CASE STUDY 3

The Amazon of innovation

On Cyber Monday, November 30, 2015, Amazon.com customers ordered more than 33 electronics per second from a mobile device.14 And 70 percent of Amazons holiday shoppers bought gifts using a mobile device. This contributed to a 40 percent annual increase in Amazons sales. Amazons last same-day delivery order for the holiday season was placed on December 24 at 9:58 AM and was delivered at 2:59 PM just in time for Christmas. (Some of Amazons major innovations are listed in Figure 3-19.)

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 infrastructurejust imagine the information systems and fulfillment facilities needed to ship electronics ordered at a rate of 33 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, Amazons 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.15 WorkMail Amazon Home Services Amazon Destinations Amazon Echo (Alexa) Amazon Dash Handmade By Amazon Amazon Books Semiconductors (Annapurna Labs) Amazon Coins Amazon Instant Video Kindle Paperwhite Kindle Fire HD 107

Today, its 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.

Amazons 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 $99). 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 work-load is heavy. But what else? It comes down to Moores 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 Amazons information systems just as if they were yours. Using technology known as Web services (dis-cussed in Chapter 6), your order processing information systems can directly integrate, over the Web, with Amazons

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 Amazons retail sales applications.

Amazon Web Services (AWS) allow organizations to lease time on computer equipment in very flexible ways. Amazons Elastic Cloud 2 (EC2) enables organizations to expand and con-tract 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 organizations computer programs to interface with Amazons 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. And to induce customers to buy Kindle apps, in 2013 Amazon introduced its own currency, Amazon Coins. In 2014, Amazon opened a 3D printing store from which customers can customize their own toys, jewelry, dog bones, and dozens of other products. It also made a push to pro-vide video services by introducing Fire TV.16

In 2015 Amazon introduced WorkMail, a potential cloud-based replacement for Microsoft Exchange. It also introduced Amazon Home Services (local professional services), Amazon Destinations (travel site), Amazon Echo (a voice-enabled order-ing system), Amazon Books (a physical retail location), and Amazon Dash (a one-button reordering device), and it started selling semiconductors after acquiring Annapurna Labs.17 By mid-2016 Amazon announced its new Kindle Oasis and the launch of its new Payments Partner Program designed to com-pete with PayPal, Apple Pay, and Visa.

Finally, Jeff Bezos announced in 2014 that Amazon was experimenting with package delivery using drones, a service called Prime Air.18 In 2015, Amazon was given permission to start testing its drones in the United States but was hampered by U.S. regulations. Consequently, by mid-2016 Amazon expanded its testing to Canada, the United Kingdom, and the Nether-lands.19 But drone delivery is something that will happen in the future; consider a business service that Amazon.com is offering right now.

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.com, sell them via their own sales channels, or both. If the FBA customer sells on Amazon.com, 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 April 2016 are shown in the table.

	FBA Costs20
Order handling (per order)	$1.00
Pick & pack (per item)	$1.06
Weight handling (per pound)	Between $0.50 for less than 1 pound, to $1.95 plus $0.39 per pound for items over 2 pounds
Storage (cubic foot per month)	$0.54 between January and September and $0.72 from October to December

If goods are sold via Amazon.com, Amazon uses its own information systems to drive the order fulfillment process. How-ever, if the goods are sold via an FBA customers 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 Amazons 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

3-4. Based on the facts presented in this case, what do you think is Amazon.coms competitive strategy? Justify your answer.

3-5. Jeff Bezos, CEO of Amazon.com, has stated that the best customer support is none. What does that mean?

3-6. 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 dont know how to do that!?

3-7. 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?

3-8. What should UPS and FedEx be doing in response to Amazon.coms interest in drone delivery?

3-9. Summarize the advantages and disadvantages for brick-and-mortar retailers to sell items via Amazon. com. Would you recommend that they do so?

3-10. If a brick-and-mortar retailer were to use FBA, what business processes would it not need to develop? What costs would it save? 109

3-11. If a brick-and-mortar retailer were to use FBA, what information systems would it not need to develop? What costs would it save?

3-12. If a brick-and-mortar retailer were to use FBA, how would it integrate its information systems with Amazons? (To add depth to your answer, Google the term Amazon MWS.)