a ton of money on investment but they also ensure that money for ongoing operations is as present as it needs to be (Verhoef, Blulai & Van Der Mei, 2011).
The last sentence in the last paragraph speaks to something that is important. This, of course, would be pace. Internet operations are complex in many ways. Some have already been mentioned. Another one that has not been covered, as just mentioned is pace. It is sometimes necessary to accelerate the pace at which online and virtual resources are deployed. It is possible to try and grow too fast. However fast Amazon does or does not grow, they have to be careful to have the proper resources in place to match the pace in question (“Accelerating resource allocation”, 2013). In addition to the above, the resource allocation noted above can be dynamic and quickly changing in nature. Amazon has to be able to move quickly. This means leveraging their technology resources in a way that is quick, efficient and often automated. Keeping things automated and automatic, at least when possible, is the wiser course. Even with that, tabs need to be kept on how things are doing. Changes to the automated procedures and configurations are sometimes necessary (Xiao, Song & Chen, 2013).
Amazon is surely on the right path. However, there are many firms that have learned that failing to evolve can lead to a company falling from grace, or even failing completely. Sears, K-Mart, Blockbuster and Circuit City are just a few firms that are heading that way, or that are already gone. Society will continue to evolve and change. The same is true of industry and retail. Amazon, Google and Wal-Mart are the major players for now. However, that will surely change over time.
ACCELERATING RESOURCE ALLOCATION IN VIRTUALIZED ENVIRONMENTS USING WORKLOAD CLASSES AND/OR WORKLOAD SIGNATURES. (2013).
Doffou, A. (2014). The Valuation of Internet Companies. Journal of Applied Financial Research, 172. Grocery Game-changer? Amazon’s Whole Foods buy could have far-reaching implications for food industry. (2017). Quality Progress, 50(8), 8-10.
Vargas-Leon, P. & Kuehn, A. (2015). The Battle for Critical Internet Resources: South America vs. Amazon.com, Inc. Revista De Direito Setorial E Regulatório, Vol 1, Iss 1, Pp 1-22 (2015), (1), 1.
Ray, G., Ling, X., & Barney, J. B. (2013). Impact of information technology capital on firm scope & performance: The role of asset characteristics. Academy of Management Journal, 56(4), 1125. doi:10.5465/amj.2010.0874
Verhoef, C., Bhulai, S., & van der Mei, R. (2011). Optimal resource allocation in synchronized multi-tier Internet services. Performance Evaluation, 68(Special Issue: Performance 2011), 1072-1084. doi:10.1016/j.peva.2011.07.020
Xiao, Z., Song, W., & Chen, Q. (2013). Dynamic Resource Allocation Using Virtual Machines for Cloud Computing Environment. IEEE Transactions On Parallel & Distributed Systems, 24(6), 1107. doi:10.1109/TPDS.2012.283
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