Case Study: The Amazon of Innovation
On Cyber Monday, November 27, 2017, Amazon customers ordered more than 1,400 electronics per second from a mobile device. 10 And shopping on Amazon’s app increased 70 percent over the previous year. On its busiest day, Amazon packed and shipped more than 1 million packages. Amazon’s last same-day delivery order for the holiday season was ordered on Christmas Eve and delivered in 58 minutes, arriving at 11:58 PM just in time for Christmas. (Some of Amazon’s major innovations are listed in Figure 2-15 .)
Figure 2-15 Innovation at Amazon
Source: Data from Amazon.com : http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-news accessed May 2018.
Figure 2-15 Full Alternative Text
You may think of Amazon as simply an online retailer, and that is indeed where the company achieved most of its success. To do this, Amazon had to build enormous supporting infrastructure—just imagine the information systems and fulfillment facilities needed to ship electronics ordered at a rate of 1,400 per second. That infrastructure, however, is needed only during the busy holiday season. Most of the year, Amazon is left with excess infrastructure capacity. Starting in 2000, Amazon began to lease some of that capacity to other companies. In the process, it played a key role in the creation of what are termed cloud services, which you will learn about in Chapter 6 . For now, just think of cloud services as computer resources somewhere out in the Internet that are leased on flexible terms.
Today, Amazon’s business lines can be grouped into three major categories:
· Online retailing
· Order fulfillment
· Cloud services
Consider each.
Amazon created the business model for online retailing. It began as an online bookstore, but every year since 1998 it has added new product categories. The company is involved in all aspects of online retailing. It sells its own inventory. It incentivizes you, via the Associates program, to sell its inventory as well. Or it will help you sell your inventory within its product pages or via one of its consignment venues. Online auctions are the major aspect of online sales in which Amazon does not participate. It tried auctions in 1999, but it could never make inroads against eBay. 11
Today, it’s hard to remember how much of what we take for granted was pioneered by Amazon. “Customers who bought this, also bought that;” online customer reviews; customer ranking of customer reviews; books lists; Look Inside the Book; automatic free shipping for certain orders or frequent customers; and Kindle books and devices were all novel concepts when Amazon introduced them.
Amazon’s retailing business operates on very thin margins. Products are usually sold at a discount from the stated retail price, and 2-day shipping is free for Amazon Prime members (who pay an annual fee of $119). How does it do it? For one, Amazon drives its employees incredibly hard. Former employees claim the hours are long, the pressure is severe, and the workload is heavy. But what else? It comes down to Moore’s Law and the innovative use of nearly free data processing, storage, and communication.
In addition to online retailing, Amazon also sells order fulfillment services. You can ship your inventory to an Amazon warehouse and access Amazon’s information systems just as if they were yours. Using technology known as Web services (discussed in Chapter 6 ), your order processing information systems can directly integrate, over the Web, with Amazon’s inventory, fulfillment, and shipping applications. Your customers need not know that Amazon played any role at all. You can also sell that same inventory using Amazon’s retail sales applications.
Amazon Web Services (AWS) allow organizations to lease time on computer equipment in very flexible ways. Amazon’s Elastic Cloud 2 (EC2) enables organizations to expand and contract the computer resources they need within minutes. Amazon has a variety of payment plans, and it is possible to buy computer time for less than a penny an hour. Key to this capability is the ability for the leasing organization’s computer programs to interface with Amazon’s to automatically scale up and scale down the resources leased. For example, if a news site publishes a story that causes a rapid ramp-up of traffic, that news site can, programmatically, request, configure, and use more computing resources for an hour, a day, a month, whatever.
With its Kindle devices, Amazon has become both a vendor of tablets and, even more importantly in the long term, a vendor of online music and video. Amazon Echo (Alexa-enabled ordering system) and Amazon Dash (a one-button reordering device) have become two of Amazon’s top-selling products.
In late 2016, Jeff Bezos announced the first package delivery by drone via Amazon Prime Air in the UK. 12 But regulations have slowed it’s adoption in the United States. While drone delivery is something that will happen in the future, consider a service that Amazon is offering right now.
In mid-2017 Amazon made news by acquiring grocery giant Whole Foods. By 2018 Amazon had opened its own automated grocery store named Amazon Go, which didn’t use cashiers or checkout terminals. Amazon’s expansion into the traditional grocery store space drove speculation about how far Amazon’s reach would extend.
Fulfillment by Amazon (FBA)
Fulfillment by Amazon (FBA) is an Amazon service by which other sellers can ship goods to Amazon warehouses for stocking, order packaging, and shipment. FBA customers pay a fee for the service as well as for inventory space. Amazon uses its own inventory management and order fulfillment business processes and information systems to fulfill the FBA customers’ orders.
FBA customers can sell their goods on Amazon, sell them via their own sales channels, or both. If the FBA customer sells on Amazon, Amazon will provide customer service for order processing (handling returns, fixing erroneously packed orders, answering customer order queries, and the like).
The costs for Fulfillment by Amazon depend on the type and size of the goods to be processed. The FBA fees for standard-size products as of May 2018 are shown in the table.
| Standard Size | FBA Costs 13 |
| Small (1 lb. or less) | $2.41 |
| Large (1 lb. or less) | $3.19 |
| Large (1 to 2 lb.) | $4.71 |
| Large (over 2 lb.) | $4.71 + $0.38/lb. above first 2 lb. |
| Storage (cubic foot per month) | $0.69 |
If goods are sold via Amazon, Amazon uses its own information systems to drive the order fulfillment process. However, if the goods are sold via an FBA customer’s sales channel, then the FBA customer must connect its own information systems with those at Amazon. Amazon provides a standardized interface by which this is done called Amazon Marketplace Web Service (MWS). Using Web-standard technology (see Chapter 6 ), FBA customers’ order and payment data are directly linked to Amazon’s information systems.
FBA enables companies to outsource order fulfillment to Amazon, thus avoiding the cost of developing their own processes, facilities, and information systems for this purpose.
Questions
1. 2-4. Based on the facts presented in this case, what do you think is Amazon’s competitive strategy? Justify your answer.
2. 2-5. Jeff Bezos, CEO of Amazon, has stated that the best customer support is none. What does that mean?
3. 2-6. Suppose you work for Amazon or a company that takes innovation as seriously as Amazon does. What do you suppose is the likely reaction to an employee who says to his or her boss, “But, I don’t know how to do that!”?
4. 2-7. Using your own words and your own experience, what skills and abilities do you think you need to have to thrive at an organization like Amazon?
5. 2-8. What should UPS and FedEx be doing in response to Amazon’s interest in drone delivery via Amazon Prime Air?
6. 2-9. Summarize the advantages and disadvantages for brick-and-mortar retailers to sell items via Amazon. Would you recommend that they do so?
7. 2-10. If a brick-and-mortar retailer were to use FBA, what business processes would it not need to develop? What costs would it save?
8. 2-11. If a brick-and-mortar retailer were to use FBA, what information systems would it not need to develop? What costs would it save?
9. 2-12. If a brick-and-mortar retailer were to use FBA, how would it integrate its information systems with Amazon’s? (To add depth to your answer, Google the term Amazon MWS.)
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