1. © 2013, published by Flat World Knowledge 6-1 Information Systems: A Manager’s Guide to Harnessing Technology, version 2.0 John Gallaugher

2. © 2013, published by Flat World Knowledge Published by: Flat World Knowledge, Inc. © 2013 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is subject to the License Agreement available here http://www.flatworldknowledge.com/legal. No part of this work may be used, modified, or reproduced in any form or by any means except as expressly permitted under the License Agreement.http://www.flatworldknowledge.com/legal 6-2

3. © 2013, published by Flat World Knowledge Chapter 6 Amazon.com: An Empire Stretching from Cardboard Box to Kindle to Cloud 6-3

4. © 2013, published by Flat World Knowledge Learning Objectives 1.Appreciate the breadth of businesses that Amazon competes in 2.Understand that Amazon’s financial performance has not been consistent 3.Begin to recognize the reasons for this performance inconsistency and set the stage for the examination unfolding in subsequent sections 4.Recognize how Amazon’s warehouse technology and systems are designed to quickly and cost-effectively get product from suppliers to customers with a minimum of error 6-4

5. © 2013, published by Flat World Knowledge Learning Objectives 1.Understand how high inventory turns and longer accounts payable periods help fuel a negative cash conversion cycle at Amazon, and why this is a good thing 2.Gain insight into various advantages that result from the firm’s scale and cost structure 3.Appreciate how data can drive advantages not fully available to off-line firms, ranging from increased personalization to innovation and service improvements 6-5

6. © 2013, published by Flat World Knowledge Learning Objectives 1.Identify the two-sides in Amazon Marketplace network effects, and why this is important in strengthening the firm’s brand 2.Appreciate how mobile access is influencing opportunities through additional changes in how, where, and when consumers shop 3.Understand the motivation behind Amazon’s Kindle business 6-6

7. © 2013, published by Flat World Knowledge Learning Objectives 1.Recognize the various ways that Amazon earns money and strengthens its competitiveness via the Kindle platform 2.Examine the changes Amazon’s digital media offerings have brought to traditional the publishing industry value chain 3.Understand key concepts such as channel conflict, wholesale pricing, and agency pricing 6-7

8. © 2013, published by Flat World Knowledge Learning Objectives 1.Identify several of Amazon’s personal cloud offerings, how they are used, and the value they provide both users and Amazon 2.Understand Amazon’s cloud-computing offerings, the services provided, the firms that use AWS, the size of this business, and the firm’s vision for its future growth 3.Recognize why firms use cloud-computing platforms, and some of the risks associated with giving up control of certain infrastructure 6-8

9. © 2013, published by Flat World Knowledge Amazon’s Profitability and Breadth of Business Postponed profits and concentrated on: – Expanding warehousing capacity – Building e-commerce operations worldwide – Developing a cloud computing platform – Pioneering in eBook readers Kindle business – Mobile computing as a vehicle for media consumption – Distribution channel for sales and advertising 6-9

10. © 2013, published by Flat World Knowledge Amazon’s Profitability and Breadth of Business – Creator of switching costs – Gathering point for useful data AWS (Amazon Web Services) business – Powerhouse cloud provider – Generates new competitive assets 6-10

11. © 2013, published by Flat World Knowledge Figure 6.X: Amazon’s “Wheel of Growth” 6-11

12. © 2013, published by Flat World Knowledge Emperor of E-Commerce Pillars of the business - Large selection, convenience, and lower prices – Work together to create additional assets for competitive advantage Outstanding customer experience results in repeat customers As number of customers increase, more products can be offered – Caters to third-party sellers 6-12

13. © 2013, published by Flat World Knowledge Fulfillment Operations New products are prepped for order within hours of arrival – Problems with incoming shipments are dealt with as and when they occur Mass land - Area where fast-moving items get dropped for fast pick-up Shelvers - Area where slower-moving items are placed – Unique shelf code scanned for the location 6-13

14. © 2013, published by Flat World Knowledge Fulfillment Operations Similar products are stacked at different locations to minimize errors during pickup – Warehouse pickers use wireless devices to pick up the required items quickly Software determines the optimal size of the package box to be used for an order Systems stamp names and addresses on sealed boxes Warehouse movements are continuously logged and productivity is tracked and plotted 6-14

15. © 2013, published by Flat World Knowledge Cash Conversion Cycle Period between distributing cash, and collecting funds associated with a given operation Account payable: Money owed for products and services purchased on credit Liquidity problems: Arise when organizations cannot easily convert assets to cash Inventory turns: Number of times inventory is sold or used during a specific period 6-15

16. © 2013, published by Flat World Knowledge Figure X: Cash Conversion Cycle (in days) Among Select Major Retailers 6-16

17. © 2013, published by Flat World Knowledge Internet Economics, Scale, and Pricing Power Quantity - Selling more goods gives better bargaining power with suppliers Size - Provides negotiating leverage to secure lower prices and longer payment terms Physical presence - Absence of brick-and-mortar stores brings down costs for real-estate, energy, inventory, and security Employee efficiency - Greater as shift workers work at constant rates throughout the day 6-17

18. © 2013, published by Flat World Knowledge Internet Economics, Scale, and Pricing Power Cash coming in from all its businesses enables the firm to compete in price competition for longer periods Dynamic pricing: Pricing that shifts over time, based on conditions that change demand Private-label brands - Enables firm to cut out pricing that would go to a branded supplier – Provide better negotiating leverage with suppliers 6-18

19. © 2013, published by Flat World Knowledge Figure X: Key Retailer Avg. Price Difference Above Amazon.com 6-19

20. © 2013, published by Flat World Knowledge Amazon’s Customer Obsession To enhance customer experience, it pioneered: – 1-click ordering – Customer reviews and recommendations – Bundles – Look and search inside the book – Where’s my stuff – Free supersaver shipping Highest rating on the University of Michigan’s American Customer Service Index 6-20

21. © 2013, published by Flat World Knowledge Leveraging the Data Asset Used to collect data and compare performance among two options studied (A and B) A/B testing Line of identifying text, assigned and retrieved by a web server, and stored by your browser Cookie Monitors trends among customer and uses the data to personalize an individual customer’s experience Collaborative filtering 6-21

22. © 2013, published by Flat World Knowledge Selection and Network Effects Sellers can warehouse and ship products themselves or use Amazon’s warehouses – Two-sided network effect: Products get more valuable as two distinct categories of participants expand Affiliate program: Firm rewards partners who bring in new business, with a percentage of any resulting sales 6-22

23. © 2013, published by Flat World Knowledge Addition to Amazon Acquisition of other firms and the growth of new internal businesses has enabled it to: – Broaden its product offerings – Absorb potentially threatening competitors before they get too big – Experiment with new product offerings and services – Integrate value-added businesses and technologies 6-23

24. © 2013, published by Flat World Knowledge Figure X: Brands and Businesses Owned by Amazon.com 6-24

25. © 2013, published by Flat World Knowledge Amazon’s Kindle Business Kindle connects customers to the firm’s product offerings and inventory – Firm’s top-selling product – Arrives linked to the customer’s amazon account Kindle Fire was offered at half the price of its competition – Kindle versions are sold at or below costs Digital publishing enables titles to enter the market far faster than physical offerings 6-25

26. © 2013, published by Flat World Knowledge Channel Conflict When a firm’s potential partners see that firm as a threat – Offers competing products via alternative channels – Works closely with threatening competitors Amazon’s wholesale pricing was endangered by some publishers switching to agency pricing – Wholesale pricing: Paying publishers for titles and then selling the books at whatever price it wanted – Agency pricing: Publisher sets the price and the reseller gets a cut 6-26

27. © 2013, published by Flat World Knowledge Amazon and the Cloud Stores purchased content off-device and can load a customer’s virtual bookshelf on demand Kindle Offers file storage similar to Dropbox and Google Drive Amazon Cloud Drive Streams music purchases through a web browser or smartphone app Amazon Cloud Player Allows firms to rent industrial-strength computing capacity on an as-needed basis Goal was to monetize the firm’s expertise in scalability and reliability AWS 6-27