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Risk Management at Amazon: Challenges and Solutions

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[Date]
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Risk Management at Amazon: Challenges and Solutions

I. Introduction

With a market capitalization of over $1 trillion, Amazon is one of the world’s largest e-

commerce and technology companies. And like any other corporation, Amazon faces several

risks and uncertainties that challenge the company’s financial performance and reputation. In the

last six months, the company has dealt with supply chain-related disruptions, legal and

regulatory issues, and an overall profit slowdown (Miller & Wilhelm, 1). With a company the

size of Amazon in a complex and rapidly changing market landscape, there comes a range of risk

management challenges that must be addressed in order to ensure that its order to maintain its

position as a market leader. This case study aims to evaluate Amazon's recent actions in dealing

with risk and uncertainty and provide recommendations for improving risk management. It will

also explore several key risk management problems faced by Amazon, including adverse

selection, moral hazard, and principal-agent issues, and propose solutions to improve the

company's profitability and efficiency. Ultimately, this case study will provide valuable insights

into effective risk management strategies for large corporations and the critical role of such

strategies in maintaining the competitiveness and success of companies like Amazon.

II. Recent Actions Dealing with Risk and Uncertainty

Amazon has faced a number of challenges in the last six months that have threatened the

company’s growth and progress. These include declining profits, supply chain issues, and

regulatory scrutiny over worker safety and labor practices (Miller & Wilhelm, 1; Sainato, 2).

And in order to address those issues, Amazon has taken several key steps to manage risk and

uncertainty.
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In order to encourage more investment amidst the falling profits, Amazon announced a

20-for-1 stock split and a share buyback of up to $10 billion in 2022 (Palmer, 3). This also aimed

to increase shareholder value and boost the company's stock price. At the same time, Amazon

has continued to invest heavily in its logistics and delivery infrastructure, with the goal of

improving efficiency, reducing costs, and minimizing supply chain disruptions (Pereira, 4). The

company has also announced plans to expand its grocery business and invest in renewable

energy projects, which could help to diversify its revenue streams and reduce its dependence on

the highly competitive e-commerce market. To address the regulatory scrutiny over worker

safety and labor practice, Amazon has made efforts such as improving warehouse safety,

increasing the minimum wage, and offering healthcare and parental leave to employees.

While Amazon's recent actions have been effective in managing some of the risks and

uncertainties facing the company, there is still room for improvement in its risk management

strategies. The share buyback program may boost stock prices in the short term, but it does not

address the underlying challenges facing the company. Similarly, while investments in logistics

and delivery could improve efficiency, they may not be enough to offset rising labor and

transportation costs. To more effectively address supply chain management, Amazon needs to

adopt a more agile and flexible approach. In response to legal and regulatory challenges,

Amazon should work more closely with regulators and develop proactive compliance strategies,

which will also reduce the risk of costly legal battles and reputational damage. To improve risk

management as a whole, Amazon could consider investing in more advanced risk analytics tools,

as well as working more closely with external stakeholders, such as regulatory bodies and

insurance providers.
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III. Adverse Selection Problem

An adverse selection problem is the type of risk that occurs when one party in a

transaction has more information than the other party, leading to a potential imbalance of risk. In

the case of Amazon, the company acts as an intermediary between buyers and sellers, and sellers

may have more information about their products than Amazon. This information asymmetry can

lead to sellers offering subpar goods or low-quality products that Amazon cannot effectively

identify or screen (Pereira, 4).

Currently, Amazon uses customer ratings, reviews, and seller performance metrics to

reduce adverse selection problems. To further minimize the negative impact of adverse selection,

Amazon should implement stricter quality control measures and increase transparency in the

transaction process. The company could also offer incentives to sellers who provide high-quality

products, encouraging them to be transparent about their product features and specifications. By

improving quality control and transparency, Amazon can build trust with its customers and

reduce the risk of negative outcomes.

IV. Moral Hazard Problem

Moral Hazard is another type of risk that occurs when one party in a transaction is more

comfortable in taking risks, whether physical or financial because they do not bear the full

consequences of those risks. One example of a Moral hazard problem in the context of Amazon

is the employees engaging in fraudulent behavior like cutting corners, taking shortcuts, and

disregarding safety operations, since they believe they will not be held accountable for the

consequences (Pereira, 4).

Amazon has implemented several strategies to mitigate the moral hazard problem. It uses

a system of performance metrics to track the performance of its sellers and employees, and

ensure that they are meeting the company's quality and ethical standards. In addition, Amazon

provides regular training sessions for its employees on topics such as data privacy and

information security, and it has established a code of conduct that outlines its expectations for

ethical behavior.

To further address the moral hazard problem, Amazon can consider the use of incentives

and disincentives, such as offering bonuses or promotions to employees who consistently exhibit

ethical behavior, while also imposing fines or other penalties for employees who engage in

unethical practices. Another practice could be the establishment of a strong corporate culture that

promotes ethical behavior and accountability, which can be achieved by promoting a work

environment that encourages open communication and transparency, and regularly taking

feedback from employees and customers to identify potential areas of improvement.

V. Principal-Agent Problem

The principal-agent problem arises when one party, the principal, hires another party, the

agent, to act on their behalf, but there is a conflict of interest between the two parties since the

goal of one party in the transaction may not align with the goals of another party. It is another

risk that Amazon faces and a conflict of interest are observed between the company and the

third-party sellers. Amazon has millions of third-party sellers who use its platform to sell their

products, to whom the main goal is to earn and maximize profits in the short term the company
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wants to prioritize long-term growth and development while being an attractive prospect for both

buyers and sellers (Pereira, 4).

In order to deal with the principal-agent problem, Amazon uses various incentive tools.

For example, Amazon charges third-party sellers fees based on the number of products they sell,

as well as a percentage of the sale price. This incentivizes sellers to increase their sales volume

and to provide high-quality products and customer service to maintain positive reviews and

ratings. Similarly, to improve profitability, Amazon provides sellers with access to data and

analytics to help them optimize their product listings and pricing strategies.

While these tools have been somewhat effective, there are other further strategies that

Amazon can consider. Amazon could offer additional services or benefits to sellers who

consistently meet certain performance metrics, such as higher visibility in search results or

access to specialized tools or resources. Another strategy could be providing easy and transparent

communication between Amazon and its third-party sellers including regular feedback and

performance evaluations.

VI. Organizational Structure

The organizational structure of Amazon has been a critical factor in its success as a

leading e-commerce company. Amazon's structure is based on a functional and decentralized

approach, with small teams empowered to make decisions and operate independently, such as

sales, marketing, and operations, which has allowed Amazon to be agile and responsive to

customer needs while maintaining a strong focus on innovation and growth (Mayer, 5).

However, as Amazon has expanded its operations to include a variety of products and services,

the structure has become more complex. This complexity has created challenges in risk
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management, as it has become more difficult to identify and mitigate risks across the

organization.

There are some areas of the structure that could be improved to enhance overall

profitability and efficiency. Amazon could implement a more decentralized structure that would

allow its individual business units higher autonomy to identify and respond to risks, and to make

decisions quickly and efficiently. At the same time, while managing risk, there is a need for an

integrated and coordinated approach to risk management between various units. The company

could also adopt a more customer-centric approach that would ensure that customers are at the

center of all decisions and enable Amazon to respond more effectively to customer needs and

preferences. Amazon could also consider changes in its organizational structure, such as the

establishment of more cross-functional teams from different departments to work on specific

projects, allowing for greater collaboration and sharing of knowledge.

VII. Conclusion

As has been discussed, Amazon faces a range of risk management challenges that are

inherent to its operations as a large, diverse organization. In the meantime, the company has

demonstrated its commitment to working thoroughly and managing and mitigating those

challenges. To further improve its risk management practices, Amazon could take steps to

minimize the negative impact of adverse selection and moral hazard on transactions, as well as

address principal-agent problems better and implement changes to its organizational structure

such as the establishment of cross-functional teams and more autonomous business units to

improve profitability and efficiency. As the company continues to evolve and expand, it will be

critical for it to maintain a strong focus on identifying and mitigating risks in order to sustain its

competitive advantage in the marketplace.

Sources

1. Miller, R., & Wilhelm, A. (2022, November 11). Amazon CEO Andy Jassy faces enormous

challenges amid falling profits and negative numbers.

https://techcrunch.com/2022/11/11/amazon-ceo-andy-jassy-faces-enormous-challenges-

amid-falling-profits-and-negative-numbers/

2. Sainato, M. (2023, March 2). ‘They’re more concerned about profit’: Osha, DoJ take on

Amazon’s grueling working conditions. The Guardian.

https://www.theguardian.com/technology/2023/mar/02/amazon-safety-citations-osha-

department-of-justice

3. Palmer, A. (2022, August 20). Amazon announces 20-for-1 stock split, $10 billion buyback.

CNBC. https://www.cnbc.com/2022/03/09/amazon-announces-20-for-1-stock-split-10-

billion-buyback.html

4. Pereira, D. (2023, March 3). Amazon SWOT Analysis (2023). Business Model Analyst.

https://businessmodelanalyst.com/amazon-swot-analysis/

5. Meyer, P. (2022, September 4). Amazon’s Organizational Structure Type & Characteristics

(An Analysis). Panmore Institute. https://panmore.com/amazon-com-inc-organizational-

structure-characteristics-analysis