Amazon.com – a case study

Amazon’s Mission

“Our imaginative and prescient is to be earth’s most customer centric company; to build a place where individuals can come to seek out and discover anything they could want to purchase online.”

Amazon.com’s quest to turn out to be earth’s most buyer centric firm is basically pushed by its use of technology. In truth, its continuous improvements are all driven by huge investments in info methods (Laudon and Laudon 2005).

Information systems not solely assist their mission, however in reality drive their enterprise strategy.

In this paper , Amazon’s use of knowledge at each stage of Porter’s worth chain will be considered. Their progressive and ahead trying use of data systems to generate aggressive advantage will be analysed in the context of Porter’s five forces and we may also take a look at how they’ve shaped Amazon have formed strategic alliances to beat certain competitive forces.

Future plans to sustain competitive edge will be examined; Amazon not solely proceed to use know-how to enhance their customer centric operations, but are now in reality opening up this expertise and providing technical and logistics options to different corporations.

The Value Chain

The idea of ‘Value Chain Anaylsis’ is described at size by Michael Porter (1985). He notes that each firm is a set of activities that are carried out to design, produce, market, deliver and assist its services or products. He identifies particular, critical-leverage factors the place a agency can use information know-how most effectively to reinforce it’s aggressive position (Laudon and Laudon , 2005).

In his worth chain model, ‘Primary Activities’ such as inbound logistics, operations, outbound logistics, gross sales and advertising and service, are seen as primary actions that add a margin of value to a firm’s merchandise and service. Since Amazon’s inception in 1995, they’ve used information expertise to handle each stage of the worth chain. Inbound logistics – including receiving, storing, inventory management – are managed by subtle expertise such Transportation Optimization and Management Systems (TOMS). They, use a set of purposes for accepting and validating buyer orders, placing and monitoring orders with suppliers and managing and assigning inventory to buyer orders. In fact in 2007, Amazon’s methods have become so environment friendly in managing inventory that they often gather from prospects earlier than their payments to suppliers come due (SEC1 2007).

Amazon’s advertising technique is designed to increase buyer site visitors to their web sites, drive consciousness of merchandise and providers, promote repeat purchases, develop incremental product and repair income alternatives, and strengthen and broaden the Amazon.com brand name. (Amazon Annual Report 2007). Technology, once more, is the conduit for their advertising technique.

Amazon have been the primary to ship personalised Web pages and providers. For instance, their technology keeps track of user preferences for books and CD purchases etc, and might advocate titles purchased by other prospects.

Their advertising consists primarily of internet advertising, including through their Associates program –Amazon.com’s affiliate web marketing program, where net builders, by linking to Amazon products and services to their sites, can obtain as a lot as 10% in referral charges, – sponsored search, portal advertising, e-mail campaigns, and different initiatives.

Customer service is one other key area the place know-how adds value to Amazon’s offer. From the outset, in line with their customer-centred mission, Amazon tried to provide superior customer support via e mail and telephone buyer assist, on-line monitoring and transport data, and the power to pay for purchases with a single click of the mouse utilizing credit card and personal info offered during a earlier purchase. This was called “1-click” express shopping, and was considered so enticing that Barnes and Noble, Amazon’s direct competitor in the online book retailing markets tried to ape it with its “Express Lane” system (McAfee 2005). Amazon later obtained an injunction on Barnes and Noble and sparked an enormous debate across the query of which software, and even enterprise processes can or can not, 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 worth 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 on this data circulate, particularly ‘promotional’ information flow and ‘intelligence gathering’ info move. These two areas seems to be paramount in Amazon’s value chain management..

According to Ward and Peppard, the implications of the promotional move of data which informs customers additional down the chain of the services obtainable need to be understood. David Chaffey (2007) speaks of Amazon’s automated e mail measurement and optimization system. As customers of Amazon will know, as quickly as we’ve purchased one thing on Amazon, we’re regularly despatched emails with information on books or product suggestions. In order for this promotional system to not descend into what one would possibly call Spam, and for it to stay relevant and customer centred, Amazon have put IS techniques into place to regulate this exercise.

A new system: automatically optimizes content material to improve customer expertise; avoids sending an e-mail marketing campaign that has low clickthrough or excessive unsubscribe rate; includes inbox management (avoid sending a quantity of emails/week); has growing library of automated e mail packages covering new releases and recommendations. In this fashion, Amazon add worth to the promotional move of knowledge via their value chain, and intelligently use and disseminate the knowledge offered to them by their know-how.

Ward and Peppard conclude that E-business presents large potential to gather info and intelligence about shopper and customer choice and attitudes online, quite than by way of conventional market analysis. When clients store on Amazon, their selections are saved in the info systems which can then use this intelligence to forecast future calls for.

Industry Value Chain – Supply Chain Management

The Value Chain of the enterprise unit is only one half of a bigger set of value-adding activities in an business – the “Industry Value Chain” (Ward & Peppard 2003). A firm’s worth chain is linked to the value chains of its suppliers, distributors and clients, and every of those gamers can add, or indeed take away from benefit which has been earned alongside the method in which. (Laudon & Laudon 2006).

Amazon has one of many most-sophisticated supply chain systems on the earth. Proprietary purposes handle nearly each side of its provide chain: warehouse management, transportation management, inbound and outbound shipping, demand forecasts, inventory planning, and more. (Information Week) Amazon’s provide chain is so tightly built-in that when a web-based buyer buys a e-book, for instance, the order-management system communicates with inventory- and warehouse-management techniques to search out the optimal distribution centre or centres for fulfilling the order. The buyer knows in less than a minute how lengthy it will take to ship the items and whether or not they’ll come in one package or individually. Effective provide chain management, has been recognized in a survey by The Economist, as being an essential contribution to gaining aggressive advantage. It says that every one market leaders have provide chains which are more aware of buyer demand. And effectively managing the information move all through the supply chain is key to gaining competitive advantage.

Porter’s Five Forces

As we have seen, aggressive advantage could be gained by way of effective use of data systems at each stage of the internal and the external value chain. The other value creation dimension, as outlined by Porter is the “Market/Industry Attractiveness”. He has recognized five forces affecting the latter, specifically, the bargaining energy of suppliers, the bargaining energy of shoppers, the specter of new entrants, the menace of substitute products and competitive rivalry inside an business. E-commerce and the internet present customers with the ability to search the entire chain for data immediately or via intermediaries (Ward and Peppard 2003). The web offers customers with close to perfect product and price visibility. Customers are free to use any web portal they choose to search for goods, and can use price comparability portals such as www.kelkoo.com to check prices between suppliers. Changing suppliers will price the buyer nothing – switching costs are low – and alternative suppliers are plentiful.

Consequently, Amazon are forced to keep their costs down and accept decrease margins. In the context of Porter’s 5 forces, the ability for patrons in changing suppliers can be classified as high customer bargaining power. Mr Jeff Bezos, the founding father of Amazon, saw this risk coming and ready for it – in 2000 he invited different retailers to promote their goods on his web site (The Economist). No conventional seller had ever accomplished this earlier than – to permit others to promote second-hand books on their own door step, was indeed a revolutionary move by Mr Bezos, and many people, even some within the firm, thought this would cannibalise Amazon’s own gross sales. Yet it will definitely helped to lift total sales. Amazon says sales of third-party gadgets, from which it takes a commission, have elevated from 6% of all items bought in 2000 to 28% in 2005. Over that time, the corporate says its personal retail revenues had been up three-fold (BusinessWeek). Bezos claims that by maintaining prospects on the Amazon website buying different retailers merchandise, Amazon’s direct revenues also increased. This is because with the assistance of some subtle know-how driven advertising methods, prospects having already chosen something from Amazon’s partners, are on the identical time tempted by Amazon’s own offerings.

Today, tons of of thousands of retail brands and particular person sellers attain new clients by leveraging the ability of the Amazon.com e-commerce platform. In 2006 Amazon went additional with this idea and launched their “Fulfilment” program, which permits businesses to use Amazon’s own order fulfilment and post-order customer support infrastructure, and permits Amazon.com customers to receive the profit of Amazon.com transport presents when shopping for from third-party sellers. In this way Amazon, appear to be effectively combating numerous aggressive forces, together with the specter of substitute merchandise and the threat of new entrants to the market. Due to the low value for new-entrants to e-Commerce – it requires comparatively little capital investment to set up an e-Business- the risk of competing web sites is omni-present for Amazon. Amazon’s challengers come from two instructions.

First, other online retailers are growing quickly. As individuals turn into more accustomed to buying on the web, they are ordering a larger variety of items and providers from a wider range of websites. From auctioning people’s second-hand items, eBay now additionally hosts fixed-priced virtual shops providing new items for sale. (The Economist). Google, for one, has changed retail sites corresponding to Amazon as the place where many individuals start their shopping. And extra personalized and social upstarts corresponding to News Corp.’s, MySpace and YouTube, which Google has purchased, have become the prime places for many individuals to gather on-line – and eventually shop. Microsoft’s taking of a 5% stake in Facebook, the net networking web site, last Friday, which now values the 2 year old networking web site at a whopping 15b$ -, could even be perceived as a possible risk to Amazon. People could select to start their shopping from their social networking sites, rather than from the extra conventional retail or portal website. Says advisor Andreas Weigend, Amazon’s chief scientist till 2004: “The world has shifted from e-business to me-business.” (Businessweek and The Economist).

Secondly, traditional retailers are rapidly moving a half of their buying and selling online. This pits Amazon against big retailers with large purchasing power, like America’s Wal-Mart and Britain’s Tesco. These “multichannel” retailers make a virtue of their capability to supply each “bricks and clicks”. Many present on-line prospects with the choice of picking up goods from the shop down the road. This is proving in style with internet patrons who need issues instantly or are keen to keep away from transport prices and staying in to simply accept a supply. Amazon may be making an attempt to battle off this menace with their AmazonPrime program, which allows clients unlimited delivery for $79 per yr.

As we now have seen, the comparatively low costs of establishing business on the Internet, implies that the risk of substitute product/ companies and the risk of new entrants additionally turn out to be more obvious. Internet know-how relies on common standards that any company can use, making it simple for rivals to compete on value alone and for brand spanking new opponents to enter the market (Laudon and Laudon 2006). Clarke (2001) says that consequently, if we’re competing in an trade where all our rivals have entry to the identical expertise, it follows that aggressive benefit comes from using data, versus expertise, and sustainability of advantage lies in an organisation at all times being better at this than its competition. Amazon would look like doing a reasonably good job in maintaining – for example with the technology permits personalization of the shopper – however as Jeff Bezos reiterated in the reprinting of his 1997 letter to shareholders for the Amazon 2006 Annual Report, “It’s all in regards to 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 needs to be greater than only a retailer. Having established the web as someplace to purchase things, Amazon is again spending heavily on growth in anticipation of consumers wanting to obtain music, video and books instead of getting them delivered within the submit. In September, the company introduced the Amazon MP3 digital music retailer to promote tracks without the anti-piracy technology generally known as digital rights administration, or DMR. The music corporations EMI and Universal are taking part in Amazon’s store, making the service a significant competitor to Apple’s iTunes service. Unless the Amazon, the pioneer of on-line retailing can present downloadable media it risks being “disintermediated”2 —just as solely a decade ago high-street bookshops, music and video shops have been disintermediated by Amazon itself. Amazon, actually have a historical past of strategic alliances with numerous companies – Borders and SmugMug, to mention just some.

A strategic alliance is a partnership of two of extra corporations or business models to attain strategically vital aims which are mutually useful, Wheelan and Hunger (2005). These alliances have allowed Amazon to use their established technological lead within the e-Commerce platform to generate revenues as nicely as their different strategic goals. Amazon Web Services (AWS) is another instance of a strategic transfer to keep up benefit. With AWS, Amazon say they are building a new business focused on a new customer set … software program builders. They currently supply ten different net providers and have built a community of over 240,000 registered developers. In order to cope with the Christmas rush, Amazon has far more computing capability than it needs for many of the 12 months. As a lot as 90% of it is idle at occasions. Renting out pieces of that community to different companies, such as SmugMug, an internet photograph site that uses the S33 service, is a approach to get additional return on Amazon’s $2 billion investment in expertise (The Economist).

Conclusion

In this paper, a selection of methods by which Amazon add worth to their inner and external worth chain have been identified. We have checked out how they optimize their utilisation of data in forging closer relations with their clients; function a lean supply-chain management technique and fight off quite a few threats posed by competing within the e-Business setting with strategies similar to providing new companies to smaller retailers, digital downloads, and opening up their applied sciences to builders. However in a fast moving global economic system, no future is certain. Amazon are conscious of the threats posed by failed alliances (Border’s will pull out of their settlement to use Amazon’s e-commerce platform in 2008, www.bloomberg.com) and the fixed risk posed by Google, even Facebook and other technology driven Web2.0 corporations. 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 methods are on the core of Amazon’s business, and going forward, as Jeff Bezos stated in his 2007 SEC filing, their greatest problem “will be to proceed to build and deploy innovative and efficient software that will greatest reap the benefits of continued advances in technology”. Amazon have made large investments in expertise – $186 million within the last quarter alone – (The Economist), and with 2007 third quarter sales up 41% and a quadrupling of profit, it appears like these expertise investments may lastly be paying off!

References

“Amazon.com – Click to download”, The Economist, Aug seventeenth 2006

Amzn Investor Relations
http://phx.corporate-ir.net/phoenix.zhtml?p=irol-irhome&c=97664 Accessed twenty eighth October 2007

“Borders to Introduce New Internet Site in Early 2008 (Update3)” www.bloomberg.com Accessed on twenty eighth October 2007

Clarke, Stephen (2001) Information Systems Strategic Management –an integrated method, Routledge, London

David Chaffey: “Amazon Case Study 9.1 Learning From Amazon’s Culture of Metrics” www.davidchaffey.com Accessed on thirteenth October 2007. “Friend Accepted”, The Economist, Friday 26th October 2007 “From scratch: Amazon keeps supply chain near home”, Beth Bacheldor, InformationWeek, March 5, 2004

“Jeff Bezos’ Risky Bet” Business Week, Cover story, November thirteen, 2006 www.businessweek.com

“Jeff Bezos’ Risky Bet” www.businessweek.com November 13, 2006. Accessed 27th October 2007

“Lifting the bonnet” The Economist Oct fifth 2006

Porter, Michael E. (1985) Competitive benefit: creating and sustaining superior efficiency 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 digital 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 interval 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.