week 12 quality management

12.2 Action Required: (Read)

Case: Customer Focus at Amazon.com

Warren Buffett, the well-known financier and CEO of Berkshire Hathaway, has never been a big backer of technology businesses. However, he owns $459 million worth of Amazon.coms bonds, making him one of Amazons biggest debt holders. Buffet observes, Ive been using a computer for eight or ten years now and I still really pay for only three things on the Internet:

The Wall Street Journal, online bridge, and books from Amazon.com. That they are one of only three companies online that have gotten money out of my pocket tells me they are doing something right. The concept of Amazon began in 1994 when Jeff Bezos, its founder and CEO, read a study that predicted the Internet would explode in popularity. He settled on selling books online because almost every book was already catalogued electronically, yet no physical bookstore could carry them all. Bezos has a rare talent for a relentless focus on the customer, and a studied disregard for short-term pressures to show results on the bottom line. The original Amazon model envisioned giving customers access to a gigantic selection without the time, expense, and hassle of opening stores and warehouses and dealing with inventory. However, Bezos quickly discovered that the only way to make sure customers get a good experience and that Amazon gets inventory at good prices was to operate his own warehouses so he could control the transaction from start to finish. In its 2002 Annual Report a letter from the 1997 Annual Report was reproduced, explaining Amazons customer-focused philosophy in these words:

From the beginning, our focus has been on offering our customers compelling value. We realized that the Web was, and still is, the World Wide Wait. Therefore, we set out to offer customers something they simply could not get any other way, and began serving them with books. We brought them much more selection than was possible in a physical store (our store would now occupy 6 football fields), and presented it in a useful, easy-to-search, and easy-to browse format in a store open 365 days a year, 24 hours a day. We maintained a dogged focus on improving the shopping experience, and in 1997 substantially enhanced our store. We now offer customers gift certificates, 1-ClickSM shopping, and vastly more reviews, content, browsing options, and recommendation features. We dramatically lowered prices, further increasing customer value. Word of mouth remains the most powerful customer acquisition tool we have, and we are grateful for the trust our customers have placed in us. Repeat purchases and word of mouth have combined to make Amazon.com the market leader in online bookselling.

In its 2002 Annual Report, Bezoss letter made numerous points to explain how that

vision of customer service had developed and expanded, including:

We have deep selection that is unconstrained by shelf space.

We turn our inventory 19 times in a year.

We personalize the store for each and every customer.

We trade real estate for technology (which gets cheaper and more capable every year).

We display customer reviews critical of our products.

You can make a purchase with a few seconds and one click.

We put used products next to new ones so you can choose.

We share our prime real estate, our product detail pages, with third parties, and, if they

can offer better value, we let them.

Customer experience costs that remain variable, such as the variable portion of

fulfillment costs, improve in our model as we reduce defects. Eliminating defects

improves costs and leads to better customer experience.

Many of the customer-pleasing features of Amazons operations are not noticed, or even known, by Amazons customers. These fall into the categories of technology, order fulfillment, and retailing strategies. In technology, the companys website has been, and remains, leading edge. In an effort to serve customer needs, Amazon was one of the early pioneers to develop software for collaborative filtering of customer data. Basically, the filter is used to suggest similar or related products to a customer after he or she has focused on a product or product category. For example, if a customer browses or purchases Managing for Quality and Performance Excellence, other books in quality management would then be suggested on the viewers Web browser. These suggestions are based on what other readers of the text had purchased, in addition to the target text. Web features and capabilities have expanded over the years, to include features such as look inside the book for a chapter preview, in-store pickup of orders, shipping choices (priority vs. regular), and affinity group selections (Wedding Registry, Baby Registry, personal Wish List, etc.).

In order fulfillment, the capabilities of its high-tech warehouses continue to drive costs down, as mentioned earlier. For example, Amazon has a nearly perfect process for sorting multiple item orders. As it expands its offerings and adds more retail partners, Amazons fulfillment capabilities pay dividends to its partners, as well as adding revenues to Amazon. By reducing the time it takes to get all the items in an order into the sorting system, Amazon shipped 35 percent more units with the same number of people than it had in earlier years. Its retailing strategy is based more and more on partnerships with those who, in most businesses, would be considered competitors. Amazon proclaims that it seeks to offer Earths Biggest Selection and to be Earths most customer-centric company, where customers can find and discover anything they might want to buy online. However, at any time, its competitor partners may be offering the same item through their linked websites at a different price. For example, when a book is being viewed, the web page will also permit the viewer to go to a linking web page of a partners book company, where the same title used (or even new) book is being sold for a lower price. Its partners include well-known retailers such as Borders Books, Waldenbooks, Waterstone, Target Stores, Lands End, and thousands of other lesser-known organizations, large and small. In fact, through what is called their Associates Program, Amazon.com provides a link to 900,000 websites carrying specialty items and where online auctions are taking place every day.

With millions of customers and potential customers accessing its global sites in the United States, the United Kingdom, Germany, Japan, and Canada daily, Amazon.coms sophisticated technology allows it to build an in-depth and potentially valuable database of many of its customers. In 1999, Amazon.com experimented with a highly controversial feature on its website. It started featuring thousands of individual bestseller lists categorized by Zip codes, workplaces, and collegeswherever its customers were ordering from. With a mouse click on its website, browsers could peek behind the scenes at the books that specific groups were reading, the compact discs they were listening to, and the videos they were watching. Amazon described it as fun, happily announcing the feature, Purchase Circles, in a press release. Soon, however, citing customer complaints, the company began backtracking. Customers were allowed to opt out of having their data collected, as long as they were savvy enough to read the fine print and send an e-mail to the company. Companies could choose not to be included by sending a fax.5 Despite the controversy, Amazon .com still has Purchase Circles on its website.

12.3 Test your Knowledge (Question):

1. How does Amazon.coms CRM software help it to gain market share and maintain its competitive advantage?

2. How are operating efficiencies realized in order fulfillment activities of Amazon.com? Will costs continue to fall, given that their warehouses are currently operating at less than 50% of capacity? (Note: This measure is expected to change over time, depending on the state of the economy.)

3. What are the customer privacy risks, besides the ones mentioned in the case, that Amazon.com must guard against in order to continue to grow its business?

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