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Amazon.com: An Empire Stretching from Cardboa

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 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 1
 

Amazon.com: An Empire Stretching from Cardboard Box to
Kindle to Cloud1
a draft chapter provided for comment. Will eventually be included in the Summer 2013 version of the award-winning
& low-cost textbook “Information Systems: A Manager’s Guide to Harnessing Technology”.
© Copyright 2013, John M. Gallaugher, Ph.D. – for more info see: http://www.gallaugher.com/
 
 
Draft
 version
 last
 modified:
 May
 3,
 2013
 –
 comments
 welcome
 john.gallaugher@bc.edu
 

 
INTRODUCTION:
 

 
LEARNING
 OBJECTIVES:
 
After
 studying
 this
 section
 you
 should
 be
 able
 to:
 
 

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.
 

 
As
 CEO
 of
 tech
 industry
 research
 firm
 Forrester
 Research,
 George
 Colony
 is
 paid
 to
 predict
 
the
 future.
 
 Firms
 spend
 big
 bucks
 for
 Forrester
 reports
 that
 cover
 trends
 and
 insight
 
across
 the
 world
 of
 computing.
 
 So
 when
 Colony
 turned
 his
 attention
 to
 Amazon.com,
 the
 
Internet
 retailer
 founded
 by
 Jeff
 Bezos,
 there
 were
 a
 lot
 of
 people
 paying
 attention.
 
 Colony
 
proclaimed
 that
 the
 recently
 public
 firm
 would
 soon
 be
 “Amazon.toast”
 as
 larger
 traditional
 
retailers
 arrived
 to
 compete
 online.1
 
 Colony
 wasn’t
 the
 only
 Bezos-­‐basher.
 
 Fortune,
 The
 
Guardian,
 and
 Barron’s
 were
 among
 the
 publications
 to
 have
 labeled
 the
 firm
 
“Amazon.bomb”.
 
 Bezos’
 personal
 favorite
 came
 from
 a
 pundit
 who
 suggested
 the
 firm
 
should
 be
 renamed
 “Amazon.org”
 adopting
 the
 domain
 of
 a
 non-­‐profit
 since
 it’ll
 never
 make
 
any
 money2.
 

 
Amazon
 went
 seven
 whole
 years
 without
 turning
 a
 profit,
 losing
 over
 $3
 billion
 during
 that
 
time.
 
 The
 firm’s
 stock
 price
 had
 fallen
 from
 a
 high
 of
 $100
 a
 share
 to
 below
 $6.
 
Conventional
 wisdom
 suggested
 that
 struggling
 dot-­‐coms
 were
 doomed
 as
 retail
 giants
 
were
 poised
 to
 bring
 their
 strong
 off-­‐line
 brands
 and
 logistics
 prowess
 to
 the
 Internet,
 
establishing
 themselves
 as
 multi-­‐channel
 dominators
 standing
 athwart
 the
 bloodied
 
remains
 of
 the
 foolish
 early-­‐movers.
 

 
But
 during
 those
 seven
 years
 and
 through
 to
 this
 day,
 Bezos
 (pronounced
 BAY-­‐zose)
 
steadfastly
 refused
 to
 concentrate
 on
 the
 quarterly
 results
 Wall
 Street
 frets
 over.
 
 Instead,
 
the
 Amazon
 founder
 has
 followed
 his
 best
 reckoning
 on
 where
 markets
 and
 technology
 
were
 headed,
 postponing
 profit
 harvesting
 while
 expanding
 warehousing
 capacity,
 building
 
e-­‐commerce
 operations
 worldwide,
 growing
 one
 of
 the
 net’s
 most
 widely-­‐used
 cloud
 
computing
 platforms,
 leading
 the
 pack
 in
 eBook
 readers,
 and
 developing
 the
 first
 credible
 
threat
 to
 Apple’s
 dominant
 iPad
 in
 tablets.
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 Faculty:
 I’ll
 post
 my
 personal
 slides
 online
 at
 gallaugher.com,
 but
 there
 is
 also
 a
 wonderful
 deck
 by
 
FaberNovel
 that
 covers
 much
 of
 the
 content
 in
 this
 case.
 You
 can
 find
 it
 at:
 
http://www.fabernovel.com/en/works/97-­‐amazon-­‐com-­‐the-­‐hidden-­‐empire
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 2
 

Tellingly,
 Amazon’s
 first
 profit
 was
 posted
 the
 week
 one-­‐time
 brick-­‐and-­‐mortar
 goliath
 
Kmart
 went
 bankrupt.
 
 Kmart
 was
 also
 the
 former
 parent
 of
 another
 giant
 of
 the
 offline
 
world,
 Borders,
 a
 firm
 that
 completely
 shuttered
 in
 the
 wake
 of
 Amazon’s
 dominance.
 
 And
 
for
 Amazon,
 profits
 continued.
 
 In
 a
 three-­‐year
 period
 following
 the
 introduction
 of
 the
 
Kindle,
 Amazon’s
 net
 income
 climbed
 from
 $476
 million
 to
 $1.15
 billion.
 
 Barnes
 &
 Noble’s
 
fell
 from
 $150
 million
 to
 $37
 million
 before
 dipping
 into
 the
 red.
 
 Punditry
 is
 a
 dangerous
 
business,
 but
 Barron’s
 made
 up
 for
 the
 dot-­‐bomb
 comment,
 putting
 Amazon
 on
 its
 cover
 
under
 a
 headline
 proclaiming
 the
 firm
 the
 world’s
 best
 retailer.
 
 Fortune
 atoned
 by
 naming
 
Bezos
 the
 “Businessperson
 of
 the
 Year”3.
 

 
Amazon’s
 future
 continues
 to
 be
 hotly
 debated
 as
 the
 firm’s
 profitability
 swings
 wildly.
 
 
Massive
 investments
 crushed
 Amazon
 profits
 in
 2012,
 with
 the
 firm
 dipping
 $39
 million
 
into
 the
 red.
 
 Yet
 stock
 performance
 during
 this
 period
 suggests
 Wall
 Street
 expects
 a
 huge
 
upside.
 And
 Amazon
 was
 recently
 named
 as
 having
 the
 “Best
 Reputation
 of
 any
 US
 
corporation.”4
 
 So
 is
 Amazon
 the
 “unstoppable
 monster
 of
 the
 tech
 industry”
 or
 a
 
“charitable
 organization
 run
 by
 elements
 of
 the
 investment
 community
 for
 the
 benefit
 of
 
customers”5?
 Both?
 Neither?
 
 

 
SIDEBAR: Jeff Bezos & the Long Term (in his own words and more)

“Our first shareholder letter, in 1997, was entitled, “It’s all about the long term.” If everything you do
needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re
willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people,
because very few companies are willing to do that. Just by lengthening the time horizon, you can
engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to
seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn. We say we’re
stubborn on vision and flexible on details.”6

Just how far ahead is Bezos’ time horizon? His personal investments include Blue Origin, a commercial
rocketry and aviation firm that intends to send humans into space. Bezos has also built a 10,000 year
clock deep inside a mountain on his ranch in West Texas. The timepiece plays an elaborate cuckoo-
like sequence, composed by musician Brian Eno, to mark every year, decade, century, millennium and
10 millennia. How’s that for a symbol of long-term thinking!7

 
Why
 Study
 Amazon.com?
 

 
Looking
 at
 the
 Internet’s
 largest
 retailer
 provides
 a
 context
 for
 introducing
 several
 critical
 
management
 concepts
 such
 as
 cash
 efficiency
 and
 channel
 conflict.
 
 We
 see
 ways
 in
 which
 
tech-­‐fueled
 operations
 can
 yield
 above-­‐average
 profits
 far
 greater
 than
 off-­‐line
 players.
 
 We
 
can
 illustrate
 advantages
 related
 to
 scale,
 the
 data
 asset,
 and
 the
 brand-­‐building
 benefits
 of
 
personalization
 and
 other
 customer
 service
 enhancements.
 
 Amazon’s
 Kindle
 business
 
allows
 us
 to
 look
 into
 the
 importance
 of
 mobile
 computing
 as
 a
 vehicle
 for
 media
 
consumption,
 a
 distribution
 channel
 for
 increased
 sales
 and
 advertising,
 a
 creator
 of
 
switching
 costs,
 a
 gathering
 point
 for
 powerful
 data,
 and
 in
 competition
 for
 platform
 
dominance.
 
 And
 the
 firm’s
 AWS
 (Amazon
 Web
 Services)
 business
 allows
 us
 to
 see
 how
 the
 
firm
 is
 building
 a
 powerhouse
 cloud
 provider,
 generating
 new
 competitive
 assets
 while
 
engaging
 in
 competition
 where
 it
 sells
 services
 to
 firms
 that
 can
 also
 be
 considered
 rivals.
 

 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 3
 

KEY
 TAKEAWAYS:
 
• Amazon
 is
 the
 largest
 online
 retailer,
 and
 has
 expanded
 to
 dozens
 of
 categories
 beyond
 

books.
 
 
 As
 much
 of
 the
 firm’s
 media
 business
 (books,
 music,
 video)
 becomes
 digital,
 the
 
Kindle
 business
 is
 a
 conduit
 for
 retaining
 existing
 businesses
 and
 for
 growing
 additional
 
advantages.
 And
 the
 firm’s
 AWS
 cloud
 computing
 business
 is
 one
 of
 the
 largest
 players
 
in
 that
 category.
 

• Amazon
 takes
 a
 relatively
 long-­‐view
 with
 respect
 to
 investing
 in
 initiatives
 and
 its
 
commitment
 to
 grow
 profitable
 businesses.
 
 The
 roughly
 seven-­‐year
 timeline
 is
 a
 
difficult
 one
 for
 public
 companies
 to
 maintain
 amid
 the
 pressure
 for
 consistent
 
quarterly
 profits.
 

• Amazon’s
 profitability
 has
 varied
 widely
 and
 analysts
 continue
 to
 struggle
 to
 interpret
 
the
 firm’s
 future.
 However,
 studying
 Amazon
 will
 reveal
 important
 concepts
 and
 issues
 
related
 to
 business
 and
 technology.
 

 

QUESTIONS
 &
 EXERCISES:
 
1. Which
 firms
 does
 Amazon
 compete
 with?
 
2. Investigate
 Amazon’s
 performance
 over
 the
 last
 five
 years.
 
 How
 has
 the
 firm
 done
 with
 

respect
 to
 revenue,
 net
 income,
 share
 price?
 How
 does
 this
 compare
 with
 competitors
 
you’ve
 mentioned
 above?
 

3. What
 are
 some
 of
 the
 advantages
 in
 having
 a
 longer
 time
 horizon?
 
 What
 are
 some
 of
 
the
 challenges?
 
 What
 needs
 to
 happen
 to
 enable
 Amazon
 to
 continue
 to
 ‘think
 long
 
term’?
 
 What
 could
 derail
 this
 approach?
 

 
THE
 EMPEROR
 OF
 E-­‐COMMERCE:
 

 
LEARNING
 OBJECTIVES:
 
After
 studying
 this
 section
 you
 should
 be
 able
 to:
 
 

1. 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.
 

2. 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.
 

3. Gain
 insight
 into
 various
 advantages
 that
 result
 from
 the
 firm’s
 scale
 and
 cost
 
structure.
 

4. Appreciate
 how
 data
 can
 drive
 advantages
 not
 fully
 available
 to
 off-­‐line
 firms,
 
ranging
 from
 increased
 personalization
 to
 innovation
 and
 service
 improvements.
 

5. Identify
 the
 two-­‐sides
 in
 Amazon
 Marketplace
 network
 effects,
 and
 why
 this
 is
 
important
 in
 strengthening
 the
 firm’s
 brand.
 

6. Appreciate
 how
 mobile
 access
 is
 influencing
 opportunities
 through
 additional
 
changes
 in
 how,
 where,
 and
 when
 consumers
 shop.
 

 
Amazon
 got
 its
 start
 selling
 books
 online.
 
 The
 firm’s
 first
 office
 was
 in
 a
 modest
 space
 
boasting
 a
 then
 appealing
 400
 square
 foot
 basement
 warehouse
 in
 a
 low-­‐rent
 area
 of
 
Seattle,
 where
 neighboring
 establishments
 included
 the
 local
 needle
 exchange,
 a
 pawn
 
shop,
 and
 “WigLand.”8
 
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 4
 

 
Today
 the
 firm
 is
 decidedly
 larger.
 
 Its
 ninety
 plus
 distribution
 centers
 worldwide
 boast
 
well
 over
 26
 million
 square
 feet
 of
 warehouse
 space.
 9
 And
 Amazon
 is
 now
 the
 world’s
 
largest
 online
 retailer
 in
 dozens
 of
 categories.
 
 The
 stylized
 smile
 in
 the
 Amazon
 logo
 
doubles
 as
 an
 arrow
 pointing
 from
 A
 to
 Z
 (as
 in
 “we
 carry
 everything
 from…”).
 A
 new
 
downtown
 Seattle
 headquarters
 will
 take
 up
 three
 full
 city
 blocks
 anchored
 by
 three
 
signature
 office
 towers.
 

 
How
 does
 a
 firm
 that
 sells
 products
 that
 pretty
 much
 any
 other
 retailer
 can
 provide,
 grow
 
and
 create
 competitive
 advantages
 that
 keep
 rivals
 at
 bay?
 
 Look
 to
 the
 napkin
 –
 Amazon’s
 
headquarters
 lobby
 sports
 the
 framed
 vision
 scribbled
 out
 by
 Amazon’s
 chief
 (see
 below).
 
 

 

 
Figure X: Amazon’s “Wheel of Growth”, adapted from a Jeff Bezos napkin scribble (note: publisher needs to
see if permission for use is required/can be obtained – has been widely shown in Amazon Investor Relations

slides & reprinted in the media.

 
At
 the
 heart
 are
 three
 pillars
 of
 Amazon’s
 business:
 large
 selection,
 convenience,
 and
 lower
 
prices.
 
 
 Says
 Bezos
 “I
 always
 get
 the
 question,
 what’s
 going
 to
 change
 in
 10
 years?
 I
 almost
 
never
 get
 asked,
 what’s
 NOT
 going
 to
 change
 in
 the
 next
 10
 years?
 That’s
 the
 more
 important
 
question,
 because
 you
 can
 build
 a
 business
 around
 things
 that
 are
 stable.
 [Things
 like]
 low
 
prices…
 faster
 delivery[offering
 customer
 convenience].
 Vast
 selection.”10
 

 
The
 three
 pillars
 of
 selection,
 convenience,
 and
 low
 prices
 reinforce
 one
 another
 and
 work
 
together
 to
 create
 several
 additional
 assets
 for
 competitive
 advantage.
 Exceptional
 
customer
 experience
 fuels
 a
 strong
 brand
 that
 makes
 Amazon
 the
 first
 place
 most
 
consumers
 shop
 online.
 
 More
 customers
 allow
 the
 firm
 to
 provide
 more
 products,
 creating
 
scale.
 
 Amazon
 also
 opens
 its
 website
 up
 to
 third-­‐party
 sellers
 –
 and
 a
 dynamic
 where
 more
 
customers
 attract
 more
 sellers
 which
 attract
 still
 more
 customers
 (and
 so
 on).
 That
 
virtuous
 cycle
 of
 buyer-­‐seller
 growth
 is
 a
 two-­‐sided
 network
 effect,
 yet
 another
 source
 of
 
competitive
 advantage.
 
 And
 all
 this
 activity
 allows
 Bezos
 and
 Company
 to
 further
 sharpen
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 5
 

the
 business
 battle
 sword
 by
 gathering
 an
 immensely
 valuable
 data
 asset.
 
 Each
 digital
 
movement
 is
 logged,
 and
 the
 firm
 is
 constantly
 analyzing
 what
 users
 respond
 to
 in
 order
 to
 
further
 fine-­‐tune
 the
 customer
 experience,
 squeeze
 out
 costs,
 and
 drive
 profits.
 Let’s
 look
 at
 
each
 of
 these
 items
 and
 see
 how
 Amazon’s
 bold
 tech-­‐based
 strategy
 is
 realizing
 additional
 
advantages
 in
 the
 domain
 of
 marketing,
 accounting,
 and
 operations.
 

 
Fulfillment
 Operations
 –
 Driving
 Selection,
 Customer
 Convenience,
 and
 Low-­‐Price
 

 
Amazon
 has
 always
 sold
 direct
 to
 consumers,
 but
 it
 didn’t
 always
 do
 this
 well.
 
 The
 firm’s
 
early
 warehousing
 was
 a
 shambles
 of
 inefficient,
 money-­‐burning
 processes.
 Said
 one
 
analyst,
 Amazon’s
 “inventory,
 and
 warehouse
 operating
 costs,
 [were]
 so
 high
 they
 made
 
old-­‐fashioned
 retailers
 look
 efficient.”11
 
 The
 situation
 was
 once
 so
 bad
 that
 in
 order
 to
 stay
 
in
 business
 Amazon
 had
 to
 issue
 more
 than
 $2
 billion
 in
 bonds.
 To
 fix
 the
 problem,
 Amazon
 
looked
 to
 others
 for
 talent,
 hiring
 away
 both
 the
 Chief
 Information
 Officer
 (CIO)
 and
 Chief
 
Logistics
 Officer
 from
 the
 world’s
 largest
 retailer,
 Walmart
 (Walmart
 sued,
 the
 two
 
eventually
 settled
 out
 of
 court).
 
 But
 raiding
 Walmart’s
 talent
 pool
 wasn’t
 enough.
 
 
Amazon’s
 warehouse
 and
 technology
 infrastructure
 is
 radically
 different
 than
 any
 
conventional
 retailer.
 
 While
 Walmart
 warehouses
 that
 support
 its
 superstores
 ship
 large
 
pallets
 of
 diapers
 to
 thousands
 of
 its
 retail
 locations,
 Amazon
 warehouses
 pick
 and
 pack
 
boxes
 of
 disparate
 individual
 items,
 sending
 packages
 to
 millions
 of
 homes.
 To
 build
 a
 
system
 that
 worked,
 Amazon
 focused
 on
 costs,
 data,
 and
 processes
 so
 that
 it
 could
 figure
 
out
 what
 was
 wrong
 and
 how
 it
 could
 improve.
 

 
One
 effort,
 “Get
 the
 C.R.A.P.
 out”
 focused
 on
 products
 that
 “Can’t
 Realize
 Any
 Profits”.
 
 The
 
firm’s
 Senior
 Vice
 President
 of
 North
 American
 Operations
 recalls
 visiting
 a
 Kentucky
 
warehouse
 and
 watching
 a
 staffer
 spend
 20
 minutes
 packaging
 up
 a
 folding
 chair
 –
 a
 
process
 way
 too
 inefficient
 for
 a
 firm
 with
 razor-­‐thin
 margins.
 
 To
 fix
 the
 situation,
 Amazon
 
worked
 with
 the
 vendor
 to
 get
 chairs
 in
 pre-­‐packaged,
 read-­‐to-­‐ship
 boxes,
 keeping
 the
 
product
 while
 cleaving
 costs.12
 

 
In
 order
 to
 automate
 profit-­‐pushing
 hyper-­‐efficiency,
 Amazon
 warehouses
 are
 powered
 by
 
at
 least
 as
 much
 code
 as
 the
 firm’s
 website13
 –
 nearly
 all
 of
 it
 home-­‐grown.14
 Technology
 
lets
 a
 given
 Amazon
 warehouse
 send
 out
 over
 2
 million
 packages
 a
 week
 during
 the
 holiday
 
season,
 all
 without
 elves
 or
 flying
 reindeer.15
 
 The
 firm’s
 larger
 warehouses
 are
 upwards
 of
 
a
 quarter-­‐mile
 in
 length
 and
 are
 packed
 with
 shelves
 stacked
 five
 or
 more
 rows
 high.
 
Technology
 choreographs
 hundreds
 of
 workers
 in
 what
 seems
 part
 symphony,
 part
 sprint.
 
 
 

 
When
 suppliers
 ship
 new
 products
 to
 Amazon,
 items
 are
 scanned
 and
 prepped
 for
 order
 
within
 hours
 of
 arrival.
 
 Dozens
 of
 workers
 examine
 the
 incoming
 shipments
 for
 defects.
 
 If
 
a
 problem
 is
 spotted
 in
 the
 receiving
 area,
 the
 staffer
 flips
 an
 adjacent
 warning
 light
 from
 
green
 to
 red,
 signaling
 a
 warehouse
 ‘problem
 solver’
 to
 swoop
 in,
 deal
 with
 the
 issue,
 and
 
make
 sure
 additional
 items
 can
 keep
 on
 flowing
 in.16
 

 
Amazon’s
 items
 that
 produce
 the
 most
 sales
 volume
 (think
 bestselling
 books,
 Kindles)
 
aren’t
 even
 stocked
 on
 proper
 shelves,
 instead
 pallets
 of
 goods
 are
 dropped
 in
 an
 area
 
called
 ‘mass
 land’
 for
 fast
 pick-­‐up
 that
 doesn’t
 require
 scurrying
 through
 a
 maze
 of
 shelves.
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 6
 

 
Slower-­‐moving
 items
 are
 racked
 up
 by
 ‘shelvers’,
 who
 place
 items
 in
 available
 spaces.

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