University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Amazon.com – a case study
“Our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.”
Amazon.com’s quest to become earth’s most customer centric company is largely driven by its use of technology. In fact, its continuous innovations are all driven by huge investments in information systems (Laudon and Laudon 2005).
Information systems not only support their mission, but in fact drive their business strategy. In this paper , Amazon’s use of information at each stage of Porter’s value chain will be considered. Their innovative and forward looking use of information systems to generate competitive advantage will be analysed in the context of Porter’s five forces and we will also have a look at how they have formed Amazon have formed strategic alliances to overcome certain competitive forces.
Future plans to sustain competitive edge will be examined; Amazon not only continue to use technology to improve their customer centric operations, but are now in fact opening up this technology and providing technical and logistics solutions to other firms.
The Value Chain
The concept of ‘Value Chain Anaylsis’ is described at length by Michael Porter (1985). He notes that every firm is a collection of activities that are performed to design, produce, market, deliver and support its products or services. He identifies specific, critical-leverage points where a firm can use information technology most effectively to enhance it’s competitive position (Laudon and Laudon , 2005). In his value chain model, ‘Primary Activities’ such as inbound logistics, operations, outbound logistics, sales and marketing and service, are seen as basic activities that add a margin of value to a firm’s products and service. Since Amazon’s inception in 1995, they have used information technology to manage each stage of the value chain. Inbound logistics – including receiving, storing, inventory control – are managed by sophisticated technology such Transportation Optimization and Management Systems (TOMS). They, use a set of applications for accepting and validating customer orders, placing and tracking orders with suppliers and managing and assigning inventory to customer orders. In fact in 2007, Amazon’s systems have become so efficient in managing inventory that they generally collect from customers before their payments to suppliers come due (SEC1 2007).
Amazon’s marketing strategy is designed to increase customer traffic to their websites, drive awareness of products and services, promote repeat purchases, develop incremental product and service revenue opportunities, and strengthen and broaden the Amazon.com brand name. (Amazon Annual Report 2007). Technology, again, is the conduit for their marketing strategy.
Amazon were the first to deliver personalized Web pages and services. For instance, their technology keeps track of user preferences for books and CD purchases etc, and can recommend titles purchased by other customers.
Their advertising consists primarily of online advertising, including through their Associates program –Amazon.com’s affiliate marketing program, where web developers, by linking to Amazon products and services to their sites, can receive up to 10% in referral fees, – sponsored search, portal advertising, e-mail campaigns, and other initiatives.
Customer service is another key area where technology adds value to Amazon’s offer. From the outset, in line with their customer-centred mission, Amazon tried to provide superior customer service through email and telephone customer support, online tracking and shipping information, and the ability to pay for purchases with a single click of the mouse using credit card and personal information provided during a previous purchase. This was called “1-click” express shopping, and was considered so attractive that Barnes and Noble, Amazon’s direct competitor in the online book retailing markets attempted to ape it with its “Express Lane” system (McAfee 2005). Amazon later obtained an injunction on Barnes and Noble and sparked a huge debate around the question of which software, and even business processes can or cannot, be patented. (http://www.oreilly.com/news/patent_archive.html)
The Extended Value Chain in e-Business
In their book, Strategic Planning for Information Systems, Ward, J and Peppard, J (2002), discuss how the value chain information flow is now being challenged by e-Business They refer to Rayport, J.F and Sviokla (1995), who have identified two crucial new areas in this information flow, namely ‘promotional’ information flow and ‘intelligence gathering’ information flow. These two areas seems to be paramount in Amazon’s value chain management..
According to Ward and Peppard, the implications of the promotional flow of information which informs customers further down the chain of the products and services available have to be understood. David Chaffey (2007) speaks of Amazon’s automated email measurement and optimization system. As users of Amazon will know, once we’ve bought something on Amazon, we are regularly sent emails with information on books or product recommendations. In order for this promotional system not to descend into what one might call Spam, and for it to remain relevant and customer centred, Amazon have put IS systems into place to control this activity.
A new system: automatically optimizes content to improve customer experience; avoids sending an e-mail campaign that has low clickthrough or high unsubscribe rate; includes inbox management (avoid sending multiple emails/week); has growing library of automated email programs covering new releases and recommendations. In this way, Amazon add value to the promotional flow of information through their value chain, and intelligently use and disseminate the information provided to them by their technology.
Ward and Peppard conclude that E-business offers huge potential to gather information and intelligence about consumer and customer preference and attitudes online, rather than through traditional market research. When customers shop on Amazon, their choices are stored in the information systems which can then use this intelligence to forecast future demands.
Industry Value Chain – Supply Chain Management
The Value Chain of the business unit is only one part of a larger set of value-adding activities in an industry – the “Industry Value Chain” (Ward & Peppard 2003). A firm’s value chain is linked to the value chains of its suppliers, distributors and customers, and each of these players can add, or indeed take away from advantage which has been earned along the way. (Laudon & Laudon 2006).
Amazon has one of the most-sophisticated supply chain systems in the world. Proprietary applications handle nearly every aspect of its supply chain: warehouse management, transportation management, inbound and outbound shipping, demand forecasts, inventory planning, and more. (Information Week) Amazon’s supply chain is so tightly integrated that when an online customer buys a book, for example, the order-management system communicates with inventory- and warehouse-management systems to find the optimal distribution centre or centres for fulfilling the order. The customer knows in less than a minute how long it will take to ship the items and whether they will come in one package or separately. Effective supply chain management, has been identified in a survey by The Economist, as being an essential contribution to gaining competitive advantage. It says that all market leaders have supply chains that are more responsive to customer demand. And effectively managing the information flow throughout the supply chain is key to gaining competitive advantage.
Porter’s Five Forces
As we have seen, competitive advantage can be gained through effective use of information systems at each stage of the internal and the external value chain. The other value creation dimension, as defined by Porter is the “Market/Industry Attractiveness”. He has identified five forces affecting the latter, namely, the bargaining power of suppliers, the bargaining power of customers, the threat of new entrants, the threat of substitute products and competitive rivalry within an industry. E-commerce and the internet provide customers with the ability to search the whole chain for information directly or via intermediaries (Ward and Peppard 2003). The internet provides consumers with near perfect product and price visibility. Customers are free to use any internet portal they choose to search for goods, and can use price comparison portals such as www.kelkoo.com to compare prices between suppliers. Changing suppliers will cost the buyer nothing – switching costs are low – and alternative suppliers are plentiful.
Consequently, Amazon are forced to keep their prices down and accept lower margins. In the context of Porter’s five forces, the facility for customers in changing suppliers can be classified as high customer bargaining power. Mr Jeff Bezos, the founder of Amazon, saw this threat coming and prepared for it – in 2000 he invited other retailers to sell their goods on his website (The Economist). No traditional seller had ever done this before – to allow others to sell second-hand books on their own door step, was indeed a revolutionary move by Mr Bezos, and many people, even some within the company, thought this would cannibalise Amazon’s own sales. Yet it eventually helped to lift overall sales. Amazon says sales of third-party items, from which it takes a commission, have increased from 6% of all items sold in 2000 to 28% in 2005. Over that time, the company says its own retail revenues were up three-fold (BusinessWeek). Bezos claims that by keeping customers on the Amazon site buying other retailers products, Amazon’s direct revenues also increased. This is because with the help of some sophisticated technology driven marketing techniques, customers having already chosen something from Amazon’s partners, are at the same time tempted by Amazon’s own offerings.
Today, hundreds of thousands of retail brands and individual sellers reach new customers by leveraging the power of the Amazon.com e-commerce platform. In 2006 Amazon went further with this concept and launched their “Fulfilment” program, which allows businesses to use Amazon’s own order fulfilment and post-order customer service infrastructure, and enables Amazon.com customers to receive the benefit of Amazon.com shipping offers when buying from third-party sellers. In this way Amazon, seem to be effectively combating a number of competitive forces, including the threat of substitute products and the threat of new entrants to the market. Due to the low cost for new-entrants to e-Commerce – it requires relatively little capital investment to set up an e-Business- the threat of competing websites is omni-present for Amazon. Amazon’s challengers come from two directions.
First, other online retailers are growing rapidly. As people become more accustomed to shopping on the internet, they are ordering a greater variety of goods and services from a wider range of websites. From auctioning people’s second-hand goods, eBay now also hosts fixed-priced virtual shops offering new goods for sale. (The Economist). Google, for one, has replaced retail sites such as Amazon as the place where many people start their shopping. And more personalized and social upstarts such as News Corp.’s, MySpace and YouTube, which Google has bought, have become the prime places for many people to gather online – and eventually shop. Microsoft’s taking of a 5% stake in Facebook, the online networking website, last Friday, which now values the two year old networking website at a whopping 15b$ -, could also be perceived as a potential threat to Amazon. People may choose to start their shopping from their social networking sites, rather than from the more traditional retail or portal site. Says consultant Andreas Weigend, Amazon’s chief scientist until 2004: “The world has shifted from e-business to me-business.” (Businessweek and The Economist).
Secondly, traditional retailers are rapidly moving part of their trading online. This pits Amazon against giant retailers with huge purchasing power, like America’s Wal-Mart and Britain’s Tesco. These “multichannel” retailers make a virtue of their ability to offer both “bricks and clicks”. Many provide online customers with the option of picking up goods from the shop down the road. This is proving popular with web buyers who want things immediately or are keen to avoid shipping costs and staying in to accept a delivery. Amazon may be attempting to fight off this threat with their AmazonPrime program, which allows customers unlimited shipping for $79 per year.
As we have seen, the relatively low costs of setting up business on the Internet, means that the threat of substitute product/ services and the threat of new entrants also become more apparent. Internet technology is based on universal standards that any company can use, making it easy for rivals to compete on price alone and for new competitors to enter the market (Laudon and Laudon 2006). Clarke (2001) says that consequently, if we are competing in an industry where all our competitors have access to the same technology, it follows that competitive advantage comes from the use of information, as opposed to technology, and sustainability of advantage lies in an organisation always being better at this than its competition. Amazon would appear to be doing a fairly good job in keeping up – for instance with the technology enables personalization of the customer – but as Jeff Bezos reiterated in the reprinting of his 1997 letter to shareholders for the Amazon 2006 Annual Report, “It’s all about the long-term”.
Sustainability of Competitive Advantage – The Future for Amazon
In the long-term, Amazon are aiming to re-invent themselves. An article in the Economist claims the e-commerce giant wants to be more than just a retailer. Having established the internet as somewhere to buy things, Amazon is again spending heavily on development in anticipation of consumers wanting to download music, video and books instead of having them delivered in the post. In September, the company introduced the Amazon MP3 digital music store to sell tracks without the anti-piracy technology known as digital rights management, or DMR. The music companies EMI and Universal are participating in Amazon’s store, making the service a significant competitor to Apple’s iTunes service. Unless the Amazon, the pioneer of online retailing can provide downloadable media it risks being “disintermediated”2 —just as only a decade ago high-street bookshops, music and video stores were disintermediated by Amazon itself. Amazon, in fact have a history of strategic alliances with various firms – Borders and SmugMug, to mention just a few.
A strategic alliance is a partnership of two of more corporations or business units to achieve strategically significant objectives that are mutually beneficial, Wheelan and Hunger (2005). These alliances have allowed Amazon to use their established technological lead in the e-Commerce platform to generate revenues as well as their other strategic objectives. Amazon Web Services (AWS) is another example of a strategic move to maintain advantage. With AWS, Amazon say they are building a new business focused on a new customer set … software developers. They currently offer ten different web services and have built a community of over 240,000 registered developers. In order to cope with the Christmas rush, Amazon has far more computing capacity than it needs for most of the year. As much as 90% of it is idle at times. Renting out pieces of that network to other businesses, such as SmugMug, an online photo site that uses the S33 service, is a way to get extra return on Amazon’s $2 billion investment in technology (The Economist).
In this paper, a number of ways in which Amazon add value to their internal and external value chain have been identified. We have looked at how they optimize their utilisation of information in forging closer relations with their customers; operate a lean supply-chain management strategy and fight off numerous threats posed by competing in the e-Business environment with strategies such as offering new services to smaller retailers, digital downloads, and opening up their technologies to developers. However in a fast moving global economy, no future is certain. Amazon are conscious of the threats posed by failed alliances (Border’s will pull out of their agreement to use Amazon’s e-commerce platform in 2008, www.bloomberg.com) and the constant threat posed by Google, even Facebook and other technology driven Web2.0 companies. Jeff Bezos will be hoping to overcome these threats by, as he says, by “opening up the guts of his organisation” to developers (BusinessWeek). Information systems are at the core of Amazon’s business, and going forward, as Jeff Bezos said in his 2007 SEC filing, their biggest challenge “will be to continue to build and deploy innovative and efficient software that will best take advantage of continued advances in technology”. Amazon have made massive investments in technology – $186 million in the last quarter alone – (The Economist), and with 2007 3rd quarter sales up 41% and a quadrupling of profit, it looks like these technology investments may finally be paying off!
“Amazon.com – Click to download”, The Economist, Aug 17th 2006
Amzn Investor Relations
http://phx.corporate-ir.net/phoenix.zhtml?p=irol-irhome&c=97664 Accessed 28th October 2007
“Borders to Introduce New Internet Site in Early 2008 (Update3)” www.bloomberg.com Accessed on 28th October 2007
Clarke, Stephen (2001) Information Systems Strategic Management –an integrated approach, Routledge, London
David Chaffey: “Amazon Case Study 9.1 Learning From Amazon’s Culture of Metrics” www.davidchaffey.com Accessed on 13th October 2007. “Friend Accepted”, The Economist, Friday 26th October 2007 “From scratch: Amazon keeps supply chain close to home”, Beth Bacheldor, InformationWeek, March 5, 2004
“Jeff Bezos’ Risky Bet” Business Week, Cover story, November 13, 2006 www.businessweek.com
“Jeff Bezos’ Risky Bet” www.businessweek.com November 13, 2006. Accessed 27th October 2007
“Lifting the bonnet” The Economist Oct 5th 2006
Porter, Michael E. (1985) Competitive advantage: creating and sustaining superior performance pg 33 The Free Press Laudon, J and Laudon K (2006), Management Information Systems: Managing the Digital Firm (10th Edition) Prentice Hall R. Preston McAfee (2005) Competitive Solutions: The Strategist’s Toolkit, Princeton University Press
Rayport, J.F and Sviokla (1995) ‘Exploiting the virtual value chain’, Harvard Business Review, November – December, 1995 SEC (2007) United States Securities And Exchange Commission submission Form 10-K from Amazon. For the quarterly period ended September 30, 2007 Ward, J and Peppard, J (2002) Strategic Planning for Information Systems, 3rd Edition John Wiley & Sons, Bedfordshire.
Wheelen, T and Hunger J, (2004) Strategic Management and Business Policy, 9th Edition, Pearson/Prentice Hall, New Jersey.