Information Systems
A Manager's Guide to Harnessing Technology
Version 10.0
John Gallaugher
978-1-4533-4120-9
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Information Systems: A Manager's Guide to Harnessing
Technology
Version 10.0
John Gallaugher
Published by:
FlatWorld
292 Newbury Street
Suite #282
Boston, MA 02115-2832
© 2025 by Boston Academic Publishing, Inc. d.b.a. FlatWorld
All rights reserved. Your use of this work is subject to the License Agreement available at
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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.
Gen: 202407182102
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Brief Contents
About the Author
Acknowledgments
Dedication
Preface
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
Chapter 2
Zara: Fast Fashion from Savvy Systems
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
Chapter 4
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for
the Manager
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid
Extinction
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
Chapter 9
Shein and Temu: E-commerce Giants from Asia Grow Globally
Chapter 10
Platforms, Network Effects, and Competing in a Winner-Take-All World
Chapter 11
Social Media, Peer Production, and Leveraging the Crowd
Chapter 12
The Sharing Economy, Collaborative Consumption, and Efficient Markets
through Tech
Chapter 13
From Facebook to Meta: Platforms, Privacy, and Big Business from the
Social Graph
Chapter 14
Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech
with Fashion
Chapter 15
Understanding Software: A Primer for Managers
Chapter 16
Software in Flux: Open Source, Cloud, Virtualized, and App-Driven Shifts
Chapter 17
Data and Competitive Advantage: Databases, Analytics, and Prepping Data
for Use with AI
Chapter 18
Artificial Intelligence—the Tech Impacting Nearly Every Industry
Chapter 19
Advertising Technologies: Balancing Personalization with Privacy as
Technology and Regulation Evolve
Chapter 20
A Manager’s Guide to the Internet and Telecommunications
Chapter 21
Information Security: Barbarians at the Gateway (And Just about Everywhere
Else)
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 22
Google in Three Parts: Search, Online Advertising, and an Alphabet of
Opportunity
Appendix A
Essential Skills for Excel
Index
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Contents
About the Author
1
Acknowledgments
3
Dedication
7
Preface
9
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
Tech’s Tectonic Shift: Radically Changing Business Landscapes
37
It’s Not the Future, It’s Now!
37
A Quick Look at AI—the Hottest Topic in Tech and Business
38
Tech: It’s at the Center of Your Uncertain Future
40
1.2
It’s Your Revolution
45
Want to Start a Startup?
47
1.3
Geek Up—Tech Is Everywhere and You’ll Need It to Thrive
51
Finance
52
Accounting
53
Marketing
53
Operations
54
Human Resources
55
The Law
56
Information Systems Careers
57
Your Future
59
1.4
Hey, Manager—You'll Need to See beyond the Hype Cycle!
60
1.5
The Pages Ahead
64
1.6
Endnotes
69
1.1
Chapter 2
Zara: Fast Fashion from Savvy Systems
2.1
2.2
Chapter 3
37
71
Introduction
71
Why Study Zara?
72
Gap: An Icon in Crisis
74
Don’t Guess, Gather Data—Make Small Batches of What Customers Want
and Ship It Fast!
77
Design
78
Manufacturing and Logistics
78
Stores
80
2.3
Moving Forward
85
2.4
Endnotes
88
Strategy and Technology: Concepts and Frameworks for Achieving
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
91
Success
3.1
3.2
Chapter 4
91
The Danger of Relying on Technology
92
But What Kinds of Differences?
94
Powerful Resources
96
Imitation-Resistant Value Chains
97
Brand
99
Scale
100
Switching Costs and Data
101
Differentiation
102
Network Effects
103
Distribution Channels
104
What about Patents?
106
3.3
Barriers to Entry, Technology, and Timing
108
3.4
Key Framework: The Five Forces of Industry Competitive Advantage
110
3.5
Endnotes
115
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
4.1
4.2
4.3
Chapter 5
Introduction
Tech-Driven Strategic Positioning for Market Dominance
117
Ordering Online—Challenges but Advantages, Too
118
Cost Cutting and Fresher Food through a Tech-Enabled Supply Chain
120
Work with Suppliers, Don't Squeeze Them
121
Advantages Pay Off
122
The Model Moves Forward
123
The Botched Bronx Move—Even the Skilled Screw Up
124
COVID-19: Crisis and Opportunity
124
Better than Traditional Grocers, but Other Rivals?
125
Future Deliveries?
126
Acquisitions Are Tough: Watch This Space
127
Endnotes
128
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
5.1
5.2
5.3
117
131
Introduction
131
Why Study Netflix?
133
Netflix versus the Competition: Big Players, Bold Plans, but It’s Getting
Crowded
134
Content Acquisition: Escalating Costs, Limited Availability, and the “Long-Enough
Tail”
137
Exclusives and Original Content
139
Streaming to Win: Online Video and Competitive Advantage
144
Streaming and the Data Asset
144
Streaming Changes Viewing Habits and Frees Creative Constraints
148
Maximizing Profits in Saturated Markets: Password Crackdowns and Introducing a
Lower-Cost, Ad-Supported Service
149
Streaming and Scale Advantages
150
The March to Global Dominance
151
It’s a Multiscreen World: Getting to Netflix Everywhere
154
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
5.4
Chapter 6
157
Endnotes
161
Moore’s Law and More: Fast/Cheap Computing and What This Means for
the Manager
163
Introduction
163
Moore’s Law and How Managers Interpret It
163
Get Out Your Crystal Ball
170
The End of Moore’s Law? Not the End of Fast/Cheap Computing!
177
Buying Time
179
6.3
The Power of Parallel: Supercomputing, Grids, Clusters, and Putting
Smarts in the Cloud
185
6.4
E-waste: The Dark Side of Moore’s Law
188
Yes, You Do Have to Pay Attention to This Garbage, but the “Internet of Trash” May
Help
191
Mickey’s Wearable: Disney’s MagicBand
194
Experience Examples
196
Big Data and Big Benefits
196
Magical Experiences Cost Serious Coin
197
Magical Experiences Can Require Magical Coordination
198
Expanding Offerings and Looking to the Future
198
Endnotes
200
6.1
6.2
6.5
6.6
Chapter 7
A Crowded Field of Rivals and Other Challenges
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid
Extinction
7.1
7.2
7.3
7.4
7.5
203
Understanding Truly Disruptive Innovation
203
The Characteristics of Disruptive Technologies
203
Why Big Firms Fail
206
Recognizing and Responding to Disruptive Innovation
210
Don’t Fly Blind: Improve Your Radar
211
Potential Disruptor Spotted: Now What?
212
No Easy Answers
214
Tech to Consider: Additive Manufacturing—Is 3D Printing Ready to
Disrupt?
217
Little Printed Houses for You and Me
218
When Does Additive Manufacturing Make Sense?
219
Granny Might Have a 3D-Printed Hip
219
Tech to Consider: Crypto, Blockchain, and DeFi—Cesspools of Scammers
or Disruptive Technologies?
221
How It Works
223
Benefits
226
Examples of Blockchains in Action
229
Concerns
230
What Do You Think?
232
Endnotes
234
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
Introduction
237
Why Study Amazon?
239
The Emperor of E-commerce
241
Fulfillment Operations—Robotics and AI Drive Selection, Customer Convenience,
and Low Price
243
Amazon’s Cash Conversion Cycle—Realizing Financial Benefits from Tech-Enabled
Speed
247
Internet Economics, Scale, and Pricing Power
248
The Advantage of Being Big: Realizing Scale Advantages as the Retail E-commerce
Leader
249
Customer Obsession
250
Leveraging the Data Asset—A/B Testing, Personalization, and Even an Ad Business
251
Selection and Network Effects
253
Acquisitions and Category Expansion: Fewer Rivals, More Markets, and More
Customer Choice
256
The Lord of Logistics
259
Building a Delivery and Logistics Business inside the Business
259
Reworking Brick-and-Mortar Retail: Failed Experiments but New AI-Fueled
Tech
264
Amazon’s “Brick-Based” Misadventures
264
Hello Machine Learning, Goodbye Checkout Line
265
More “Green” from High-Tech Grocery Shopping?
266
Amazon’s Consumer Electronics (Kindle, Fire, Alexa) and Amazon as
Publisher (Twitch, Print, Games, and Video)
269
The Kindle Line: Igniting Possibilities on eBook and Tablet
270
Alexa: A Wild Success That’s Losing a Ton of Money
272
Amazon for Your TV
275
Amazon—Now a Major Content Publisher
277
Channel Conflict and Consolidated Power
279
Amazon and the Cloud: From Personal Storage to AWS
282
The Consumer Cloud Is Everywhere
283
About AWS
283
Understanding the Corporate Cloud
284
So What, Really, Is This AWS Stuff?
286
AI at Amazon: Powering the Firm and For Sale to Others
293
Where Does Amazon Use AI? In Just about Everything It Does!
294
Buying AWS Services? Want Some AI with That?
295
Investing in Anthropic—a Firm Created by OpenAI Alumni
297
Chips and Infrastructure for More Powerful AI
298
8.8
Is Amazon Too Big?
300
8.9
Shopify: A Decidedly Different E-commerce Player
302
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.10 Endnotes
Chapter 9
237
Shein and Temu: E-commerce Giants from Asia Grow Globally
9.1
304
309
The Overnight Fashion Giant
309
Why Study These Firms?
310
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
9.2
9.3
9.4
9.5
Chapter 10
Shein: They've “Out Zara'ed Inditex”
311
The Shein Model
311
AI, Mine That Data! Apps, Advertising, and Social Media
312
Arm the Influencers!
313
Data Is Greater than Vogue
313
Thousands of Partners, Working Quickly, Coordinated by Software
314
Shein Grew by Taking Advantage of Import Loopholes
315
Big Challenges and Blistering Criticism: Will Shein’s Stellar Growth
Continue?
317
Supplier Working Conditions
317
Offensive Designs, Knock-Offs, and IP Violations
319
Dangerous Products
320
One of the Biggest Players in One of the Most Toxic Industries
320
Shein’s Future: Global Expansion, Marketplaces, and Competitors
322
Going Big, Not Going Home
322
Marketplace Strategy: Less Like Zara, More Like Amazon
322
Serious Competitors, Including New Titan, Temu
323
A Dark or Shiny Bright Future for Shein?
325
Endnotes
326
Platforms, Network Effects, and Competing in a Winner-Take-All World
329
10.1 Introduction
329
10.2 Platforms Are Powerful, but Where Does All That Value Come From?
331
Exchange
331
Staying Power
332
Complementary Benefits
332
10.3 One-Sided or Two-Sided Markets?
337
Understanding Network Structure
338
10.4 How Are These Markets Different?
341
10.5 Competing When Network Effects Matter
345
Move Early
346
Subsidize Adoption
347
Leverage Viral Promotion
348
Expand by Redefining the Market
350
Alliances and Partnerships
351
Leverage Distribution Channels
352
Seed the Market
354
Encourage the Development of Complementary Goods
355
Leverage Backward Compatibility
356
Rivals: Be Compatible with the Leading Network
356
Incumbents: Close Off Rival Access and Constantly Innovate
357
Large, Well-Known Followers: Preannouncements
357
10.6 The Apple Platform Cashes In on Banking
359
10.7 The Zoom Boom—Big Guys Can Be Beat
361
10.8 Endnotes
364
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 11
Social Media, Peer Production, and Leveraging the Crowd
11.1 Introduction
367
11.2 Blogs
377
11.3 Wikis
383
11.4 Social Networks
387
Corporate Use of Social Networks
11.5 X: The Death of Twitter or the Rise of a Super App?
390
395
Twitter: A Side Project That Became the Pulse of the Planet
395
Under Musk’s Ownership: Not Business as Usual
396
A New CEO and WeChat Envy
398
X: A Key Tool for Intelligence, Engagement, and Organic and Paid Promotion
399
11.6 TikTok—the World’s Addiction
402
A Giant Is Born
403
The Interface Matters—App Built for Posts and Remixes
403
Addicted to TikTok? Blame AI
404
TikTok Shops Wants to Make Shopping Even More Viral
406
Increased Scrutiny and Outright Bans
406
11.7 Prediction Markets and the Wisdom of Crowds
Blockchain for Better and Unrestricted Prediction Markets
409
410
11.8 Crowdsourcing
411
11.9 Get SMART: The Social Media Awareness and Response Team
414
Creating the Team
416
Responsibilities and Policy Setting
417
Monitoring
420
Establishing a Presence
421
Engage and Respond
422
11.10 Endnotes
Chapter 12
367
The Sharing Economy, Collaborative Consumption, and Efficient Markets
through Tech
425
429
12.1 Introduction
429
12.2 Boom Times and Looming Challenges in the Sharing Economy
433
Share On! Factors Fueling the Rise of Collaborative Consumption
433
Winning in Electronic Markets
433
Social Media for Virality and Trust Strengthening
435
Share Everything? The Myth of the Market for Your Neighbor’s Power Drill
436
Can You Share Nicely? Challenges of Safety and Regulation
436
12.3 Future Outlook: Established Players Get Collaborative
440
12.4 Airbnb—Hey Stranger, Why Don’t You Stay at My Place?
442
At Airbnb, Big Data Is a Big Deal
444
A Phenomenal Start, but Not without Challenges
445
12.5 Uber's Wild Ride: Sharing Economy Startup Success, Flailing after a Fallen
Founder, and a Profitable Comeback
446
Disrupting Markets by Matching Demand with Supply
449
Driven by Data
451
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
APIs to Expand Reach
452
How Big Can This Thing Get? Challenges Both Local and Global
453
12.6 Endnotes
Chapter 13
From Facebook to Meta: Platforms, Privacy, and Big Business from the
Social Graph
13.1 Introduction
456
459
459
The Rise of Facebook and Growing Concerns
461
Why Study Meta?
462
13.2 Features and Competitive Advantage of Facebook and Other Meta
Services
464
The Social Graph and Why Facebook’s Is So Strong
465
Feeds: Viral Sharing Accelerated
465
Facebook’s Dominance on the Desktop
466
Search: Not Quite Google—but Sometimes Quite Useful
467
13.3 Meta Goes Mobile and Grows by Acquisition
470
Why Mobile Is Different and in Some Ways Better than the Desktop
471
Big Bets: Bringing Potential Rivals and Platform Powerhouses into the Meta Family
472
Instagram
472
So Threads Is a Thing!
473
WhatsApp
473
Snapping Snapchat’s Lead with Stories
474
TikTok Threatens: AI-fueled Reels Is a Success but Not a Killer
475
13.4 The Metaverse and Meta on Your Face—Billions in Losses, but Does a Big
Payday Await?
477
So What Is “The Metaverse?”
477
Oculus—Meta’s Ride to the Metaverse
479
When Will This Thing Make Money?
480
Ray-Ban Meta Smart Glasses—Not Metaverse, Yet
481
13.5 AI: Essential to Meta’s Success
483
Meta Is a Pioneer, but Keeping Pace Is a Costly Challenge
483
Llama and Beyond
484
EMU—Image Generation
485
AI ChatBots: Snoop Dungeon Master and Big Sis Kendall Jenner
486
CodeCompose
487
Chips and Infrastructure
488
13.6 Lessons from Meta’s Platform Expansion: Big Growth, Bad Partners, APIs,
and a Mobile Melee
489
Mobile Is Tougher, but Global Players Have Big Mobile Platforms
492
Messenger: A Pillar Business Building Meta’s Future
493
13.7 Move Fast and Break Things: Fumbles and Fake News
496
Beacon Busted—Management Lessons on Tech Planning and Deployment
497
Faked Out by Fake News
498
13.8 Endnotes
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
501
Chapter 14
Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech
with Fashion
14.1 Introduction
506
A Fashion Company with a Technology Soul
507
508
Customers Like It—but What about Suppliers? Growing the Customer Base and
Creating a Win-Win
509
Customer Evolution
510
14.3 Subscription: Bigger than Rental
512
14.4 Customer Engagement (Mobile, Social, and Physical Storefronts)
514
Mobile
514
Social
514
14.5 Data
516
14.6 Operations and Logistics
519
HyperGrowth and Hiccups
520
Worn with Love and Still Good—Retail Partnerships
521
Fulfillment as a Service—Here Come the Competitors
521
14.7 Surviving and Thriving Post-Pandemic
523
COVID-19 Kills Fashion for a Year—Hyman Fights for Her Firm’s Survival
524
Leaders in the Growing Club of Tech-Focused Female Founders
525
14.8 Endnotes
Understanding Software: A Primer for Managers
15.1 Introduction
What Is Software?
527
529
529
530
15.2 Operating Systems
532
15.3 Application Software: Apps, Desktop Products, and Enterprise Systems
536
And That’s Just the Start
15.4 Distributed Computing, Web Services, and APIs: The Platform Builders
Formats to Facilitate Sharing Data
15.5 Writing Software
539
542
546
549
AI Is Radically Changing Programming: Programmers Won’t Be Replaced, Instead
Everyone Will Be Coding with a Co-pilot
552
Low Code/No Code—Programming without Coding
554
15.6 Software Development Methodologies: From Waning Waterfall to
Ascending Agile, Plus a Sprint through Scrum
557
A Brief Introduction to Popular Approaches to Developing Software
557
15.7 Beyond the Price Tag: Total Cost of Ownership and the Cost of Tech
Failure
560
Why Do Technology Projects Fail?
Chapter 16
505
Rental and Subscription: Here’s How It Works
14.2 Founding the Business: Are We On to Something?
Chapter 15
505
561
15.8 Software Centric Products Aren't Easy: VW's Electric Vehicle Woes
565
15.9 Endnotes
569
Software in Flux: Open Source, Cloud, Virtualized, and App-Driven Shifts
16.1 Introduction
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
571
571
16.2 Open Source
573
16.3 Why Open Source?
576
16.4 Examples of Open Source Software
579
16.5 Give It Away and Make Money: The Business of Open Source
581
16.6 Defining Cloud Computing
584
16.7 Software in the Cloud: Why Buy When You Can Rent?
585
The Benefits of SaaS
586
16.8 SaaS: Not without Risks
589
16.9 Understanding Cloud Computing Service and Deployment Models: SaaS,
PaaS, IaaS, and Public, Private, Hybrid Clouds
591
Challenges Remain
Chapter 17
596
16.10 Clouds and Tech Industry Impact
598
16.11 Virtualization: Software That Makes One Computer Act Like Many
601
16.12 Apps and App Stores: Further Disrupting the Software Industry on
Smartphones, Tablets, and Beyond
603
16.13 Make, Buy, or Rent
605
16.14 Endnotes
607
Data and Competitive Advantage: Databases, Analytics, and Prepping
Data for Use with AI
609
17.1 Introduction
609
17.2 Data, Information, and Knowledge
613
Understanding How Data Is Organized: Key Terms and Technologies
613
Serverless Computing: Can Someone Else Manage This Complexity?
615
17.3 Where Does Data Come From?
617
Transaction Processing Systems
618
Enterprise Software (CRM, SCM, and ERP)
619
Surveys
619
External Sources
621
17.4 Data Rich, Information Poor
624
Incompatible Systems
624
Operational Data Can’t Always Be Queried
625
17.5 Data Warehouses, Data Marts, Data Lakes, and the Technology behind
“Big Data”
627
Even More Speed and Flexibility from Data Lakes and the Data Cloud
629
It’s Not One or the Other
631
Implementing Large-Scale Data Projects
631
Know Data Science? Firms Need Your Skill!
632
17.6 The Business Intelligence Toolkit
633
Query and Reporting Tools
634
Data Mining
637
17.7 Data Asset in Action: Technology and the Rise of Walmart
640
A Data-Driven Value Chain
640
Data Mining Prowess
643
Sharing Data, Keeping Secrets
643
HR, Meet VR
644
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
In-Store Innovations: Keeping Pace with Amazon Go and Leading with Skills and
Scale
645
Advertising: A Multibillion-Dollar Business that Brings in More Data
646
Betting Big on E-commerce
647
Challenges Abound
647
17.8 Endnotes
Chapter 18
Artificial Intelligence—the Tech Impacting Nearly Every Industry
651
18.1 AI, Write My Intro
651
Bard’s Response:
651
18.2 Generative AI: Whoa—This Is Something Different!
653
18.3 So How Does This Stuff Really Work? A Manager’s Guide to
Understanding GenAI
656
A Manager’s AI Glossary
658
How Will the Machine Learn?
661
18.4 Generative AI: Changing Products and the Nature of Work Itself
664
Generative AI and the Future of Work
664
GenAI Everywhere! Just a Few Examples
666
18.5 Understanding AI Risks
Understanding Risks Posed by AI
Chapter 19
649
671
672
18.6 It’s Not as Easy as the Press Might State: Technical, Organizational, Legal,
and Societal Challenges of AI and Machine Learning
687
18.7 Addressing AI Risks and Building More Responsible Technology
689
Recognizing Risks and Setting Standards
691
Steps in Developing and Deploying More Ethical, Less Risk-Prone Systems
692
18.8 AI as Your DJ—a Look at Spotify’s Magic
698
18.9 Endnotes
701
Advertising Technologies: Balancing Personalization with Privacy as
Technology and Regulation Evolve
19.1 Understanding Online Advertising
705
705
Online Advertising Is Booming: Here’s Why
705
Ad Formats and Ad Purchasing
706
Understand Key Terms: Zero-, First-, Second-, and Third-Party Data
708
19.2 Web Tracking: The Cookie Crumbles and Ad Tech Evolves
711
Introduction
711
Want a Cookie? Great—Now I Can Track You!
712
Retiring the Third-Party Cookie and Figuring Out What Comes Next
713
Browser Profiling after Third-Party Cookies
714
19.3 App Tracking: Apple and Facebook Go to War over In-App Tracking
718
The Battle over iOS Privacy
719
Why Is This URL So Long?
721
19.4 Device Profiling: From Geotargeting to Televisions That Watch You
723
IP Addresses and Geotargeting
724
Geotargeting beyond IP Address
726
Your TV Is Probably Watching You Back
727
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 20
19.5 Privacy Regulation: A Moving Target
729
Do the Crime? You’ll Pay the Fine!
730
19.6 Privacy, Data Protection, Governance, and Management Policies
732
19.7 Endnotes
734
A Manager’s Guide to the Internet and Telecommunications
20.1 Introduction
737
20.2 Internet 101: Understanding How the Internet Works
737
The URL: “What Are You Looking For?”
739
IP Addresses and the Domain Name System: “Where Is It? And How Do We Get
There?”
744
20.3 Getting Where You’re Going
Chapter 21
748
TCP/IP: The Internet’s Secret Sauce
748
20.4 Last Mile: Faster Speed, Broader Access
756
Cable Broadband
757
DSL: Phone Company Copper
757
Fiber: A Light-Filled Glass Pipe to Your Doorstep
758
Wireless
758
Satellite Wireless and Schemes to Reach the Remote
761
Wi-Fi and Other Hotspots
762
Net Neutrality: What’s Fair?
762
Summing Up
764
20.5 To Infinity and Beyond: SpaceX Starlink and the Awesome Power Wielded
by Elon Musk's Firms
765
20.6 Endnotes
769
Information Security: Barbarians at the Gateway (And Just about
Everywhere Else)
21.1 Introduction
773
773
Got a Bank Account or Credit Card? You’ve Been Hacked!
774
A Look at the Target Hack
774
21.2 Why Is This Happening? Who Is Doing It? And What’s Their Motivation?
777
21.3 Where Are Vulnerabilities? Understanding the Weaknesses
783
User and Administrator Threats
784
Technology Threats (Client and Server Software, Hardware, and Networking)
793
Push-Button Hacking, Made Worse by Generative AI
798
21.4 Taking Action
803
Taking Action as a User
803
Taking Action as an Organization
804
21.5 Endnotes
Chapter 22
737
Google in Three Parts: Search, Online Advertising, and an Alphabet of
Opportunity
22.1 Introduction
Why Study Alphabet?
22.2 Understanding Search
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
812
815
815
819
820
22.3 Search Advertising
How Much Do Advertisers Pay per Click?
830
Mobile Apps and the Challenge for Google Search
831
22.4 The Google Ad Network: Distribution beyond Search
833
Ad Networks and Competitive Advantage
22.5 Generative AI and the Future of Search and Other Google Products
834
836
Disruption Arrives
837
An Uncertain Future
837
The Response: AI Everywhere!
839
You'll Need to Learn to Be a Critical User of AI
840
22.6 Alphabet’s Multi-Front Battle
841
Strategic Issues
841
Android Everywhere
844
YouTube
845
Google Pay
845
Google and Social
846
Apps, Cloud, and the Post-Hard-Drive World
848
22.7 Endnotes
Appendix A
827
Essential Skills for Excel
852
855
A.1
Introduction and Using Formulas
855
A.2
Basic Formatting and Understanding References
859
A.3
Manipulating Sheets
863
A.4
Freezing Panes, Sorting, and Using Filters
868
A.5
Tables and Autofill
872
A.6
Paste Special and Copy as Picture
876
A.7
Column, Bar, Pie, Line, and Scatter Charts
880
A.8
Functions Related to IF
886
A.9
The VLOOKUP and HLOOKUP Functions
889
A.10 Conditional Formatting
892
A.11 Pivot Tables and Slicers
897
A.12 Excel for Mac versus Excel for Windows
900
A.13 Additional Exercise Starter Files
902
A.1 Additional Exercise
902
A.2 Additional Exercise
902
A.3 Additional Exercise
903
A.4 Additional Exercise
903
A.5 Additional Exercise
903
A.6 Additional Exercise
904
A.7 Additional Exercise
904
A.8 Additional Exercise
904
A.9 Additional Exercise
904
A.10 Additional Exercise
905
A.11 Additional Exercise
905
Index
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907
About the Author
Professor John Gallaugher has led student learning experiences on six continents. As the founding faculty member for Boston College’s TechTrek and former
co-lead of the school’s graduate field studies in Europe and Asia, Professor Gallaugher has had remarkable access to study technology growth and its impact
worldwide. Professor Gallaugher and his students have regularly spent time with
leading tech executives, entrepreneurs, and venture capitalists in San Francisco,
Silicon Valley, Seattle, Boston, New York, Dublin, and Ghana. This unique opportunity helps give his teaching and writing a broad, deep, and continually
refreshed perspective on key industry trends and developments. Professor Gallaugher’s research has appeared in the Harvard Business Review, MIS Quarterly,
and other leading journals.
Professor Gallaugher has been named an “Apple Distinguished Educator” by Apple Inc., “Guru
to Grads” by Entrepreneur magazine, and a “Most Popular Professor” by BusinessWeek. He has
also received the Boston College Trzaska Faculty Leadership Award, the all-university Teaching
Award, the Carroll School of Management Teaching Award, and the student newspaper’s Momentum Award for campus impact. Entrepreneurs that he has worked with have gained admittance
to elite startup accelerators (Y Combinator, Techstars, MassChallenge), launched multiple products, raised over $100 million in capital, and achieved unicorn ($1 billion+) valuations. Professor Gallaugher has been a featured speaker at Apple Inc.’s Educator Summit and AcademiX conferences,
and was the international keynote speaker at AIBUMA (the Africa International Business and Management Conference) in Nairobi, Kenya. He has also held an honorary appointment at the University of Technology Sydney. He has consulted for and taught executive seminars for several organizations, including Accenture, Alcoa, Duke Corporate Education, ING, Partners HealthCare, Staples,
State Street, the University of Ulster, and the U.S. Information Agency. His comments on business
and technology have appeared in the New York Times, National Public Radio, Bloomberg Businessweek, the Boston Globe, Wired, the Associated Press, Chronicle (WCVB-TV), The Daily Yomiuri
(Japan), and the Nation (Thailand), among others.
A member of the business analytics department at BC’s Carroll School of Management, Professor Gallaugher earned his Ph.D. in Information Systems from the Syracuse University School of
Management, and he holds an MBA and an undergraduate degree in computer science, both from
Boston College. In addition to his work teaching managerial courses, Professor Gallaugher also
teaches technical topics, including SwiftUI and iOS app development and electronics programming
in CircuitPython. He has shared over 500 videos related to his teaching and research on YouTube,
and via his website Gallaugher.com. Professor Gallaugher occasionally publishes information
related to his teaching, research, and concepts related to future versions of his textbook via his
free subscription at Substack.com. He can also be followed on social media via Threads: @john.
gallaugher, Mastodon: @gallaugher@mastodon.world, and LinkedIn.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Acknowledgments
In prior versions of this text I have thanked first among my colleagues my former department
chair, Jim Gips, who has been my very best mentor, a dear friend, steadfast and unflinching advocate, and who so kindly and repeatedly gave me rides home where we’d often linger in his car for
long chats that reflected his deep care and concern for his students, colleagues, university, and
society. As creator of the EagleEyes and Camera Mouse projects (Cameramouse.org), Prof. Gips has
given voice to countless people with disabilities worldwide and because of this, he was the single
most impactful researcher that I know. Jim passed away in June 2018. The New York Times ran
an obituary of this brilliant, kind, humble, and inspiring man who helped so many. I will miss him
dearly.
As always, my enduring thanks to my current and former students, who continue to inspire,
impress, and teach me more than I thought possible. It’s deeply rewarding to see so many former
students return to campus as executive speakers, and to so kindly host visiting students at their
own firms. Serving as your professor has been my greatest professional privilege, and I am grateful
for such an extraordinary opportunity. Keep at it, and continue to make us all proud!
Thanks also to the many alumni, parents, and friends of Boston College who have so generously invited me to bring my students to visit with and learn from them. The experiences that
you’ve provided to us have been nothing short of astonishing. We were present at the launch of
the iPhone. We’ve not only made twice-a-year pilgrimages to Sand Hill Road, One Infinite Loop,
Hacker Way, and The Googleplex, but many of our former students were funded and mentored by
the VCs we’ve visited with. Name a tech firm making waves and we’ve almost certainly got an alumnus there, and whenever I’ve asked, they’ve uniformly opened their offices to share insight with
our students. The East and West Coast leadership of the Boston College Technology Council have
played a particularly important role in making this happen. From Bangalore to Boston, Guangzhou
to Ghana, Seoul to Silicon Valley, you’ve provided my students with world-class opportunities,
enabling us to meet with scores of CEOs, senior executives, partners, and entrepreneurs. You’ve positively impacted lives, shaped careers, and helped make our university stronger. My students and I
remain deeply grateful for your commitment and support.
A tremendous thanks to my former student research team at Boston College who have helped
me keep the edition up to date. The team includes: Kaitlin Ardiff, Abhinav Arora, Kathie Chang, Phil
Gill, Michael Lapointe, Xin (Steven) Liu, Tiffany Liu, Rootul Patel, Kelly Pedersen, Mujtaba Syed, and
Branick Weix who at various times sped things along and helped me fill this project with rich, interesting examples. You have all been so kind to tolerate my constant and unreasonable requests.
I am also deeply grateful to my departmental colleagues at Boston College. I’m so lucky to work
with such brilliant and caring faculty. I hope you know how very much I appreciate you all.
I would also like to thank Kurt Norlin, who helped to shape the “Essential Skills for Excel”
Appendix that has been newly added to this version of the text. Fellow FlatWorld author, Joseph
Manzo, also generously allowed us to use some material from his title Data Analytics Using Excel
Microsoft 365: With Accounting and Finance Datasets v3.0 to help round out the coverage of Excel
in this Appendix. Alexander Traugutt of Elon University was also instrumental in preparing the
supplements that accompany this Appendix.
I’m also grateful for the folks at FlatWorld, who continue to wear the white hats while offering
low-cost, highly innovative learning products, challenging industry conventions, and helping students and faculty worldwide. Lindsey Kaetzel has been an especially understanding, highly skilled,
and rapidly responding steward of this work. Thank you so much for keeping things on track and
making the final product stronger. Sean Wakely, thank you for texts, phone calls, and meetings that
have kept me on track and focused on priorities. You have assembled the Justice League of the
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
4
Information Systems
Textbook Publishing Industry to get the word out on our low-cost, high-impact product. And Alastair Adam and John Eielson, thank you for your stewardship of FlatWorld and for the countless
improvements at the firm. I look forward to great things to come.
I would also like to thank the following colleagues who so kindly offered their time and comments while reviewing this work:
• Donald Army, Dominican University of California
• Vipin Arora, Oregon State University
• David Bloomquist, Georgia State University
• Teuta Cata, Northern Kentucky University
• Amita Goyal Chin, Virginia Commonwealth University
• Chuck Downing, Northern Illinois University
• John Durand, Pepperdine University
• Bud Esserman, Baylor University
• Marvin Golland, Polytechnic Institute of New York University
• Brandi Guidry, University of Louisiana
• Shohreh Hashemi, University of Houston Downtown
• Kiku Jones, The University of Tulsa
• Roy Jones, The University of Rochester
• Nora Junaid, University of Massachusetts Amherst
• Fred Kellinger, Pennsylvania State University–Beaver Campus
• Zeinab Karake, University of Maryland College Park
• Ram Kumar, University of North Carolina–Charlotte
• Eric Kyper, Lynchburg College
• Alireza Lari, Fayetteville State University
• Mark Lewis, Missouri Western State University
• Eric Malm, Cabrini College
• Roberto Mejias, University of Arizona
• Vishal Midha, Illinois State University
• Bill Mills, East Texas Baptist University
• Esmail Mohebbi, University of West Florida
• Liz Ghini Moliski, University of Texas at Austin
• John Preston, Eastern Michigan University
• Shannon Provost, University of Texas–Austin
• Mahesh Raisinghani, Texas Woman’s University
• Yuqing Ren, University of Minnesota
• Shu Schiller, Wright State University
• Tod Sedbrook, University of Northern Colorado
• Richard Segall, Arkansas State University
• Erich Selvig, University of Minnesota
• Ahmad Syamil, Arkansas State University
• Erica L. Wagner, Portland State University, School of Business
• Patricia Wallace, The College of New Jersey
I’m also grateful to the kindness and insight provided by early adopters of this text. Your comments, encouragement, suggestions, and student feedback were extremely helpful in keeping me
focused and motivated while advancing the current edition.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Acknowledgments
I’ll continue to share what I hope are useful insights via social media and via Substack. Do
feel free to offer comments, encouragement, ideas, and examples for future versions. I am hugely
appreciative of all who continue to share the word about this project with others. Your continued
advocacy helps make this model work!
And finally, a thanks to my family, to whom I’ve dedicated this book. That really doesn’t do a
shred of justice to my great fortune in being Kim’s husband and father to Ian, Ori, and Lily. You’ve
been especially tolerant of the time commitment associated with my publishing projects. You are
my world.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
5
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Information Systems
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Dedication
For Ian, Ori, Lily, and Kim—yottabytes of love!
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
What’s New in Version 10.0
While past users of this textbook will find the structure and content familiar, this is also the most
extensive single update of this text since the first version was published. While Information Systems: A Manager’s Guide to Harnessing Technology is updated often, the goal is to strike a balance
that keeps concepts current, fresh, and exciting. I also strive to keep statistics and figures accurate
and up-to-date, all while minimizing adopters’ need to revise their class preparations by limiting
larger changes to the most important concepts, chapters, and cases. The following list reflects the
changes made in v.10.0 of this text. All chapters of this version received a refresh of examples and
statistics. There are also several new chapters, chapter sections, subsections, and mini-cases. Many
sections include new or refreshed exercise questions as well. The following is a list of some of the
more significant changes, although there are many more incremental updates than those mentioned.
Chapter 1—Setting the Stage: Technology and the Modern Enterprise
• A rewritten introduction in “Tech’s Tectonic Shift: Radically Changing Business Landscapes.”
• Chapter Section: “Hey Manager—You’ll Need to See beyond the Hype Cycle!” Introduces the
concept of the Hype Cycle, a handy tool that can be used to frame examinations of technology
throughout the text.
• Subsection: “A Quick Look at AI—the Hottest Topic in Tech and Business.”
• Subsection: “Tech: It’s at the Center of Your Uncertain Future” discusses how difficult it is to
make useful guesses about the direction and impact of winning tech. Crypto, NFT, and Metaverse losses are all mentioned.
• Subsection: “Want to Start a Startup?” Offers several recommendations and introduces key
issues related to technology-focused entrepreneurship, particularly as they relate to collegiate
entrepreneurs.
• New videos include the following:
• "Will ChatGPT Take Your Job?"
• "Amazing Invention—This Drone Will Change Everything"
• "Europe's New Big Tech Rules Will Have Greater Impact than U.S. Antitrust Lawsuits: Fmr.
FTC Chairman"
• "How Canva Made Easy Graphic Design a Billion-Dollar Tech Tool"
• "How to Get into Silicon Valley’s $600 Billion Startup School, The Circuit with Emily Chang"
• "How AI Is Powering the Future of Financial Services, JPMorgan Chase & Co."
• "Will AI Replace Accountants?"
• "Computer-Generated Influencers on Social Media Give a Peek into the Future of Marketing"
• "Google Cloud Manufacturing Operations Solutions"
• "How CoCounsel's AI Assistant Is Making Lawyers Unstoppable!"
• "Generative AI and Programming, Peter Norvig, Director of Research, Google"
• "The Hype Cycle"
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
Chapter 2—Zara: Fast Fashion from Savvy Systems
• Updated stats, charts, and a pared down discussion of Gap versus Zara.
• Information on how the global political climate can influence a firm like Inditex, which
recently closed operations in Myanmar, Russia, and Venezuela.
• Coverage of Zara’s new in-store technology: self-checkout using the app (and security tag
removal stations), click-and-collect (with on-site recycling station), automated in-store return
of online orders, and the use of the app to automate fitting room reservations (no more running around jiggling handles to see if a room is free).
• “Moving Forward” section mentions sustainability concerns among governments and activists,
the impact of fast fashion on the environment, and several steps Inditex is taking to become a
more sustainable company.
• New videos include the following:
• "A Look at the Tech in Zara’s Flagship Madrid Store"
• "Fast Fashion Is Hot Garbage"
Chapter 3—Strategy and Technology: Concepts and Frameworks for Achieving Success
• Updated examples, data, and quotes throughout the chapter.
• Commodity section includes callout quote from Jeff Bezos: “Advertising is the price you pay for
having an unremarkable product or service.”
• The section on FreshDirect has been eliminated since FreshDirect is now broken out as a separate case.
• A new callout for Nortel and Beer: "Nortel versus Beer: The Beer Wins" shows how quickly a
leading firm can fail if strategists don’t understand the interplay between technology shifts
and strategic impact.
• Since the FreshDirect case is now the fourth chapter, the FreshDirect reference under “Imitation-Resistant Value Chains” has changed to reference Zara instead. The straddling key term
also appears here.
• “Distribution Channels” now includes mention of key term bundling.
• GenAI is discussed as a technology capable of creating substitute goods.
• New callout: "ChatGPT Is Killing Stack Overflow" discusses how ChatGPT has launched a
superior substitute good versus Stack Overflow, tanking the firm’s traffic and causing a layoff
of nearly 30 percent of the firm’s staff.
• New videos include the following:
• "Generative AI Is About to Reset Everything, and, Yes It Will Change Your Life, Forbes"
Chapter 4—FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
• The FreshDirect chapter was already quite current and includes the fewest overall updates;
however, do note that the firm has been acquired by the Turkish delivery firm Getir. Faculty
teaching with this case might note that the model works great in NYC, where there is high
product–market fit (FD offers lower costs and higher selections versus traditional rivals), but
that this product–market fit might not have transferred to other areas that didn’t feel such
high price / low selection pain as NYC.
• The text now changes references to Amazon Go, including that Amazon has closed Amazon
Go “just-walk-out” stores in NYC, as well as several more Go and full Amazon Fresh grocery
stores throughout the country. However, Amazon has taken this technology to a Whole Foods
in Washington, DC.
• Subsection: “Acquisitions Are Tough: Watch This Space.” The firm has stepped back from
expansion to Washington, DC, and Philadelphia, focusing instead on strengthening the greater
NYC market. Students are challenged to consider several things: 1) Was the NYC market so
unique that it was difficult to use the FreshDirect model is expansion to other markets? 2)
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
Mergers often fail, while this is not a failed merger at this point, is it possible that Ahold, with
its focus on traditional grocery businesses, might not have understood and been able to leverage the unique aspects of the FD market and model and that prompted its eventual sale to
Getir?
Chapter 5—Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
• The introduction is entirely rewritten to reflect the current state of Netflix and the streaming
wars. Several developments have arisen since the last edition, including Netflix shuttering
its DVD-by-mail business, the firm launching an advertising tier, and Reed Hastings stepping
down as CEO.
• The section that covered Netflix’s DVD-by-mail business has been eliminated. Instead, a new
callout "Netflix Concludes Its First Act" has been added to the first section, covering the major
strategic issues that led to Netflix dominance of DVD-by-mail.
• Updates include industry shifts such as AT&T’s spinning out Warner/Discovery, the Max
rebranding, Viacom/CBS now known as Paramount offering Paramount+, etc.
• A section that had previously given Netflix’s justification for offering only subscription options
without advertising has been eliminated, as Netflix now offers an advertising-supported subscription tier.
• Subsection: “Maximizing Profits in Saturated Markets: Password Crackdowns and Introducing
a Lower-Cost, Ad-Supported Service” discusses Netflix’s addition of an ad-supported tier, how
this is in many ways superior to ads offered by TV, the pent-up demand from displaced TV
advertisers, the rationale behind the ad tier, and Netflix’s industry-leading low churn (while
rivals have all increased).
• Callout: "“Hey! This Isn’t a Film with Black Leads!” When AI Might Go Too Far" discusses Netflix’s AI showing thumbnails featuring black actors when they actually only played a minor
role in the film.
• Subsection: “Sports and Streaming.” While Netflix is currently a non-player in live sports, these
broadcasts are a compelling and uniquely differentiated good—held by a single rights holder
and unavailable from anyone else. The increase in streaming services that are bidding on
sports, the fragmentation of sports viewing, and an increasing cast of bidders driving up prices
is an opportunity for faculty to discuss product characteristics, market dynamics, and the role
of data in driving decision-making.
• Callout: "Games Are Finally Included with Netflix. Does Anyone Care and Will Games Ever
Have an Impact?" shows that Netflix now offers free games. This section discusses the challenges in trying to make this market have an impact. It’s a very uncertain experiment.
• The section “Hacking Corporate Culture” has been eliminated. It was old and the firm has instituted several policy changes, while the section seemed to add little to the strategic and tech
focus of this chapter.
• New videos include the following:
• "The Story of Netflix: 25th Anniversary, Netflix"
• "Netflix Ending DVD-by-Mail Service with Disc Giveaway"
• "Netflix's Side Quest: A Deep Dive into Its Ambitious Plans to Become a Gaming Giant"
• "How Netflix Serves 167M Users"
Chapter 6—Moore’s Law and More: Fast/Cheap Computing, and What This Means for the Manager
• More information in “AI and Machine Learning—Faster than Moore’s Law” shows that artificial
intelligence—one of the most significant trends in computing performance—is moving even
faster than Moore’s Law.
• Some definitions now refer to “the late” Gordon Moore, as he has died since the last edition.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• Yottabyte added to bits and bytes table. FYI: It’s predicted that by the 2030s, about one yottabyte of data each year will be generated. If a yottabyte were etched onto DVDs and stacked
vertically, it would reach all the way to Mars.
• Waves of computing now mentions wave seven—artificial intelligence everywhere.
• Included info on Apple’s A17Pro chip, which uses a 3nm process that, according to the firm, is
only “10 silicon atoms wide.”
• Chapter section: “The End of Moore’s Law? But Not the End of Fast/Cheap Computing!” Makes
clear that although we’re hitting the limits of packing transistors on chips, we are still seeing
dramatic fast/cheap computing improvements. Architecture advancement is described using
Apple M1 as example, downside of a loss of compatibility is explained, as are solutions Apple
used—an x86 emulator and new compilers.
• Cloud computing is now described as a way to enable tasks that simply couldn’t be done on
the device alone. Siri is described and the concept of latency is introduced. Managers are challenged to think about if they can address switching costs from an architectural shift, and
identify tasks that can be offloaded for performance improvements despite latency issues.
• Subsection now named “IoT—the Internet of Things: Tech Is Everywhere!” Updated examples
include the new Raspberry Pi Pico W microcontroller that’s a Wi-Fi device capable of running
Python and costs only $6.
• Updated subsection “Moore’s Law Inside Your Medicine Cabinet . . . and Your Colon.” Removed
reference to Proteus, which filed for bankruptcy, but included newer updates, including how
Medtronic and Amazon used PillCam for telehealth remote diagnosis during the pandemic.
• eWaste statistics updated. Also, while the notorious e-waste site Agogbloshie in Ghana has now
been shut down, this resulted in several problems—from scrappers who lost their only form
of wage-earning, some who lost their homes, and only to see toxic recycling disperse to other
parts of the nation. Students are challenged to think about ways to channel outrage beyond
documentary-making into durable results with lasting impact.
• Disney MagicBand case updated. Mentions third iteration—MagicBand+. Includes definition
of haptic (the new band has haptic feedback). Additional information on benefit of MagicBand
and its expansion to other parks and Disney Cruise Line.
• New videos include the following:
• "How Are Microchips Made?"
• "AI: Moore's Law Is Being Decimated": By “decimated” the author means actually it’s being
outperformed by other advances, furthering the focus of the chapter that “fast/cheap computing” continues despite Moore’s Law slowing down.
• "A Sneak Peek inside Intel’s Supercomputing Lab"
• "How 6 Million Pounds of Electronic Waste Gets Recycled a Month": Profiles Sims Lifecycle
Services, a woman-owned e-waste recycler in Sims, Tennessee.
• "How a Robot Recycles Our Electronic Waste": A demonstration of Apple’s Daisy Robot,
which can recycle 24 models of iPhones, 2.4 million units a year.
• "MagicBand+ Overview"
Chapter 7—Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
• Acknowledges that Professor Clayton Christensen has passed away.
• Significant rewrite of subsection: “Intel—A Study of Disruption in Progress.” New updates on
ARM’s competition with Intel, but also adding information on Nvidia and how the firm rose to
be one of only five firms to achieve a $1 trillion market cap. This section also further explores
generative AI and machine learning, and how Nvidia has leveraged the rise of systems like
OpenAI’s ChatGPT to grow markets.
• Chapter section: “Additive Manufacturing—Is 3D Printing Ready to Disrupt?” The promise, failure, and rise of additive manufacturing is discussed.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• Significant updates to chapter section renamed: “Tech to Consider: Crypto, Blockchain, and
DeFi—Cesspools of Scammers or Disruptive Technologies?” Several developments are added
to this section including the following:
• Defining and discussing DeFi or decentralized finance.
• The collapse of the TerraUSD stablecoin. The collapse of FTX and Alameda Trading (Sam
Bankman-Fried’s firms), and the role this played in the “crypto winter.” The collapse of the
NFT market (including Justin Bieber’s million-dollar blunder buying a digital chimp).
• Mentions the adoption of Bitcoin as legal tender in both El Salvador and the Central
African Republic, with reasons why the CAR reversed itself roughly a year later.
• The addition of digital finance is substantial.
• Fidelity Investments, the world’s third largest mutual fund and asset management firm,
has a crypto group of over 600 employees and has pioneered multiple financial innovations
using these technologies.
• Callout: "Can China's Digital Currency Disintermediate the Dollar?" discusses governmentissued central bank digital currencies (CBDC), compares them to stablecoins, and explores the
motivation, struggles, and success behind China’s e-CNY, perhaps the world’s most aggressive
CBDC effort. The mBridge effort linking the e-CNY to other central banks is also introduced.
• New videos include the following:
• "The Competition for ARM’s Technology Is Ferocious"
• "How Nvidia Grew from Gaming to AI Giant, Now Powering ChatGPT"
• "3D Printing a Home: Step-by-Step Overview, SQ4D"
• "Why 3D Printing Is Vital to Success of U.S. Manufacturing"
• "The FTX Collapse, Explained"
• "What Is DeFi, and Could It Upend Finance as We Know It?"
• "China’s Digital Currency Revolution"
• "What Is Web3?"
Chapter 8—Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
• The introduction has been significantly re-written and streamlined, with updated information
on Amazon’s size and its leading position on a wide variety of markets, and presented in a way
that sets the stage for the chapter’s many sections.
• Streamlined: “The Emperor of E-Commerce” section. The “Robotics” section has been significantly updated. Amazon now deploys over a quarter of a million robots throughout its facilities. A series of new robots operate autonomously alongside humans (instead of scurrying
inside caged areas), and a new robot arm can grasp about 65 percent of the packages Amazon
sells, taking on some picking tasks normally done only by humans.
• Amazon may soon replace the “shelf-toting” robots with newer robots that bring a bin at a time
containing only those items a worker needs to choose. This not only improves accuracy, it’s also
ergonomically easier on employees since trays arrive at waist height and workers no longer
reach up or down to grab a product from a shelf.
• Information is also provided on robot–human interaction, designing robots that are easier for
humans to understand (e.g., that slow instead of abruptly stop, that include visual cues like
eyes and shape-shifting screens).
• Updated information on Amazon Brands (it is eliminating most of its own brands), with reasons why the firm has made this decision.
• Eliminated information on Amazon Business (competing with Granger and Staples). The info
didn’t seem to add much to the strategic discussion of the firm, and it was a good opportunity
to slim the chapter and make room for more relevant info.
• Updated information on Amazon Prime (costs, scale).
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• Updated information on Amazon’s massive ad business. Related: Why so many firms feel compelled to use this, and the potentially eroding customer and seller experience on Amazon.
• Callout: "Are Maturing Firms Degrading Customer Experience to Pursue Growth?"
• Information on how you can organize a visit to an Amazon fulfillment center is also offered in
exercises.
• “The Lord of Logistics” has been updated with the latest data and operations info. The section
mentioning the Scout delivery robot has been eliminated since that effort has since been abandoned.
• The “Beyond Clicks: More Bricks” section has been significantly updated and retitled as
“Reworking Brick-and-Mortar Retail: Failed Experiments but New AI-Fueled Tech.” The section
now covers the closing of Amazon Books, 4-star locations, Amazon Style, plus popup stores.
• The section on “Amazon as Your Campus Bookstore” has been removed. It seems Amazon has
not aggressively expanded the program. They’ve even dropped their old textbook rental business.
• Callout: "Pay with the Hand" discusses Amazon One palm payment, how it works, privacy controversies, and Amazon’s response to concerns.
• Consumer electronics section has been restructured and updated significantly. Now named
“Amazon’s Consumer Electronics (Kindle, Fire, Alexa) and Amazon as Publisher (Twitch, Print,
Games, and Video),” the chapter now emphasizes the wins (Kindle), losses (Fire Phone), and
mixed results (dominant but money-losing Echo/Alexa).
• The subsection on the Halo has been eliminated since this product has been dropped.
• Lots of updated stats on Amazon streaming, the latest costs, success/failures, and the new
push into advertising.
• Alexa is now embedded into 1 billion devices.
• Data and market updates in AWS/cloud computing section
• Chapter section: “AI at Amazon: Powering the Firm and For Sale to Others” discusses:
• how Amazon uses AI in almost every function it provides.
• Amazon’s various offerings in AWS, from tools provided by third parties to Amazon’s own
infrastructure and IT tools.
• several examples, including CodeWhisperer (and how Amazon addresses legal concerns
with AI code generation tools).
• Amazon’s HealthScribe as an example of AWS AI verticals.
• the difficulty in using AI for health care (privacy, security) and highlights that AWS has
addressed these to gain US HIPAA compliance.
• Amazon’s need for and creation of two AI chipsets.
• AI’s use in Thursday Night Football is highlighted, including technologies that won Amazon an
Emmy award for interactive live event experience.
• Amazon’s investment in Anthropic is highlighted, and this is also used to contrast AI techniques: RLHF versus Constitutional AI.
• New question mentions Amazon’s free AI Ready courses. Some instructors might want to use
the new question/exercise that refers students to the variety of free Amazon AI Ready courses
for course or extra credit work.
• Chapter section: “Is Amazon Too Big?” Includes an exploration of the current U.S. Department
of Justice (DOJ) investigation of Amazon.
• Chapter section and mini-case: “Shopify—A Decidedly Different E-commerce Player.” Contrasts Shopify with Amazon. Students learn about Shopify’s tools and how the firm makes
money. The rise of Shopify during the pandemic is contrasted with the problems that arose via
rapid growth, and the various factors that conspired to result in billion-dollar losses. The firm’s
adjustments are also examined, along with the rise of new competitors.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• Note: A proposed exercise suggests students form teams and run a Shopify business. Students
should find a supplier willing to drop-ship goods. Teams should also investigate how to advertise on social media, including TikTok and Meta platforms. While there is a cost to set this up,
perhaps faculty can justify costs split among team members as students will save on textbook
costs through FlatWorld. Also note that students gain significant skills through this exercise
that they can add to their resumes and talk about during internships and job interviews.
• New videos include the following:
• "How Giant Is Amazon?"
• "Introducing the Full Amazon Robot Lineup"
• "Up Close with Amazon's Sparrow Robot"
• "How Amazon Beat Supply Chain Chaos with Ships, Containers and Planes": This is a fascinating video that will give students a perspective of the complexity, steps, and ingenuity
Amazon uses when shipping products. It also covers how the firm modified processes during the recent supply chain crisis.
• "Inside Amazon’s Meticulous Same-Day Delivery Strategy, WSJ Shipping Wars"
• "Amazon Wants You to Just Walk Out of Whole Foods Now": A great tour that shows all the
tech that enables tricky checkout, such as weighted produce, deli items, and salad bar purchases.
• "How Amazon Changed Whole Foods, Five Years Later"
• "Amazon Go—SNL": A humorous look at why some might not be enthusiastic adopters of
certain tech.
• "“Alexa, Let's Chat”: Experience New Alexa Capabilities": This video shows the AI chatbot
features of Alexa, albeit in an Amazon promotional video that’s kind of corny.
• "Top 50+ AWS Services Explained in 10 Minutes": A nice technical overview of AWS services
and why they might be used.
• "A Quick Look at the Amazon Q Corporate Chatbot": AWS’s own ChatGPT-like generative
AI service.
• "How Amazon Is Using AI to Deliver Orders Even Faster"
• "Using Style Snap While Shopping on Amazon Fashion"
• "AI Race Heats Up as Amazon Bets Big on Anthropic"
• "FTC Sues Amazon"
• "The Insane Rise and Fall of Shopify"
New Chapter 9—Shein and Temu: E-commerce Giants from Asia Grow Globally
• The chapter explores the stellar rise of e-commerce–only fashion firm Shein (pronounced “shein”). The firm has grown to be the #2 fashion firm in the world, online or off, behind only
Inditex, and has an online shopping app that has consistently ranked ahead of Amazon’s in
downloads in many nations worldwide. The chapter discusses how the company leverages
information technology to replace key parts of Zara’s value chain for an even more efficient
model. The firm’s app and website use the discovery model popular in China, rather than the
search model popular with Amazon. Flash sales, specials, and other gamification techniques
keep customers coming back and provide more data on individual customers and broader
trends. Online ads and aggressive data gathering via social media also allow the firm to leverage artificial intelligence to suggest designs for product creation. These designs represent a
new-area of AI-enabled work, where designs are prompted by AI and workers are more evaluators, assemblers, and curators of AI results. Information systems also helps the firm work
with thousands of contract manufacturers, linking them to Shein systems. Manufacturers produce very small product runs of many more products than even Zara produces. This allows
Shein to go from designing to shipping product in as little as three days for some goods. Shein’s
offerings are often a sort of A-B test where goods shown in online ads and surfaced in inapp discovery indicate if a design should be expanded and a larger product run is warranted,
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
leading to even less unsold inventory that Inditex. Shein suppliers ship directly to consumers,
taking advantage of what’s known as the de minimis provision, allowing shipments less than
$800 to skirt import taxes, tariffs, inspection, and inspection-related delays that larger, traditional warehouse shipments are subject to.
• The weaknesses in Shein’s model are also explored. AI-suggested products with limited oversight have led to many failures, including culturally insensitive products and products that
have stolen the intellectual property that others have shared via social media—allowing students to think critically about both building better AI and the role of human oversight in AI
solutions. Shein’s human rights and environmental record is also examined, and students are
asked to think about how changes in the de minimis provision will impact the firm.
• Shein's future is also examined, including growth strategy and the launch of a marketplace
platform similar to Amazon’s. Students are challenged to think about how having more products and new models changes the firm’s existing information systems and issues related to
these changes. Shein competitors: Amazon, Alibaba, TikTok’s new shopping initiative, and,
most significantly, Temu are also introduced.
• There are several videos and images in the chapter, and faculty should find exercises effective
in preparing students for lively in-class discussions and debates that improve their critical
thinking on information systems, AI, ethics, growth, and competition. Videos include the following:
• "The Rise of Shein"
• "Social Media Influencers Facing Backlash over Videos Promoting Shein"
• "How Temu Makes Money from $10 Smartwatches from China"
Chapter 10—Platforms, Network Effects, and Competing in a Winner-Take-All World
• Updated intro section includes more international firms (Shopify, Spotify, several Indian firms
join Chinese firms mentioned in earlier editions) and mentions EV charging standards.
• Updated top eight firms in U.S. market cap are platform firms.
• Included information on Apple Vision Pro in section on creating platform value.
• Notes that VisionPro was introduced during Apple’s World Wide Developer Conference
months before shipping, specifically to give developers time to adapt existing offerings to
Vision Pro and create new products and services for the platform.
• Updates and new stats for the Roblox mini-case.
• New subsection: “Electric Vehicle Charging Standards: Everyone versus Tesla—and It Looks
Like Tesla Won.”
• New content for question challenging students to consider both sides of the “regulate them
and break them up” versus “leave free markets alone” debate, also challenging students how a
manager at a dominant tech company may proactively respond to concerns.
• Replaced GiltGroupe iPad adaptation with three examples of firms offering subsidies to grow
the customer side of a two-sided customer firm partner market. These are Groupon, Upromise,
and SwagBucks.
• Removed discussion of virality mentioning Skype and Whats App with general discussion of
how most social media sites leverage viral recruitment.
• New example shows Shein and Temu leveraging social proof and viral promotion along with
subsidies. It’s noted that the Temu app is now the #1 shopping app in the United States, while
Shein also outranks the Amazon app in several markets worldwide.
• Updated section on Blue Ocean Strategy by offering additional examples of firms that have
found new, large, unaddressed markets, including Uber, SalesForce, and SyncOnSet.
• Closed versus proprietary standards mentions EV standards battle.
• Distribution channels discussion also mentions OpenAI’s investment by and partnership with
Microsoft to bring ChatGPT into a broad range of consumer and office products.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• New callout section: "Lessons from the Rise and Fall and Perhaps Rise Again of
Threads—Meta’s Challenge to Post-Musk Twitter (Err, X)" lists several ways in which Elon Musk
made Twitter a more hostile place for both users and advertisers after acquiring the firm and
rebranding it as X. Meta’s creation of Threads as an alternative launched the world’s most
rapidly adopted app—garnering 100 million users in less than a week. Threads was built by
leveraging the Instagram platform—a 'gram account got you into Threads with the same user
name. You’d follow everyone you’d followed on Instagram when they showed up on Threads,
too—and your 'gram followers would automatically follow you on Threads, too. But Threads
launched with a host of missing features, and usage dropped as rapidly as it grew. While competition is early and Threads has yet to implement the open ActivityPub standard that would
integrate it with the broader “Fediverse” of sites, Threads provides a great “lab” for understanding network effects, switching costs, platforms, and the importance of value in developing new
services.
• “Leverage Backward Compatibility” section now discusses backward compatibility’s role in
Apple’s seamless (even market-share-gaining) transition from Intel to Apple Silicon.
• New section: “The Apple Platform Cashes In on Banking.” This is one of several additions
related to fintech, finance, and banking in this edition. Apple’s platform has been used to
aggressively move into consumer banking: Apple Pay, Apple Credit Card, the Apple Savings
Account, and Apple Buy Now Pay Later are all introduced. Each effort is discussed, along with
how these efforts compare with traditional bank offerings. Apple’s partnership (or lack of partnership) with others is also offered. Information on Apple payments and revenue generated
from Apple Pay is also discussed, as are bank rival platforms, including Paze and Zelle, that are
targeted at competing with fintech by Apple, Google, PayPal, and Amazon, among others.
• Brief update on Zoom’s post-pandemic performance included in Zoom mini-case.
• New videos include the following:
• "Apple Vision Pro Impressions!"
• "The Incredible Logistics of Tesla's Supercharging Network"
• "Can Bing and OpenAI Challenge Google? Microsoft's Satya Nadella Weighs In"
• "Twitter versus Threads Is More Interesting Than You Think"
• "Apple versus Banks: The Digital-Wallet War, Explained"
Chapter 11—Social Media, Peer Production, and Leveraging the Crowd
• Major updates in the Chapter 11 Introduction, including to the current stats on major social
media platforms. Cleaned out less relevant ones and added information on TikTok.
• Peer-production example of Apple’s AirTag offered: Many think Apple’s AirTags support
GPS—they don’t. GPS is costly, both in terms of hardware and battery life. Instead, AirTags simply broadcast their signal using Bluetooth Low Energy and any nearby Apple device will pick
up the broadcast and forward it to the Cloud so that its location can be identified. So if you’re
an Apple device owner, you are peer-producing the “Find My” AirTag feature.
• Blogging includes info on Substack—compares number of paying subscribers to major news
organizations.
• Trimmed key terms on trackbacks and blog rolls—these are less important in an age of Substack/Medium blogs.
• The rise of Glossier to a billion-dollar valuation from a beauty blog is still relevant and inspiring, although the brand suffered a bunch of non-tech-related missteps. A mention of this along
with a book chronicling the issues is now linked in the Glossier callout.
• Old Spice example replaced with 250,000 post, 450 million view, record-breaking TikTok
#GuacDance campaign by Chipotle.
• Blogging info is cleaned up, deleting less popular tools, describing network effects of WordPress, and mentioning Medium and Substack.
• Dollar Shave Club video removed from “Blog” section—didn’t seem to fit well there.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• New section: “Substack: A Booming Self-Publishing Platform. Is Your Professor Writing
There?” Discusses the fast-authoring newsletter-creation platform that has paid over $300
million to self-publishing authors so far. Many academics and well-known journalists are
bypassing traditional publishing gate-keepers and creating lucrative careers or side-gigs as
Substack authors.
• Added key term content adjacency problem—advertiser concern their brands may appear next
to unflattering content.
• A new exercise suggests students create a Substack or similar blog and work with the professor
to make this an assignment for the course. Many former students have found that blogging
about firms and industries garnered interest from staff in the firm's covered. This can also be a
useful way for students to use social media to show additional interest in and commitment to
a given industry—a great resume add and distinguisher during the job search and beyond.
• Additional callout: "Wikipedia: Trainer of AI, Destroyed by AI, or Both?" discusses how
Wikipedia and its non-profit foundation is perhaps the most influential site in training generative AI, yet also that generative AI poses a threat to Wikipedia. Discusses how Wikipedia
itself uses AI, has developed API tools to work more closely with other organizations, and how
it might evolve to maximize potential and minimize the threat of generative AI.
• New key term: corpus (as in data used to train an AI model)
• Updated information on social networks, defunct services were removed from the discussion,
stats were added, updated, or refreshed, TikTok information, and information on LinkedIn
influencers.
• Influencers is also defined as a key term, and size of the influencer market is given.
• New callout: "Spotify Wrapped: Give It Away and Go Viral" shows lots of data on a social share
that has become an annual Internet “event.”
• Workplace from Meta has replaced Facebook for workplace.
• I removed the discussion of MyStarbucksIdea and Dell’s IdeaStorm. These were both great former uses of social media, but neither is active anymore.
• New mini-case replacing the old one on Twitter: “X: The Death of Twitter or the Rise of a Super
App?” The case covers the rise and influence of Twitter and Musk’s acquisition. Musk’s multiple
technology changes and their impact on limiting Twitter reach are also discussed and related
to concepts such as network effects and switching costs. Musk’s erratic behavior is also examined with respect to X and his other firms. His aspiration to turn X into a “super app” similar
to China’s influential WeChat is also examined. Many of the examples of effective corporate
use of Twitter are also included and updated in this section. A host of new exercises are also
included.
• New key term: doxxing
• Note that Innocentive has been purchased by Wazoku.
• United Breaks Guitars is replaced with feminist and body-positive anthem, the Jax TikTok hit
“I Know Victoria’s Secret.” The song’s origins and impact are detailed, along with how TikTok’s
platform was particularly impactful in its influence. Lots of data is offered, Victoria’s Secret’s
CEO response is shown, as are Jax’s follow-up. One thing to note—in just months the video
had over twice as many views on TikTok as United Break Guitars earned on YouTube in over 14
years. This will be a great discussion point for how firms should monitor and respond to viral
criticism.
• New chapter section: “TikTok—The World’s Addiction.”
• Example and stats in the “SMART” section are revised and updated, and old examples that are
no longer relevant (e.g., MyStarbucksIdea) have been removed.
• Tweets from the Untrained now renamed to “Posts from the Clueless.” The Kenneth Cole
graphic is replaced by a Shein tweet on MLK day that quotes the slain civil rights leader in its
discount promotion—crossing lines of both tackiness and offensiveness.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• Note that throughout the chapter, X replaces Twitter for contemporary mentions, while Twitter
and tweet remain for incidents that happened when that was the name of the firm.
• New callout: "Taylor + Travis = NFL TikTok Gold" shows examples of how the NFL sought to
expand its visibility by reaching out to Taylor Swift fans. The buildup happened during the
summer when Swift had repeatedly performed to sellout crowds at NFL stadiums, but hit a
peak when the hitmaker was spotted at a Kansas City Chief’s game cheering on Travis Kelce,
one of the league’s biggest stars. A viral TikTok trend was also started where Swift fans punked
their football fan significant others, stating “Swift will make this guy’s career” (Kelce already
had two Super Bowl rings, multiple endorsements, and a hit podcast). Data on the impact is
offered, including the boost in ticket and jersey sales, and increased followers.
• New videos include the following:
• "Substack versus The Giants: Challengers"
• "Jimmy Wales: Wikipedia and Generative AI—What Does the Future Hold? With AnneMarie Imafidon"
• "How Spotify Wrapped Collects User Data without Being Creepy, WSJ Tech News Briefing"
• "Why It's So Hard for Meta, PayPal, and X to Build a Super App Like WeChat | WSJ"
• "Linda Yaccarino Defends Elon Musk, X, and Herself at Code 2023"
• "Taylor Swift–Travis Kelce Romance Rumors Boost Sales for KC Chiefs, GMA"
• "Crowdsource by Google: Building Better Products for Everyone with Machine Learning": Have you ever responded to “Are You A Robot?” by identifying images? You’re crowdsourcing in a way that helps train AI. Google’s brief video shows the type of data that the
firm collects via the crowd, and how the firm uses it to improve AI and machine learning.
• "Jax—I Wrote a Song Called “Victoria’s Secret” and I Always Wanted to Be Part of a Flash
Mob": Warning... If you’re sensitive like me and have daughters, you might want to have a
tissue on hand when watching this. It’s pretty powerful.
• "Uber CEO Kalanick Argues with Driver, Caught on Tape"
Chapter 12—The Sharing Economy, Collaborative Consumption, and Efficient Markets through
Tech
• Updated information on leading sharing firms, including removing firms that have gone out of
business and adding ones that are more significant.
• New section: “What’s the Circular Economy?” Discusses the overlap of Sharing Economy players with the overall Circular Economy. The CE is defined, examples of participants are offered,
and renewed effort by global financial institutions including the World Bank to back CE innovation are all discussed.
• Updated information on the Airbnb case on the profitable and now public company that has
also been invited to be part of the S&P500.
• A series of customer and host concerns—including a large number of fake listings, add-on
fees, and listings not conforming to photos and descriptions—prompted a host of new features, including an AI-driven verification scheme where hosts must prove they are on-site
and take real-time photos of a property in order to receive a “verification” check.
• More information on increasing amount of legislation curtailing Airbnb, including 2023
laws in NYC that effectively ban the service.
• Lots of updates to the Uber case, including details on the firm’s post-IPO march to eventually
reach profitability.
• Advertising is growing into a $1 billion business for Uber.
• Uber’s advances in safety are described. They have gotten so strong that the firm has introduced Uber Teen—additional tech-delivered safety measures are discussed.
• More details on Uber’s use of AI, including fraud detection, risk tracking and assessment,
processing of documents submitted by drivers, driver verification process, service predic-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
tion, and the use of generative AI, also provide ways for drivers to get better instant
feedback, such as details on where to make a pickup or where to go next. There’s also a
link to Uber’s AI group and their blog posts for students interested in further exploring this
topic.
• Information on use of APIs to bring non-Uber services inside the app, including train, bus,
flight, car rental, and hotel. This is already launched in the United Kingdom and is being
rolled out in other markets.
• New videos include the following:
• "What Is the Circular Economy?"
• "The Airbnb Effect: Why Second Homes Have Become So Divisive"
• "Airbnb Rolls Out New Features, CEO Says They Will Be “Growth Driver”"
• "Uber Finally Makes a Profit . . . What Took So Long?"
• "Uber CEO Khosrowshahi on Profit, Autonomous Vehicles, AI": Uber’s CEO discusses the
firm’s profitability, running a tech team with three leaders, and the use of AI in the firm,
currently and in an autonomous future.
Chapter 13—From Facebook to Meta: Platforms, Privacy, and Big Business from the Social Graph
• While there are more subsections in this chapter, some have been moved, and many sections
have been removed to keep the chapter current and a manageable size.
• Chapter is renamed with Meta as the firm’s proper name, and Meta platforms now get more
complete coverage.
• The intro section has been significantly updated with new data, information on failed projects,
new controversies, losses, layoffs, and a profit- and-growth rebound.
• Section on Sheryl Sandberg has been removed, as she has left Facebook.
• The second section is now named: “Features and Competitive Advantage of Facebook and
Other Meta Services” and includes quite a few updates: Graph Search is dead, so the section
introduces the concept of “deep web” while also illustrating problems that occur when showing results from searching the social graph. Lots of stats have been updated, old products have
been removed, a new litany of failed products is also offered.
• New subsection in Instagram discussion: “TikTok Threatens. AI-fueled Reels Is a Success But
Not a Killer.”
• New callout: Chapter 13 Section 3 recaps the rise, pullback, and rise again of Threads and points
readers to more in-depth coverage in Chapter 10 and Chapter 11.
• Discusses the firm’s first, failed attempt at creating a TikTok clone (Lasso) and the firm’s subsequent Reels effort. Reels uses AI tools, encourages cross-posting between Meta platforms, and
is already a larger business for advertisers than all of TikTok. Reels has also boosted Instagram
time by 24 percent.
• New chapter section: “The Metaverse and Meta on Your Face—Billions in Losses, but Does a
Big Payday Await?”
• New subsection: “So What Is ‘The Metaverse?’”
• Metaverse is defined and framed regarding how this relates to the Internet. Students will
learn there is not one “metaverse,” but likely many platforms, currently largely proprietary,
and that this differs from the early Internet, which created so many standards we rely on
today (e.g. Web, e-mail, HTML, jpeg, mp3, etc.).
• Predictions on the impact of the Metaverse are presented, along with the many, many challenges that must be solved if these predictions are to be realized.
• New subsection: “When Will This Thing Make Money?”
• Documents the woes of the Oculus Unit (over $31 billion in losses, dramatically low MAUs
for HorizonWorlds free virtual community, etc.) and what Meta is doing to try to switch
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
21
course. The new AR/VR mixed-reality Quest 3 headset is discussed, along with its relation
to and contrast with Apple’s Vision Pro. Several strategic issues for platform creation are
brought out in this section, relating this material to core concepts in the text.
• New subsection: “Ray-Ban Meta Smart Glasses—Not Metaverse, Yet”
• The second iteration of Meta’s Ray-Ban smart glasses is described, past weaknesses are
discussed with stats, issues of privacy raised, and potential for platform innovation mentioned.
• New chapter section: “AI: Essential to Meta’s Success.”
• You’ll find AI mentioned in most chapters in this update. The Meta chapter is worthy of a separate section on AI, all its own, which covers the following:
• Meta’s extensive use of AI across the firm in ways that have been vital to its success.
• Meta’s contribution to open source AI, such as PyTorch.
• The firm’s Llama 2 general AI model, which is open sourced. The advantages, challenges,
and risks of this offering are discussed, including its ability to run on edge devices.
• Meta’s DALL-E/Midjourney rival, EMU, is mentioned. Not open sourced, but incorporated
into things like photo editing and sticker creation. Various gaffes in the rollout, including
the creation of potentially offensive and terms of service–violating stickers, are discussed.
• Meta’s new Entertainment AI chatbots with celebrity themes.
• CodeCompose—a programming helper AI tool.
• Stats on effectiveness are offered, along with a discussion of how Meta’s offering compares
to Microsoft’s GitHub CoPilot.
• Students are also challenged to think about how tech may change the job of programmers
and other non-technical workers.
• And Meta’s custom chips (GPUs and ASICs) are also mentioned, with a nice reinforcement
of topics raised in Chapter 6.
• Statistics in the section “Lessons from Meta’s Platform Expansion: Big Growth, Bad Partners,
APIs, and a Mobile Melee” have been updated.
• The new WeChat stats may be especially interesting given Musk’s interest in turning X into
a super app (covered in the social media chapter). Some faculty may wish to combine the
WeChat reading here with the X reading in that chapter.
• To streamline the chapter I’ve eliminated the subsection “APIs, Playing Well with Others, and
Value Added: The Success and Impact of Open Graph”; as well as the subsection “Strategic Concerns for Platform Builders: Asset Strength, Free Riders, and Security.”
• Much of what Meta has tried to do outside of its own services is being limited with the rise
of third-party cookies and Apple’s requirement that users agree to data sharing. This will also
help the chapter from being “too big,” although faculty should always feel free to only focus on
areas they think are most relevant to cover.
• Given the strength of the chapter “Advertising Technologies” introduced in the last edition,
and in order to keep chapter sizes under control, I’ve decided to eliminate the old subsection
named “Advertising and Social Networks: A Challenging Landscape but a Big Payoff.” Many of
the issues discussed here are impacted by the elimination of third-party cookies and Apple’s
requirement of opt-in tracking. I think the advertising chapter does a good job of covering the
current state of the ad market, and ad issues continue to be mentioned in other parts of this
chapter, so I don’t think this section as useful as it had once been.
• The subsection “Challenges of Going Global: Low ARPUs, Legitimate Rivals, and Unreachable
Users” has also been eliminated. Most of the more salient issues are covered throughout the
text, which is heavy on global firms operating with technology and working in the digital economy.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• The subsection “The Admirable Goals and Unintended Consequences of Internet.org” has been
eliminated since Meta has largely stopped Internet.org efforts in the way initially envisioned.
• New videos include the following:
• "Mark Zuckerberg Talks Meta, AI, and Martial Arts with Forbes "
• "Is WhatsApp, Facebook’s Biggest Acquisition, Paying Off a Decade Later?"
• "TikTok versus Instagram Reels versus YouTube Shorts: Who Will Win the Short-Video
Race?, WSJ"
• "Watch Zuckerberg Demo Quest 3 Headset"
• "Meta’s Ray-Bans, Hands-On: These Glasses Now Stream to Instagram"
• "Meta's Llama 2: The Doomsday Weapon AI That Could End Humanity"
• "Gen AI–Assisted Code Authoring at Meta"
• "Zuckerberg Brings AI to WhatsApp, Instagram"
• "Here's How Essential WeChat Is to Everyday Life in China "
Chapter 14—Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with
Fashion
• Several updates—the firm has since gone public, but the share price has gone from above $17
post IPO to less than $1 by fall 2023.
• Information on firm’s new retail collaborations with Amazon, Nordstrom Rack, and Saks Fifth
Avenue.
• Acknowledgment of the firm’s triple challenges—warehouse issues, pandemic, and inflation—and how this has made it difficult to accurately prediction churn rate and CLV.
• The section “Subscription Bigger than Rental” has been moved forward since this is now,
clearly, the bread and butter of RTR’s business.
• Information on the firm’s use of analytics in strategic choices, such as expanding inventory
depth, moving from unlimited returns to a certain number based on subscription tier, and
avoiding discounts but favoring increasing the number of products one could subscribe to.
Analytics are especially vital in a firm doing business where there is no precedent and metrics
can’t be easily estimated.
• Information on AI use: The firm incorporated AI in search. Vague terms that mean something
to humans but not conventional search can now be used based on models built using the firm’s
proprietary data. Think results from: “clambake in Nantucket,” or “Miami vibe.” AI will also be
incorporated into a text-based customer concierge service for providing additional customer
support.
• RTR’s chief supply chain officer is a veteran of Amazon’s grocery biz. Since arriving, he has
deployed more than 1.5 million RFID tags that track items and automate distribution into one
of 26 proper bins so goods get an optimal cleaning.
• New section: “Worn with Love and Still Good—Retail Partnerships.”
• Discusses how RTR has begun selling inventory past its useful life directly on its site as
well as through several partners. Section also includes information on the partnership with
W-Hotels, offering destination-specific clothing (e.g., ski wear for Aspen), delivered to guest
rooms and sent back to RTR when guests check out.
• New info on competitors—Gap’s Banana Republic stopped their service, Urban Outfitters
Nuuly is expanding very aggressively and has seen customer growth, but is still losing money.
Le Tote, mentioned in the last revision as an RTR competitor that also bought Lord and Taylor,
has also gone bankrupt. It’s suing Urban Outfitters, claiming the firm stole its secrets when creating Nuuly.
• New videos include the following:
• "Rent the Runway on Post-Pandemic Comeback "
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• "How Rent the Runway Is Moving Your Closet to the Cloud": RTR’s Chief Technology Officer
discusses how the firm uses Amazon’s AWS cloud to scale the firm’s custom personalization
technology. The video also provides an additional look at the RTR distribution center floor.
• "How Urban Outfitters Is Winning the Clothing Rental Game"
Chapter 15—Understanding Software: A Primer for Managers
• Updated stats with fresher facts and figures.
• Updated “Hardware Layer Cake” with more contemporary examples.
• Updated examples on various types of operating systems, and a new graphic on updated
smartphone market share comparing the United States to China (graph is interactive, so you
can encourage students to visit this site and explore how data has changed over time).
• Clarified definitions of firmware and added key term for BIOS (Basic Input Output System) as
distinct from the OS.
• Note that Otis Elevator has been spun out of United Technology. The reference to UTC has
been removed from this edition.
• A new exercise encourages students to investigate their devices (PCs, smartphones, smart
devices) to see if there are any firmware updates, explore the reason for these updates, and
report these to the class. It may be interesting to see how many students are running outdated
versions of their devices, and to discuss possible implications of using devices that aren’t
updated (e.g., are they less secure, more prone to failure, capable of using the latest peripherals
or standards?).
• A new exercise encourages students to explore accessibility features on products.
• Enterprise response planning (ERP) failure at Avon added to the list of bungled rollout examples. This section also draws a connection with the five components of information systems,
mentioned in an earlier chapter, and notes that many of the firms failed to adequately consider the “data, people, and procedure” pieces when rolling out hardware and software.
• Discussion of server query over the Internet now mentions AI queries returned by Open AI or
Google Gemini (previously Bard) as additional examples.
• Expedia API use replaces HipMonk with API firm “Wheel the World”—a site for travelers with
physical challenges and accessibility needs.
• The scripting section has slightly updated information on Python, as well as a callout on the
CircuitPython programming language. This relates to concepts of open source and embedded systems, also covered in this book. Your author offers over eighty free-to-use instructional
videos on CircuitPython on his YouTube channel.
• New subsection: “AI Is Radically Changing Programming: Programmers Won’t Be Replaced,
Instead Everyone Will Be Coding with a Co-Pilot.” This section makes the case that large language models (LLMs) aren’t making programming go away, but rather will increase the amount
of executable logic that’s generated by all sorts of traditionally non-programming knowledge
workers. The section makes the case that all will need to understand the basics of logic execution and will require new skills to evaluate whether generated code will be accurate, reliable,
and won’t introduce security concerns. The examples of macro-generating AI assistants generating even more “billion-dollar spreadsheet blunders” is just one issue raised.
• New subsection: “Low Code/No Code—Programming without Coding.” Covers the basics of
low code/no code tools—what they are, which firms are offering them, what they can be used
for, how they can be used effectively, and the risks of using these tools and in empowering citizen developers.
• Also note the additional exercise at the end, which you might use as a project for the course,
encouraging students to choose an LCNC tool, find a need, build an IS, and present results
to the class. A great learning opportunity and resume builder!
• This section also includes a video showing how code generators like Microsoft’s GitHub CoPilot and Amazon’s Code Whisperer work.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• New subsection and mini-case: “Software-Centric Products Aren’t Easy: VW’s Electric Vehicle
Woes.” This section details VW’s many problems as it attempts to shift to more software-centric
product offerings (EVs). Many of the reasons for VW’s struggles are highlighted, and the impact
on firm finances, reputation, and executive careers is also offered. Students are challenged to
investigate other firms that provide examples of failed and successful conversion to digital,
software-centric firms and product offerings, and share key issues related to failure or success.
• This new section also includes two videos, one from an auto blogger chronicling the many
issues encountered after a year owning VW’s flawed iD4 SUV, and another that discusses
the battle for EV market supremacy, the major players, and key factors at work in various
major world EV markets.
• New videos include the following:
• "Get Inspired! Limor “Lady Ada” Fried Built a Multimillion-Dollar Hardware Business on
Open Source and Python"
• "The Best Low Code/No Code Tools": Provides a great visual overview so students can see
what these tools look like and how they are used. They also get pointers in the video for
additional resources if they’d like to explore more offerings and tutorials online.
• "Apple Previews Accessibility Features on Global Accessibility Awareness Day (GAAD)"
• "What Is Enterprise Resource Planning (ERP) Software?": A solid ten-minute overview
introducing various common functions of businesses, how these might be part of an ERP,
shared in a common database, and used in analytics. This may be especially useful to have
students consider the complexity of functions inside a business and how software impacts
all functions of nearly every employee of the firm. Students should also appreciate that
firms with well-integrated systems should have better operational efficiency and more data
for stronger decision making.
• "The Potential of Generative AI for SAP Code Development"
• "EPS Rapid: Expedia's Travel API Integration"
• "EV Expert Says VW ID.4 Is Junk; “VW Abandons Owners”"
• "Who Is Going to Win the Electric Car Race?"
Chapter 16—Software in Flux: Open Source, Cloud, Virtualized, and App-Driven Shifts
• Updated stats and examples.
• Alternative components to the LAMP stack now discussed. The “MEAN” stack is mentioned in
the area introducing LAMP, and the MEAN stack is offered as a new key term: MEAN being an
acronym for components used in distributed (usually web) development: MongoDB, Express.js,
AngularJS, and Node.js.
• Multiple new key terms are introduced, including front-end, back-end, (software) stack (and
related full-stack). These are common terms used when referring to software development, and
all students should really know what these refer to.
• Interoperability is added as a benefit of using open source software (OSS).
• Examples of firms’ paying staff and releasing their own OSS toolkits are offered (Google,
ExxonMobil, Walmart, Goldman Sachs, Meta).
• Updated and refreshed examples of OSS in Section 16.4.
• Paragraph on firms not realizing early benefits expected by cloud computing is now included
in Section 16.7.
• Removed old stats/chart on cost to run a website in various cloud providers.
• The discussion on cloud computing has been refined and clarified, introducing terms such
as service models: SaaS, PaaS, and IaaS and deployment models: public, private, and hybrid
clouds.
• New example of Bank of America turning to its own private cloud to save $2 billion.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• Cloud in action mentions Microsoft Azure power cruise self-driving cars, and Redmond’s $2 billion investment in the GM- and Honda-backed venture.
• Updated example on risks, mentioning an Amazon outage taking down all sorts of tech, from
Roombas to the learning management system Canvas (which your students may use for this
course).
• “Clouds and Tech Industry Impact” mentions NVidia’s rise to become a trillion-dollar firm
largely as a result of increased chip use by cloud firms’ needing computing to support AI/ML.
• Tour of Microsoft’s MASSIVE data center—shows hardware as well as power and reliability of
hardware.
• Microsoft’s Circularity Center—server hardware needs to be replaced roughly every five years.
Microsoft is working to repurpose and responsibly recycle its hardware components in a quest
to meet the firm’s environmental commitments.
• Information on Kubernetes, a component used to coordinate containers (such as Docker) is
introduced.
• New videos include the following:
• "The Rise of Open Source": Covers popular OSS products, funding models, firms offering
their own OSS products (including Walmart and Goldman Sachs), and issues related to
security, including the Heartbleed issues in widely used by under-supported OpenSSL software vital to the operation of much of the Internet.
• "How Cloud Computing Became a Big Tech Battleground"
• "Cloud Computing in Six Minutes": Discusses deployment models: public, private, and
hybrid cloud; and service models: IaaS, PaaS, and SaaS. This is a great supplement to chapter’s core concepts.
• "Microsoft Joins GM—Cruise Self-Driving Partnership"
• "The Era of Gen AI Is Here": A promotional video by Google that mentions clients such as
General Electric, Bayer, Priceline, and beauty firm Adore Me as users of Google’s cloud-based
AI tools.
• "Kubernetes in 100 Seconds": Shows Kubernetes as a conductor and various musicians in
an organization as Docker components.
Chapter 17—Data and Competitive Advantage: Databases, Analytics, and Prepping Data for Use
with AI
• Given the rising use of, impact of, and managerial necessity to better understand AI, the prior
sections on AI have been removed from this chapter and an entirely new chapter on AI and
machine learning follows this chapter.
• Updated stats and examples throughout.
• Callout on dynamic pricing is now called "Broadway Meets Big Data, and Also Offers a Sports
Ticketing Slam Dunk". Some of the older data on sports ticketing is replaced with an arts
example (hopefully broadening the appeal to students of all majors). The case of Disney’s
Broadway production of The Lion King is detailed. Additional info on sports ticketing, especially post-COVID, is still included and has been updated, as well. The Beacons technology is
now a new key term.
• Information included on data brokerage callout "Who’s Collecting Data about You?" detailing
how legitimate “header” data has been accessed by hackers, who are selling it for $20 in Bitcoin,
revealing a user’s address history, relatives and birthdates, state driver ID number, Social Security number, e-mail, mobile number, and SIM, enabling all sorts of nearly turn-key identity
theft and griefing.
• The “The Business Intelligence Toolkit” section now includes a discussion of “Generative AI for
Data Analysis.”
• Spotify content is moved to the AI chapter and updated/expanded with new material for an AI
focus.
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Information Systems
• Significant update to Walmart mini-case.
• Updated statistics and information. New content on Walmart’s use of warehouse robotics—use and impact on workforce. Also information on Walmart’s push into advertising,
with lots of in-store opportunities. Walmart’s acquisition and investment strategy is also
covered, with additional information on Walmart in India, its majority stake in Flipkart (ecommerce leader) and PhonePe (payment leader), and opportunities this offers the firm re:
Amazon.
• New videos include the following:
• "What AI Tools to Learn for Coding and Data Analysis?"
• "Dynamic Pricing, Explained: Why Prices Are Changing More Often, WSJ Price Index"
• "How Amazon, CVS, and Walgreens Are Tapping into the $4 Trillion Health Care Market"
• "Why Even Your Local Grocery Store Wants Your Digital Data": Loyalty programs, in-store
Wi-Fi, Bluetooth Beacons, and tracking cameras are all part of the new retailer data acquisition playbook. And much of this data is up for sale or being used for targeted advertising
and promotion.
• "Airbnb's Claire Lebarz on Leveraging Data Analytics"
• "A Look at Robots in Walmart Distribution Centers"
• "What Will Be Walmart's Future Strategy in India?"
New Chapter 18—Artificial Intelligence—The Tech Impacting Nearly Every Industry
• This chapter covers issues related to some of the most interesting and potentially impactful
technologies facing firms today—artificial intelligence. We dive into generative AI, offer a
managerial overview of how the technology works, and offer a glossary of key terms with
explanations so you’ll be ready for your next tech-focused strategy meeting. We cover how
firms are incorporating AI into existing products, discuss the risks and challenges of AI, why
working with AI can be so challenging for firms, and what firms can do to be more ethical
developers and users of AI, as well as better stewards for technology in general.
• Section 18.1: “AI, Write My Intro”
• Points out that Congressman Jake Auchincloss (who happens to be my congressman) delivered the first AI-generated speech of the floor of the U.S. Congress.
• The rest of this short section is completely generated by ChatGPT 3.5.
• Students are challenged to examine it in comparison with the rest of the text, and use it as
one of many touchpoints when considering the impact of GenAI covered later in the chapter (and indeed throughout the text).
• Section 18.2: “Generative AI: Whoa—This is Something Different!”
• Defines AI, GenAI, and other key terms.
• Video: "Generative AI: What Is It Good For?"
• Recommendation FOR “Me, Myself, and AI” podcast. Faculty note: having students choose
an episode of the podcast, summarize findings, and share with the class is also a useful
class exercise.
• Section 18.3: “So How Does This Stuff Really Work? A Manager’s Guide to Understanding
GenAI”
• A solid yet easy-to-digest managerial introduction on how generative AI like ChatGPT
works. Students gain knowledge of many key terms, including foundation model, LLM,
parameters, prompt, and well over a dozen other key terms they’ll encounter in the trade
press and in industry.
• Video: "How Large Language Models Work"
• Video: "Prompt Engineering: Inside AI’s Hottest New Job, WSJ"
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
27
• Subsection: “How Machines Learn” discusses several concepts, including supervised learning, self-supervised learning, semi-supervised learning, RLHF, and Constitutional AI (touted
by the OpenAI refugees who founded Anthropic as a more ethical approach).
• Video: "Why Anthropic's Founder Left Sam Altman’s OpenAI" includes neat demos of how
Constitutional AI is an improvement over RLHF used in ChatGPT and other systems.
• Callout: "The “Transformer”—No ChatGPT without Google"
• Section 18.4: “Generative AI: Changing Products and the Nature of Work Itself”
• Several ways of using GenAI are discussed, with examples offered.
• GenAI in current products and addressing vertical segments are offered. These include
accounting, law, and even a GenAI beer that came to market (with GenAI-created label, of
course).
• Video: "Microsoft's AI Future of Work Event: Everything Revealed in Eight Minutes" shows
Microsoft’s tools in a variety of products.
• Video: "GitHub Copilot: Getting Started with Chat" shows how the job of programmers is
changing and being enhanced with GenAI.
• Video: “Adobe Firefly: Out of Beta & Ready for Your Imagination” (GenAI in graphic arts).
• Callout: "I Am Not a Robot, but I’ve Occasionally Taught Some" discusses Captchas and AI
data classification - updated from an earlier version of the text.
• Section 18.5: “Understanding AI Risks”
• Prepare for some great discussions. This section tries to separate the Terminator-future
hype that often shows up in these discussions from current, real risks (or other mid-term
issues that will likely emerge soon). These include AI/GenAI security risks; Bias: racism/
sexism and its implications for the firm; Hallucinations: Is your AI lying to you? Deliberate misinformation and deception; AI: A master teacher in causing harm; copyright and
AI: very uncertain terrain; job shocks; scale that concentrates power and carries an environmental impact; it’s not just sci-fi stuff[mdash]from finance to conflict, AI is already a
destructive force; what if we can’t understand how it thinks?
• Callout "“The AI Turned Me White!”" includes images of an MIT student of East Asian ethnicity who asked Gen to improve a photo so it could be used in LinkedIn. The photo gave
her blue eyes and other Caucasian features.
• Callout: "Google, Translate Kazakh to English. Bias Included at No Extra Charge"
• Bias in data is demonstrated by showing the results of translating from the Kazakh language (which has no gender-specific pronouns) into English. He versus she is shown in
stereotypical results. More important, students are asked to consider a number of very
thorn, yet highly important questions about AI bias. Students are challenged to consider the issue from a managerial, rather than political, perspective, and should also see
that the answers aren’t easy to arrive at, especially given the differing needs of changing
markets and markets worldwide.
• Video: "Google’s AI “Bard” Gives Wrong Answer" (and led to $100 billion in lost market value).
• Video: "AI Can Replicate Voices in High-Tech Phone Call Scams, FTC Warns"
• Video: "ChatGPT and Generative AI Are Hits! Can Copyright Law Stop Them?"
• Callout: "Will the Professor Become an AI?"
• Video: "How AI Could Save (Not Destroy) Education, Sal Khan, TED"
• Video: "OpenAI CEO, CTO on Risks and How AI Will Reshape Society"
• Section 18.6: “It’s Not as Easy as the Press Might State: Technical, Organizational, Legal, and
Societal Challenges of AI and Machine Learning.”
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• Material updated and adapted from an earlier version of the text, which was in Chapter 17.
• Also includes information on where students can try out AI training without programming, as well as find free online courses to learn more and gain technical skills.
• Section 18.7: “Addressing AI Risks and Building More Responsible Technology”
• “Recognizing Risks and Setting Standards”
• “Steps in Developing and Deploying More Ethical, Less Risk-Prone Systems” (includes many
concrete things/resources/tactics firms can use in addressing risks raised in the earlier section).
• Callout: "Addressing Algorithmic Bias Is Hard, but Can Deliver Real Business Benefits"
• Video: "AI Is Dangerous, but Not for the Reasons You Think, Sasha Luccioni, TED" includes
some wonderful examples of addressing many pressing risks.
• Video: "DEF CON 31—Growing the Community of AI Hackers with Generative Red
Team—Cattell, Chowdhury, Carson". A longer and more technical video from the elite DEF
CON conference, but for those interested, it can give lots of interesting information on how
teams are testing AI systems for vulnerabilities and weaknesses.
• Callout: "Crafting an Ethics Board—Not as Easy as It Sounds (Ask OpenAI and
Google)" (updated from earlier work and now includes mention of the OpenAI board struggle).
• Video: "Sam Altman and the OpenAI Power Struggle, Explained"
• Callout: "Catching the Golden State Killer: The Promise and Peril of Big Data’s Reach" (from
an earlier version). It can be a great classroom discussion piece on the benefits and challenges of big data and privacy.
• Section 18.8 (Mini-case) “AI as Your DJ—A Look at Spotify’s Magic.”
• Updated from earlier version, which used to be located in the prior “Data Asset” chapter.
Includes information on Spotify Wrapped.
• Video (new): "How Spotify’s AI-Driven Recommendations Work"
Chapter 19—Advertising Technologies: Balancing Personalization with Privacy as Technology
and Regulation Evolve
• New callout: "Did AI Make That Ad?" discusses that Ad tech firms have rushed out new generative artificial intelligence tools to aid the creation and refinement of advertising.
• New section: “Understand Key Terms: Zero-, First-, Second-, and Third-Party Data.” Provides a
useful overview of key terms—zero-party data through third-party data—and sets the stage
for understanding how laws and technology make it difficult to acquire certain data.
• Google has now scheduled Q1 2024 as the beginning of its phased disabling of third-party cookies.
• New key term ATT (for app tracking technology) is used to describe approval process that
allows access to Apple’s IDFA tracker.
• Updated info: After the launch of ATT, most advertisers were reporting a revenue drop of
between 15 and 20 percent, with some reporting as much as a 40 percent drop.
• Faculty might note that iOS now has the majority of the U.S. smartphone market (stats
updated accordingly).
• Google now offers its own privacy nutrition labels.
• Google’s FLoCs technology (mentioned in an earlier version) has been dropped. The current
version now describes Google’s Topics and Privacy Sandbox—a technology Google promotes as
being respectful of privacy while allowing targeted ads to be served.
• Note that China’s app tracking ID, CAID, was never implemented. Wikipedia has some info on
this. I’ve removed mention of this from the update.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• Updated information on IDFA and the impact on firms such as Facebook ($10 billion loss) and
TikTok (lower projections by $2 billion).
• Information on the SKAdNetwork technology is offered. This allows advertisers and ad networks to still track the effectiveness of an ad campaign without sharing identifying information on the person being advertised to.
• New section discusses tracking URLs: “Why Is This URL So Long?”
• Describes them, offers new tracking URL key term, and describes how Apple is limiting
their use in some of its products.
• Image shows a regular URL plus a tracking URL created by clicking “Share” on the New
York Times website. The tracking URL is about seven times larger than the standard URL.
• New subsection: “Do the Crime? You’ll Pay the Fine!”
• Highlights the increased enforcement of data privacy laws in the European Union and
United States, and the fines that have been levied for rules violators.
• New videos include the following:
• "Generative AI Is Creating Custom Advertisements for Marketing Brands": shows several
examples of AI used to create ad images and copy.
• "How to Collect Data without Cookies?"
• "What Is Topics? Privacy Sandbox"
• "Understand SKAdNetwork in Ninety Seconds"
• "Meta's Record Fine Drives Pressure for EU, U.S. Data Privacy"
Chapter 20—A Manager’s Guide to the Internet and Telecommunications
• Increased emphasis on wireless Internet, especially satellite communication.
• Chrome has dropped the padlock icon because it conveyed “too much” security. Information on
the new, selectable “Tune” icon, which reveals more information about a website’s security and
allows the user to change key privacy and security-related settings.
• Updated information distinguishing between generic TLDs (like .baby, owned by Johnson &
Johnson), which require the firm to allow other organizations to have access to this TLD, and
brand TLDs (e.g., trademarked names like .google), which are exclusively controlled by TLD
owners.
• Additional information on iPv4 versus IPv6, including that Amazon has a $500 million to $1 billion a year business in renting fixed IPv4 numbers over AWS.
• New example of DNS hijacker stealing half a million dollars in crypto, plus survey showing
that one in five firms still have poor “cyber-hygiene” and vulnerable DNS listings.
• Updated information on 5G, including the difference between various forms of mobile 5G
(including the superior but FAA-concerning C-band technologies). The new C-band auction is
mentioned, as are fixed wireless 5G—both for rural broadband use and the very fast, but footprint limited mmWave UWB or Ultra Wide Band 5G.
• Updated information on Starlink Satellite Internet and CSquared, providing broadband access
to the underserved.
• Removed some of the discussions around wireless and femtocell technology, which applied
more to 4G rather than now common 5G networks.
• Net neutrality section was updated. The Biden administration has reinstated net neutrality
provisions that were thrown out by the Trump administration.
• Key term of net neutrality is also defined.
• New chapter subsection and mini-case on SpaceX’s Starlink effort: “To Infinity and Beyond:
SpaceX Starlink and the Awesome Power Wielded by Elon Musk’s Firms.”
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• Students will understand satellite telecom (GEO and LEO efforts) and how these compare
with terrestrial services. SpaceX’s Starlink service and the technologies involved are
explained, and this is compared to other, historical efforts that have failed.
• Students are challenged to think about opportunities as well as market disruption created
by providing a high-speed satellite Internet service that rivals broadband and that is available in areas where broadband doesn’t reach. Starlink’s power is also examined, as seen by
governments such as Ukraine (where Starlink service is vital, but where its use has been
restricted for some military applications), China, and Turkey. Students are challenged to
consider the firm’s perception and power re: interaction with governments and other firms,
and an exercise asks them to create ethics policies and advocate for their implementation.
Rival efforts by governments, as well as Amazon Kuiper, are mentioned.
• New videos include the following:
• "How Does the Internet Work?—Glad You Asked, S1"
• "Why 5G Will Change the World"
• "What Elon Musk's 42,000 Satellites Could Do to Earth"
Chapter 21—Information Security: Barbarians at the Gateway (and Just About Everywhere
Else)
• Updated stats on average cost of a hack and total impact of hacking on the global economy.
• New “hack slam” presentation suggested as an exercise. Have students (individuals or teams
depending on class size) research a prominent hack and log what they are researching on a
shared document like a Google Sheet or Wiki Page so there are no repeats. Then have students
present their findings, rapid fire, to the class, detailing the hack, the vulnerability that caused
the hack, the estimated damage (financial, reputation) to the firm, and (most important) what
can they, as managers, do to ensure that a similar hack won’t happen in their own organization.
• While the Equifax and Target hacks are older, I think they’re great early illustrations of problems that might occur (and continue to occur). I’ve kept these in since faculty can rely on these
classic cases to get students thinking about key security issues. However, I’ve added a more
current large exploit (Log4j) as a video. This also illustrates a number of key issues related
to cybersecurity. After just this first section, students should already begin thinking broadly
about vulnerabilities, potential exploits, and a manager’s cybersecurity responsibility to the
organization, its customers, and its partners.
• Have added an additional motivation point: Surreptitiously hijacking hacked hardware for
cryptocurrency mining.
• Updated dark web markets, with example of Hydra takedown in 2022. The market did about $1
billion in business annually at its height.
• Examples of botnet hackers have been updated with stats from a great IEEE Spectrum article
on dueling botnet gangs created by teenagers.
• Updated examples of ransomware and extortion are offered, including information on the
MOVEit exploit—considered one of the most costly hacks of all time.
• Updated examples of corporate espionage.
• Cyberwar section now shows how fallout of a cyberwar can extend beyond the borders of combatant nations, taking out a German power grid and European ISPs.
• Phishing example includes $100 million scam targeted against Facebook and Google employees, who paid bills to fake accounts.
• New subsection: “AI: A Hacker and Scammer’s Best Friend” provides an overview of how AI is
being used to generate sophisticated phishing scams, convincing deepfakes, and step-by-step
hacking instructions, and to find hackable vulnerabilities in source code.
• New key terms: deepfake, script kiddies.
• Updated subsection: “Push-Button Hacking, Made Worse by Generative AI.” Open source AI
tools have been used to create tools specifically designed for cyberattacks. Tools like WormGPT,
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
DarkBERT, DarkBART, and ChaosGPT can be used for a variety of cyberattacks, for deliberately
searching for sensitive information and vulnerabilities that can be used in cyberattacks, for
assisting in malware creation, and for crafting “persuasive and strategically cunning” phishing
scams, are available for subscription via dark web contacts on dark web forums and black hat
Telegram channels.
• LastPass hack mentioned.
• 2FA key term added.
• Updated best practices in the “Building a Better Password” section.
• New subsection: “Passkeys—A Ladder Out of Password Hell.” This section discusses passkeys,
how public-key cryptography works, and how passkeys will help eliminate the need to memorize passwords, or in many cases even engage in traditional 2FA with its text-for-access-code
delays. Several challenges to the implementation of passkeys are also discussed.
• The callout on securing web transmissions has been removed. It showed the padlock, which
Google has eliminated from the latest version of Chrome (pointed out in an earlier section),
and it discussed public-key encryption (which is now mentioned in the passkey section).
• Vulnerabilities in popular software that let Chinese language users type on standard latin
alphabet keyboards is cited. This is a great example that gives non-Chinese speakers an understanding that there may be several layers of software required by an organization that are
potentially vulnerable and that they may not be considering (yet another case for diverse
teams for information security).
• The default password portion is now followed up with information warning about hard-coding credentials, citing a GitHub study where some 10 million “secrets” such as API keys were
publicly revealed. Likely many more organizations have private repositories with similar problems where secrets are revealed far beyond just the engineers that should have access to them.
• Removed LastPass from recommended password vaults.
• Added use passkeys and 2FA/MFA to recommendations.
• Added “Be usage smart” to user recommendations. Case of Strava and other fitness apps
revealing the location of intelligence personnel and military bases is cited. Also added an aside
pointed out by MIT Tech Review that women may be more likely to consider these vulnerabilities, as they are far more likely than men to have concerns over stalking from public data
(again, benefits from diverse teams!).
• Education discussion is updated to include ideas on ensuring that employees have read and
dealt with updates (e.g., tests, lockdowns until action is certified until taken). Monitoring and
educating example mentions DEF CON hack, showing that turning off Wi-Fi and Bluetooth
using Apple control panel doesn’t prevent all alerts from getting through, with a simple Raspberry Pi being used to spoof Apple TVs (common in conference and hotel rooms), allowing
hackers to access accounts that may link to cloud files, e-mail, and more.
• Updated information on certifications now mentions SOC (System and Organization Controls),
PCI (Payment Card Industry), and additional European and state regulations.
• Information security asset management software mentioned.
• As an example of how government can play a positive role, the MassCyberCenter is mentioned,
which provides training, centralized threat sharing, and other resources to poorly staffed
municipalities, as well as funding local programs at state universities that train students in
cybersecurity and then link them to job and internship opportunities with municipalities.
• Concept of red teaming (new key term) mentioned—an organization-approved group that
assumes the role of an adversary to probe for weaknesses and vulnerabilities.
• New subsection: “AI Can Help the Good Guys, Too!”
• Provides an overview of many ways that AI is used in audit, analysis, threat detection, prevention, and professional learning and development.
• New videos include the following:
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
• "Deepfake Technology: Biggest Cybersecurity Threat, Explained"
• "Apache Log4j: The Exploit That Almost Killed the Internet"
• "MOVEit Transfer Zero-Day Attack Case Study"
• "Red Team—Hacking Google, EP003": This video discusses red teaming. Students should
love this—shows some really neat career opportunities, as well.
• "How Cyberwarfare Works"
• "WormGPT Is Like ChatGPT for Hackers and Cybercrime"
• "Hacking with ChatGPT"
• "Understand Passkeys in Four Minutes": Google’s explainer is a great, animated accompaniment of the passkey discussion and will hopefully help illustrate more arcane concepts like
public-key encryption.
• "Apple’s Craig Federighi Explains New iPhone Security Features"
• "An Early Look at Microsoft Security Copilot—A GenAI Tool for the Cyber-security Professional"
Chapter 22—Google in Three Parts: Search, Online Advertising, and an Alphabet of Opportunity
• Intro is streamlined and updated with new stats, plus important information setting the stage
regarding the opportunity and existential threat that AI poses to the firm.
• New graphic showing an example of how Google displays current search results (although this
is constantly in flux, especially with new GenAI being incorporated into search). The image
points out that geography is used to serve ads from a local vendor, and that one vendor also
ranks ahead of an ad for the brand that was mentioned in the search.
• Updated information on Google’s server farms used to support search.
• Updated information on how search advertising works, including a new graphic that points
out indexed ad extensions and how these were used in the top-performing ad.
• DoubleClick still shows in URL, but Google now refers to DoubleClick as the Google Marketing
Platform, which also includes other Google display ad offerings.
• New key terms: display advertising, Ad creative.
• New section: “Generative AI and the Future of Search and Other Google Products.” Discusses
Google’s challenges as generative AI poses a threat to traditional search query and the advertising business this supports.
• Links Google’s being blindsided by ChatGPT to aspects of Disruptive Tech framework (students get a callback to an earlier chapter while trying to interpret current competition using
this framework). ChatGPT’s climb and Google’s initial stumbles are detailed.
• Coverage of the various ways Google is now embedding AI into its entire product line.
• Section added on how new generative tools will require a new skillset, with examples.
• Significant updates to the section “The Battle Unfolds,” which is now named “Alphabet’s MultiFront Battle.”
• While earlier editions cited Microsoft’s lack of growth compared to Google, Redmond is now
larger than Google’s market cap, and poses a significant new threat through its OpenAI investment.
• Much more content was added in “How Big Is Too Big,” including callouts on both United
States and European Union regulation—over $13.4 billion fines in Europe alone since 2017.
• Subsection on the evolution of search is now cut since there’s now a larger section in this chapter on generative AI.
• A lot of updates were made to Android.
• Removed section on Google Glass—note that Google stopped supporting Glass for Enterprise
in early 2023.
• Note that Susan Wojcicki is no longer CEO of YouTube.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
• RT breakout was removed, as RT has been shut down following the war in the Ukraine.
• Updated information on Google Labs, experimental products, the rollout of Verily, and expansion of Google’s Waymo driverless car initiative.
• Updates to Google’s Cloud competition with rivals.
• New videos include the following:
• "Your Marketing, Multiplied by Google AI": Shows how Google deploys AI tools for customers so that they can develop better creative and landing pages. Includes image, text, and
video creative examples that use AI. It even shows AI-generated voices immediately translated to other languages.
• "How Google Might Merge AI Chat with Search": shows how Google’s first attempt at SGE
(Search Generative Experience) is offered in beta.
• "Driverless Taxis in San Francisco Cause Traffic Jams, Chaos"
• "Google Cloud Unveils New AI Products at Next 2023 (SuperCut)": Shows lots of updates
to Google’s Generative AI offerings for enterprises. This is a bit tech and jargon heavy, but
there are some pretty impressive examples in here—including the creation of a customized
generative AI-style chatbox for driver’s license renewal. Also shows how you can take old
legacy code written in C and have it refactored in Go and SQL.
Supplements
Information Systems: A Manager’s Guide to Harnessing Technology v10.0 is accompanied by a
robust supplements program that augments and enriches both the teaching and student learning
experiences. Faculty should contact their FlatWorld sales representative or FlatWorld support at
support@flatworld.com for more information or to obtain access to the supplements upon adoption.
Sample Syllabi
Sample syllabi based on either sixteen-week, ten-week, or eight-week terms provide useful templates that help new adopters transition from their current course textbook to Information Systems: A Manager’s Guide to Harnessing Technology v10.0. Suggestions for integrated and independent coverage of the “Essential Skills for Excel” appendix are provided for each term length. Faculty
can download the syllabi from the FlatWorld website or they can be obtained by contacting your
local FlatWorld representative or FlatWorld support (support@flatworld.com).
Instructor’s Manual
The instructor’s manual (IM) includes learning objectives and an outline for each chapter. The IM
also features possible responses to the questions and exercises in each section of the text, video
discussion questions, and additional activities and resources, all of which encourage students to
engage more deeply with the course material. The “Essential Skills for Excel” appendix instructor’s
manual includes additional activities that can be assigned to students to further practice the concepts they are learning.
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34
Information Systems
PowerPoint Slides
PowerPoint lecture slides provide a concise but thorough outline for each chapter and include relevant tables, figures, and images from the text to enliven lectures and stimulate class discussions.
These PowerPoint slides also include a list of Learning Objectives by chapter. Instructors can use
the slides as composed to support lectures or customize and build upon them to suit their particular teaching needs.
Test Item File
The Test Item File (TIF) includes more than fifty questions per chapter in true/false, multiplechoice, fill-in-the-blank, and short answer formats. All answers are provided, including possible
responses to the short answer questions. The items have been written specifically to reinforce the
major topics covered in each chapter and to align with FlatWorld Homework and in-text quiz items.
The Test Item File questions are also available in pre-formatted form for easy export into popular
learning management systems such as Canvas or Blackboard.
Test Generator—Powered by Cognero
FlatWorld is pleased to provide a computer-generated test program powered by leading assessment
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printing exams. Please contact your local FlatWorld representative or FlatWorld support (support@flatworld.com) for more information or to request the program.
FlatWorld Homework
Accompanying FlatWorld Homework for this text is provided in an easy-to-use interface. Multiple
choice, fill-in-the-blank, matching, scenario-based, and other question types are available for use
and are all auto-gradable. Students who utilize the homework questions should see their performance improve on examinations that are given using the Test Item File questions provided to
adopters via Word documents or LMS packages.
Online Quizzes
Quiz questions for student self-evaluation are available by section and by chapter in the online version of this text. Students can use the quizzes to test themselves on their comprehension as they
move through the different sections of the text or once they have completed a chapter.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Preface
Other Supplements (All Starter and Solution
Files for the “Essential Skills for Excel”
Appendix)
All necessary Starter and Solution Files for both the student exercises included in the “Essential
Skills for Excel” Appendix and the Additional Exercises provided in Instructor’s Manual for the
Appendix are provided in organized zip files. Students can also access the Additional Exercise
Starter Files in Appendix A Section 13.
Letter from the Author
Thanks for using this book. I very much hope that you enjoy it!
I find the space where business and technology meet to be tremendously exciting. The information systems (IS) course should be the most exciting class within any university. No discipline
is having a greater impact on restructuring work, disrupting industries, and creating opportunity.
And none more prominently features young people as leaders and visionaries. But far too often,
students resist rather than embrace the study of tech.
Material in this book is used at both the graduate and undergraduate levels. I think it’s a mistake to classify books as focused on just grad or undergrad students. After all, we’d expect our
students at all levels to be able to leverage articles in the Wall Street Journal or Bloomberg Businessweek. Why can’t our textbooks be equally useful?
You’ll also find this work to be written in an unconventional style for a textbook, but hey, why
be boring? Let’s face it, Fortune and Wired wouldn’t survive if forced to publish the dry, encyclopedic prose used by most textbooks. Many students and faculty have written kind words about the
tone and writing style used in this book, and it’s been incredibly rewarding to hear from students
who claim they have actually looked forward to assigned readings and have even read ahead or
explored unassigned chapters. I hope that you find this book to be engaging, as well.
The mix of chapters and cases is also meant to provide a holistic view of how technology and
business interrelate. Don’t look for an “international” chapter, an “ethics” chapter, a “mobile” chapter, or a “systems development and deployment” chapter. Instead, you’ll see these topics woven
throughout many of our cases and within chapter examples. And you’ll also see core concepts
that do have their own chapter also emphasized in individual examples—e.g., case chapters and
mini-cases that relate to strategy concepts and that cover how organizations use artificial intelligence. This is how professionals encounter these topics “in the wild,” so we ought to study them not
in isolation but as integrated parts of real-world examples. Examples are consumer-focused and
Internet-heavy for approachability, but the topics themselves are applicable far beyond the context
presented.
Also note that many chapters are meant to be covered across multiple classes. For example,
the chapter about Google is in three parts, the one about Netflix is in two, and the one on strategy
and technology likely covers more than one lecture as well. Faculty should feel free to pick and
choose topics most relevant to their classes, but many will also benefit from the breadth of coverage provided throughout the book. I’d prefer our students to be armed with a comprehensive
understanding of topics rather than merely a cursory overview of one siloed area.
There’s a lot that’s different about this approach, but a lot that’s worked exceptionally well,
too. I hope that you find the material to be useful and enjoyable. I also look forward to continually
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
improving this work, and I encourage you to share your ideas with me via Threads using the hashtag #BizTechBook or at my website, Gallaugher.com. And if you find the material useful, do let
others know, as well. I remain extremely grateful for your interest and support!
Best wishes!
Professor John Gallaugher
Carroll School of Management
Boston College
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 1
Setting the Stage: Technology
and the Modern Enterprise
1.1 Tech’s Tectonic Shift: Radically
Changing Business Landscapes
Learning Objectives
1. Appreciate how, in recent years, technology has helped bring about radical changes across
industries and throughout societies.
2. Understand that the increasingly rapid pace of tech advancement creates both promise and
peril, for workers, firms, industries, and societies.
3. Recognize that while tremendous wealth has been created by tech giants, global regulators
are now working to curtail their overwhelming power and influence in ways that will alter past
competitive advantages.
4. Understand that your career will be filled with constant change, much of it brought about by
changing technology. You’ll spend the rest of your life learning new technologies and evaluating their impact.
It’s Not the Future, It’s Now!
This book is written for a world that continues to radically upend firms and markets. Consider
just a few examples: Uber, the world’s largest “taxi service,” owns no vehicles for hire. Airbnb, the
world’s largest accommodations provider, doesn’t own a single hotel or rental property. Google, the
world’s most profitable advertiser, produces no television shows, owns no networks, nor any newspapers or magazines. Facebook, the world’s most visited media destination, creates no content. And
many of the world’s most disruptive retailers—from Alibaba to Shopify to Temu—own no product
inventory of their own.[1] Change is clearly afoot, and it’s wearing silicon sneakers, carrying a smartphone, and is being blown forward by cloud-fueled, AI-smart hurricane tailwinds. While technology
is fundamentally transforming business environments, managers seem painfully ill-equipped for
the transition. A report in Forbes suggests 72 percent of firms are failing at digital transformation.[2]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
38
Information Systems
market capitalization
(market cap)
The market cap of a
publicly traded firm is its
total value. Market cap can
be calculated by
multiplying the number of a
firms shares by its current
share price.
R&D
Research and
development—the portion
of a firm focused on
innovation, typically
pioneering advances that
will eventually arrive as
new products and
technologies.
microprocessor
The part of the computer
that executes the
instructions of a computer
program.
server farm
A massive network of
computer servers running
software to coordinate
their collective use. Server
farms provide the
infrastructure backbone to
SaaS and hardware cloud
efforts, as well as many
large-scale Internet
services.
So, congratulations on studying technology and business. Your skills are needed! Tech isn’t just
“the future,” as many say—it’s today. Roughly 20 percent of the world’s economy is considered “digital,” with most of the remaining 80 percent running on it.[3] Look at the extremes of wealth creation
and corporate power and you’ll see tech firms above all others. As of this writing, only five firms
have surpassed $1 trillion in value, and all of them are in tech. Apple, Microsoft, Alphabet (Google),
Meta (Facebook/Instagram/WhatsApp), Amazon, and Nvidia. While these firms reached $1 trillion
market capitalizations by dominating separate markets, they are increasingly competing with
each other in new markets, and they’re all investing the largest portions of their R&D in one
area—artificial intelligence (AI), so let’s begin our biz/tech overview there.[4] While four of those trillion-dollar firms have been some of the most active users of AI—the fifth, Nvidia, is the “arms
merchant” in the AI battle—providing the chips that everyone’s using.
A Quick Look at AI—the Hottest Topic in Tech
and Business
Nvidia is a big deal because it’s the overwhelmingly most important firm in providing
microprocessors (the calculating brain of computers) that are used in artificial intelligence. Nvidia
has an astonishing market dominance in high-end AI chips—a share estimated to be between 80
and 95 percent of the market[5]—granting it the ability to set premium prices and keep profit margins unapologetically high. Talk to ChatGPT, Google Gemini (previously Bard), use Microsoft
Copilot, summon Siri, or call on Alexa, and there’s a good chance that the heavy work of figuring
out what you’ve said and responding with what you want is being handled in massive server farms
loaded with Nvidia chips.
Server farms and the expensive chips inside them represent just one area of AI-fueled spending, but there are others. Microsoft spent $13 billion for a 49 percent stake in OpenAI—the creator
of ChatGPT.[6] Google hesitated to publicly release GPT-like technology, even though it was a leader
in developing tech at the core of current AI, but after the launch of ChatGPT, a Google “Code
Red” call to do more brought co-founders Sergey Brin and Larry Page back to the Googleplex, and
was followed by a furious launch of new products, some which seemed to compete directly with
Google search—the invention that singularly made Google the largest and most profitable advertiser in history.[7] Amazon has pledged $5 billion to the startup Anthropic AI,[8] which was founded
by scientists who left OpenAI. Facebook and Apple are paying ludicrously high salaries to attract AI
talent for their own efforts, and if you want to study advanced AI at university, that’s getting
tougher when big tech backs up the money truck on campus and unloads salaries that can be several times more than what your professor earns lecturing and grading papers.[9]
Techies are excited about AI. Bill Gates has said that AI is “the most transformative technology
any of us will see in our lifetimes.”[10] So that’d be ahead of the PC, the Internet, smartphones, and
other technologies that have made him and his current peer cohort of billionaires the wealthiest
people on the planet. The CEO of Alphabet (Google’s parent), Sundair Pichai, says AI is an invention
as profound as electricity and Promethean fire.[11] So, the money bag nerds are excited. But they’re
also scared. Over 1,100 scientists signed a joint letter asking AI labs to immediately pause development for six months. This wasn’t a petition that gathered signatures of any rando outside a grocery
store—it included the most prominent minds and business leaders in the field. Even hero-turnedvillain and worlds-wealthiest man Elon Musk signed it.[12] Of course, the kicker is that almost no one
who signed the letter took their foot off the gas.[13] Development in the six months following the
letter actually sped up. And while some of the leaders of the world’s most elite AI labs have openly
warned that AI could pose a “risk of extinction” as deadly as pandemics and nuclear weapons[14] (I’m
sure that’ll help you sleep tight), others think the Terminator scenarios are off-kilter and distract
from real risks that are happening today. Many AI systems today are actively discriminating—making biased recommendations that are harmful to women and people of color. They’re enabling
scammers and hackers. They’re teaching a generation of mischief-makers, griefers, and harm-plot-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
ters. The tech behind multi-billion-dollar valuations is being trained on the copyright materials of
artists, journalists, and other writers who never agreed for their work to be used, uncompensated.
GenAI can often leave gaping security holes—especially when free consumer products can be used
by anyone in the enterprise without training or an understanding of risks. And chatbots can often
hallucinate or seemingly make things up. Oh, yeah, and those server farms aren’t cheap to run. Consider that Ireland, the home of regional headquarters for many tech giants, is loaded with so much
supporting tech that data centers currently gobble up 18 percent of the country’s electricity needs,
even as the country also scrambles to hit climate targets.[15] There’s no question AI will require massive and nearly constant job training, and we have no idea how these tools will create job shocks
and workplace shifts.
While educators wonder how to teach when the take-home paper can now be generated with
grad-student quality after just a few taps into a web prompt, we’re also seeing massive positive
use cases. Sure AI can be buggy and wrong, but well-trained programmers are finding it to be the
first place many turn to look up a technique or learn a new skill (yes, GenAI can be a very good
programmer).[16] Lawyers are using it to sift through reams of legal cases and automate time-consuming tasks (although use the wrong tool and don’t double-check your work and you could be in
trouble for passing off cases that were “made up” by tech).[17] The largest accounting firms in the
world are rolling out AI to automate the grunt work of tax and other financial work, leaving staff
to focus on more high-value contributions.[18] And when used properly, the tech can fight crime,
advance cleantech, diagnose diseases, and fuel life-science breakthroughs. AI was front-and-center during the accelerated development of COVID vaccines, allowing a handful of treatments to
hit the market in record-shattering time, and almost certainly saving multimillions of lives.[19] We’re
really at the very early days of AI, but the tech seems to be making significant leaps forward every
few months. And we don’t even know how users will interact with it. Alexa, Siri, and Google Home
are all getting increasingly GenAI smart, and the tech is baked into all sorts of mainstream software. And that’s just with products that have already been invented. Sir Jony Ive, the former Apple
Inc. design chief who brought us must-have products like the iPod and iPhone, is working on new
wearable technologies that imagine entirely new ways of walking around with an always-accessible, all-knowledgeable super-advisor.[20] And he’s certainly not the only one working on consumer
AI. From this point forward, you should expect to have a world-class tutor within reach.
Will ChatGPT Take Your Job?
CNBC offers a brief overview of the promise, peril, and uncertainty presented by modern AI.
View in the online reader
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
39
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Information Systems
Tech: It’s at the Center of Your Uncertain
Future
FIGURE 1.1 NFTs from the Bored Ape
Yacht Club
So AI is an increasingly big deal—and if you had the foresight to invest in Nvidia
before it hit a tril, good for you! But most didn’t. It’s really hard to predict which
tech will be significant and disruptive, and we’re surrounded by society-changing,
multibillion-dollar use cases that no one thought about when the technology
emerged. As an example, before smartphones, most folks were raised with parents saying “Never talk to strangers,” “Never get into a stranger’s car.” Now we use
smartphones to summon strangers so that we can get into their cars.
Business leaders and pundits frequently guess wrong, place terrible bets, and
end up losing. A few years ago Web 3.0 was poised to be “the next big thing”—it
wasn’t. Zuckerberg got so excited by the Metaverse that he renamed his company
Meta—and has so far lost over $46 billion on the concept without seeing a penny
in profits.[21] Speculators fleeced into crude NFT art were conned into wasting $5
Source: ArtMediaWorx/Shutterstock.com
billion on “monkey JPEGs.”[22] Many more drank from Sam Bankman-Fried’s
fraud-infused Kool-Aid and threw away billions more on various crypto schemes. While the business press lined up the social media battle as being a faceoff between Instagram and Snapchat,
almost no one saw TikTok, which is now a generation’s media addiction, and a firm influential
enough that it’s collectively freaking out legislators worldwide, some of whom have tried to ban the
tech or even shame rivals who let their kids use it.[23]
You’ve also seen several years of digital-fueled growth compressed into the COVID years.
The pandemic “broke” many offline habits that ushered in waves of technology-enabled lifestyle
changes. When we couldn’t leave our homes and were otherwise social distancing, contactless payment, online grocery delivery, telehealth, and work-from-home all boomed. We have had a whipsaw
pullback at the end of the pandemic. Inflation pushed interest rates higher and many firms overhired, following a year of record-breaking payroll expansion with one of record-breaking layoffs.
We’re also seeing unsustainable me-too investment in some sectors that will almost certainly lead
to a shakeout (e.g., how many subscription streaming services can the market truly support?).
But breathtaking tech change will also be your career constant. It took telephones seventyfive years to get to 50 million users, but it took ChatGPT 3.5 just two months to gain double those
users.[24] TikTok gained roughly 700 million adherents in its first four years of existence, a figure
Christianity took nineteen centuries to achieve.[25]
Consider the unprecedented influence and radical change those trillion-dollar firms have catalyzed. Apple, the first firm in the trillion-dollar market cap club, was once widely considered a
tech industry has-been, but within ten years and powered by a succession of handheld consumer
electronics hits (iPod, iPhone, iPad), Apple became the most valuable and most profitable company
in America. Apple’s CarPlay has made it common to integrate our cellphones with our cars. And
the yet unproven Apple’s VisionPro is attempting to usher in a new era of “spacial computing” that
pushes consumer virtual reality and augmented reality forward with a series of groundbreaking
tech advancements that are sure to get lighter and cheaper as the technology improves. The Apple
Watch alone has sales greater than the entire Swiss watch industry.[26] Apple also puts a big fat
exclamation mark on the twenty-first-century key to tech-business success—create platforms, not
products. Apple’s integrated ecosystem has launched a constellation of apps, add-ons, and services
that add value to Apple ownership. And Apple’s growing business of consumer services—Apple
Music, Arcade, Apple TV+, Apple Fitness, News, and iCloud—now bring in so much coin that if it
were a separate division, it’d be deep into the Fortune 100, bigger than Boeing, Coke, Nike, Oracle, or
Delta Airlines.[27]
Google has brought in more advertising revenue than any firm, online or off, and has risen to
become the most profitable media company on the planet. Today, billions in advertising dollars flee
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
old media and are poured into digital efforts, and this shift is reshaping industries and redefining
the skills needed to reach today’s consumers. The firm’s ambitions have grown so large that Google
has rechristened itself Alphabet, a holding company with divisions focused on markets as diverse
as driverless cars, life extension, and cloud computing and AI, where it’s a leader.
Meta, Facebook's parent, has an astonishing 3.6 billion monthly users[28]—a reach no media firm
or government had ever remotely approached. Led by Meta, firms are now harnessing social media
for new product ideas, for millions in sales, and to vet and build trust. But with promise comes
peril. When mobile phones are cameras just a short hop from YouTube, Facebook, Instagram, and
TikTok, every ethical lapse can be captured, and every customer service flaw graffiti-tagged on the
permanent record that is the Internet. The service and ethics bar for today’s manager has never
been higher. Social media has also emerged as a catalyst for global change, playing key organizing roles in uprisings worldwide. While a status update alone won’t depose a dictator or expunge
racism, technology can capture injustice, broadcast it to the world, disseminate ideas, and rally the
far-reaching. Yet technology itself has no morality. We’ve seen leading social media firms struggle as
their platforms are used to spread hate, pornography, terrorism both foreign and domestic, conspiracy theories, and fake news in ways that enrich organized crime and enable the influence of hostile
foreign governments and domestic tyrants.
And tech competition is now very much not a U.S.-only phenomenon. Spotify—the firm that
beat Apple in subscription music—is based in Sweden. TikTok, Meta's most significant threat yet,
started in China. E-commerce retail has seen some of the most noteworthy non-Amazon players
also rise from abroad. Shopify is Canadian, while Shein and Temu were started in China.
Fast/cheap technology is also blowing the doors open on all new products and use cases, not
simply in embedding the Internet into everything from lamps to smart locks to thermostats, but
also in its ability to empower millions in emerging markets. Even in the far reaches of nations in
sub-Saharan Africa, fast/cheap tech is becoming an economic lubricant. Seventy percent of the
region’s population lives within range of mobile phone coverage, a percentage of the population
greater than those who have access to reliable and safe water or electricity.[29] Tech giants including
Google, IBM, and Microsoft now run R&D centers and significant operations in several sub-Saharan
African nations,[30] tapping into world-class tech talent that’s finally gaining infrastructure for
growth. Many nations in sub-Saharan Africa now rank among the world’s fastest-growing
economies. And entrepreneurs with local expertise are increasingly serving local needs and building impactful businesses. Ghanaian firm Esoko leverages mobile phones to empower the agrarian
poor with farming info and commodity pricing, raising incomes and lowering the chance of
exploitation by unscrupulous middlemen. The firm Sproxil has used text message verification to
save lives by fighting drug counterfeiting in developing nations around the world. Kenya’s M-Pesa
and Somaliland’s Zaad use text messages to replace cash, bringing the safety and speed of electronic payment and funds transfer to the unbanked and leveraging mobile money at rates that
initially outstripped the usage of any nation in the West.[31] Mobile money can cut corruption, too,
an effort with broad implications as this tech spreads worldwide. When Afghan police officers
adopted M-Pesa and began receiving pay using mobile money, many reportedly thought they had
received a big raise because the officers handing out their pay were no longer able to cheat workers
by skimming cash for themselves.[32]
The way we conceive of software and the software industry is also changing radically. Amazon,
Apple, Meta, Google, IBM, Netflix, and Oracle are among the firms that collectively pay thousands
of programmers to write code that is then given away for free. Today, open source software powers
most of the websites that you visit. And the rise of open source has rewritten the revenue models
for the computing industry and lowered computing costs for startups to blue chips worldwide. Cloud computing and software as a service are turning sophisticated, high-powered computing into a utility available to even the smallest businesses and nonprofits.
Cheap processors and software smarts are also powering the robotics and drone revolution
with far-reaching impact. Today’s farmers use drones to regularly survey crops at closer distances
and with greater regularity than satellite or plane flight could ever match. A combination of AI
plus conventional and infrared imagery can show irrigation variation, crop success, plant damage,
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
41
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Information Systems
Amazing
Invention—This Drone
Will Change Everything
View in the online reader
Europe's New Big Tech
Rules Will Have Greater
Impact than U.S.
Antitrust Lawsuits: Fmr.
FTC Chairman
Sweeping regulation in
Europe will open messaging
platforms and app stores,
and provide consumers with
much more control over their
data. CNBC also discusses
what has happened in the
United States and what may
happen in the future.
View in the online reader
and fungal and insect infestations, and offer other insights to improve crop yields, stave off crises,
improve farmer profits, and cut consumer costs. Today’s agricultural drones can be purchased for
less than $1,000, as compared with agricultural plane flights that cost more than $1,000 an hour.[33]
And while Amazon and UPS efforts to offer drone-to-doorstep delivery for the masses are very
much a work in progress, Silicon Valley’s Zipline is leading the charge for the humanitarian community, delivering medical supplies and blood to remote regions of the world, offering life-saving
packages at pizza-delivery speed.
Many organizations today collect and seek insights from massive datasets, which are often
referred to as “Big Data.” Data analytics, business intelligence, and so-called machine learning are
driving discovery and innovation, redefining modern marketing, and creating a shifting knife-edge
of privacy concerns that can shred corporate reputations if mishandled. And the pervasiveness of
computing has created a set of security and espionage threats unimaginable to the prior generation.
Yet while technology and strategy combine for some of the business world’s strongest winnertake-all, winner-take-most advantages, major tech firms are also under investigation for their
influence and competitive practices. Apple, Amazon, Meta, and Alphabet are under investigation in
the United States and Europe.[34] China is investigating Alibaba, and collectively the tech giants face
investigations in Australia, Brazil, Canada, Japan, South Korea, and the United Kingdom. The influence of tech firms is sending ripples throughout society, causing many to rethink our current
notion of capitalism. Tech’s role in fueling conspiracy theories, hate, and misinformation, and as a
tool for sowing political discord and division, has led many to wonder if we can put the most evil
outcomes of the tech genie back in the bottle without limiting the economic benefits that digital
advancements have brought the world. Managers and employees face a deep set of ethical challenges associated with firm size, competition, data access and use, privacy, security, partnerships
and alliances, and much more.
The recent layoffs and the rise of AI that can program may have led some to question the
future of technology careers. Sure, tech careers will change, but past tech shifts have often accelerated productivity, not eliminated workers. Business Insider ranks software developer as the top job
for the next decade.[35] The World Economic Forum’s “Jobs of Tomorrow” report ranks data and AI
jobs as growing 37 percent, with engineering and cloud computing jobs growing 34 percent.[36] As for
nontech jobs, well, expect to use much more tech. When spreadsheets came along, accountants
didn’t go away—the position boomed and became more enjoyable since the dullest work of penciland-paper math moved to hyper accurate and repeatable spreadsheets and accounting software.
We didn’t cut secretaries when the word processor came along—secretaries did more and became
administrative assistants, while everyone was now expected to be able to type their own documents and handle much of their own correspondence. Advances in data collection and analytics
mean jobs that were once “math-free” are now havens for data collection and analysis—human
resources, marketing, advertising. You’ll face a lifetime of having to geek-up with new tech. The
skills you learn in this textbook should help you understand and evaluate technology, and consider
tech’s impact on firms, industries, and societies. Having a solid understanding of the interplay of
business and technology will become the bedrock of your career as a manager, so get ready to learn
big in the pages that follow!
As recent years have shown, tech creates both treasure and tumult. While tech creates new
giants that dominate the top of lists of the world’s most valuable and most profitable firms, also
know that half of the Fortune 500 companies on the list in 2000 have fallen off since then as a result
of mergers, acquisitions, and bankruptcies.[37] These disruptions aren’t going away and will almost
certainly accelerate, impacting organizations, careers, and job functions throughout your lifetime.
It’s time to place tech at the center of the managerial playbook.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
Key Takeaways
• In the previous decade, tech firms have created profound shifts in the way firms advertise
and individuals and organizations communicate.
• Trillion-dollar firms are now increasingly competing with one another, and all are heavily
investing in AI.
• AI itself is a set of technologies that offer tremendous promise: from life-extending innovation
to education improvements to simplifying boring and monotonous tasks. But modern AI is
also fraught with problems, including incorrect answers, poor data, copyright concerns, and
misuse by bad actors.
• New technologies have fueled globalization, redefined our concepts of software and computing, crushed costs, fueled data-driven decision making, and raised privacy and security
concerns.
• The EU is leading in regulating tech firms, and the impact of EU regulation is likely to alter
competition with and between tech firms.
• In many ways you are preparing for jobs that don’t yet exist. Prepare to spend the rest of
your life evaluating tech and making decisions regarding tech use and investment.
Questions and Exercises
1. Search online and compare profits from Google, Apple, and other leading tech firms with
those of major media firms and other nontech industry leaders. How have profits at firms
such as Google and Apple changed over the past few years? What do you think is behind
such trends? How do these compare with changes in the nontech firms that you chose?
2. How do recent changes in computing impact consumers? Are these changes good or bad?
Explain. How do they impact businesses?
3. Serial entrepreneur and venture capitalist Marc Andreessen has written that “software is eating the world,” suggesting that software and computing are transforming entire industries
and creating disruptive new upstarts. Come to class with examples of firms and industries
that have been completely transformed through the use of software.
4. Venture capitalist Ben Evans, who once worked with Andreessen, has said that “mobile
is eating the world.” Give examples of how mobile has built billion-dollar industries that
wouldn’t exist without handheld computing power. How should today’s managers be thinking about mobile as an opportunity and a threat?
5. Make a list of pros and cons of modern AI technology. How is AI transforming modern business environments and society? Which firms, industries, and jobs will be most impacted by
this technology?
6. How is social media impacting firms, individuals, and society?
7. What kinds of skills do today’s managers need that weren’t required a decade ago?
8. Investigate the role of technology in emerging markets. Come to class with examples to
share on how technology is helping fuel economic growth and provide economic opportunity and public good to consumers outside of North America, Europe, and Asia’s wealthier
nations.
9. Work with your instructor to identify and implement ways in which your class can leverage
social media. For example, you might create a Facebook group where you can share ideas
with your classmates, join a service like Threads or Mastodon and create a hashtag for
your class, leverage Google Hangouts, create a course wiki, or start a Slack channel. (Refer
to Chapter 11 for more on these and other services.)
10. Watch the video below, produced by the World Economic Forum. Is artificial intelligence
(AI) really intelligence? What makes AI “smarter”? Which nations lead in AI, and why? What
advantages does each have? What sort of balance can be struck between fearing AI, regulating AI, and harnessing AI? Give examples of how AI can be used in business.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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AI on Track to Achieving Super Intelligence?
This video from the World Economic Forum highlights the global AI race, what powers AI, concerns and benefits of AI, and short examples of how AI is being used today.
View in the online reader
11. Watch this video on how 3D printing is spurring advances in manufacturing. How are technologies like this poised to influence the economy, society, and the jobs of the future? Work
with classmates to brainstorm ways in which 3D printing can benefit society.
3D Printing Spurring Revolutionary Advances in Manufacturing and Design
This video from “PBS News Hour” discusses how 3D printing is spurring revolutionary advances
in manufacturing and design. Watch massive metal printers build rocket engines and fuel tanks.
View in the online reader
12. Research online to investigate how tech firms fared during the pandemic. Which ones benefited? Which struggled, and why? How has tech influenced our lives during the pandemic?
Which trends are likely to reshape how consumers and businesses use technologies? Consider how this differs from what may have happened if we did not have a global health crisis.
13. As this version went to press, the EU was preparing to introduce a sweeping set of regulations impacting Internet and other tech firms. Research what this legislation has done. List
the main changes that it has brought about. How has this impacted firms, competition, and
profitability? Are other regions outside the EU copying these efforts or creating new ones? If
so, give examples.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
45
1.2 It’s Your Revolution
Learning Objectives
1. Name firms across hardware, software, and Internet businesses that were founded by people in their twenties (or younger).
2. Gain strategies and advice to plan your journey if you’re interested in starting a startup.
3. Understand the concept of the Startup Accelerator and recognize firms that have gone
through Y-Combinator.
The intersection where technology and business meet is both terrifying and
exhilarating. But if you’re under the age of thirty, realize that this is your space.
While the fortunes of any individual or firm rise and fall over time, it’s abundantly clear that many of the world’s most successful technology
firms—organizations that have had tremendous impact on consumers and businesses across industries—were created by young people. Consider just a few:
Bill Gates was an undergraduate when he left college to found Microsoft—a
firm that would eventually become the world’s largest software firm and catapult
Gates to the top of the Forbes list of world’s wealthiest people (enabling him to
also become the most generous philanthropist of our time).
FIGURE 1.2 Bill Gates Mug Shot
Wealth accumulation wasn’t the only fast-paced
activity for young Bill Gates. The Microsoft
founder appears in a mug shot for a New
Mexico traffic violation. Microsoft, now
headquartered in Washington state, had its
roots in New Mexico when Gates and partner
Paul Allen moved there to be near early PC
maker Altair.
Michael Dell was just a sophomore when he began building computers in his
dorm room at the University of Texas. His firm would one day claim the top spot
among PC manufacturers worldwide.
Mark Zuckerberg founded Facebook as a nineteen-year-old college sophomore.
Steve Jobs was just twenty-one when he founded Apple.
Source: Wikimedia Commons.
Sergey Brin and Larry Page were both twenty-something doctoral students
at Stanford University when they founded Google. So were Jerry Yang and David Filo of Yahoo! All
would become billionaires.
Kevin Systrom was twenty-six when he founded the photo-sharing service Instagram. In just
eighteen months, his thirteen-person startup garnered 35 million users worldwide, including 5 million Android users in just a single week, and was sold to Facebook for a cool $1 billion. Systrom’s
take was $400 million.[38] Snapchat founder Evan Spiegel dropped out of college to focus on his new
firm. By age twenty-four he was running a firm valued at over $15 billion[39] with a personal net
worth of over $1.5 billion.[40] Tony Hsieh proved his entrepreneurial chops when, at twenty-four, he
sold LinkExchange to Microsoft for over a quarter of a billion dollars.[41] He’d later serve as CEO of
Zappos, eventually selling that firm to Amazon for $900 million.[42] Brian Chesky, Nathan Blecharczyk, and Joe Gebbia, the triumvirate who co-founded Airbnb, were also all in their twenties. As of
this writing, the firm is worth over $85 billion—even after the toll the pandemic took on the travel
industry.[43]
Steve Chen and Chad Hurley of YouTube were in their late twenties when they launched their
firms. Jeff Bezos hadn’t yet reached thirty when he began working on what would eventually
become Amazon. The founders of Dropbox, Box, and Spotify were all under thirty when they
founded businesses that would go on to be worth billions.[44] Irish national Patrick Collison and his
younger brother John sold their first company for $5 million. Patrick was just twenty-one when he
and John co-founded Stripe, a payments firm now valued at $95 billion, making it, at the time, the
most valuable startup in the United States.[45] The founders of Rent the Runway, Jenn Hyman and
Jenny Fleiss, were in their twenties and still in grad school when they launched the firm that is
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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recasting how millions of consumers engage with high-end designer apparel and accessories. Whitney Wolfe Herd founded Bumble when she was twenty-five; less than seven years later her firm
went public with a valuation of about $7 billion.[46] Just a few years out of undergrad, dancer and
fitness enthusiast Payal Kadakia launched ClassPass, a service allowing customers to take fitness
classes from multiple providers and that had been valued at over $1 billion before it was acquired.[47]
Melanie Perkins was a nineteen-year-old frustrated design student in Australia when she first got
the idea for Canva, a firm she’s led to an over $26 billion valuation (a prior round had valued the firm
at $40 billion) and that has become a leader in bringing generative AI tools to the masses.[48]
How Canva Made Easy Graphic Design a Billion-Dollar Tech Tool
Melanie Perkins got the idea for Canva when she was just nineteen. Today she’s CEO of a firm
valued at over $26 billion that is a leader in consumer-accessible generative AI tools.
View in the online reader
Early bloomer David Karp actually quit high school for self-paced, tech-focused home schooling. It was a good move: He was taking meetings with venture capitalists at twenty, went on to
found what would become one of the world’s most visited websites, and sold that website, Tumblr,
to Yahoo! for $1.1 billion at an age when he was younger than most MBA students.[49] Another young
home schooler, Palmer Luckey, started “modding” video game controllers at age fifteen, founded
Oculus as a teenager, and sold it to Facebook for $2 billion (that’s two Instagrams) by age twentyone, and all before his company had even shipped its first consumer product.[50] In another brilliant
sign of the times, Luckey jump-started his effort not by gaining investment from angel investors or
venture capitalists, who would demand an ownership stake in his business, but from a Kickstarter
campaign. Hoping to raise $250,000, Luckey’s Oculus Rift campaign actually raised over $2.4 million
without giving up a single share of equity.[51]
Your author has also seen many former students build thriving businesses they started in
their early twenties. These include Nick Rellas, the cofounder and first CEO of Drizly, which sold
to Uber for over $1 billion; Bill Clerico, cofounder of WePay, which sold to Chase for $400 million; Andrew Chang, who cofounded blockchain firm Paxos, which hit a valuation of $2.4 billion;
and Andrew Boni, who leads the marketing tech firm Iterable he cofounded, and gained a valuation
of over $2 billion. Rellas founded his firm while still an undergraduate; Clerico, after spending the
year after graduation as an investment banker; and both Chang and Boni were still in their early
twenties when they founded their respective firms. Dozens of other former students of mine have
created thriving tech businesses (for the curious, I have a post on Substack highlighting many former students; refer to the “The Lucky Chairs” article).[52] First-hand experience shows what can be
accomplished by bright, dedicated, hard-working young people.
This trend will almost certainly accelerate. We’re in a golden age of tech entrepreneurship
where ideas can be vetted and tested online, and funding crowdsourced, Kickstarter-style; “the
cloud” means a startup can rent the computing resources one previously had to buy at great
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
expense; app stores give code jockeys immediate, nearly zero-cost distribution to a potential market
of hundreds of millions of people worldwide; and social media done right can virally spread awareness of a firm with nary a dime of conventional ad spending. Crafting a breakout hit is tough, but
the jackpot can be immense.
And you don’t have to build a successful firm to have an impact as a tech revolutionary. Shawn
Fanning’s Napster, widely criticized as a piracy playground, was written when he was just nineteen.
Fanning’s code was the first significant salvo in the tech-fueled revolution that brought about an
upending of the entire music industry. Finland’s Linus Torvalds wrote the first version of the Linux
operating system when he was just twenty-one. Today Linux has grown to be the most influential
component of the open source arsenal, powering everything from cell phones to supercomputers.
TechCrunch crows that Internet entrepreneurs are like pro athletes—“they peak around [age]
25.”[53] Bloomberg Businessweek regularly runs a list of America’s Best Young Entrepreneurs—the
top twenty-five aged twenty-five and under. Inc. magazine’s list of the Coolest Young Entrepreneurs
is subtitled the “30 under 30.” While not exclusively filled with the ranks of tech startups, both
of these lists are nonetheless dominated by technology entrepreneurs. Whenever you see young
people on the cover of a business magazine, it’s almost certainly because they’ve done something
groundbreaking with technology. The generals and foot soldiers of the technology revolution are
filled with the ranks of the young, some not even old enough to legally have a beer. For the oldtimers reading this, all is not lost, but you’d best get cracking with technology, quick. Junior might
be on the way to either eat your lunch or be your next boss.
Want to Start a Startup?
It’s not surprising so many university students experiment with startup ideas. It’s easy to find
cofounders, mentors love speaking with enthusiastic young people, and the stakes are also among
the lowest they’ll ever be in one’s life. If you’re living on campus, you’ve got housing, you likely have
a meal plan, you’ve got great Internet service, and you probably don’t have a family that you need to
support. Also, a few years of experimentation at college may help you refine a product to the point
where you’re ready to try to raise money and build your own firm rather than take a job working for
someone else. Trying to build a startup as a “side gig” while working a full-time job is really rough.
If you want to start a startup, some of the best things that you can do are 1) attend highquality startup-focused events, 2) attend tech events if you’re building a tech startup, and perhaps
most important, 3) start building product. If your university has a startup club, join it. If not, start
one. I’ve worked with my university to create entrepreneurship initiatives that include an “Elevator
Pitch” competition (think a timed, sixty-second idea pitch, à la Shark Tank); a year-long accelerator
program where students are paired with experience mentors; and a final Venture Competition and
Demo Day where students show real products and compete for cash prizes that university alumni
have generously donated. Have real investors and entrepreneurs judge these competitions—not
students or professors (unless your profs have started their own firms). Experienced and well-connected judges will give you the best feedback and may even invest in your firm. If you’re fortunate
enough to attend school in an urban area where there are startup meetups, attend them (checking
on Meetup.com is a good place to start). These are great places to get the “inside scoop” on what’s
happening in the startup scene, and often really important insider info on if there are unscrupulous operators that you should avoid—especially important for female founders—and you can find
a good mentor! As an upside, there are often subgroups focused on underrepresented founders,
immigrant founders, first-generation collegiate founders, etc. These can often be useful places to
get additional advice. Work with your professors to invite high-quality founders, investors, and
other executives to visit campus or Zoom in for lectures. Reach out to alumni on LinkedIn—they’re
often loyal to the school and more likely to take time out from their busy schedule to inspire the
next generation. Attend hackathons, and if there aren’t any being run in your area—start one! You
don’t have to be a skilled developer to participate in a hackathon, but these events are a great
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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way to meet other potential founders and perhaps even bang out a quick prototype and get feedback. Again, if you organize a hackathon, get high-quality industry experts—executives, founders,
and venture investors—to judge ideas that teams present at the end. And spend time hanging out
where tech students linger—computer labs and maker spaces, and the “tech floor” if your university has themed student housing. If you are fortunate enough to be studying in an urban area
where startups and investors are close by, organize field visits to those firms. I’ve run weekly Friday afternoon TechTreks at my university, taking students on field visits to area startups, as well as
the offices of venture investors and large tech firms. Contact alumni first, but if you want to reach
a firm where alums don’t work, try contacting the HR office. Many are often quite excited to have
bright, enthusiastic students learn more about their companies. And if you’re not a tech student,
be sure to bring the techies (or sponsor this through a technical organization like an information
systems, computer science, or engineering club). Techies are so hard to hire that few firms say “no”
when tech firms want to stop by. And if you do visit a firm or have a speaker stop by, make sure that
you and all of your colleagues do their homework. Read up on the firms and the people you are visiting with. Visit their websites, download and try their apps, visit their LinkedIn pages. Know the
market and competitors. Nothing turns off speakers more than a room full of underprepared students. And nothing gets their attention more than someone who has over prepared and shows real
interest with thoughtful questions that offer substantive advice.
The most important part of the recommendation above is to start building product. If you’re
not a technical cofounder, then find one, or even better, gain tech skills. Very few startups succeed
thinking they can simply “outsource development” to some coders they hire. Having tech skills inhouse is essential for the nimbleness you’ll need to quickly refine product to market needs (we’ll
discuss product–market fit later in this book). A good test to see if you have the stomach to be a tech
entrepreneur is to see if you can handle a technical course. Building a startup will almost certainly
be the hardest thing you’ve ever done, and if you can’t get through a semester of coding, you might
need to strengthen your stamina and tenacity before trying to create a firm. You don’t necessarily
have to take a university course to learn tech like how to build a high-quality website or robust app.
There are plenty of online courses, many of them free (I even have all materials for my iOS course
free, online (refer to the YouTube channel, John Gallaugher), just please don’t expect me to be able
to offer tech support or answer technical questions). Start early. Freshman have four years to skill
up, but the longer you wait the less time you’ll have to begin building what you want. This doesn’t
mean a founder needs to be the CTO, but if you have skills to build a prototype, it’ll be easier to
recruit other technical cofounders and build a tech team. Remember, many talented tech students
are already working on their own projects or may be working for others. Someone with an impressive prototype is far more persuasive than someone wind-bagging about a hoped-for product or
service. Also, most founders don’t know what they don’t know, so having a working prototype will
help shape questions on technologies, platforms, design and architecture, and more.
And don’t make some of the common mistakes of green, collegiate founders. Spending a lot of
time on a “pitch deck,” logo design, or seeking funding is a almost always a sign of a “wantrepreneur” rather than an entrepreneur. Do understand the golden triad of entrepreneurship: 1) there’s
a problem, 2) I can solve the problem, 3) and I can be paid by solving the problem. If you take a good
entrepreneurship course or read broadly (The Lean Startup methodology by Eric Reis is particularly popular, but there are also many free resources you can find online), you may learn important
concepts (also covered in this book), like build products and platforms, not features; build businesses that scale; ensure that you have product–market fit, etc. However, firms will make a lot of
changes once they can get real product feedback—redefining products, markets, and more. Spending hours on a business plan is less helpful than many think. Instead, roll up your sleeves and
start building a real product or service! Also, never ask someone to sign a non-disclosure agreement. You’re almost certainly not the only one in the world working on an idea, but winning ideas
are those that are translated into desirable products, and doing that usually involves iteration
through feedback. Despite what you might have seen in the movie The Social Network, you’ve got
much more to gain as a founder by sharing your idea, getting feedback, learning from potential customers, and improving your work. Also (and this is key) no reputable venture investor will ever sign
an NDA—asking an investor to do this will make you look terribly uninformed and decreases the
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
49
chance you’ll be taken seriously. Successful founders are almost always focused on building something that addresses need. Investors want to see this. And it’s best to show up after you’ve gotten
feedback from real customers that you’re on to something.
That said, understand many entrepreneurs fail in their first efforts, and many who are successful end up pivoting—significantly redefining the market, business, and/or product offering. Few
understand they need to pivot until they start getting customer feedback and testing markets. And
even if you do fail, early failures may help you learn so that you’ll increase your likelihood of future
successes. Students who build real products likely learn many things they wouldn’t in class alone.
They’ve got something they can show potential employers (perhaps prototypes that are on GitHub,
apps to download, or websites to visit, which all become part of one’s technical portfolio). Communicating with potential customers, collaborating with an early founding team, and pitching your
ideas in university events all help develop soft skills that are vital—confidence, maturity, communication and persuasive skills, and more.
pivoting
None of this means you should completely ignore the things you’d learn in an entrepreneurship course. You’ll eventually need to speak to a lawyer. Many university law schools have pro-bono
programs where law students can draft simple founding documents, and when things get serious
and you’re on your way to raising money, you’ll want to speak with an experienced startup attorney.
Experienced venture investors can help you walk through the process. Take a look at the firms
they’ve backed. Are there several successes? You can and should reach out to successful and failed
startups backed by an investor to vet your money before you commit. Also, consider if a startup
accelerator is right for you. The most successful startup accelerators are very competitive, and if
selected you usually participate in a residency program (on average about three months) where
firms receive mentorship from founders and experienced investors. These programs usually provide some very modest seed capital in exchange for a small ownership stake. After the program is
done, startups then pitch their products in Demo Days, where investors are invited to see earlystage firms and typically follow up with the most promising ones. I’ve seen students have
successful experiences with several accelerators, including Y-Combinator, TechStars (there are
many versions in several cities worldwide), the A16Z SPEEDRUN game accelerator, and MassChallenge (which is entirely nonprofit and doesn’t even take an equity stake). Not everyone benefits
from an accelerator, so evaluate your needs and the potential benefits and trade-offs if you’re
offered an accelerator slot. Also beware. Just as there are “wantrepreneurs,” there are wannabe investors that may have started programs, suckered someone into offering a small amount of
funding, but otherwise don’t really offer much value. The term “dumb money” is often used to
describe an investor who buys into a stake in your firm but lacks experience, connections, or other
resources to really make their investment pay off. I’ve seen many young investors jump at a noname accelerator or work with low-quality investors simply because they feel like this is a
win—they got admitted or got a term sheet. If you can, it’s almost always better to build a strong
product and seek money from more successful investors, perhaps even at a smaller stake, than take
early money from someone who is “all hat, no cattle” or who doesn’t have much to show except a
bunch of no-name investments that have never really paid off for founders. Also be careful accepting money from friends and family. I’ve seen several excited young entrepreneurs talk a good game
and get “uncle and grandma money” only to greatly regret they accepted investment from a relative
who had visions of backing the next Zuckerberg, when they were really backing nothing but hopes
and dreams.
term sheet
Finally, think about your goals. Successful founders want to build something and make a difference. Founders that are thinking about the “exit” (often selling out to another firm) are far less
attractive than those who are focused on building real products and services that tackle real problems. There’s a lot more to learn, and most of the lessons that apply to business success that are
covered in this book are also highly relevant to new and growing ventures. Seems like a journey
you’re up for? Go for it! And when you’re successful, be sure to return to your university and share
your insight with the next generation. Who knows, maybe I’ll be including your name in the list
above some day!
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
In product development
and entrepreneurship, this
involves significantly
redefining the market,
business, and/or product
offering.
A legal document that is
the agreement between a
founding firm and its
investors. It defines
investment terms,
ownership stake, board
membership if offered, etc.
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How to Get into Silicon Valley’s $600 Billion Startup School, The Circuit
with Emily Chang
Y-Combinator is the world’s most elite and most selective startup accelerator. Not all Y-Combinator firms are started by young people, but many of the firm’s most successful startups were
founded by twenty-somethings. Alumni include founders of Airbnb, Reddit, Stripe, and WePay.
Sam Altman of OpenAI is an alum for his less successful startup, Loopt, but went on to run the
firm, then head OpenAI. Refer to this video of Emily Chang interviewing Garry Tan, the current
CEO. While you should get inspired by young startup leaders, also realize starting a business is
extraordinarily difficult, and even firms that have elite mentors and a Y-Combinator backing are
likely to fail.
Key Takeaways
• Recognize that anyone reading this book has the potential to build an impactful business.
Entrepreneurship has no minimum age requirement.
• The ranks of technology revolutionaries are filled with young people, with several leading
firms and innovations launched by entrepreneurs who started while roughly the age of the
average university student.
• Several forces are accelerating entrepreneurship and and lowering its cost. These include
crowdfunding, cloud computing, app stores, AI, 3D printing, and social media, among others.
• University may be the best time to start a startup, and there are many things a would-be
entrepreneur can do to learn while completing their degree. Lots of advice and things students can do now are offered in the preceding paragraphs.
• Founders are served well by relentlessly focusing on building, testing, and refining product.
The (relatively speaking) low-risk time one spends in college can help clarify if an idea is a bad
one or if founders have built something worth their time, investors’ money, and customers’
use/purchase/subscription.
• There are many additional ways one can refine their product after college. Many founders
have benefited from accelerator programs or by accepting investment from seed and earlystage investors; however, the quality of programs and investors vary widely. Don’t rush into
a commitment without doing homework and understanding if anything gained is worth the
tradeoff.
Questions and Exercises
1. Look online for lists of young entrepreneurs. How many of these firms are tech firms or heavily rely on technology? Are there any sectors more heavily represented than tech?
2. Have you ever thought of starting your own tech-enabled business? Brainstorm with some
friends. What kinds of ideas do you think might make a good business?
3. How have the costs of entrepreneurship changed over the past decade? What forces are
behind these changes? What does this mean for the future of entrepreneurship?
4. Many universities and regions have competitions for entrepreneurs (e.g., business plan competitions, elevator pitch competitions). Does your school have such a program? What are the
criteria for participation? If your school doesn’t have one, consider forming such a program.
5. Research business accelerator programs such as Y Combinator, Techstars, and MassChallenge. Do you have a program like this in your area? What do entrepreneurs get from
participating in these programs? What do they give up? Do you think these programs are
worth it? Why or why not? Have you ever used a product or service from a firm that has
participated in one of these programs?
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
6. Explore online for lists of resources for entrepreneurship. Use social media to share these
resources with your class.
7. Why are we in the “golden age” of technology entrepreneurship? What factors are helping
entrepreneurs more rapidly achieve their vision, and with a lower cost?
8. Have any alumni from your institution founded technology firms or risen to positions of prominence in tech-focused careers? If so, work with your professor to invite them to come speak
to your class or to student groups on campus. Your career services, university advancement
(alumni giving and fundraising), alumni association, and LinkedIn searches may be able to
help uncover potential speakers.
9. Some instructors may have students work on individual or group projects as part of the
class. One option is to plot a startup and justify it based on concepts learned in this textbook
and in your course. Work with your instructor to identify judging criteria and pitch your idea
to classmates and perhaps others in the university or outside investors, as well.
1.3 Geek Up—Tech Is Everywhere
and You’ll Need It to Thrive
Learning Objectives
1. Appreciate the degree to which technology has permeated every management discipline.
2. See that tech careers are varied, richly rewarding, and poised for continued growth.
Shortly after the dot-com bubble, there was a lot of concern that tech jobs would be outsourced,
leading many to conclude that tech skills carried less value and that workers with tech backgrounds had little to offer. Turns out this thinking was stunningly wrong. Tech jobs boomed, and
as technology pervades all other management disciplines, tech skills are becoming more important,
not less. Today, tech knowledge can be a key differentiator for the job seeker. It’s the worker without tech skills who needs to be concerned.
As we’ll present in depth in a future chapter, there’s a principle called Moore’s Law that’s behind
fast/cheap computing. And as computing gets both faster and cheaper, it gets “baked into” all sorts
of products and shows up everywhere: in your pocket, in your vacuum, and on the radio frequency
identification (RFID) tags that track your luggage at the airport.
Well, there’s also a sort of Moore’s Law corollary that’s taking place with people, too. As technology becomes faster and cheaper, and developments like open source software, cloud computing,
generative artificial intelligence, software as a service (SaaS), and outsourcing push technology
costs even lower, tech skills are being embedded inside more and more job functions. And ubiquitous tech fuels our current era of “Big Data,” where bits-based insights move decision-making
from hunch to science. What this means is that, even if you’re not expecting to become the next
Tech Titan, your career will doubtless be shaped by the forces of technology. Make no mistake
about it—there isn’t a single modern managerial discipline that isn’t being deeply and profoundly
impacted by tech.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Finance
Many business school students who study finance aspire to careers in investment banking. Many ibankers will work on IPOs (initial public stock offerings), in effect helping value companies the first
time these firms wish to sell their stock on the public markets. IPO markets need new firms, and
the tech industry is a fertile ground that continually sprouts new businesses like no other. Other
i-bankers will be involved in valuing merger and acquisition (M&A) deals, and tech firms are active
in this space, too. The technology sector has become a major driver of global M&A activity.[54] Leading tech firms are flush with cash and constantly on the hunt for new firms to acquire. In just five
years, Google has bought a whopping 103 firms, IBM has bought sixty-four, Microsoft has bought
sixty-three, Cisco has bought fifty-seven, and Intel has bought forty-eight![55] Yahoo! bought thirtyseven companies in a year and a half.[56] Trader beware—software might take your job. Researchers
in the United States and China have shown an AI approach that beat major trading indices as well
as traditional investment portfolio allocation strategies.[57] No wonder so-called robo-advisors like
Betterment have been growing by billions of dollars.[58] And even in nontech industries, technology impacts nearly every endeavor as an opportunity catalyst or a disruptive wealth destroyer. The
aspiring investment banker who doesn’t understand the role of technology in firms and industries
can’t possibly provide an accurate guess at how much a company is worth.
Those in other finance careers will be lending to tech firms and evaluating the role of technology in firms in an investment portfolio. Most of you will want to consider tech’s role as part of your
personal investments. And modern finance simply wouldn’t exist without tech. When someone
arranges for a bridge to be built in Shanghai, those funds aren’t carried over in a suitcase—they’re
digitally transferred from bank to bank. And forces of technology blasted open the two-hundredyear-old floor trading mechanism of the New York Stock Exchange, in effect forcing the NYSE
to sell shares in itself to finance the acquisition of technology-based trading platforms that were
threatening to replace it. Computer-automated trading, where a human doesn’t touch the deal at
all, is responsible for some 60 percent of U.S. equity trading volume.[59] For a look at the importance
of tech in finance, consider that banking giant Chase spends $4 billion a year on technology and
employs over twelve thousand technologists, globally.[60] Tech isn’t a commodity for finance—it’s the
discipline’s lifeblood.
How AI Is Powering the Future of Financial Services, JPMorgan Chase & Co.
Hear JPMorgan Chase's Sameena Shah discuss “How AI Is Powering the Future of Financial Services” as part of the MIT Technology Review EmTech Digital Conference.
View in the online reader
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
Accounting
If you’re an accountant, your career is built on a foundation of technology. The numbers used by
accountants are all recorded, stored, and reported by information systems, and the reliability of any
audit is inherently tied to the reliability of the underlying technology. Increased regulation raises
executive and board responsibility and ties criminal penalties to certain accounting and financial
violations. Legislation has raised the stakes for mismanagement and misdeeds related to a firm’s
accounting activities and have ratcheted up the importance of making sure accountants (and executives) get their numbers right. Negligence could mean jail time. This means the link between
accounting and tech has never been tighter, and the stakes for ensuring systems accuracy have
never been higher.
Business students might also consider that while accounting firms regularly rank near the top
of Bloomberg Businessweek’s “Best Places to Start Your Career” list, many of the careers at these
firms are highly tech-centric. Every major accounting firm has spawned a tech-focused consulting practice, and in many cases, these firms have grown to be larger than the accounting services
functions from which they sprang. Today, Deloitte’s tech-centric consulting division is larger than
the firm’s audit, tax, and risk practices. At the time of its spin-off, Accenture was larger than the
accounting practice at former parent Arthur Andersen (Accenture executives are also grateful they
split before Andersen’s collapse in the wake of the prior decade’s accounting scandals). Now, many
accounting firms that had previously spun off technology practices are once again building up
these functions, finding strong similarities between the skills of an auditor and skills needed in
emerging disciplines such as information security and privacy.
Will AI Replace Accountants?
Interested in a career in accounting? Then you might be interested in this interview with Dr. Mike
Willis, the head of the University of Cambridge (UK) Director of Accounting Grad Program, on the
future of the accounting profession and the impact of AI on the field.
Marketing
Technology has thrown a grenade onto the marketing landscape, and as a result, the skill set
needed by today’s marketers is radically different from what was leveraged by the prior generation.
Online channels have provided a way to track and monitor consumer activities, and firms are leveraging this insight to understand how to get the right product to the right customer, through the
right channel, with the right message, at the right price, at the right time. The success or failure of a
campaign can often be assessed immediately based on online activity such as website visit patterns
and whether a campaign results in an online purchase.
The ability to track customers, analyze campaign results, and modify tactics has amped up
the return on investment of marketing dollars, with firms increasingly shifting spending from
tough-to-track media such as print, radio, and television to the Web.[61] And new channels continue
to emerge: smartphone, tablet, smart TV, smartwatch and other wearables, smart auto, and more.
Look to Apple to show how fast things grow: Within roughly four years, iOS devices were in the
hands, backpacks, purses, and pockets of over two hundred million people worldwide, delivering
location-based messages and services and even allowing for cashless payment.[62] Apple has since
sold over two billion iPhones worldwide, creating the primary channel for all sorts of customer
engagement.[63]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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The rise of social media is also part of this blown-apart marketing landscape. Now all customers can leverage an enduring and permanent voice, capable of broadcasting word-of-mouth
influence in ways that can benefit and harm a firm. Savvy firms are using social media to generate
sales, improve their reputations, better serve customers, and innovate. Social media has also lead
to the $21 billion+ influencer economy,[64] while AI has ushered in the era of virtual influencers who
have garnered millions of online followers and earned millions of promotional dollars along the
way. Those who don’t understand this landscape risk being embarrassed, blindsided, and out of
touch with their customers.
Search engine marketing (SEM), search engine optimization (SEO), customer relationship management (CRM), personalization systems, and a sensitivity to managing the delicate balance
between gathering and leveraging data and respecting consumer privacy are all central components of the new marketing toolkit. And there’s no looking back—tech’s role in marketing will only
grow in prominence. Analyst firm Gartner predicts that chief marketing officers are on a path to
spend more on technology than any other function within the firm.[65]
Computer-Generated Influencers on Social Media Give a Peek into the Future of
Marketing
See how virtual influencers have garnered millions of followers. Also learn the term uncanny valley.
View in the online reader
Operations
A firm’s operations management function is focused on producing goods and services, and operations students usually get the point that tech is the key to their future. Quality programs, process
redesign, supply chain management, factory automation, and service operations are all tech-centric. These points are underscored in this book as we introduce several examples of how firms have
designed fundamentally different ways of conducting business (and even entirely different industries), where value and competitive advantage are created through technology-enabled operations.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
Google Cloud Manufacturing Operations Solutions
This short video from Google Cloud platform shows how Big Data, robotics, and other technologies are transforming the factory floor, and how goods are produced for market.
View in the online reader
Human Resources
Technology helps firms harness the untapped power of employees. Knowledge management systems are morphing into social media technologies—social networks, wikis, and Twitter-style messaging systems that can accelerate the ability of a firm to quickly organize and leverage teams of
experts. And crowdsourcing tools and question-and-answer sites like Quora and Stack Overflow
allow firms to reach out for expertise beyond their organizations. Human resources (HR) directors
are using technology for employee training, screening, and evaluation. The accessibility of end-user
technology means that every employee can reach the public, creating an imperative for firms to set
policy on issues such as firm representation and disclosure and to continually monitor and enforce
policies as well as capture and push out best practices. The successful HR manager recognizes that
technology continually changes an organization’s required skill sets as well as employee expectations.
The hiring and retention practices of the prior generation are also in flux. Recruiting hasn’t
just moved online; it’s now grounded in information systems that scour databases for specific skill
sets, allowing recruiters to cast a wider talent net than ever before. Job seekers are writing résumés
with keywords in mind, aware that the first cut is likely made by a database search program, not a
human being. The rise of professional social networks also puts added pressure on employee satisfaction and retention. Prior HR managers fiercely guarded employee directories for fear that a
headhunter or competitive firm might raid top talent. Now the equivalent of a corporate directory
can be easily pulled up via LinkedIn, a service complete with discrete messaging capabilities that
can allow competitors to rifle-scope target your firm’s best and brightest. Thanks to technology, the
firm that can’t keep employees happy, engaged, and feeling valued has never been more vulnerable.
And while many students have been wisely warned that inappropriate social posts can ruin
their job candidacy, also know that the inverse is true. In many ways social media is “the new
résumé.”[66] Thoughtful blog posts, a compelling LinkedIn presence, Twitter activity reflecting an
enthusiastic and engaged mind, and, for tech students, participation in collaborative coding communities like GitHub all work to set apart a candidate from the herd. If you can’t be found online,
some employers may wonder if you have current skills, or if you have something to hide.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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How Companies, Human Resource Departments Are Using AI When Hiring, Plus a
Look at Regulation
Yahoo! Finance discusses new laws and a shifting set of concerns for organizations that are using
more technology as part of their human resources functions and especially their hiring processes.
View in the online reader
The Law
And for those looking for careers in corporate law, many of the hottest areas involve technology.
Intellectual property, patents, piracy, and privacy are all areas where activity has escalated dramatically in recent years. The number of U.S. patent applications awaiting approval has tripled in
the past decade, while China saw a threefold increase in patent applications in just five years.[67]
Firms planning to leverage new inventions and business methods need legal teams with the skills
to sleuth out whether a firm can legally do what it plans to. Others will need legal expertise to
help them protect proprietary methods and content, as well as to help enforce claims in the home
country and abroad. Tech is increasingly being used to automate rote legal tasks, and generative
AI is becoming mainstream in the legal profession;[68] however, we’ve also seen examples of clueless
lawyers who have violated professional practice standards by submitting ChatGPT-generated legal
analyses that presented bogus, non-existent examples.[69]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
How CoCounsel's AI Assistant Is Making Lawyers Unstoppable!
Watch a brief demonstration of CoCounsel, one of many generative AI tools that are enhancing
how attorneys do their jobs.
View in the online reader
Information Systems Careers
While the job market goes through ebbs and flows, recent surveys have shown there is no end in
sight for workers with technology skills. In the U.S. News ranking of “Best Jobs in America” tech
skills made up all of the top fifteen jobs that weren’t part of the health care industry.[70] Glassdoor listed tech jobs in nine of the top ten slots in its “50 Best Jobs in America.”[71] The World
Economic Forum’s Future of Jobs Report ranked IT job titles in twelve of its top twenty,[72] and
demand for computer and information technology workers will outstrip supply for years to come.
Information- and computer-related careers are expected to grow by double digits for at least the
next decade.[73] Want to work for a particular company? Chances are they’re looking for tech talent. Eighty-two percent of CEOs expect to need more tech workers.[74] LinkedIn says, “In the next
five years, we’ll see 150 million more technology-related jobs across industries globally, so demand
for digital skills is very much on the rise.”[75] The Harvard Business Review has declared “Data Scientist” the “Sexiest Job of the 21st Century,”[76] and Bloomberg says undergraduates with data science
training are now being hired with salaries greater than investment banking analysts.[77] The recent
pandemic not only showed the resilience of tech careers, but also the work-from-home flexibility
offered to tech staff, who often just need a laptop and reliable Internet to get the job done. Fortune’s rankings of the “Best Companies to Work For” is full of technology firms and has been topped
by tech businesses nearly every year since it started.[78] And everyone wants to hire more coders
from underrepresented groups. Apple, Etsy, Square, Meta, and Alphabet are among the firms with
programs to prep and encourage more women and minorities to pursue tech careers (details in endnotes).
Students studying technology can leverage skills in ways that range from the highly technical
to those that emphasize a tech-centric use of other skills. And why be restricted to just the classes
taught on campus? Resources like Coursera, Codecademy, Udemy, edX, YouTube, and others provide
a smorgasbord of learning where the smart and motivated can geek up. Carve out some time to give
programming a shot—remember, the founders of Tumblr and Instagram were largely self-taught.
Your author even offers hundreds of free videos on learning to code iOS apps from scratch, as well
as tutorials on building robotics and other hardware products. The high demand for scarce technical talent has also led many tech firms to offer six-figure starting salaries to graduating seniors
from top universities.[79] Take some advice from the Harvard Business Review: “Leading a digital
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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transformation? Learn to code.”[80] Opportunities for programmers abound, particularly for those
versed in new technologies. But there are also non-programming roles for experts in areas such as
user-interface design (who work to make sure systems are easy to use), process design (who leverage
technology to make firms more efficient), and strategy (who specialize in technology for competitive advantage). Nearly every large organization has its own information systems department. That
group not only ensures that systems get built and keep running but also increasingly takes on
strategic roles targeted at proposing solutions for how technology can give the firm a competitive
edge. Career paths allow for developing expertise in a particular technology (e.g., business intelligence analyst, database administrator, social media manager), while project management careers
leverage skills in taking projects from idea through deployment.
Even in consulting firms, careers range from hard-core programmers who “build stuff” to analysts who do no programming but might work identifying problems and developing a solutions
blueprint that is then turned over to another team to code. Careers at tech giants like Apple, Google,
and Microsoft don’t all involve coding end-user programs either. Each of these firms has its own
client-facing staff that works with customers and partners to implement solutions. Field engineers
at these firms may work as part of (often very lucratively compensated) sales teams to show how a
given company’s software and services can be used. These engineers often put together prototypes
that are then turned over to a client’s in-house staff for further development. An Apple field engineer might show how a firm can leverage iPads in its organization, while a Google field engineer
can help a firm incorporate search, banner, and video ads into its online efforts. Careers that involve
consulting and field engineering are often particularly attractive for those who are effective communicators who enjoy working with an ever-changing list of clients and problems across various
industries and in many different geographies.
Upper-level career opportunities are also increasingly diverse. Consultants can become partners who work with the most senior executives of client firms, helping identify opportunities for
those organizations to become more effective. Within a firm, technology specialists can rise to be
chief information officer or chief technology officer—positions focused on overseeing a firm’s information systems development and deployment. And many firms are developing so-called C-level
specialties in emerging areas with a technology focus, such as chief information security officer
(CISO), and chief privacy officer (CPO). Senior technology positions may also be a ticket to the
chief executive’s suite. Fortune pointed out how the prominence of technology provides a training
ground for executives to learn the breadth and depth of a firm’s operations, and an understanding of the ways in which a firm is vulnerable to attack and where it can leverage opportunities for
growth.[81]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
Generative AI and Programming, Peter Norvig, Director of Research, Google
No, tech jobs aren’t going away; tech will be baked into even more jobs. Peter Norvig, one of
the world’s leading AI scientists, discusses the role of AI in the future of tech jobs, and how most
jobs will become tech-enabled.
View in the online reader
Your Future
With tech at the center of so much change, realize that you may very well be preparing for careers
that don’t yet exist. But by studying the intersection of business and technology today, you develop
a base to build upon and critical thinking skills that will help you evaluate new, emerging technologies. Think you can afford to wait on tech study, and then quickly get up to speed at a later
date? Whom do you expect to have an easier time adapting and leveraging a technology like social
media—today’s college students who are immersed in technology or their parents who are embarrassingly dipping their toes into the waters of TikTok? Those who put off an understanding of
technology risk being left in the dust.
Consider the nontechnologists who tried to enter the technology space in the early part of
this century’s tech growth. News Corp head Rupert Murdoch piloted his firm to the purchase of
MySpace only to see this one-time leader lose share to rivals.[82] Former Warner executive Terry
Semel presided over Yahoo!’s[83] malaise as Google blasted past it. Barry Diller, the man widely credited with creating the Fox Network, led InterActive Corp (IAC) in the acquisition of a slew of tech
firms ranging from Expedia to Ask.com, only to break the empire up as it foundered.[84] And Time
Warner head Jerry Levin presided over the acquisition of AOL, executing what many consider to be
one of the most disastrous mergers in U.S. business history.[85] Contrast these guys against the technology-centric successes of Mark Zuckerberg (Facebook), Steve Jobs (Apple), and Sergey Brin and
Larry Page (Google).
While we’ll make it abundantly clear that a focus solely on technology is a recipe for disaster,
a business perspective that lacks an appreciation for tech’s role is also likely to be doomed. At this
point in history, technology and business are inexorably linked, and those not trained to evaluate
and make decisions in this ever-shifting space risk irrelevance, marginalization, and failure.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Key Takeaways
• As technology becomes cheaper and more powerful, it pervades more industries and is
becoming increasingly baked into what were once nontech functional areas.
• Technology is impacting every major business discipline, including finance, accounting, marketing, operations, human resources, and the law.
• Tech jobs rank among the best and highest-growth positions, and tech firms rank among
the best and highest-paying firms to work for.
• Information systems (IS) jobs are profoundly diverse, ranging from those that require heavy
programming skills to those that are focused on design, process, project management, privacy, and strategy.
Questions and Exercises
1. Look at Fortune’s “Best Companies to Work For” list. How many of these firms are technology firms? Which firm would you like to work for? Is it represented on this list?
2. Look at Bloomberg Businessweek’s “Best Places to Start Your Career” list. Is the firm you
mentioned above also on this list?
3. What are you considering studying? What are your short-term and long-term job goals?
What role will technology play in that career path? What should you be doing to ensure that
you have the skills needed to compete?
4. Which jobs that exist today likely won’t exist at the start of the next decade? Based on your
best guess on how technology will develop, can you think of jobs and skill sets that will likely
emerge as critical five and ten years from now?
5. Explore online resources to learn technology on your own and search for programs that
encourage college students. If you are from an underrepresented group in technology (i.e.,
a woman or minority), search for programs that provide learning and opportunity for those
seeking tech careers. Share your resources with your professor via a class wiki or other
mechanism to create a common resource everyone can use to #geekup. Then tweet what
you create using that hashtag!
1.4 Hey, Manager—You'll Need to See
beyond the Hype Cycle!
Learning Objectives
1. Understand the Hype Cycle.
2. Be able to draw the Hype Cycle and identify the various “stages” that it depicts.
3. Recognize that the cycle is essentially a guess, not a scientific or metric-based plot; however,
also know that you’ll be learning several techniques and frameworks that help you gain a
better sense of where a firm is on the Hype Cycle Curve, and whether or not a firm should
make investments in a given technology or tech-enabled way of doing business.
Larry Ellison, the billionaire founder of database and ERP giant Oracle, has said that “the tech
industry is more fashion-driven than women's fashion.”[86] Spend any time watching the industry
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
and you're likely to feel the same way. It seems that press and practitioners are in a constant race,
looking to identify and get in on “the next big thing,” but wow, is this difficult. There are lots of
firms and individuals that burned cash chasing technologies that never lived up to the initial hype
(crypto, smart glasses, the Metaverse); others that wallow in years of multi-billion-dollar development (driverless cars); or that get it wrong while a well-timed rival with the right mix of user
experience and assets blasts past them (the iPhone and Android).
Gartner, one of the world's best-known tech advisory firms, has created a concept known as the
Hype Cycle.[87] Credit Gartner in your work, but the phrase is not copyrighted, so you'll see the Hype
Cycle widely used in presentations, textbooks, and press articles. The accompanying video gives a
solid overview of the concept. You'll see the Hype Cycle used to discuss specific technologies (ChatGPT), technology categories (generative AI), and even broader concepts (work from home). For the
manager, the Hype Cycle is essentially about timing. A firm that's late in adopting a technology may
find itself unable to create the competitive advantages of early movers. Don't make the mistake of
getting suckered into the trap of thinking a firm can just be a fast-follower. Network effects, scale,
switching costs, and more are key competitive assets that an early mover may be able to create over
its slow-moving rivals. You'll learn about all of these concepts later in this book, but for now know
that the winner-take-all, winner-take-most dynamic you see in so many tech industries is a direct
result of firms that have created benefits by moving early. But move too early and firms might burn
precious cash on technologies that aren't ready or that might be surpassed by others. There are also
plenty of hyped technologies that have died out or that have been surpassed by rivals, so while it
can be wise to experiment with emerging technologies, firms need to also know when to abandon
efforts that likely won't pan out. And the opposite is true as well—a firm might give up on a tech or
sour on an early, unrealized investment only to see some characteristics of technologies and markets change the game for adoption, allowing new rivals to gain a lead. It's your job as a manager to
understand the risks and rewards.
The Hype Cycle
View in the online reader
The Hype Cycle (modified curve presented below) is usually described as a curve with market
expectations (vertical axis) plotted against time (horizontal axis) in an rapidly up, rapidly down,
then slower upward sloping and plateauing curve that stakes out five stages: 1) A stage of emerging
innovation, sometimes referred to as an innovation trigger, where a new tech or other concept
arrives. If interest accelerates, expectations rise and the curve slopes sharply upward. This typically
happens as early proofs-of-concept show promise, early-stage venture capitalists plow money into
startups focused on this area, and firms launch experimental efforts; 2) If the hype continues, many
technologies will hit a period of over-inflated expectations—the curve hits a peak and then begins
a downward trend. When this happens there's a lot of media hype, but still very little payoff or
evidence that the tech will deliver on hoped-for benefits; 3) A lack of proven return on investment
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(ROI) typically leads to a period of diminishing interest and investment—the trough of disillusionment. Many technologies never recover from a fall—they fail completely or are surpassed by rival
approaches. But in many cases, tech matures and use cases emerge with some clear payoff; 4) Firms
begin to adopt the tech with specific, benefits-generating results. That's referred to as a slope of
enlightenment; 5) A period of regular use, the plateau of productivity.
FIGURE 1.3 Five Stages along the Hype Cycle Curve
Source: John Gallaugher
While many plot new tech and trends on a curve like this, no one has a crystal ball. There are
no metrics associated with measuring “expectations” and usually no real “time” plotted, either. And
while you might see lines drawn between the five stages of the hype cycle, there isn't any real, measurable cutoff where we can observe a value and clearly state, “Ah, we've arrived here!” In nearly
all cases, Hype Cycle Curve plots are guesses and broad-stroke assessments of what's happening.
That's not to say the tool is useless, but know that you're not looking at something scientific—just
a tool to help focus on what's happening at a point in time in industry. You can, of course, go to
Gartner for advice. At any given time, the firm has scores of technologies and trends plotted on
a Hype Cycle Curve and additional in-depth analysis. However, an informed observer and someone gaining experience experimenting with technology and can also greatly improve the likelihood
that they'll guess correctly and understand the current state of technologies and markets so that
they can make better strategic and investment decisions.
The Hype Cycle curve also doesn't document the important nuances that really move markets—specific changes in technologies, user interfaces, business models, entry of firms with additional assets, or the ability to turn tech investment into durable, strategic benefit. And there can be
all sorts of outside factors, too, like government innovation or the arrival of a low-cost/high-value
supporting technology that's a part of a larger offering. But an ability to recognize and understand
truly impactful factors are what you, hopefully, gain from this textbook. We'll offer tools to help you
understand the common patterns depicted by the Hype Cycle, and give you valuable concepts and
frameworks for understanding technology, making decisions regarding technologies, and hopefully
also provide the skills and tools to plot more successful tech and strategic decisions.
This is really, really difficult. Here are just a few examples: IBM Watson showed tremendous
promise in artificial intelligence. After all, it beat Jeopardy champs Ken Jennings and . . . that other
guy. IBM invested billions in the technology, created a Watson business division to commercialize
the technology, and rolled out impressive initiatives in health care, life sciences, and other fields.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
But few realized the initial hype.[88] Meanwhile, Google's invention of the machine learning Transformer (the T in ChatGPT—yes, it was invented by Google,[89] not ChatGPT parent OpenAI) allowed
other fast-moving firms to build impressive new generative AI technologies that relied on the same
underlying base technology, neural networks, that Watson used. Don't worry if you don't understand these technology names—later chapters will introduce terms and offer plenty of examples.
But the example of Watson does show how a technology leader with a one-hundred-year-plus
history (IBM) can lose out to rivals. And this pattern has happened plenty of times before. IBM
trumpeted something called Utility Computing, which was really just cloud computing, but a firm
that started as a bookstore, Amazon, has become the undisputed leader in this product category.
Today IBM doesn't even rank in the top three cloud computing firms worldwide. Xerox invented
the graphical user interface, but Apple commercialized it, and Microsoft won the market with
Windows. Palm and Blackberry had an initial lead in smartphones, and Microsoft tried to offer
phone operating systems for years, but Apple crushed them with iPhone innovations, with Google's
Android the only substantive rival (and one that outsells Apple in most markets worldwide).
Key Takeaways
• The press and tech industry are often guilty of overhyping technology.
• Gartner has created a framework that roughly tracks technology through five potential stages
on a graph, with Expectations in the y-axis and Time in the x-axis.
• The five stages are Emerging Innovation (expectations quickly rise), Inflated Expectations
(expectations peak, then trend downward), Trough of Disillusionment (expectations crater),
Slope of Enlightenment (expectations slowly increase once again), and Plateau of Productivity (expectations flatten or increase slightly over time as use enters the mainstream.
• The graph doesn’t have quantifiable measures; it’s really just guesses, but it’s useful in helping understand the current state of tech and tech-fueled business practices.
• Not all technology will travel through the entire graph. Some never emerge from failure to
achieve initially high expectations. Others are passed by newer, superior technologies and
techniques.
• The Hype Cycle Curve doesn’t depict important factors influencing technology adoption and
diffusion, but you’ll gain an understanding of many useful concepts and frameworks throughout this text.
• The Hype Cycle Curve also doesn’t advocate specifically for the advantage of moving early
or following quickly; rather, it should be one of many tools a manager uses when making
decisions about technology investment.
Questions and Exercises
1. Work with your instructor and split up into teams. Choose a technology that another group
isn’t using (use an online doc to keep track of which groups are tracking which technologies). Draw a Hype Cycle graph. Research your technology and plot where you think it is on
the graph. Explain your estimate to the class.
2. Related to above, and you will not be able to do this until the course is nearly done, keep
track of the graph and at the end of the course, update your graph and include key players
(specific firms offering the technology) and whether or not they have created resources for
competitive advantage. Cite which resources should be necessary for durable advantage,
why, and why firms haven’t achieved them.
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1.5 The Pages Ahead
Learning Objective
1. Understand the structure of this text, the issues and examples that will be introduced, and
why they are important.
Hopefully this first chapter has helped get you excited for what’s to come. The text is written in
a style similar to business magazines and newspapers (i.e., the stuff you’ll be reading and learning
from for the rest of your career). The introduction of concepts in this text are also example rich, and
every concept introduced or technology discussed is grounded in a real-world scenario to show why
it’s important. But also know that while we celebrate successes and expose failures in that space
where business and technology come together, we also recognize that firms and circumstances
change. Today’s winners have no guarantee of sustained dominance. What you should acquire in
the pages that follow are a fourfold set of benefits that (1) provide a description of what’s happening in industry today, (2) offer an introduction to key business and technology concepts, (3) offer a
durable set of concepts and frameworks that can be applied even as technologies and industries
change, and (4) develop critical thinking that will serve you well throughout your career as a manager.
Chapters don’t have to be read in order, so feel free to bounce around, if you’d like. Your professor may ask you to skip or skim over certain sections. An emphasis has also been placed on
finding high-quality videos that illustrate or extend concepts mentioned in the reading. Look to
your instructor for guidance on which videos should be watched, especially as this relates to class
assignments and discussions. Many students have written to me stating that they’ve enjoyed reading even those areas not assigned (the ultimate compliment for a textbook author). I hope you find
the text as enjoyable, as well. Let’s look at what you can expect.
In Chapter 2 we see how a tech-fed value chain helped Spanish clothing giant Zara craft a
counterintuitive model that seems to defy all conventional wisdom in the fashion industry. We’ll
show how Zara’s model differs radically from that of the firm it displaced to become the world’s top
clothing retailer: Gap. We’ll show how technology ranging from handheld mobile devices to communications and scheduling systems to RFID tags work together to impact product design, product
development, marketing, cycle time, inventory management, and customer loyalty; and how technology decisions influence broad profitability that goes way beyond the cost-of-goods thinking
common among many retailers. We’ll also offer a mini-case on Fair Factories Clearinghouse, an
effort highlighting the positive role of technology in improving ethical business practices. Another
mini-case shows the difference between thinking about technology versus broad thinking about
systems, all through an examination of how high-end fashion house Prada failed in its rollout of
technology that on the surface seemed very similar to Zara’s.
Chapter 3 focuses on building big-picture skills to think about how to leverage technology for
competitive advantage. Technology alone is rarely the answer, but through a rich set of examples,
we’ll show how firms can weave technology into their operations in ways that create and reinforce
resources that can garner profits while repelling competitors. Amazon, Apple, Blue Nile, Cisco, Dell,
Google, OpenTable, Uber, TiVo, and Yahoo! are among the many firms providing a set of examples
illustrating both successes and failures in leveraging technology. The chapter will show how firms
use technology to create and leverage brand, scale economies, switching costs, data assets, network
effects, and distribution channels. We’ll introduce how technology relates to two popular management frameworks—the value chain and the five forces model. And we’ll provide a solid decision
framework for considering the controversial and often misunderstood role that technology plays
among firms that seek an early-mover advantage.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
In Chapter 4, we’ll cover tech’s role at FreshDirect, a firm that has defied the many failures in
the online grocery space and devastated traditional rivals. We’ll take an extended look at how a tech
firm found product–market fit and built a series of tech-fueled resources for competitive advantage that led to spectacular growth and changed the way America’s largest city shops for groceries.
We’ll also learn from one of the firm’s missteps in rolling out new technology, learn savvy steps the
firm made to grow during the pandemic, and examine its future competition as new rivals show up
to try to win away the firm’s loyal customers. We’ll also wonder if the firm’s recent acquisition can
have a payoff for its new parent.
Chapter 5 studies Netflix and how the firm grew the world’s most dominant and profitable
streaming platform, despite well-resourced rivals. We present how the shift from atoms (physical
discs) to bits (streaming and downloads) created additional challenges and opportunities. Issues of
digital products, licensing and partnerships, bargaining power of unique-good suppliers, content
creation, revenue models, brand building and customer satisfaction, disparate competitors, global
expansion challenges, and delivery platforms are all discussed. The section also covers how the
streaming business has additional advantages in data collection and leverage, distinctly different
but still significant scale assets, compelling benefits for consumers and content providers, and
more. The chapter also provides an overview of the cloud-based Netflix technical infrastructure
and the firm’s open source contributions.
Chapter 6 focuses on understanding the rate of technology change from a computing power
and cost perspective, and the implications for firms, markets, and society. The chapter offers accessible definitions for technologies impacted by Moore’s Law but goes beyond semiconductors and
silicon to show how the rate of magnetic storage (e.g., hard drives) and networking price and performance improvement create markets filled with uncertainty and opportunity. The chapter will
show how tech has enabled AI advancements that are happening at performance rates greater
than Moore predicted, as well as the rise of Apple and Amazon; created mobile phone markets that
empower the poor worldwide; and created seven waves of disruptive innovation. We’ll also show
how Moore’s Law, perhaps the greatest economic gravy train in history, will inevitably hit a limit on
shrinking transistors and halt the advancement of current technology. Studying technologies that
“extend” Moore’s Law, such as multicore semiconductors, helps illustrate both the benefit and limitation of technology options, and in doing so helps develop skills around recognizing the pros and
cons of a given innovation. Supercomputing, grid, and cloud computing are introduced through
examples that show how these advances are changing the economics of computing and creating
new opportunities. Issues of e-waste are explored in a way that shows that firms need to consider
not only the ethics of product sourcing but also the ethics of disposal. A mini-case on the development of Disney’s MagicBand shows how fast/cheap technology is being used to replace paper
ticketing at Disney World in ways that improve the customer experience, streamline operations,
and cut costs. The case also raises issues on the challenges of developing complex new technology
that impact many areas of the firm and its customers.
In Chapter 7 we’ll also introduce the concept of disruptive innovation to help managers understand why so many large incumbents are beat by new entrants, and we’ll offer methods for becoming the disruptor rather than the disrupted. Concepts of disruptive technologies and disruptive
innovation are introduced in a way that will help managers recognize potentially firm-destroying
and career-crushing tech-driven challenges and get new possibilities on a firm’s early radar. Minicases show disruption in action—for example, competition between Intel and ARM, Yahoo! as a
firm that blew a chance at being the disruptor, and Intuit’s migration from packaged software to
cloud. You’ll also see several examples of potentially disruptive technologies, which will challenge
you to think through how what you’ve just learned can be applied to spot threat and opportunity.
These include sections Chapter 7 Section 3 and Chapter 7 Section 4.
Chapter 8 explores one of the most disruptive firms in the world. The chapter is broken into
several parts. The first discusses the firm’s physical goods e-commerce business and provides an
opportunity to examine how it seeks tech-driven efficiencies in warehouse operations that leverage AI and robotics, fuels strategic goals, creates advantages through the accounting and finance
concept of the cash conversion cycle, reinforces brand strength, enables scale and network effects,
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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creates a powerful data asset, and is fundamentally redefining shopping habits. The chapter also
examine’s Amazon’s ability to create a logistics business, turning this into a new business, the role
of technology in allowing this sort of vertical integration, and the business case beyond this effort.
We’ll also see how Amazon has operated with physical stores—shutting many early experiments
but growing Whole Foods and grocery efforts. We’ll also examine Amazon’s growing device businesses, including Kindle, Fire tablet, TV, Fire Phone (a failure), and Alexa/Echo (a dominant player
but one that contributes to the majority of Amazon’s $10 billion in consumer products losses). The
chapter also covers the importance of platform creation, issues of channel conflict, and how the
firm is disrupting the entire publishing and media creation value chain. We’ll examine Amazon’s
personal and corporate cloud computing initiatives, the infrastructure that underpins these efforts,
and the business opportunities that these efforts create. We’ll see how Amazon uses AI internally
and look at some of the major artificial intelligence services it provides via AWS. Finally, we’ll provide a mini-case on Amazon rival Shopify.
New in this edition is Chapter 9. In this chapter we’ll look at the rise of Shein, a firm that has,
almost overnight, become the world’s second largest fashion retailer. Shein will allow us to examine
yet another radically different business model, one that challenges Inditex’s advantages. We’ll note
how Shein uses technology to foster fast-fashion supply chain relationships, uses AI for design of
an array of products unmatched by anyone in fashion retail, and how social media and A/B testing techniques play a role in increasing hits and reducing misses. We’ll also take a look at the firm's
various controversial practices, including exploitation of a shipping loophole in U.S. law, criticism
over labor and environmental practices, and the use of artificial intelligence in a way that violates
copyright and exploits smaller artisans. Finally, we’ll look at the rise of competitors in the space,
including Temu and TikTok’s new retail offering.
In Chapter 10 we’ll see how technologies, services, and platforms can create nearly insurmountable advantages. Tech firms from Facebook to Intel to Microsoft are dominant because of network
effects—the idea that some products and services get more valuable as more people use them.
Studying network effects creates better decision-makers. The concept is at the heart of technology
standards and platform competition, and understanding network effects can help managers
choose technologies that are likely to win, hopefully avoiding getting caught with a failed, poorly
supported system. Students learn how network effects work and why they’re difficult to unseat.
The chapter ends with an example-rich discussion of various techniques that one can use to compete in markets where network effects are present. A subsection also examines competition in
electric vehicle charging station standards. Mini-cases examine the rise of the Roblox platform, the
unexpected victory of Zoom over other well-positioned video conferencing rivals, and Apple’s move
into FinTech by offering credit card, loan, and savings account services.
Peer production and social media have created some of the Internet’s most popular destinations and most rapidly growing firms, and they are empowering the voice of the customer as never
before. In Chapter 11 students learn about various technologies used in social media and peer production, including blogs, wikis, social networking, and more. Prediction markets and crowdsourcing
are introduced, along with examples of how firms are leveraging these concepts for insight and
innovation. Finally, students are offered guidance on how firms can think SMART by creating a
social media awareness and response team. Issues of training, policy, and response are introduced,
and technologies for monitoring and managing online reputations are discussed. Two minicases
examine X/Twitter and TikTok.
Chapter 12 expands on peer production concepts introduced in the previous chapter to explore
the so-called sharing economy and collaborative consumption. Examples are offered of citizens’
coming together to create or share resources across markets, and of the creation of electronic markets to facilitate these services. Drivers that help bring about the sharing economy, the advantages
enjoyed by sharing economy firms, and the challenges these firms face are also introduced. The
chapter also discusses how mainstream firms are leveraging sharing economy concepts, and the
future outlook for these firms is explored. Extended mini-cases on Airbnb and Uber discuss their
impact, success, competitive advantage, platform creation, use of APIs, and major issues being faced
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
as two of the sector’s most successful firms. Success strategies and challenges for firms involved in
the sector are illustrated, and the future outlook for the space is explored.
Chapter 13 will allow us to study success and failure in IS design and deployment by examining
one of the Internet’s hottest firms. Meta is one of the most accessible and relevant Internet firms
to so many, but it’s also a wonderful laboratory to discuss critical managerial concepts. We’ll discuss
the rise of Facebook’s core web platform, including features like feeds, and various competitive
advantages that the firm was able to create. We’ll see how the firm grew by enveloping services
provided by other firms as features in Facebook’s own platform. We’ll also examine how mobile is
different and look at both Facebook’s many failed mobile apps as well as its wildly successful acquisitions of Instagram and WhatsApp. We’ll also see how it has competed with rivals Snapchat and
TikTok. We’ll explore the metaverse, the reason for the firm’s rebranding as Meta, its Oculus acquisition, and its various metaverse-related offerings. We’ll also examine the role AI plays in the firm
and discuss several of the firm’s AI offerings, from the open-source Llama models to GenAI tools
for image generation and coding. The discussion includes information on the desktop platform’s
early success, stagnancy, the firm’s mobile platform struggles, attempts to build Messenger into a
platform (and contrast with WeChat and other international efforts), and continued challenges.
The failure of the Beacon system shows how even bright technologists can fail if they ignore the
broader procedural and user implications of an information systems rollout.
Chapter 14 provides a fascinating look at how two young women entrepreneurs have crafted
a business that has attracted millions of customers and recast how women relate to designer fashion. We’ll see how the main business started as fashion rental, but also how a larger business of
subscription fashion has emerged. We’ll introduce key concepts in entrepreneurship, such as product–market fit and minimum viable product, and lifetime customer value. The case illustrates how
a new firm developed strong network effects through crafting a win–win for customers and fashion
brands. Social and mobile are detailed as being key enablers for the firm’s unique sharing economy
model. A section on how the firm leverages analytics to inform everything from pricing to product sourcing to customer service shows the advantages of the tech-centric firm over conventional
retailers. Technology, as well as human capital, is described in a firm that is at its heart a highly complex reverse logistics business where everything that goes out must come in and often heads right
out again after cleaning and treatment. While RTR grew tremendously, we’ll also see how the firm
struggled under several brutal challenges, including issues with technology rollout and an unprecedented drop in demand from the COVID-19 pandemic.
Chapter 15 offers a primer to help managers better understand what software is all about.
The chapter offers a brief introduction to software technologies. Students learn about operating
systems, application software, and how these relate to each other. Enterprise applications are introduced, and the alphabet soup of these systems (e.g., ERP, CRM, and SCM) is accessibly explained.
Various forms of distributed systems (client-server, Web services, APIs, messaging) are also covered.
The chapter provides a managerial overview of how software is developed, offers insight into the
importance of Java and scripting languages, and explains the differences between compiled and
interpreted systems. A managerial introduction to approaches, system development methodologies are also offered, including waterfall, agile, and scrum. System failures, total cost of ownership,
and project risk mitigation are also introduced. The array of concepts covered helps a manager
understand the bigger picture and should provide an underlying appreciation for how systems
work that will serve even as technologies change and new technologies are introduced. A chapter
minicase discusses why Volkswagen, the world’s largest auto manufacturer, has struggled with the
massive software projects needed for electric vehicles.
The software industry is changing radically, and that’s the focus of Chapter 16. The issues covered in this chapter are front and center for any firm making technology decisions. We’ll cover
open source software, software as a service, hardware clouds, app software, and virtualization. Each
topic is introduced by discussing advantages, risks, business models, and examples of their effective
use. The chapter ends by introducing issues that a manager must consider when making decisions
whether to purchase technology, contract or outsource an effort, or develop an effort in-house.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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In Chapter 17 we’ll study data, which is often an organization’s most critical asset. Data lies at
the heart of every major discipline, including marketing, accounting, finance, operations, forecasting, and planning. We’ll help managers understand how data is created, organized, and effectively
used. We’ll cover limitations in data sourcing, issues in privacy and regulation, and tools for access,
including various business intelligence and so-called Big Data technologies. Sections on artificial
intelligence and machine learning should give you a solid managerial understanding of what’s at
work in one of the most critical new technologies of this century. And you’ll explore issues around
the ethics of technology efforts and what a company can do to operate more ethically and protect itself, its workers, and its customers from ethical lapses and crises. A mini-case on Walmart
shows data’s use in empowering a firm’s entire value chain, while examples from Spotify to L.L.
Bean underscore Big Data’s impact on the modern enterprise.
In Chapter 18 we'll cover issues related to some of the most interesting and potentially impactful technologies facing firms today. We'll dive into generative AI, offer a managerial overview of how
the technology works and offer a glossary of key terms with explanations so you'll be ready for
your next tech-focused strategy meeting. You’ll learn the major players and technologies and how
AI is changing the nature of work itself. We'll cover how firms are incorporating AI into existing
products, discuss the risks and rewards of AI, see why working with AI can be so challenging for
firms, and learn what firms can do to be more ethical developers and users of AI, as well as better
stewards for technology in general.
Chapter 19 discusses the latest changes in advertising technology. We’ll give an overview of the
industry, why online ads now outsell all other categories of advertisement, introduce industry key
terms, and see how ads are sold. We’ll also discuss personalization and customer profiling technology and how moves by Google are upending an industry that had previously relied on tracking
using cookies, yet the replacement it proposes is a firm- rather than industry-supported standard.
We’ll also learn how Apple’s move to protect consumer privacy and require opt-in tracking in iOS
apps runs against Meta’s (and other firms’) interests and ability to gather large amounts of profiling
data. Tracking technologies, such as those used for location tracking, will be introduced, along with
the benefits and weaknesses of each. We’ll also examine the state of privacy laws worldwide, the
concerns that governments and public advocacy groups have raised, and issues firms should consider when dealing with sensitive user information. We’ll also discuss issues related to privacy, data
protection, governance, and data management policies that apply both within the ad industry and
beyond.
Chapter 20 unmasks the mystery of the Internet—it shows how the Internet works and why
a manager should care about IP (Internet Protocol) addresses, IP networking, the DNS (Domain
Name Service), peering, and packet versus circuit switching. We’ll also cover last-mile technologies
and the various strengths and weaknesses of getting a faster Internet to a larger population. The
revolution in mobile technologies and the impact on business will also be presented. A mini-case
at the end of this chapter examine’s SpaceX’s Starlink service, as well as the power and influence of
Elon Musk.
Chapter 21 helps managers understand attacks and vulnerabilities and how to keep end users
and organizations more secure. The ever-increasing number of megabreaches at firms that now
include Target, TJX, Heartland, Epsilon, Sony, and even security firm RSA; massive vulnerabilities
caused by software holes such as those in the popular MOVEit program; plus the increasing vulnerability of end-user systems have highlighted how information security is now the concern of
the entire organization, from senior executives to frontline staff. This chapter explains what’s happening with respect to information security—what kinds of attacks are occurring, who is doing
them, and what their motivation is. We’ll uncover the source of vulnerabilities in systems: human,
procedural, and technical, including new vulnerabilities related to the rise of generative AI. Hacking concepts such as botnets, malware, phishing, and SQL injection are explained using plain,
accessible language. Also presented are techniques to improve information security both as an
end user and within an organization. The combination of current issues and their relation to a
broader framework for security should help you think about vulnerabilities, even as technologies
and exploits change over time.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 1
Setting the Stage: Technology and the Modern Enterprise
Chapter 22 discusses one of the most influential and far-reaching firms in today’s business
environment. Google now earns more ad revenue and is a more profitable media company than
any other media firm, online or off. Google is a major force in modern marketing, research, and
entertainment. In this chapter you’ll learn how Google (and Web search in general) works. Issues
of search engine ranking, optimization, and search infrastructure are introduced. Students gain an
understanding of search advertising and other advertising techniques, ad revenue models such as
CPM (cost per thousand impressions) and CPC (cost per click), online advertising networks, various
methods of customer profiling (e.g., IP addresses, geotargeting, cookies), click fraud, fraud prevention, and issues related to privacy and regulation. The chapter concludes with a broad discussion of
how Google is evolving (e.g., Android, Chrome, apps, YouTube) and how this evolution is bringing it
into conflict with several well-funded rivals, including Amazon, Apple, and Microsoft.
Nearly every industry and every functional area is increasing its investment in and reliance
on information technology. With opportunity comes trade-offs: research has shown that a high
level of IT investment is associated with a more frenzied competitive environment.[90] But while the
future is uncertain, we don’t have the luxury to put on the brakes or dial back the clock—tech’s
impact is here to stay. Those firms that emerge as winners will treat IT efforts “as opportunities
to define and deploy new ways of working, rather than just projects to install, configure, or integrate.”[91] The examples, concepts, and frameworks in the pages that follow will help you build the
tools and decision-making prowess needed for victory.
Key Takeaways
• This text contains a series of chapters and cases that expose durable concepts, technologies, and frameworks, and does so using cutting-edge examples of what’s happening in
industry today.
• While firms and technologies will change, and success at any given point in time is no guarantee of future victory, the issues illustrated and concepts acquired should help shape a
manager’s decision-making in a way that will endure.
Questions and Exercises
1. Which firms do you most admire today? How do these firms use technology? Do you think
technology gives them an advantage over rivals? Why or why not?
2. What areas covered in this book are most exciting? Most intimidating? Which do you think
will be most useful?
Endnotes
1. T. Goodwin, “The Battle Is For The Customer Interface,” TechCrunch,
March 3, 2015.
2. M. Gale, "Think Going To The Moon Was Tough 50 Years Ago, Try Digitally
Transforming A Corporation Because 72% Of Us Are Failing At It," Forbes,
July 30, 2019.
3. M. Johnson, "TIME: Into the Metaverse," Time, Aug. 15, 2022.
4. S. Rosenbush, "Big Tech Is Spending Billions on AI Research. Investors
Should Keep an Eye Out," The Wall Street Journal, March 8, 2022.
5. S. Nellis and C. Mehta, "With no big customers named, AMD's AI chip
challenge to Nvidia remains uphill fight," Reuters, June 13, 2023.
6. J. Novet, "Microsoft’s $13 billion bet on OpenAI carries huge potential
along with plenty of uncertainty," CNBC, April 8, 2023.
7. J. Love and D. Alba, "Google’s Plan to Catch ChatGPT Is to Stuff AI Into
Everything, Bloomberg, March 8, 2023.
8. O. Durson, "Amazon invests $5 billion in Anthropic to compete with
Microsoft's OpenAI investments," NeoWin, Sept. 5, 2023.
9. C. Metz, "A.I. Researchers Are Making More Than $1 Million, Even at a
Nonprofit," The New York Times, April 19, 2018.
10. Heaven, D., "Bill Gates isn’t too scared about AI," MIT Technology Review,
July 11, 2023
11. R. Anderson, "Does Sam Altman Know What He's Creating?" The Atlantic,
July 24, 2023
12. C. Loizos, "1,100+ notable signatories just signed an open letter asking ‘all
AI labs to immediately pause for at least 6 months’," TechCrunch, March
29, 2023.
13. W. Knight, "Six Months Ago Elon Musk Called for a Pause on AI. Instead
Development Sped Up," Wired, Sept. 20, 2023.
14. K. Roose, "A.I. Poses ‘Risk of Extinction,’ Industry Leaders Warn," The
New York Times, May 30, 2023.
15. I. Smith, "Data centres gobble up 18% of Ireland’s electricity as country
struggles with climate targets," EuroNews Green, June 13, 2023
16. W. Knight, "The Huge Power and Potential Danger of AI-Generated Code,"
Wired, June 29, 2023.
17. P. Lee, et al. "Artificial Intelligence and the Practice of Law," League of California Cities, Sept. 20, 2023.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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18. C. Noto, "PwC turns to AI for audit transformation," CFO Dive, May 15,
2023.
19. A. Sharma, et al. "Artificial Intelligence-Based Data-Driven Strategy to
Accelerate Research, Development, and Clinical Trials of COVID Vaccine,"
National Library of Medicine, July 6, 2022.
20. J. Weatherbed, "Details emerge on Jony Ive and OpenAI’s plan to build
the ‘iPhone of artificial intelligence’," The Verge, Sept. 28, 2023.
21. P. Confino, "Mark Zuckerberg’s $46.5 billion loss on the metaverse is so
huge it would be a Fortune 100 company—but his net worth is up even
more than that," Fortune, Oct. 27, 2023.
22. N. Desai, "NFT crash: 95% of the market is now 'worthless', study
finds—as value of 'Bored Ape' artwork owned by Justin Bieber plummets
by 97%," The Daily Mail, Sept. 21, 2023.
23. S. Gray, et al. "A GOP debate question about banning TikTok turned
nasty, with Nikki Haley saying Vivek Ramaswamy is 'just scum'," Business
Insider, Nov. 9, 2023.
24. D. Milmo, "ChatGPT reaches 100 million users two months after launch,"
The Guardian, Feb. 2, 2023.
25. A. Sherman, "TikTok reveals detailed user numbers for the first
time," CNBC, Aug. 24, 2020.
26. N. Statt, "Apple now sells more watches than the entire Swiss watch
industry," The Verge, Feb. 5, 2020.
27. T. Spangler, "Apple Services Revenue Hits $22.3 Billion, a New Record, as
Tech Giant Beats Wall Street Expectations on Strong iPhone Sales," Variety, Nov. 2, 2023.
28. F. Richter, "Meta Reaches 3.6 Billion People Each Month," Statista, Oct.
29, 2021.
29. M. Tuerk, "Africa Is The Next Frontier For The Internet," Forbes, June 9,
2020.
30. A. Fofung, "After IBM and Google, Microsoft to open new engineering
office in Nigeria," Face2Face Africa, May 7, 2019.
31. G. York, “How Mobile Phones Are Making Cash Obsolete in Africa,” The
Globe and Mail, June 21, 2013
32. Unattributed, “A phoneful of dollars,” The Economist, Nov. 15, 2014.
33. C. Anderson, “10 Breakthrough Technologies: Agricultural Drones,” MIT
Technology Review, 2014.
34. Staff, "European regulators crack down on Big Tech," Reuters, Oct. 5,
2023.
35. M. Hoff, "Here are the best high-paying and fast-growing jobs for the next
decade," Business Insider, Sept. 12, 2023.
36. Staff, "Jobs of Tomorrow: Mapping Opportunity in the New Economy,"
World Economic Forum, Jan. 22, 2022.
37. T. Novellino, “Don’t Get Cozy Fortune 500. It's Do or Die Time for Digital
Disruption,” Upstart, June 4, 2015.
38. J. Guynn, “Insta-Rich: How Instagram Became a $1 Billion Company in 18
Months,” Los Angeles Times, April 20, 2012.
39. B. Stone and S. Friar, “Evan Spiegel Reveals Plan to Turn Snapchat Into a
Real Business,” Bloomberg Businessweek, May 26, 2015.
40. M. Stone, “The fabulous life of Snapchat CEO Evan Spiegel, the youngest
billionaire in the world,” Business Insider, March 12, 2015.
41. M. Chafkin, “The Zappos Way of Managing,” Inc., May 1, 2009.
42. S. Lacy, “Amazon Buys Zappos; The Price Is $928m., Not
$847m.,” TechCrunch, July 22, 2009.
43. O. Royale, "Brian Chesky says Airbnb’s successful IPO was ‘one of the
saddest periods’ of his life—then Barack Obama gave him one piece of
advice," Fortune, Sept. 11, 2023.
44. J. Bort, “Oculus Founder Palmer Luckey Dropped Out of College—And So
Did All These Other Tech Superstars,” Business Insider, March 25, 2014.
45. B. Stupples and K. Roof, "Stripe Founders Build $23 Billion Fortune With
Top U.S. Startup," Bloomberg, March 15, 2021.
46. S. Subin, "Bumble IPO: The female founder behind the dating app making
market history," CNN, Feb, 11, 2021.
47. L. Thomas, "Mindbody acquires workout subscription platform ClassPass
as fitness industry rebounds," CNBC, Oct. 14, 2021.
48. E. Hinchliffe and J. Abrams, "In the AI race, Canva cofounder and CEO
Melanie Perkins doesn’t believe in ‘reinventing the wheel'," Fortune, Nov.
3, 2023.
49. J. Wortham and N. Bolton, “Before Tumblr, Founder Made Mom Proud.
He Quit School,” New York Times, May 20, 2013.
50. T. Clark, “How Palmer Luckey Created Oculus Rift,” Smithsonian Magazine, Nov. 2014.
51. D. Ewalt, “Palmer Luckey: Defying Reality,” Forbes, January 5, 2015.
52. J. Gallaugher, "The Lucky Chairs," Thoughts from Prof. G., Sept. 24, 2023.
https://profgallaugher.substack.com/p/the-lucky-chairs
53. M. Arrington, “Internet Entrepreneurs Are Like Professional Athletes, They
Peak Around 25,” TechCrunch, April 30, 2011.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
54. Staff, "Global M&A Trends in Technology, Media and Telecommunications:
2023 Mid-Year Update," PwC—https://www.pwc.com/gx/en/services/
deals/trends/telecommunications-media-technology.html
55. S. Miller, “The Trouble with Tech M&A,” The Deal, May 7, 2012.
56. V. Ravisankar, “How to Hack Hiring,” TechCrunch, April 26, 2014.
57. G. Press, "This Week In AI Stats: Up To 50% Failure Rate In 25% Of Enterprises Deploying AI," Forbes, July 19, 2019.
58. H. Johnson, "Investing is one of the best ways to grow your money, and
you don't need $1,000 to start," Business Insider, March 13, 2019.
59. M. Philips, “How the Robots Lost: High-Frequency Trading’s Rise and
Fall,” Bloomberg Businessweek, June 6, 2013.
60. Z. Miller, "‘With a $4 billion budget, we can do quite a bit around heritage
technology’: Chase’s CIO, Rohan Amin," TearSheet, Dec. 23, 2020.
61. J. Pontin, “But Who’s Counting?” Technology Review, March/April 2009.
62. D. Coldewey, “iOS Passes 200 Million Devices, 25 Million of Which Are
iPads,” TechCrunch, June 6, 2011.
63. W. Hillard, "At 2 billion iPhones sold, Apple continues to redefine what customers want," Apple Insider, Sept. 22, 2021.
64. D. Platter, "Computer-Generated Influencers On Social Media Give A Peek
Into The Future of Marketing," Forbes, July 31, 2023.
65. L. Arthur, “Five Years from Now, CMOs Will Spend More on IT than CIOs
Do,” Forbes, February 8, 2012.
66. R. Silverman and L. Weber, “The New Résumé: It’s 140 Characters,” Wall
Street Journal, April 9, 2013.
67. J. Schmid and B. Poston, “Patent Backlog Clogs Recovery,” Milwaukee
Journal Sentinel, August 15, 2009.
68. C. Stokel-Walker, "Generative AI Is Coming For the Lawyers," Wired, Feb.
21, 2023.
69. M. Bohannon, "Lawyer Used ChatGPT In Court—And Cited Fake Cases.
A Judge Is Considering Sanctions," Forbes, June 8, 2023.
70. U.S. News, 100 Best Jobs in America 2021: Software Developer, Statistician, Data Scientist, IT Manager, Information Security Analyst. Accessed
March 31, 2021. https://money.usnews.com/careers/best-jobs/rankings/
the-100-best-jobs
71. "50 Best Jobs in America", Glassdoor, Accessed March 31,
2021—https://www.glassdoor.com/List/Best-Jobs-in-AmericaLST_KQ0,20.htm
72. C. Harvey, "10 Hot IT Job Titles for 2021," InformationWeek, March 10,
2021.
73. Computer and Information Technology Occupations, U.S. Bureau of Labor
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computer-and-information-technology/home.htm
74. J. Parker, "Tech jobs ‘permeating’ every sector of NC economy and growing, new report says," WRAL TechWire, Jan. 27, 2021.
75. J. Liu, "Hiring for these jobs is on the rise in 2021, according to LinkedIn,"
CNBC, Jan. 20, 2021.
76. T. Davenport and T.J. Patil, "Data Scientist: The Sexiest Job of the 21st
Century," Harvard Business Review, Oct. 2012.
77. S. Hagen, "These Are the Highest Paying Jobs for the Class of 2019,"
Bloomberg, March 13, 2019.
78. Refer to archive at: https://fortune.com/best-companies/
79. E. Goode, “For Newcomers in Silicon Valley, the Dream of Entrepreneurship Still Lives,” New York Times, January 24, 2012.
80. S. Anthony, “Leading a Business Transformation? Learn to Code,” Harvard
Business Review, Sept. 22, 2015.
81. J. Fortt, “Tech Execs Get Sexy,” Fortune, February 12, 2009.
82. O. Malik, “MySpace, R.I.P.,” GigaOM, February 10, 2010.
83. J. Thaw, “Yahoo’s Semel Resigns as Chief amid Google’s Gains,”
Bloomberg, June 18, 2007.
84. G. Fabrikant and M. Helft, “Barry Diller Conquered. Now He Tries to
Divide,” New York Times, March 16, 2008.
85. J. Quinn, “Final Farewell to Worst Deal in History—AOL-Time Warner,”
Telegraph (UK), November 21, 2009.
86. D. Farber, "Oracle's Ellison nails cloud computing," CNet, Sept. 26, 2008.
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research/methodologies/gartner-hype-cycle
88. M. Scherwin, "America Forgot About IBM Watson. Is ChatGPT Next?,"
The Atlantic, May 5, 2023.
89. P. Olson, "Meet the $4 Billion AI Superstars That Google Lost,"
Bloomberg, July 13, 2023.
90. E. Brynjolfsson, A. McAfee, M. Sorell, and F. Zhu, “Scale without Mass:
Business Process Replication and Industry Dynamics,” SSRN, September
30, 2008.
91. A. McAfee and E. Brynjolfsson, “Dog Eat Dog,” Sloan Management
Review, April 27, 2007.
CHAPTER 2
Zara: Fast Fashion from Savvy
Systems
2.1 Introduction
Learning Objective
1. Understand how Zara’s parent company, Inditex, leveraged a technology-enabled strategy
to become the world’s largest fashion retailer.
It wasn’t supposed to be called Zara. Spanish entrepreneur Amancio Ortega was brainstorming
names for his new clothing shop and had settled on Zorba, after the classic movie Zorba the Greek.
Unfortunately, there was already a bar in town with the same name, and the bar’s owner was worried that patrons would be confused by a new, unaffiliated, non-boozy Zorba. By this time, the
molds for the letters for Ortega’s shop sign had already been cast, so they played around with what
they could spell and came up with Zara, instead.[1] Zara is probably the more fashionable name, anyway, but the magic isn’t in the moniker. For Zara, it’s technology that has made all the difference in
its rise to dominate the decidedly ungeeky fashion industry. That little shop with the second-choice
name was the start of a world-spanning empire—an enterprise that is now the largest pure-play
fashion retailer on the planet.
Today, Zara is the game-changing crown jewel in the multibrand empire of Inditex Corporation
(Industrias de Diseño Textil), a firm that’s crushed the performance of nearest global rival H&M.
Even more deeply wounded were one-time high-fliers Gap and Topshop (bought then shed by
wannabe rival ASOS).[2] The firm’s supremacy is plotted and executed from “The Cube,” the gleaming, futuristic headquarters located in the northern Spanish coastal city of La Coruña (or A Coruña
in the local Galician language). The blend of technology-enabled strategy that Zara has unleashed
deviates widely from the standard fashion retail playbook. Unlike rivals, Zara shuns advertising,
rarely runs sales, and while nearly every other major player outsources manufacturing to low-cost
countries, Inditex is highly vertically integrated, keeping huge swaths of its production process inhouse. These counterintuitive moves are part of a recipe for success that’s beating the pants off the
competition and has catapulted Ortega to become the world’s second wealthiest person (and at one
point, briefly holding the top spot).[3]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
72
Information Systems
FIGURE 2.1 Zara Stores around the World
Zara’s operations are concentrated in Spain, but they have stores around the world, like these in Manhattan and
Shanghai. The photo on the left shows an upward photo of most of the large building the store is in, which the
photo on the right shows just the showcase window out front.
Sources: J2R/Shutterstock.com; TonyV3112/Shutterstock.com
While Inditex supports eight brands, Zara is unquestionably the firm’s crown jewel and growth
engine, accounting for roughly two-thirds of sales.[4]
Why Study Zara?
While competitors falter, Zara is undergoing one of the fastest global expansions the fashion world
has ever seen, and has emerged from COVID’s retail hell far stronger than its closest rivals.[5] The
fashion director for luxury goods maker LVMH calls Zara “the most innovative and devastating
retailer in the world.”[6]
Zara’s duds look like high fashion but are comparatively inexpensive (average item price is
$27, although prices vary by country).[7] A Goldman analyst has described the chain as “Armani at
moderate prices,” while another industry observer suggests that while fashions are more “Banana
Republic,” prices are more “Old Navy.”[8] Legions of fans eagerly await “Z-day,” the twice-weekly
inventory delivery to each Zara location that brings in the latest clothing lines for women, men, and
children. One well-known fan of the brand is the Duchess of Cambridge. The day after her wedding
to Prince William, the former Kate Middleton made an appearance in a cornflower blue, pleated
polyester dress from Zara. The price was £49.99[9] for high-quality, inexpensive fashion that’s good
enough for a future queen.
Physical retailers are clearly struggling. Nieman Marcus is selling itself, H&M and Gap are
shrinking their retail footprints, and Macy’s is closing hundreds of stores. But pretty much the
only reason Zara closes stores is to open even bigger ones to meet demand. As this chapter illustrates, Zara’s super-efficient model leads to competitively priced merchandise, higher margins,
fewer markdowns and write-offs, faster inventory turnover, reduced risk, and less advertising.[10]
To understand and appreciate just how counterintuitive and successful Zara’s strategy is, and
how technology makes all of this possible, it’s important to first examine the conventional wisdom
in apparel retail. To do that we’ll look at former industry leader—Gap.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 2
Zara: Fast Fashion from Savvy Systems
FIGURE 2.2 The Extraordinary Growth of Inditex
Source: John Gallaugher, based on firm public financial data in date range
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
73
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Information Systems
Gap: An Icon in Crisis
Most fashion retailers place orders for a seasonal collection months before these lines make an
appearance in stores. While overseas contract manufacturers may require hefty lead times, trying
to guess what customers want months in advance is a tricky business. In retail in general and
fashion in particular, there’s a saying: Inventory equals death. Have too much unwanted product
on hand and you’ll be forced to mark down or write off items, killing profits. For years, Gap sold
most of what it carried in stores. Mickey Drexler, a man with a once radar-accurate sense of style
and the iconic CEO who helped turn Gap’s button-down shirts and khakis into America’s business
casual uniform, led the way. But over time, Drexler’s spot-on style began to skew far off target.
Chasing the youth market, Drexler filled Gap stores with miniskirts, low-rise jeans, and even a
much-ridiculed line of purple leather pants.[11] The throngs of teenagers he sought to attract never
showed up, while Gap’s mainstay customers left for other retailers that easily copied Gap’s classic styles. The inventory hot potato Drexler was left with crushed the firm. Gap’s same-store sales
declined for twenty-nine months straight. Profits vanished. Gap co-founder and chairman Don
Fisher lamented, “It took us thirty years to get to $1 billion in profits and two years to get to
nothing.”[12] The firm’s debt was downgraded to junk status. Several CEOs later, and after years of
restructuring that resulted in the closure of hundreds of stores, Gap’s admiration of Inditex, and its
inability to act on this envy, remains clear. Says one Gap exec, “I would love to organize our business
like Inditex, but I would have to knock the company down and rebuild it from scratch,”[13] a statement that perfectly reflects the power of Zara’s imitation-resistant value chain.
contract
manufacturing
Outsourcing production to
third-party firms. Firms that
use contract
manufacturers don’t own
the plants or directly
employ the workers who
produce the requested
goods.
Contract Manufacturing: Lower Costs at What Cost?
Conventional wisdom suggests that leveraging cheap contract manufacturing in developing
countries can keep the cost of goods low. Firms can lower prices and sell more product or maintain higher profit margins—all good for the bottom line. But many firms have also experienced the
ugly downside to this practice. Global competition among contract firms has led to race-to-thebottom cost-cutting measures. Too often, this means that in order to have the low-cost bid,
contract firms skimp on safety, ignore environmental concerns, employ child labor, and engage
in other ghastly practices.
The apparel industry in particular has been plagued by accusations of sweatshop labor and
unsafe working conditions. Incidents such as the spring 2013 Bangladesh Rana Plaza disaster,
which killed more than 1,100 people in the collapse of an illegally constructed eight-story building
housing multiple contract garment factories, underscore the human toll of unacceptable contract
manufacturing practices. Walmart, The Children’s Place, and Benetton were among the firms said
to have purchased clothing from firms operating in Rana Plaza.[14] The track record of Bangladeshi
garment factories has been notably grim. In the dozen years prior to the Rana Plaza incident, over
seven hundred workers in Bangladesh were killed in garment factory fires.[15] While Gap was not
implicated in the Rana Plaza incident, the firm was singled out as a protest target because it is
one of the largest importers of clothing from Bangladesh[16] and it refused to sign a safety accord
backed by H&M and Zara, among others. The geopolitical landscape can significantly influence
the ethics of a company’s global operations. In recent years, Inditex has closed operations in
Myanmar due to labor concerns, and has shed stores in Russia due to the war in Ukraine, and
Venezuela due to ongoing political strife.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 2
Zara: Fast Fashion from Savvy Systems
Bangladesh Factory Collapse
Watch this coverage about a garment factory in Bangladesh that collapsed, killing at least
230 people.
View in the online reader
Big firms are big targets, and those that fail to adequately ensure their products are made under
acceptable labor conditions risk a brand-damaging backlash that may turn off customers, repel
new hires, and leave current staff feeling betrayed. And evidence of negligence or ignoring illegal
practices could expose a firm to lawsuits. Today’s managers need to think deeply, not only about
their own firm’s ethical practices, but also those of all of their suppliers and partners.
Tech for Good: The Fair Factories Clearinghouse
The problem of sweatshop labor and dismal industry practices has plagued the clothing industry
for years. Managers often feel the pressure to seek ever-lower costs and all too often end up
choosing suppliers with unacceptably poor practices. Even well-meaning firms can find themselves stung by corner-cutting partners that hide practices from auditors or truck products in
from unmonitored off-site locations. The results can be tragic for those exploited, and can carry
lasting negative effects for the firm. The sweatshop moniker continues to dog Nike years after
allegations were uncovered and the firm moved aggressively to deal with its problems.[17]
Nike rival Reebok (now part of Authentic Brands) has always taken working conditions seriously.
The firm even has a vice president of human rights and has made human dignity a key platform for
its philanthropic efforts. Reebok invested millions in developing an in-house information system
to track audits of its hundreds of suppliers along dimensions such as labor, safety, and environmental practices. The goal in part was to identify any bad apples, so that one division, sporting
goods, for example, wouldn’t use a contractor identified as unacceptable by the sneaker line.
The data was valuable to Reebok, particularly given that the firm has hundreds of contract
suppliers. But senior management realized the system would do even more good if the whole
industry could share and contribute information. Reebok went on to donate this system and
provided critical backing to help create the nonprofit organization Fair Factories Clearinghouse.
With management that included former lawyers for Amnesty International, the Fair Factories
Clearinghouse provides systems where apparel and other industries can share audit information
on contract manufacturers. Launching the effort wasn’t as easy as sharing the technology. The
U.S. Department of Justice needed to provide a special exemption and had to be convinced the
effort wouldn’t be used by buyers to collude and further squeeze prices from competitors (the
system is free of pricing data).
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
75
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Information Systems
Suppliers across industries now recognize that if they behave irresponsibly, the Fair Factories
system will carry a record of their misdeeds, notifying all members to avoid the firm. As more
firms use the system, its database becomes broader and more valuable. To its credit, Nike has
since joined the Fair Factories Clearinghouse.
Key Takeaways
• Zara has used technology to dominate the retail fashion industry as measured by sales, profitability, and growth.
• Excess inventory in the retail apparel industry is the kiss of death. Long manufacturing lead
times require executives to guess far in advance what customers will want. Guessing wrong
can be disastrous, lowering margins through markdowns and write-offs.
• Contract manufacturing can offer firms several advantages, including lower costs and
increased profits. But firms have also struggled with the downside of cost-centric contract
manufacturing when partners have engaged in sweatshop labor, poor working conditions,
and environmental abuse.
• Firms with products manufactured under unacceptable labor conditions face multiple risks,
including legal action, brand damage, reduced sales, lower employee morale, and decreased
appeal among prospective employees.
• Some in the apparel industry have used technology to pool data and weed out dishonest
contract manufacturers. This information system becomes more valuable as more firms use
it and add more data. Since this system involved competitors sharing data, participants
needed to show regulators that it was not sharing data in a way that constituted collusion
and unfair practices.
Questions and Exercises
1. Has anyone shopped at Zara? If so, be prepared to share your experiences and observations
with your class. What did you like about the store? What didn’t you like? How does Zara
differ from other clothing retailers in roughly the same price range? If you’ve visited Zara locations in different countries, what differences did you notice in terms of offerings, price, or
other factors?
2. What is the “conventional wisdom” of the fashion industry with respect to design, manufacturing, and advertising?
3. What do you suppose are the factors that helped Gap to at one point rise to be first in sales
in the fashion industry? Why do you suppose Gap profits collapsed?
4. Where do Gap clothes come from? Who makes them? Why? Are there risks in this
approach?
5. Describe the downside of working with a supplier exposed as having used unethical practices. How does this potentially damage a firm? How can technology play a role in helping a
firm become more socially responsible with its supply sourcing?
6. Describe the Fair Factories Clearinghouse. Which firm thought of this effort? Why did they
give the effort away? Think in terms of strategic resources: What happens as more firms join
this effort and share their data?
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 2
Zara: Fast Fashion from Savvy Systems
77
2.2 Don’t Guess, Gather Data—Make
Small Batches of What Customers
Want and Ship It Fast!
Learning Objective
1. Contrast Zara’s approach with the conventional wisdom in fashion retail, examining how the
firm’s strategic use of information technology influences design and product offerings, manufacturing, inventory, logistics, marketing, and ultimately profitability.
Having the wrong items in its stores hobbled Gap for roughly a decade, and Gap is more rule than
exception. H&M, the world’s number two clothing retailer, reported $4.3 billion in unsold inventory.
One analyst called the firm, which had seen six straight quarters of declining financial performance,[18] “a slow-motion train wreck.”[19] Burberry, Nike, and Urban Outfitters joined H&M as targets
of public outcry after these retailers were found to have had so much excess inventory that they
opted to destroy it rather than use deep discounts and donations that could erode the exclusivity
of their brands.[20] But how do you make sure stores carry the kinds of things customers want to
buy? Try asking them. Zara’s store managers lead an intelligence-gathering effort that heavily influences the products that the firm produces. Armed with custom apps on mobile devices (initially
Windows PDAs, now iPads) staff regularly chat up customers to gain insight on what patrons
would like to see on store racks and shelves. A Zara manager might casually ask, “What if this skirt
were in a longer length?” “Would you like it in a different color?” “What if this V-neck blouse were
available in a round neck?” Staff enter responses on their mobile devices and send these insights
back to headquarters. Managers are motivated to use these systems and accurately record data
because they have skin in the game. As much as 70 percent of salaries can come from store sale
performance,[21] with an additional 10 percent of the firm’s overall profit increase shared across all
firm employees.[22]
PDAs
Personal digital assistants,
an early name for
handheld mobile
computing devices.
Another level of data gathering starts as soon as the doors close. Then the staff turns into a sort
of investigation unit in the forensics of trendspotting, looking for evidence in the piles of unsold
items that customers tried on but didn’t buy. Are there any preferences in cloth, color, or styles
offered among the products in stock? Record these insights, as well.[23]
Information on what’s selling is also tallied via the stores’ point-of-sale (POS) system—the
cash registers that ring up sales and deduct sold items from inventory. Nearly every retailer in every
industry has a POS system, and the sales data gathered from these systems is very important. But
Zara goes beyond most firms by also leveraging staff to gather more data via PDA and other means.
This helps point to new products that customers want to see Zara produce, while also helping to
uncover reasons why some products are being rejected. In essence, the POS tells the firm what’s
selling, while PDA and related data tell the firm what customers at a given location want to see on
shelves. All this valuable data allows the firm to plan new styles and issue rebuy orders based on
feedback rather than hunches and guesswork. The goal is to improve the frequency and quality of
decisions made by the design and planning teams.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
point-of-sale (POS)
system
A transaction processing
system that captures
customer purchases. Cash
registers and store
checkout systems are
examples of point-of-sale
systems. These systems
are critical for capturing
sales data and are usually
linked to inventory systems
to subtract out any sold
items.
78
Information Systems
Design
Rather than create trends by pushing new lines via catwalk fashion shows, Zara designs follow
evidence of customer demand. The firm’s chairman and CEO notes, “Our business model is the
opposite of the traditional model. Instead of designing a collection long before the season, and then
working out whether clients like it or not, we try to understand what our customers like, and then
we design it and produce it.”[24] Data on what sells and what customers want to see goes directly
to “The Cube,” where teams of some 300 designers crank out an astonishing 30,000 items a year[25]
versus 2,000 to 4,000 items offered up at big chains like H&M (the world’s second largest fashion
retailer) and Gap.[26] H&M has offered lines by star designers like Stella McCartney, Karl Lagerfeld,
and Kenzo Takada, as well as celebrity collaborations with The Weeknd and Zara Larsson (which
cheekily put Swedish pop star “Zara’s” fashions in H&M stores). By contrast, the Zara design staff
relies heavily on young, hungry Project Runway types fresh from design school. There are no prima
donnas in “The Cube.” Team members must be humble enough to accept feedback from colleagues
and share credit for winning ideas. Individual bonuses are tied to the success of the team, and
teams are regularly rotated to cross-pollinate experience and encourage innovation. Design staff
regularly reach out to store managers electronically and via phone, and even sometimes fly managers back to headquarters in Spain to view mockups and consult on design.[27] The idea—those
closest to customers are better equipped than the corner office VP at knowing what customers
want.[28]
Manufacturing and Logistics
Since the beginning, the idea has been to understand what the customer wants first and
then have an integrated manufacturing and logistics system to be able to deliver it to
them quickly.
—Zara CEO Pablo Isla[29]
In the fickle world of fashion, even seemingly well-targeted designs could go out of favor in the
months it takes to get plans to contract manufacturers, tool up production, then ship items to warehouses and eventually to retail locations. But getting locally targeted designs quickly onto store
shelves is where Zara really excels. In one telling example, when one pop star played a set of concerts in Spain, teenage girls arrived to the final show sporting a Zara knockoff of the outfit she wore
during her first performance.[30] The average time for a Zara concept to go from idea to appearance
in store is fifteen days; compare that to their rivals, who receive new styles once or twice a season.
Smaller tweaks arrive even faster. If enough customers come in and ask for a round neck instead
of a V neck, a new version can be in stores within just ten days.[31] To put that in perspective, Zara is
twelve times faster than Gap despite offering roughly ten times more unique products![32] At H&M, it
takes three to five months to go from creation to delivery—and they’re considered one of the best.
Other retailers need an average of six months to design a new collection and then another three
months to manufacture it. VF Corporation (Lee, Wrangler) can take nine months just to design a
pair of jeans, while J.Jill needs a year to go from concept to store shelves.[33] At Zara, most of the
products you see in stores didn’t exist three weeks earlier, not even as sketches.[34] Says one analyst, “Think of Zara not as a brand, but as a very speedy chameleon that adapts instantly to fashion
trends.”[35]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 2
Zara: Fast Fashion from Savvy Systems
The firm is able to be so responsive through a competitor-crushing combination of vertical
integration and technology-orchestrated coordination of suppliers, just-in-time manufacturing,
and finely tuned logistics. Vertical integration is when a single firm owns several layers in its value
chain.[36] While H&M has 900 suppliers and no factories, nearly 60 percent of Zara’s merchandise is
produced in-house, with an eye on leveraging technology in those areas that speed up complex
tasks, lower cycle time, and reduce error. Profits at Zara come in part from blending math with a
data-driven fashion sense. Inventory optimization models help the firm determine how many of
which items in which sizes should be delivered to each specific store during twice-weekly shipments, ensuring that each store is stocked with just what it needs.[37] Outside the distribution center
in La Coruña, fabric is cut and dyed by robots in twenty-three highly automated factories. Zara is
so vertically integrated, the firm makes 40 percent of its own fabric and purchases most of its dyes
from its own subsidiary. Roughly half of the cloth arrives undyed so the firm can respond to any
midseason shifts in taste and trends. When cotton prices rose to record levels, Zara was able to shift
offerings away from more costly fabrics, preserving margins. By contrast, during that same period
rival H&M saw profits drop 10 percent largely due to margin pressure.[38] Other local suppliers provide on-demand, partially finished greige (pronounced gray) goods to be further customized based
on designer/manager collaboration. After cutting and dying, many items are stitched together
through a network of local cooperatives that have worked with Inditex so long they don’t even
operate with written contracts. The firm does leverage some contract manufacturers, but most of
those used for trendy clothes are fairly close (Portugal, Morocco, and Turkey). There are far cheaper
places to seek partners, but for Zara, speed beats manufacturing costs and drives profits.[39] Any contractors employed in farther regions (the firm has used partners in Asia and Latin America)
produce staple items with longer shelf lives, such as T-shirts and jeans, but such goods account for
only about one-eighth of dollar volume (also lessening exposure to events associated with poor
partner labor practices, which have occurred).[40]
79
vertical integration
When a single firm owns
several layers in its value
chain.
value chain
The set of activities
through which a product
or service is created and
delivered to customers.
greige
Goods to be further
customized based on
designer/manager
collaboration.
All of the items the firm sells end up in a five-million-square-foot distribution center in La
Coruña (that’s about as big as ninety football fields), or a similar facility in Zaragoza in the northeast
of Spain.[41] The facilities move over 17 million items every week,[42] with no item staying in-house for
more than seventy-two hours. Ceiling-mounted racks and customized sorting machines patterned
on equipment used by overnight parcel services, and leveraging Toyota-designed logistics, whisk
items from factories to staging areas for each store. Clothes are ironed in advance and packed on
hangers, with security and price tags affixed. This system means that instead of wrestling with
inventory during busy periods, employees in Zara stores simply move items from shipping box to
store racks, spending most of their time on value-added, sales-focused functions like helping customers find what they want.[43]
Zara inventory is smart. Security tags are custom made to also include RFID technology. RFID
(radio frequency identification) tags wirelessly emit a unique identifying code for the individual
item that they are attached to. As an item moves around the Zara distribution center, or into Zara
stores, wall-mounted or hand-held scanners can listen in, track product, and take inventory. RFID
lets Zara know where products are, so if a customer asks for an item in a store (perhaps in a different size or color), staff using custom apps on an iPod Touch can immediately tell if a product is in
store, in a nearby store, or if it can be ordered from the distribution center or Zara.com. Firms from
Walmart to JCPenney have struggled to effectively implement RFID, but Zara’s vertical integration
is an advantage here, as well. Since the entire supply chain is under Zara control and all items flow
through one of two warehouses, Zara can affix tags to all products before sending them out to
stores (a challenge for other retailers that have third-party suppliers ship to multiple warehouses
or directly to stores). Stores remove tags when customers buy items (avoiding any privacy concern
that customer goods may be electronically tracked post-purchase).[44] Stores then send tags back to
Zara warehouses for reuse (reassigning a tag’s unique identification number to a new clothing
item). Although tags only cost ten cents, with hundreds of millions of items sold each year, these
costs would easily add up, so the reusable tag system makes solid financial sense (Zara bought so
many tags at launch that it actually consumed one in every six tags produced for the entire apparel
industry that year).[45] RFID tags also allow Zara staff to take in-store inventory four times as often
as the pre-RFID rate, with greater accuracy, and using one-fourth the staff.[46]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
RFID
Small chip-based tags that
wirelessly emit a unique
identifying code for the
item that they are attached
to. Think of RFID systems
as a next-generation bar
code.
80
Information Systems
RFID Tags in Use
Watch RFID tags announce inventory items from warehouse to store, increasing efficiency and
customer service.
View in the online reader
logistics
Coordinating and enabling
the flow of goods, people,
information, and other
resources among
locations.
To get products into stores quickly, trucks serve destinations that can be reached overnight,
while chartered cargo flights serve farther destinations within forty-eight hours.[47] Air freight ships
via Air France–KLM Cargo and Emirates Air, and flights coordinate outbound shipment of all Inditex brands with return legs loaded with raw materials and half-finished clothes items from
locations outside of Spain. Zara is also a pioneer in going green, with an environmental strategy
that includes the use of renewable energy systems at logistics centers and biodiesel for the firm’s
trucking fleet.
Stores
Most products are manufactured for a limited production run. While running out of bestsellers
might be seen as a disaster at most retailers, at Zara the practice delivers several benefits.
First, limited runs allow the firm to offer customers unrivaled exclusivity. While a Gap in Los
Angeles carries nearly the same product line as one in Milwaukee, each Zara store is stocked with
items tailored to the tastes of its local clientele. A Fifth Avenue shopper quips, “At Gap, everything
is the same,” while a Zara shopper in Madrid says, “You’ll never end up looking like someone else.”[48]
Upon visiting a Zara, the CEO of the National Retail Federation marveled, “It’s like you walk into a
new store every two weeks.”[49]
Second, limited runs encourage customers to buy right away and at full price. The firm has
begun rolling out “Pay and Go” app self-checkout—pay in the app, then move to a kiosk where you
can remove security tags and leave—no waiting in line! And this frees staff to provide harder-toautomate in-store service.[50] Don’t bother asking when something will go on sale; if you wait three
weeks the item you want has almost certainly been sold or moved out to make room for something
new. Retail FOMO among Zara shoppers is serious: says one twenty-three-year-old Barcelona shopper, “If you see something and don’t buy it, you can forget about coming back for it because it will
be gone.”[51] A study by consulting firm Bain & Company estimated that the industry average markdown ratio is approximately 50 to 70 percent, and less than 1 percent of JCPenney revenue came
from items bought at full price.[52] Contrast this with Zara, where 85 percent of products are sold
without a discount.[53]
The constant parade of new, limited-run items also encourages customers to visit often. The
average Zara customer visits the store seventeen times per year, compared with only three annual
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 2
Zara: Fast Fashion from Savvy Systems
visits made to competitors.[54] Even more impressive—Zara puts up these numbers with almost no
advertising. The firm’s founder has referred to advertising as a “pointless distraction.” The assertion
carries particular weight when you consider that during Gap’s collapse, the firm increased advertising spending but sales dropped.[55] Fashion retailers such as H&M spend as much as 4 percent of
revenue promoting their products, while ad spending at Inditex ranges from 0.3 to 0.05 percent.[56]
Finally, limited production runs allow the firm to, as Zara’s CEO once put it, “reduce to a minimum the risk of making a mistake, and we do make mistakes with our collections.”[57] Failed product
introductions are reported to be just 1 percent, compared with the industry average of 10 percent.[58] The overall number of unsold items at Zara is less than 10 percent of inventory, while the
industry average often runs as high as 20 percent.[59] So even though Zara has higher manufacturing costs than rivals, Inditex gross margins are nearly 60 percent, compared to 39 percent at Gap.
Reducing stock doesn’t just mean fewer write-offs and markdowns. Less idle stock in the back room
means less “frozen money” embedded in to-be-sold inventory, plus more store square footage for
the showroom floor.[60]
While stores provide valuable frontline data, headquarters plays a major role in directing instore operations. Software is used to schedule staff based on each store’s forecasted sales volume,
with locations staffing up at peak times such as lunch or early evening. The firm claims these more
flexible schedules have shaved staff work hours by 2 percent. This constant refinement of operations throughout the firm’s value chain has helped reverse a prior trend of costs rising faster than
sales.[61]
Even the store displays are directed from “The Cube,” where a basement staging area known as
“Fashion Street” houses a Potemkin village of bogus storefronts meant to mimic some of the chain’s
most exclusive locations throughout the world. It’s here that workers test and fine-tune the chain’s
award-winning window displays, merchandise layout, and even the in-store soundtrack. Every two
weeks, new store layout marching orders are forwarded to managers at each location.[62] And Zara
stores are going even more high-tech. The firm’s mobile phone app allowed customers visiting certain stores to scan displays and see mannequins turn into virtual runway models, strutting and
twirling to offer a hand-held catwalk glimpse.
A Look at the Tech in Zara’s Flagship Madrid Store
Self-checkout, fitting room reservations, and robot-delivered online orders highlight some of the
tech rolling out in Zara stores.
View in the online reader
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Integrating E-commerce: Omnichannel = More Sales +
Better Customer Experience
omnichannel
An approach to retail that
offers consumers an
integrated and
complementary set of
shop, sales, and return
experiences (e.g., retail
store, online, and
sometimes even phone
and catalog).
Inditex had been a relative latecomer to e-commerce, but online sales have grown substantially,
accounting for 14 percent of revenues by year-end 2019. While Zara continues to offer limited-run
products, it has boosted its e-commerce efforts. Inditex sees e-commerce as a critical part of the
firm’s omnichannel strategy, which blends online and offline sales in ways that best benefit the customer. The company sees the link between online and offline sales as being so fluid, it doesn’t even
break out online sales as a separate category. For example, roughly two-thirds of online shopping
returns are done in-store, while one-third of online orders are scheduled for in-store pickup. Many
of the returns are exchanges for new sizes that are easier to assess in person.[63] And if an item isn’t
available in the current location, online orders handled from in-store apps might surface an item in
the right size or color available online, allowing store managers to rescue a sale and satisfy the customer. A review of fashion e-commerce apps rated Zara’s offering as best-in-class,[64] and there is no
evidence that online shopping is cannibalizing in-store sales.[65] In fact, it’s estimated that e-commerce now makes up about a quarter of Zara sales.[66]
FIGURE 2.3 Zara’s iPad App
This image from Zara’s 5-star–rated app shows in-store availability, as well as a style guide, size guide, and
garment care information.
Source: Zara, https://www.zara.com/au/en/striped-shirt-dress-p07338051.html?v1=322014674&v2=2038184
Zara has expanded its ability to fulfill e-commerce orders, deploying fifty-two special e-commerce stockrooms globally, each capable of delivery to stores or customer homes.[67] For especially
busy locations with a high volume of in-store pickup, Zara has begun to deploy “Click and Collection” stations. Customers visit a large touch-screen, type in or scan an order by holding up the
app, and a robot will fetch and deliver a lovingly packed order as the kiosk window slides open.
Customers are even encouraged to remove product packaging and recycle it on the spot for more
convenience with an eco-friendly nod.[68] The initial rollout of these systems could handle the distribution of some 2,400 online orders at a single retail location.[69] The firm’s Madrid flagship store
showcases additional tech that Zara plans to roll out to further streamline the customer experi© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Zara: Fast Fashion from Savvy Systems
ence. The app can be used to reserve a fitting room. If the customer hasn't reserved a fitting room,
they can show a camera how many items they'd like to try on, and the system will assign a fitting
room—no more jiggling door handles and disturbing fellow shoppers to see if a room is free. The
store also includes an automatic online returns point, a specific checkout for in-store returns, and a
number of self-checkout stations.[70] Zara also launched the zara.com/ww site, which provides delivery direct from Spain for markets where the firm does not yet have a store presence. Zara also
experimented with an e-commerce-focused pop-up store in London.[71] One could imagine that a
smaller store with fewer in-store sizes and less inventory could be used to introduce the brand as
an e-commerce destination in other markets that don’t yet have retail locations.
While Zara’s products are very competitively priced, the uniqueness of the firm’s product line
does give it some price cushioning that vendors of more commoditized clothing don’t enjoy. For
example, fashion retailer Primark quit its e-commerce experiment after seeing that shipping costs
for commodity shirts were similar to their sales price.[72] Zara’s approach to online seems to blend
perfectly with the company’s overall strategy/technology alignment.
COVID-19 Response: Tech-Centric Operations + Ecommerce + Omnichannel in a Crisis
As coronavirus sickened populations and filled ICU beds, many nations responded with lockdown
efforts that effectively shuttered all in-store retail. Even after lockdowns, many regions imposed
traffic-limiting store capacity restrictions, while skittish consumers avoided stores entirely. The
impact on retail was devastating. The list of bankruptcies announced during the pandemic
included Brooks Brothers, JCPenney Co., J. Crew, Lord & Taylor, Lucky, Neiman Marcus Group Inc.
and the parent of Jos. A. Banks and Men’s Wearhouse, to name just a few.
“Zara Owner Built a Post-Covid Retailer Before Virus Came Along”
—Bloomberg[73]
No firm that relies so heavily on in-store traffic could avoid pain, and Inditex was no exception.
With 88 percent of its stores to close during spring 2020, Inditex sales nosedived. A 44 percent
drop in quarterly sales led to the firm’s first ever loss as a public company. However, because of
the strength and responsiveness of the firm’s integrated inventory and omnichannel systems, the
damage was not nearly as bad as its rivals’. The firm’s strengthened e-commerce efforts, which
had grown to account for 14 percent of sales pre-pandemic, shot up 95 percent in April 2020, and
increased 50 percent that same quarter.[74] The RFID-powered ability of the firm to surface inventory regardless of its location helped the company shift inventory from closed stores so that it could
be used to meet increased e-commerce demand. The firm quickly mobilized staff to retrieve clothes
and accessories from store shelves and stockrooms so that these products could be used to fulfill
e-commerce orders. One Inditex executive stated, “We adapted so well to the online world because
it was all natural. Without RFID, it wouldn’t have been possible.”[75] To gain a sense of the benefits of
this responsiveness, consider that the loss at smaller rival H&M was estimated at four times larger
than the red ink spilled at Inditex, and fast-fashion rival Primark, which has no online sales effort,
says store closures due to COVID-19 cost their firm $1.4 billion.[76] A Bloomberg headline declared
“Zara Owner Built a Post-Covid Retailer Before Virus Came Along.”[77]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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information system
(IS)
Technology ≠ Systems—Just Ask Prada
An integrated solution that
combines five
components: hardware,
software, data,
procedures, and the
people who interact with
and are impacted by the
system.
Here’s another interesting thing about Zara. Given the sophistication and level of technology integration within the firm’s business processes, you’d think that Inditex would far outspend rivals on
tech. But as researchers Donald Sull and Stefano Turconi discovered, “Whether measured by IT
workers as a percentage of total employees or total spending as a percentage of sales, Zara’s IT
expenditure is less than one-fourth the fashion industry average.”[78] Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact,
making sure that every dollar spent on tech has a payoff.
return on investment
(ROI)
The amount earned from
an expenditure.
Contrast this with high-end fashion house Prada’s efforts at its flagship Manhattan location. The
firm hired the Pritzker Prize-winning hipster architect Rem Koolhaas to design a location Prada
would fill with jaw-dropping technology. All items for sale in the store would sport radio frequency
identification (RFID) tags. Walk into a glass dressing room and customers could turn the walls
opaque, then into a kind of combination mirror and heads-up display. By wirelessly reading the
tags on each garment, dressing rooms would recognize what was brought in and make recommendations of matching accessories as well as similar products that patrons might consider.
Customers could check inventory, and staff wielding PDAs could do the same. A dressing room
camera would allow clients to see their front and back views side-by-side as they tried on clothes.
It all sounded slick, but execution of the vision was disastrous. Customers didn’t understand the
foot pedals that controlled the dressing room doors and displays. Reports surfaced of fashionistas disrobing in full view, thinking the walls went opaque when they didn’t. Others got stuck in
dressing rooms when pedals failed to work or doors broke, unable to withstand the demands of
the high-traffic tourist location. The inventory database was often inaccurate, regularly reporting
items as out of stock even though they weren’t. As for the PDAs, staff reported that they “don’t
really use them anymore” and that “we put them away so tourists don’t play with them.” The
investment in Prada’s in-store technology was also simply too high, with estimates suggesting
the location took in just one-third the sales needed to justify expenses.[79]
The Prada example offers critical lessons for managers. While it’s easy to get seduced by technology, an information system (IS) is actually made up of more than hardware and software. An
IS also includes data used or created by the system, as well as the procedures and the people
who interact with the system.[80] Getting the right mix of these five components is critical to executing a flawless information system rollout. Financial considerations should forecast the return
on investment (ROI)
(ROI)—the amount earned from an expenditure—of any such effort (i.e., what will
we get for our money, and how long will it take to receive payback?). And designers need to thoroughly test the system before deployment. At Prada’s Manhattan flagship store, the effort looked
like tech that was chosen because it seemed fashionable rather than functional.
Curiously, the time may have come for the profitable introduction of the smart dressing room.
Zara has also begun experimenting with hybrid mirrors that detect a garment’s RFID tag, allowing
a customer to get outfit suggestions and see an entire outfit assembled and superimposed on
the mirror before them,[81] while rivals including H&M, Macy’s, and Sears have also experimented
with smart mirrors.
Key Takeaways
• Zara store management and staff use mobile devices and POS systems to gather and analyze customer preference data, and to plan future designs based on feedback, rather than
on hunches and guesswork.
• Zara’s combination of vertical integration and technology-orchestrated supplier coordination,
just-in-time manufacturing, and logistics allows it to go from design to shelf in days instead
of months.
• RFID tags help Zara keep better track of inventory–improving warehouse-to-store distribution, and make it easier to locate items that customers want to purchase.
• Advantages accruing to Inditex include fashion exclusivity, fewer markdowns and sales,
lower marketing expenses, and more frequent customer visits.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 2
Zara: Fast Fashion from Savvy Systems
• Zara’s IT expenditures are low by fashion industry standards. The spectacular benefits
reaped by Zara from the deployment of technology have resulted from targeting technology
investment at the points in the value chain where it has the greatest impact, and not from
the sheer magnitude of the investment. This is in stark contrast to Prada’s experience with
in-store technology deployment.
• While information technology is just hardware and software, information systems also include
data, people, and procedures. It’s critical for managers to think about systems, rather than
just technologies, when planning for and deploying technology-enabled solutions.
Questions and Exercises
1. In what ways is the Zara model counterintuitive? In what ways has Zara’s model made the
firm a better performer than Gap and other competitors?
2. What factors account for a firm’s profit margin? What does Gap focus on? What factors does
Zara focus on to ensure a strong profit margin?
3. How is data captured in Zara stores? Using what types or classifications of information systems? How does the firm use this data?
4. What role does technology play in enabling the other elements of Zara’s counterintuitive
strategy? Could the firm execute its strategy without technology? Why or why not?
5. Why has Zara’s RFID rollout been less problematic than those at Walmart and JCPenney?
How does Zara’s use of RFID reduce concerns that customer products will be tracked postpurchase? How does Zara reduce the expense associated with tagging each item? How
does RFID improve efficiency and customer service?
6. How does technology spending at Zara compare to that of rivals? Advertising spending?
Failed product percentages? Markdowns?
7. What risks are inherent in the conventional practices in the fashion industry? Is Zara susceptible to these risks? Is Zara susceptible to different risks? If so, what are these?
8. Consider the Prada case mentioned in the sidebar “Technology ≠ Systems.” What did Prada
fail to consider when it rolled out the technology in its flagship location? Could this effort have
been improved for better results? If you were put in charge of this kind of effort, what would
determine whether you’d go forward with the effort or not? If you did go forward, what factors would you consider, and how might you avoid some of the mistakes made by Prada?
2.3 Moving Forward
Learning Objectives
1. Detail how Zara’s approach counteracts several profit-eroding challenges that many fashion
retailers struggle with.
2. Identify the environmental threats that Zara is likely to face, and consider options available to
the firm for addressing these threats.
The holy grail for the strategist is to craft a sustainable competitive advantage that is difficult
for competitors to replicate. And for two decades Zara has delivered the goods. Zara's tech-centric
demand-to-design-to-sourcing value chain is now enabling the firm to shift to more profitably
address consumer and economic change. Throughout its history, Inditex growth had been driven
by new store openings, but its next stage of growth will actually involve fewer stores. Inditex plans
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
as many as 1,200 permanent store closures, or about 16 percent of its global outlets. To be clear,
these collectively represent the firm’s smallest, weakest operating locations, only accounting for
about 5 percent of sales in total, and some of these locations will be replaced by larger marquee
locations that should see high foot traffic in post-pandemic urban centers.[82] Larger stores can also
hold Zara retail tech, like “click and collect” stations and in-store e-commerce returns. The firm's
global brand strength is also allowing Zara to further beef up e-commerce efforts. Consumers who
walk into Zara ahead of rivals are also demonstrating their tendency to open Zara's apps, visit
the firm's websites, and ring up sales when they shop online, and Inditex expects online sales to
climb to one-quarter of overall revenue in the next two years. Growing e-commerce will require
a larger warehouse, store, and logistics infrastructure, and that doesn't come without investment.
The firm's unique strategic position means that much of its infrastructure and systems are homegrown proprietary efforts, rather than sourced from existing vendors. Inditex expects to spend
upwards of 1 billion euros on improving e-commerce infrastructure and an additional 1.7 billion
euros to more deeply integrate online with stores.[83]
But that’s not to say the firm is done facing challenges. Consider the limitations of Zara’s Spaincentric, just-in-time manufacturing model. By moving all of the firm’s deliveries through just two
locations, both in Spain, the firm remains hostage to anything that could create a disruption in the
region. Firms often hedge risks that could shut down operations—think weather, natural disaster,
terrorism, labor strife, or political unrest—by spreading facilities throughout the globe. If problems
occur in northern Spain, Zara has no such fallback.
operations
The organizational
activities that are required
to produce goods or
services. Operations
activities can involve the
development, execution,
control, maintenance, and
improvement of an
organization’s service and
manufacturing procedures.
In addition to these operations vulnerabilities, the model also leaves the firm potentially more
susceptible to financial vulnerabilities during periods when the euro strengthens relative to foreign
currencies, or where inflation rises, especially when compared against the U.S. dollar (to which
many developing nations peg their currency). A stronger euro means Zara’s Spain-centric costs
would rise at higher rates compared to competitors’. Rising transportation costs are another concern. If fuel costs rise, the model of twice-weekly deliveries that has been key to defining the Zara
experience becomes more expensive to maintain.
Still, Zara is able to make up for some cost increases by raising prices overseas (when the euro
is strong versus the dollar, Zara items can cost 40 percent more than they do in Spain). Management has considered a logistics center in Asia but expects current capacity will suffice for now.[84]
Another possibility might be a regional center. China has surpassed France to become Zara’s second
largest market after Spain,[85] meaning some of the clothing that Zara sells travels from Asia to
Spain, only to be routed back to stores in China.[86] If Zara could replicate what it does in Spain with
a facility in China, Vietnam, or other nation in the region, this could give the firm more global sourcing flexibility and likely decrease costs. However, experts remain skeptical of Zara’s ability to
replicate the firm’s high-tech, flexible capacity half a world away.[87] One advisor to the firm voices
concerns in having “two brains, one in Spain and one in China.”[88] Zara plans to continue to expand
in the United States,[89] and a similar facility in the Maquiladora region of northern Mexico could
serve the U.S. markets via trucking capacity similar to the firm’s Spain-based access to Europe, while
also providing a regional center to serve expansion throughout the Western Hemisphere. Rising
incomes and a cultural link to Spain make Latin America look like an increasingly attractive market, but the United States may not be as ripe for growth. While Zara now has over eighty-five stores
in the United States, one industry watcher calls the United States a “graveyard of European retailers.”[90] Among U.S. expansion challenges cited are American fashionistas’ tendency to be
concentrated on the coasts and American sizes often being significantly different in cut than the
rest of the world.[91]
Yet another issue is related to the fast-fashion industry’s oversized impact on the environment.
As its biggest player, Zara is a prime target for those seeking change. A recent Bloomberg article
pointed out that roughly 11.3 million tons of textile waste each year are thrown away just in the
United States. That comes out to around 2,150 pieces of clothing each second. The fashion industry
is responsible for 10 percent of global CO2 output—more than international flights and shipping
combined.[92] Clothing manufacture is also responsible for 20 percent of world wastewater creation,
and accounts for one-fifth of plastic produced.[93]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 2
Zara: Fast Fashion from Savvy Systems
87
As a firm based in Europe, Inditex can expect more stringent environmental laws and a greater
degree of home-market activism than competitors in most other markets. The firm is trying to get
out in front of both legislation and critics by setting aggressive sustainability goals. Inditex targets
for the end of the decade include a commitment to use 40 percent recycled fibers across the product line, 25 percent “next generation” fibers, 25 percent fibers sourced via organic or regenerative
farming practices, with the remaining 10 percent coming from “other sustainable sources.”[94] The
firm has also committed to halving its emissions by 2030.[95] Inditex has invested in several firms
to help improve sustainability, including a firm that recycles hard-to-separate poly-cotton blends,
turning recycled goods into usable cloth. Zara has committed to using the firm's cloth in a new
product line.[96] Zara's parent has also committed to buying 30 percent of the output of the firm
Infinited Fiber Company, which creates cloth from textile waste fiber.[97] Inditex has also invested in
a Spain-based recycler, Moda Re, and is partnering with rivals, including H&M and Mango, to create
a non-profit association to manage clothing waste.[98] Being more planet-friendly is something that
customers, employees, and vendors are increasingly demanding, and steps should help the firm
comply with coming regulation. The EU, for example, has stated that planned regulations requiring
fashion companies to produce clothes in a more sustainable way will be in place by 2028.[99]
Fast Fashion Is Hot Garbage
For a humorous yet disturbing look at the environmental impact of fast fashion, along with some
consumer-focused recommendations at the end, check out Climate Town’s video on the topic.
View in the online reader
Rivals have studied the Zara recipe, and while none has attained the efficiency of Amancio
Ortega’s firm, many are trying to learn from the master. There is precedent for contract firms closing the cycle time gap with vertically integrated competitors that own their own factories. Dell (a
firm that once built its own PCs while nearly all its competitors used contract labor) has seen its
manufacturing advantage from vertical integration fall as the partners that supply rivals have
mimicked its techniques and have become far more efficient.[100] In terms of the number of new
models offered, clothing is actually more complex than computing, suggesting that Zara’s value
chain may be more difficult to copy. Still, H&M has increased the frequency of new items in stores
and is eyeing shifting some contract manufacturing away from Asia and closer to its European markets.[101] Forever 21 and Uniqlo get new looks within six weeks, and Renner, a Brazilian fast-fashion
rival, rolls out mini-collections every two months.[102] Evolving technology, such as the app by
retailer Zalando, which allows customers to snap a photo of an item and search for similar styles,
may also create so-called showrooming pressure, where customers browse a retailer but buy competing items online.[103] Rivals have a keen eye on Inditex, with the CFO of luxury goods firm
Burberry claiming the firm is a “fantastic case study” and “we’re mindful of their techniques.”[104]
Perhaps the biggest threat to Inditex and indeed, all fast-fashion firms, is the rise of directto-consumer retailer Shein, and its similarly styled competitors like Temu. Shein has also used
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
showrooming
The concept where
customers browse at
physical retailers, but
purchase products from
lower-cost online rivals.
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Information Systems
technology to squeeze out costs, many of them ones that traditional retailers can’t completely eliminate. And Shein has been known to add up to 10,000 new items a day. Shein sales grew from
$10 billion in 2020 to $100 billion in 2022, its U.S. sales put it ahead of both Zara and H&M combined,[105] and at one point in 2022, investors put money into the then privately held firm at a
valuation that was larger than the total market cap of both Inditex and H&M.[106] Shein’s growth is
astonishing, but the newcomer also has a host of additional challenges—including legislation and
serious concerns over manufacturing ethics.
Zara’s winning formula can only exist through management’s savvy understanding of how
information systems can enable winning strategies (many tech initiatives were led by José Maria
Castellano, a “technophile” business professor who became Ortega’s right-hand man in the 1980s).[107]
It is technology that helps Zara identify and manufacture the clothes customers want, get those
products to market quickly, and eliminate costs related to advertising, inventory missteps, and
markdowns. A strategist must always scan the state of the market as well as the state of the art
in technology, looking for new opportunities and remaining aware of impending threats. With systems so highly tuned for success, it may be unwise to bet against “The Cube.”
Key Takeaway
• Zara’s value chain is difficult to copy; but it is not invulnerable, nor is future dominance guaranteed. Zara management must be aware of the limitations in its business model, and must
continually scan its environment and be prepared to react to new threats and opportunities.
Questions and Exercises
1. The Zara case shows how information systems can impact every single management discipline. Which management disciplines were mentioned in this case? How does technology
impact each?
2. Would a traditional Internet storefront work well with Zara’s business model? Why or why
not?
3. Zara’s just-in-time, vertically integrated model has served the firm well, but an excellent business is not a perfect business. Describe the limitations of Zara’s model and list steps that
management might consider to minimize these vulnerabilities.
4. What challenges might Zara face in expanding to China or to the United States? Do you think
Zara should increase capacity in Spain or open a regional distribution center in another part
of the world? What are the pros and cons of each approach?
5. Search online to find examples of firms that suffered production problems because they
employed just-in-time manufacturing or kept limited inventory on hand. What caused the
production problems? List any steps you can think of that the firms might consider to minimize the potential of such problems from occurring in the future. What role might technology
play in your solution?
6. Have you purchased clothing from Shein, Temu, or other fast-fashion, online-only rivals?
What was your experience like? Should Zara be threatened? Why or why not?
Endnotes
1. B. White, “How Zara Got Its Name,” Telegraph, November 12, 2012.
2. A. Felsted, "Asos Looks a Lot Better Off Without Topshop," Bloomberg,
Jan. 10, 2023.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
3. K. Taylor and W. Martin, “Who is Amancio Ortega—The Richest Man in the
World,” The Independent, Sept. 1, 2017.
4. R. Murphy, “Expansion Boosts Inditex Net,” Women’s Wear Daily, April 1,
2008.
5. K. Rozario, "Inditex Stock Spikes By 7% As Zara’s Fast Fashion Strategy
Flies," Forbes, June 7, 2023.
6. J. Surowiecki, “The Most Devastating Retailer in the World,” New Yorker,
September 18, 2000.
7. C. Rohwedder, “Zara Grows as Retail Rivals Struggle,” The Wall Street
Journal, March 26, 2009.
Chapter 2
Zara: Fast Fashion from Savvy Systems
8. J. Folpe, “Zara Has a Made-to-Order Plan for Success,” Fortune, September 4, 2000.
9. R. Parekh, “How Zara Ballooned into a Multi-Billion Dollar Brand without
Advertising,” Advertising Age, August 19, 2013.
10. G. Petro, “The Future Of Fashion Retailing, Revisited: Part 2—Zara,”
Forbes, July 23, 2015.
11. J. Boorstein, “Fashion Victim,” Fortune, April 13, 2006.
12. P. Sellers, “Gap’s New Guy Upstairs,” Fortune, April 14, 2003.
13. The Economist, “Inditex: Fashion Forward,” March 24, 2012.
14. S. Greenhouse, “Retailers Split on Contrition after Collapse of Factories,”
The New York Times, April 30, 2013; and S. Greenhouse, “As Firms Line
Up on Factories, Walmart Plans Solo Effort,” The New York Times, May
14, 2013.
15. S. Zain Al-Mahmood and J. Burke, “Bangladesh Factory Fire Puts
Renewed Pressure on Clothing Firms,” Guardian, May 9, 2013.
16. E. Fox, “Why I’m Protesting against Gap over Bangladesh,” CNNMoney,
May 21, 2013.
17. K. Draper, "Reading All the Books on Nike, Déjà Vu Sets In," The New York
Times, Oct. 8, 2022.
18. C. Russell, "Is H&M Losing Its Shine?" Forbes, Jan. 31, 2019.
19. I. Kottasova, "Sale coming soon? H&M needs to offload $4 billion in unsold
clothes," The New York Times, June 28, 2018.
20. C. Lieber, "Why fashion brands destroy billions’ worth of their own merchandise every year," Vox, Sept. 27, 2018.
21. K. Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 9, 2008.
22. C. Bjork, “Booming Inditex to Share Profits with Employees,” The Wall
Street Journal, March 18, 2015.
23. D. Baxter-Wright, "9 things Zara employees want you to know," Cosmopolitan, May 18, 2018.
24. T. Buck, “Fashion: A Better Business Model,” Financial Times, June 18,
2014.
25. T. Buck, “Fashion: A Better Business Model,” Financial Times, June 18,
2014.
26. M. Pfeifer, “Fast and Furious,” Latin Trade, September 2007; and “The
Future of Fast Fashion,” Economist, June 18, 2005.
27. P. Kowsmann, “Fast Fashion: How a Zara Coat Went From Design to Fifth
Avenue in 25 Days,” The Wall Street Journal, Dec. 6, 2016.
28. D. Budds, “The Secret Behind Zara’s Success: Its Store Managers,” FastCompany, Dec. 6, 2016.
29. D. Budds, “The Secret Behind Zara’s Warp-Speed Fashion: Its Store Managers,” FastCompany, Dec. 6, 2016.
30. “The Future of Fast Fashion,” Economist, June 18, 2005.
31. J. Tagliabue, “A Rival to Gap That Operates Like Dell,” The New York
Times, May 30, 2003.
32. M. Helft, “Fashion Fast Forward,” Business 2.0, May 2002.
33. L. Sullivan, “Designed to Cut Time,” InformationWeek, February 28, 2005.
34. J. Surowiecki, “The Most Devastating Retailer in the World,” New Yorker,
September 18, 2000.
35. P. Kowsmann, “Fast Fashion: How a Zara Coat Went From Design to Fifth
Avenue in 25 Days,” The Wall Street Journal, Dec. 6, 2016.
36. Definition from the “father” of the value chain, Michael Porter. Refer to M.
Porter, “Strategy and the Internet,” Harvard Business Review 79, no. 3
(March 2001): 62–78, among others.
37. C. Gentry, “European Fashion Stores Edge Past U.S. Counterparts,” Chain
Store Age, December 2007.
38. M. Johnson, “Investors Relieved as Inditex Profit Soars,” Financial Times,
March 21, 2011.
39. S. Hansen, “How Zara Grew into the World’s Largest Fashion Retailer,”
The New York Times, November 9, 2012.
40. N. Tokatli, “Global Sourcing: Insights from the Global Clothing Industry—The Case of Zara, a Fast Fashion Retailer,” Journal of Economic
Geography 8, no. 1 (2008): 21–38.
41. M. Helft, “Fashion Fast Forward,” Business 2.0, May 2002.
42. T. Buck, “Fashion: A Better Business Model,” Financial Times, June 18,
2014.
43. C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to
Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20,
2008; and K. Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 9, 2008.
44. C. Bjork, “Zara Builds Its Business Around RFID,” The Wall Street Journal,
Sept. 16, 2014.
45. SCDigest Editorial Staff, “RFID and AIDC News: Zara's Aggressive Move to
Item-Level Tagging Features Plan to Re-Use Tags,” Supply Chain Digest,
Sept. 30, 2014.
46. L. Dejarlais, “Fashion-Forward Retailer Zara Leverages RFID Item Intelligence, Improves Key Metrics,” Impinj, Nov. 5, 2014.
47. K. Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 9, 2008.
48. K. Capell, “Fashion Conquistador,” BusinessWeek, September 4, 2006.
49. M. Helft, “Fashion Fast Forward,” Business 2.0, May 2002.
50. R. Sheppard, "Zara has opened its most innovative store concept yet in
Plaza de España in Madrid," RetailWeek, April 13, 2022.
51. K. Capell, “Fashion Conquistador,” BusinessWeek, September 4, 2006.
52. B. Tuttle, “In Major Shakeup, JCPenney Promises No More ‘Fake Prices,’”
Fortune, January 26, 2012; and G. Petro, "The Future of Fashion Retailing
Revisited," Forbes, July 23, 2015.
53. D. Sull and S. Turconi, “Fast Fashion Lessons,” Business Strategy Review,
Summer 2008; and K. Capell, “Fashion Conquistador,” BusinessWeek,
September 4, 2006.
54. N. Kumar and S. Linguri, “Fashion Sense,” Business Strategy Review,
Summer 2006.
55. P. Bhatnagar, “How Do You Ad(dress) the Gap?” Fortune, October 11,
2004.
56. E. O’Leary, A. Ringstrom, and E. Thomasson, “Zara-owner Inditex has the
edge in online battle with H&M,” Reuters, March 16, 2015; and unattributed author, “Zara, A Spanish Success Story,” CNN.com, June 15, 2001.
57. C. Vitzthum, “Zara’s Success Lies in Low-Cost Lines and a Rapid Turnover
of Collections,” The Wall Street Journal, May 18, 2001.
58. N. Kumar and S. Linguri, “Fashion Sense,” Business Strategy Review,
Summer 2006.
59. S. Berfield and M. Baigorri, “Zara’s Fast Fashion Edge,” Bloomberg Businessweek, Nov. 14, 2013.
60. Inditex Press Release, “Inditex’s 2012 Net Sales Rose 16%,” March 3,
2013; and Gap Press Release, “Gap Inc. Reports Fourth Quarter Earnings
per Share Increase of 66 Percent,” February 28, 2013.
61. C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to
Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20,
2008.
62. C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to
Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20,
2008.
63. J. Neumann and A. Garcia, “Zara Parent Inditex Slows Store Expansion as
Online Sales Grow,” The Wall Street Journal, March 9, 2016.
64. K. Splyby, “Ecommerce: Zara leads review of high street retailers’ mobile
apps,” Drapers, Jan. 8, 2015.
65. A. Grac, “Zara parent Inditex’s shares up on ecommerce hopes,” MarketWatch, March 9, 2016.
66. J. Perri, "Shein holds largest U.S. fast fashion market share," Bloomberg
Second Measure, Jan. 4, 2023.
67. I. Gestal, "Inditex continues its transformation: 33 stock rooms for 2020,"
MDS, July 29, 2019.
68. R. Sheppard, "Zara has opened its most innovative store concept yet in
Plaza de España in Madrid," RetailWeek, April 13, 2022.
69. B. Morgan, "The 20 Best Examples Of Using Artificial Intelligence For Retail
Experiences," Forbes, March 4, 2019.
70. R. Sheppard, "Zara has opened its most innovative store concept yet in
Plaza de España in Madrid," RetailWeek, April 13, 2022.
71. I. Gestal, "Inditex continues its transformation: 33 stock rooms for
2020," MDS, July 29, 2019.
72. E. O'Leary, A. Ringstrom, and E. Thomasson, “Zara-owner Inditex has the
edge in online battle with H&M,” Reuters, March 16, 2015.
73. R. Orihuela, "Zara Owner Built a Post-Covid Retailer Before Virus Came
Along," Bloomberg, June 9, 2020.
74. S. Dowsett, "Zara owner Inditex books first loss, shifts to big stores and
online," Reuters, June 10, 2020.
75. R. Orihuela, "Zara Owner Built a Post-Covid Retailer Before Virus Came
Along," Bloomberg Quint, June 9, 2020. Retrieved from:
https://www.bloombergquint.com/onweb/inditex-weathers-lockdownstorm-with-low-inventory-online-push.
76. G. Dean, "Cut-price apparel retailer Primark predicts that store closures
during COVID-19 will cost it $1.4 billion," BusinessInsider, Jan. 14, 2021.
77. R. Orihuela, "Zara Owner Built a Post-Covid Retailer Before Virus Came
Along," Bloomberg Quint, June 9, 2020. Retrieved from:
https://www.bloombergquint.com/onweb/inditex-weathers-lockdownstorm-with-low-inventory-online-push.
78. D. Sull and S. Turconi, “Fast Fashion Lessons,” Business Strategy Review,
Summer 2008.
79. G. Lindsay, “Prada’s High-Tech Misstep,” Business 2.0, March 1, 2004.
80. A. Sanchenko, “Foundations of Information Systems in Business” (lecture,
October 13, 2007), http://www.scribd.com/doc/396076/Foundations-ofInformation-Systems-in-Business
81. M. Wilson, "First Look: Zara unveils pioneering store concept," Chain Store
Age, May 18, 2018.
82. S. Chaudhuri, "Zara Owner to Close 1,200 Stores as It Outlines PostCoronavirus Future," The Wall Street Journal, June 10, 2020.
83. M. Hansbury, "Zara's owner says it will close as many as 1,200 stores as
it doubles down on online shopping," BusinessInsider, June 10, 2020.
84. C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to
Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20,
2008.
85. C. Robertson, “Inditex’s Zara Faces Rising Competition,” eft, April 22,
2014.
86. T. Buck, “Fashion: A Better Business Model,” Financial Times, June 18,
2014.
87. S. Berfield and M. Baigorri, “Zara’s Fast Fashion Edge,” Bloomberg Businessweek, November 14, 2013.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
89
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88. S. Berfield and M. Baigorri, “Zara’s Fast Fashion Edge,” Bloomberg Businessweek, November 14, 2013.
89. A. Hartmans, "Zara is opening or revamping nearly 30 stores in the US by
2025—here's where they're located," Business Insider, March 15, 2023.
90. S. Hansen, “How Zara Grew into the World’s Largest Fashion Retailer,”
The New York Times, November 9, 2012.
91. S. Hansen, “How Zara Grew into the World’s Largest Fashion Retailer,”
The New York Times, November 9, 2012.
92. R. Dottle and J. Gu, "The Global Glut of Clothing Is an Environmental Crisis," Bloomberg, Feb. 23, 2022.
93. M. Choi, "Zara uses recycling tech from start-up backed by Mount Nicholson co-developer Nan Fung," South China Morning Post, May 26, 2023.
94. C. Pons and H. Reid, "Zara owner boosts sustainability goals as fast-fashion feels the heat," Reuters, July 11, 2023
95. A. Rolt, "Zara owner announces commitment to halve emissions by 2030,"
GreenBiz, July 18, 2023.
96. M. Choi, "Zara uses recycling tech from start-up backed by Mount Nicholson co-developer Nan Fung," South China Morning Post, May 26, 2023
97. Staff, "The State of Fashion," Business of Fashion, 2023.
98. C. Pons and H. Reid, "Fast fashion firms prepare for EU crackdown on
waste mountain," Reuters, Sept. 1, 2023
99. J. Gronholt-pedersen, "EU wants all textile waste rules in place by 2028,
commissioner says," Reuters, June 27, 2023.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
100. T. Friscia, K. O’Marah, D. Hofman, and J. Souza, “The AMR Research
Supply Chain Top 25 for 2009,” AMR Research, May 28,
2009, http://www.amrresearch.com/Content/View.aspx?compURI=tcm:7-43469
101. A. Ringstrom, “H&M invests in supply chain as fashion rivalry intensifies,”
Reuters, March 30, 2017.
102. M. Pfeifer, “Fast and Furious,” Latin Trade, September 2007; and C.
Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to
Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20,
2008.
103. A. Samuely, “Zalando’s image recognition app makes shopping easier,”
RetailDive, Sept. 5, 2014.
104. C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to
Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20,
2008.
105. J. Perri, "Shein holds largest U.S. fast fashion market share," Bloomberg
Second Markets, Jan. 4, 2023.
106. J. Dawkins and G. Mayer, "Shein's rise: How the wildly popular brand
became the most feared fast-fashion retailer in the world and now could
be sold in Forever 21 stores," Business Insider, Aug. 24, 2023.
107. C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to
Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20,
2008.
CHAPTER 3
Strategy and Technology:
Concepts and Frameworks for
Achieving Success
3.1 Introduction
Learning Objectives
1. Define operational effectiveness and understand the limitations of technology-based competition leveraging this principle.
2. Define strategic positioning and the importance of grounding competitive advantage in this
concept.
3. Understand the resource-based view of competitive advantage.
4. List the four characteristics of a resource that might possibly yield sustainable competitive
advantage.
Managers are confused, and for good reason. Management theorists, consultants, and practitioners
often vehemently disagree on how firms should craft tech-enabled strategy, and many widely read
articles contradict one another. Headlines such as “Move First or Die” compete with “The FirstMover Disadvantage.” A leading former CEO advises, “destroy your business,” while others suggest
firms focus on their “core competency” and “return to basics.” The pages of the Harvard Business
Review have declared, “IT Doesn’t Matter,” while a New York Times bestseller hails technology as
the “steroids” of modern business. One pundit declares, “Data is the new Oil,”[1] while others write,
“There's no such thing as data,”[2] and “Data isn't oil—it's sand.”[3] And will AI be humanity’s demise
or its savior?[4]
Theorists claiming to have mastered the secrets of strategic management are contentious and
confusing. But as a manager, the ability to size up a firm’s strategic position and understand its likelihood of sustainability is one of the most valuable and yet most difficult skills to master. Layer
on thinking about technology—a key enabler to nearly every modern business strategy, but also a
function often thought of as easily “outsourced”—and it’s no wonder that so many firms struggle
at the intersection where strategy and technology meet. The business landscape is littered with the
corpses of firms killed by managers who guessed wrong.
Developing strong strategic thinking skills is a career-long pursuit—a subject that can occupy
tomes of text, a roster of courses, and a lifetime of seminars. While this chapter can’t address the
breadth of strategic thought, it is meant as a primer on developing the skills for strategic thinking
about technology. A manager who understands issues presented in this chapter should be able to
see through seemingly conflicting assertions about best practices more clearly; be better prepared
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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to recognize opportunities and risks; and be more adept at successfully brainstorming new, techcentric approaches to markets.
The Danger of Relying on Technology
sustainable
competitive
advantage
Financial performance that
consistently outperforms
industry averages.
Firms strive for sustainable competitive advantage, financial performance that consistently outperforms their industry peers. The goal is easy to state, but hard to achieve. The world is so
dynamic, with new products and new competitors rising seemingly overnight, that truly sustainable advantage might seem like an impossibility. New competitors and copycat products create a
race to cut costs, cut prices, and increase features that may benefit consumers but erode profits
industry-wide. Nowhere is this balance more difficult than when competition involves technology.
The fundamental strategic question for increasingly digital businesses is, “How can I possibly compete when everyone can copy my technology and the competition is just a click away?” Put that way,
the pursuit of sustainable competitive advantage seems like a lost cause.
But there are winners—big, consistent winners—empowered through their use of technology.
How do they do it? In order to think about how to achieve sustainable advantage, it’s useful to
start with two concepts defined by Michael Porter. A professor at the Harvard Business School and
father of the value chain and the five forces concepts (refer to the sections later in this chapter),
Porter is justifiably considered one of the leading strategic thinkers of our time.
operational
effectiveness
Performing the same tasks
better than rivals perform
them.
commodity
A basic good that can be
interchanged with nearly
identical offerings by
others—think milk, coal,
orange juice, or, to a lesser
extent, Windows PCs and
Android phones. The more
commoditized an offering,
the greater the likelihood
that competition will be
based on price.
fast follower problem
Exists when savvy rivals
watch a pioneer’s efforts,
learn from their successes
and missteps, then enter
the market quickly with a
comparable or superior
product at a lower cost
before the first mover can
dominate.
According to Porter, the reason so many firms suffer aggressive, margin-eroding competition is
because they’ve defined themselves according to operational effectiveness rather than strategic
positioning. Operational effectiveness refers to performing the same tasks better than rivals perform them. Everyone wants to be better, but the danger in operational effectiveness is “sameness.”
When offerings are roughly the same, they are more commodity than differentiated. That often
means that competition will focus on offering the lowest price, and this can pull down profits for
all players that consumers see as basically equivalent in features. This risk is particularly acute in
firms that rely on technology for competitiveness. After all, technology can be easily acquired. Buy
the same stuff as your rivals, hire students from the same schools, copy the look and feel of competitor websites, reverse engineer their products, and you can match them. The fast follower
problem exists when savvy rivals watch a pioneer’s efforts, learn from their successes and missteps,
then enter the market quickly with a comparable or superior product at a lower cost.
Since tech can be copied so quickly, followers can be fast, indeed. Groupon founder Andrew
Mason claimed the daily deal service had spawned five hundred imitators within two years of
launch.[5] Venture capitalist Ben Evans notes that at the time of Facebook’s WhatsApp purchase,
there were over fifty social apps in the Google Play store with over one million downloads each.[6] A
bunch of startups want you to sleep with them—at one time over 175 mattress firms operated in a
crowded space made popular with disruptive models by Casper, Purple, and Leesa, Tuft & Needle,
among others. Almost none of these firms manufactures their own products, and as CNBC states,
“You can’t tell them apart.”[7] When technology can be matched so quickly, it is rarely a source of
competitive advantage. And this phenomenon isn’t limited to the Web.
Advertising is the price you pay for having an unremarkable product or service.
—Jeff Bezos, founder of Amazon.com[8]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
For the dangers of the fast follower problem, look at the competition between Snapchat and
Facebook. Snapchat is considered the pioneer of many photo and video sharing features, such as
“Stories,” location stickers, and augmented-reality “selfie filters.” But Facebook properties, including
Instagram, WhatsApp, Messenger, and the flagship Facebook app routinely mimic Snap features,
implementing some in as little as four months after their appearance in Snapchat, leading
TechCrunch to quip Facebook’s development mantra, formerly “Move Fast and Break Things”
should now be “Move Last and Take Things.”[9] Even worse, all these Facebook properties are larger
than Snapchat, making Facebook the first stop for advertisers seeking to access the largest-possible
audience. Snapchat’s growth tumbled 82 percent after Instagram Stories launched,[10] and the firm
posted a $2.2 billion loss in its first quarter as a public company.[11]
Tech and Strategy Lessons from the Tragedy of TiVo
The digital video recorder (DVR) category was pioneered by TiVo, an early-to-market firm that
created a best-in-class interface for recording television programs to a hard drive instead of tapes
or discs. While DVR technology is now ubiquitous, TiVo's early role was so significant that for a
time, its name had been used as a verb (e.g., “be sure to TiVo ‘Saturday Night Live’”) and was
often used to describe all DVRs.[12]
FIGURE 3.1 TiVo versus Cable Firms
Source: John Gallaugher
Yet despite pioneer TiVo's early category-defining name recognition, the firm was never a consumer electronics success. The company experienced losses during nearly every year it operated
as an independent publicly traded firm. TiVo was eventually acquired by Rovi, a firm that
rebranded as TiVo,[13] and which was eventually acquired by Xperi in a deal largely focused on
patents.[14] Indeed, the few years when TiVo had reported a profit were usually associated with
legal victories rather than sales success.
Why did TiVo fail as a consumer electronics firm? Its technology was largely based on components available to rivals: off-the-shelf processors, commodity hard drives, and the open source
Linux operating system. Rivals could enter the market with a fraction of the development time
required had they needed to develop similar products from scratch. TiVo also found its biggest
competition wasn’t from other consumer electronics firms, but rather from cable TV providers.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
93
augmented reality
A technology that
superimposes content,
such as images and
animation, on top of
real-world images.
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These firms had a distribution channel and existing customer base that TiVo lacked. Want a DVR?
The cable guy will install it for you. And these non-consumer electronics rivals were strongly motivated: both by fear of being displaced as the primary interface with their customers, and by the
opportunity to collect data, that vital resource for digital-age competitive advantage that could be
used in business decisions ranging from service offerings to advertising to content development.
The Flip Video camera is another example of technology alone offering little durable advantage. The pocket-sized video recorders used flash memory instead of magnetic storage. Flip cameras
grew so popular that Cisco bought Flip parent Pure Digital for $590 million. The problem was that
digital video features were easy to copy, and constantly falling technology costs (refer to Chapter
6) allowed rivals to embed video into their products. Later that same year, Apple (and other firms)
began including video capture as a feature in their music players and phones. Why carry a Flip
when one pocket device can do everything? The Flip business barely lasted two years. Cisco killed
the division, taking a more than half-billion-dollar spanking in the process.[15]
strategic positioning
Performing different tasks
than rivals, or the same
tasks in a different way.
Operational effectiveness is critical. Firms must invest in techniques to improve quality, lower
cost, and design efficient customer experiences. But for the most part, these efforts can be matched.
Because of this, operational effectiveness is usually not sufficient to yield sustainable dominance
over the competition. In contrast to operational effectiveness, strategic positioning refers to performing different activities from those of rivals, or the same activities in a different way.
Technology itself is often very easy to replicate, and those assuming advantage lies in technology
alone may find themselves in a profit-eroding arms race with rivals able to match their moves step
by step. But while technology can be copied, technology can also play a critical role in creating and
strengthening strategic differences—advantages that rivals will struggle to match.
But What Kinds of Differences?
The principles of operational effectiveness and strategic positioning are deceptively simple. But
while Porter claims strategy is “fundamentally about being different,”[16] how can you recognize
whether your firm’s differences are special enough to yield sustainable competitive advantage?
resource-based view
of competitive
advantage
The strategic thinking
approach suggesting that
if a firm is to maintain
sustainable competitive
advantage, it must control
an exploitable resource, or
set of resources, that have
four critical characteristics.
These resources must be
(1) valuable, (2) rare, (3)
imperfectly imitable, and
(4) nonsubstitutable.
An approach known as the resource-based view of competitive advantage can help. The idea
here is that if a firm is to maintain sustainable competitive advantage, it must control a set of
exploitable resources that have four critical characteristics. These resources must be (1) valuable, (2)
rare, (3) imperfectly imitable (tough to imitate), and (4) nonsubstitutable. Having all four characteristics is key. Miss value and no one cares what you’ve got. Without rareness, you don’t have something
unique. If others can copy what you have, or others can replace it with a substitute, then any seemingly advantageous differences will be undercut.
Strategy isn’t just about recognizing opportunity and meeting demand. Resource-based thinking can help you avoid the trap of carelessly entering markets simply because growth is spotted.
The telecommunications industry learned this lesson in a very hard and painful way. With the
explosion of the Internet it was easy to see that demand to transport Web pages, e-mails, MP3s,
video, and everything else you can turn into ones and zeros, was skyrocketing.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
Most of what travels over the Internet is transferred over long-haul fiber-optic cables, so telecom firms began digging up the ground and laying webs of fiberglass to meet the growing demand.
Problems resulted because firms laying long-haul fiber didn’t fully appreciate that their rivals and
new upstart firms were doing the exact same thing. By one estimate there was enough fiber laid to
stretch from the Earth to the moon some 280 times![17] On top of that, a technology called dense
wave division multiplexing (DWDM) enabled existing fiber to carry more transmissions than ever
before. The end result: These new assets weren’t rare, and each day they seemed to be less valuable.
For some firms, the transmission prices they charged on newly laid cable collapsed by over 90
percent. Established firms struggled, upstarts went under, and WorldCom became the biggest
bankruptcy in U.S. history. The impact was also felt throughout all industries that supplied the
telecom industry. Firms like Sun, Lucent, and Nortel, whose sales growth relied on big sales to telecom carriers, saw their value tumble as orders dried up. Estimates suggest that the
telecommunications industry lost nearly $4 trillion in value in just three years,[18] much of it due to
executives who placed big bets on resources that weren’t strategic.
Nortel versus Beer: The Beer Wins
FIGURE 3.2
NORTEL—Now with Real DWDM
Source: Generated by John Gallaugher via Canva
There's a sad but popular tale among Nortel investors that provides a cautionary example
of the dangers of following crowds during periods of hype—especially when one doesn't fully
understand technology and market dynamics. It goes like this: Nortel, one of the dominant
firms providing telecom equipment during the early Internet build-out, saw its value run up
tremendously. At Nortel's height, the firm’s share price had gone through many splits and was
worth $124.50, with an overall market cap above $380 billion. Investors who didn't get out when
the price was up were in a world of hurt. Nortel's share price at bankruptcy was just $0.39. If you
were faced with the option to either spend $1,000 in Nortel stock at its hype peak versus $1,000
on beer, you'd have more money from drinking all the beer and returning the empties than you
would from your investment in Nortel.[19]
Key Takeaways
• Technology can be easy to copy, and technology alone rarely offers sustainable advantage.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
95
dense wave division
multiplexing (DWDM)
A technology that
increases the transmission
capacity (and hence
speed) of fiber-optic cable.
Transmissions using fiber
are accomplished by
transmitting light inside
“glass” cables. In DWDM,
the light inside fiber is split
into different wavelengths
in a way similar to how a
prism splits light into
different colors.
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• Firms that leverage technology for strategic positioning use technology to create competitive
assets or ways of doing business that are difficult for others to copy.
• True sustainable advantage comes from assets and business models that are simultaneously
valuable, rare, difficult to imitate, and for which there are no substitutes.
Questions and Exercises
1. What is operational effectiveness?
2. What is strategic positioning?
3. Is a firm that competes based on the features of technology engaged in operational effectiveness or strategic positioning? Give an example to back up your claim.
4. What are the dangers of competing on operational effectiveness? Are firms more likely to be
considered commodities or differentiated offerings? How would you describe the basis for
consumer decision-making when evaluating products that are highly similar?
5. What is the “resource-based” view of competitive advantage? What are the characteristics
of resources that may yield sustainable competitive advantage?
6. Choose a technology-based company. Discuss its competitive advantage based on the
resources it controls.
7. Use the resource-based view of competitive advantage to explain the collapse of many
telecommunications firms in the period following the burst of the dot-com bubble.
3.2 Powerful Resources
Learning Objectives
1. Understand that technology is often critical to enabling competitive advantage, and provide
examples of firms that have used technology to organize for sustained competitive advantage.
2. Understand the value chain concept and be able to examine and compare how various firms
organize to bring products and services to market.
3. Recognize the role technology can play in crafting an imitation-resistant value chain, as well
as when technology choice may render potentially strategic assets less effective.
4. Define the following concepts: brand, scale, data and switching cost assets, differentiation,
network effects, and distribution channels.
5. Understand and provide examples of how technology can be used to create or strengthen
the resources mentioned above.
Management has no magic bullets. There is no exhaustive list of key resources that firms can look
to in order to build a sustainable business. And recognizing a resource doesn’t mean a firm will
be able to acquire it or exploit it forever. But being aware of major sources of competitive advantage can help managers recognize an organization’s opportunities and vulnerabilities, and can help
them brainstorm winning strategies. Also, these assets rarely exist in isolation. Oftentimes, a firm
with an effective strategic position can create an arsenal of assets that reinforce one another, creating advantages that are particularly difficult for rivals to successfully challenge.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
97
Imitation-Resistant Value Chains
While many of the following resources are considered in isolation, the strength of any advantage
can be far more significant if firms are able to leverage several of these resources in a way that
makes each stronger and makes the firm’s way of doing business more difficult for rivals to match.
Firms that craft an imitation-resistant value chain have developed a way of doing business that
others will struggle to replicate, and in nearly every successful effort of this kind, technology plays
a key enabling role. The value chain is the set of interrelated activities that brings products or services to market (refer to below). If you read the earlier case on Zara and compare it to rivals, there
are differences across every element. But most importantly, the elements in Zara's value chain work
together to create and reinforce competitive advantages that others cannot easily copy. Incumbents trying to copy the firm would be straddled across two business models, unable to reap the
full advantages of either. And late-moving pure-play rivals will struggle, as Zara's lead time allows
the firm to develop brand, scale, data, and other advantages that newcomers lack (refer to below for
more on these resources).
imitation-resistant
value chain
A way of doing business
that competitors struggle
to replicate and that
frequently involves
technology in a key
enabling role.
value chain
The set of activities
through which a product
or service is created and
delivered to customers.
straddling
Key Framework: The Value Chain
The value chain is the “set of activities through which a product or service is created and delivered to customers.”[20] There are five primary components of the value chain and four supporting
components. The primary components are:
• Inbound logistics—getting needed materials and other inputs into the firm from suppliers
• Operations—turning inputs into products or services
• Outbound logistics—delivering products or services to consumers, distribution centers,
retailers, or other partners
• Marketing and sales—customer engagement, pricing, promotion, and transaction
• Support—service, maintenance, and customer support
The secondary components are:
• Firm infrastructure—functions that support the whole firm, including general management,
planning, IS, and finance
• Human resource management—recruiting, hiring, training, and development
• Technology/research and development—new product and process design
• Procurement—sourcing and purchasing functions
While the value chain is typically depicted as it’s displayed in Figure 3.3, goods and information
don’t necessarily flow in a line from one function to another. For example, an order taken by the
marketing function can trigger an inbound logistics function to get components from a supplier,
operations functions (to build a product if it’s not available), or outbound logistics functions (to
ship a product when it’s available). Similarly, information from service support can be fed back to
advise research and development (R&D) in the design of future products.
When a firm has an imitation-resistant value chain—one that’s tough for rivals to copy in a way
that yields similar benefits—then a firm may have a critical competitive asset. From a strategic
perspective, managers can use the value chain framework to consider a firm’s differences and
distinctiveness compared to rivals. If a firm’s value chain can’t be copied by competitors without
engaging in painful trade-offs, or if the firm’s value chain helps to create and strengthen other
strategic assets over time, it can be a key source for competitive advantage. Many of the examples used in this book, including FreshDirect, Amazon, and Zara, illustrate this point.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
In strategic management,
this refers to a firm's
attempt to occupy more
than one position, while
failing to match the
benefits of a more efficient,
singularly focused rival.
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Information Systems
FIGURE 3.3 The Value Chain
Source: John Gallaugher
An analysis of a firm’s value chain can also reveal operational weaknesses, and technology is
often of great benefit to improving the speed and quality of execution. Firms can often buy software to improve things, and tools such as supply chain management (SCM; linking inbound and
outbound logistics with operations), customer relationship management (CRM; supporting sales,
marketing, and in some cases R&D), and enterprise resource planning software (ERP; software
implemented in modules to automate the entire value chain) can have a big impact on more efficiently integrating the activities within the firm, as well as with its suppliers and customers. But
remember, these software tools can be purchased by competitors, too. While valuable, such software may not yield lasting competitive advantage if it can be easily matched by competitors as
well.
There are other potential dangers in using third-party software to automate critical tasks. If a firm
adopts software that changes a unique process into a generic one, it may have co-opted a key
source of competitive advantage, particularly if other firms can buy the same stuff. This isn’t a
problem with something like accounting software. Accounting processes are standardized and
accounting isn’t a source of competitive advantage, so most firms buy rather than build their
own accounting software. But using packaged, third-party SCM, CRM, and ERP software typically requires adopting a very specific way of doing things, using software and methods that can
be purchased and adopted by others. Many of the firms covered in this text, including Inditex,
Netflix, and Amazon, have elected to develop their own proprietary software solutions in large
part because they see their uniqueness in certain operations as key to creating difficult-to-imitate
competitive advantages.
Dell’s Struggles: Nothing Lasts Forever
Michael Dell enjoyed an extended run that took him from assembling PCs in his dorm room as an
undergraduate at the University of Texas at Austin to heading the largest PC firm on the planet.
For years Dell’s super-efficient, vertically integrated manufacturing (where it built its own PCs
rather than outsourcing manufacturing, like nearly all competitors) and direct-to-consumer sales
combined to help the firm earn seven times more profit on its own systems when compared with
comparably configured rival PCs.[21] And since Dell PCs were usually cheaper, too, the firm could
often start a price war and still have better overall margins than rivals.
But then Dell’s killer model, one that had become a staple case study in business schools worldwide, began to lose steam. Nearly two decades of observing Dell had allowed the contract
manufacturers serving Dell’s rivals to improve manufacturing efficiency.[22] Component suppliers
chose to locate near contract manufacturers, and assembly times fell dramatically. And as the
cost of computing fell, the price advantage Dell enjoyed over rivals also shrank in absolute
terms. That meant savings from buying a Dell weren’t as big as they once were. On top of that,
the direct-to-consumer model also suffered when sales of notebook PCs outpaced the more
commoditized desktop market. Notebooks can be considered to be more differentiated than
desktops, and customers often want to compare products in person—lift them, type on keyboards, and view screens—before making a purchase decision, leading Dell to work with retailers
instead of being direct-only. In time, these shifts knocked Dell from its ranking as the world’s
number one PC manufacturer.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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99
Dell’s struggles as computers, customers, and the product mix change all underscore the importance of continually assessing a firm’s strategic position among changing market conditions.
There is no guarantee that today’s winning strategy will dominate forever. As you study firms
including FreshDirect, Zara, Netflix, and others, it’s important to remember that the advantages
that were sustainable for years in earlier competition might not line up with market realities and
the competitive environment going forward.
Brand
A firm’s brand is the symbolic embodiment of all the information connected with a product or service, and a strong brand can also be an exceptionally powerful resource for competitive advantage.
Consumers use brands to lower search costs, so having a strong brand is particularly vital for firms
hoping to be the first online stop for consumers. Want to buy a book online? Auction a product?
Search for information? Which firm would you visit first? Almost certainly Amazon, eBay, or
Google. But how do you build a strong brand? It’s not just about advertising and promotion. First
and foremost, customer experience counts. A strong brand proxies quality and inspires trust, so if
consumers can’t rely on a firm to deliver as promised, they’ll go elsewhere. As an upside, tech can
play a critical role in rapidly and cost-effectively strengthening a brand. If a firm performs well,
consumers can often be enlisted to promote a product or service (so-called viral marketing). Firms
that grew to gargantuan size before committing any substantial investment on advertising include
Google, Skype, eBay, Facebook, LinkedIn, Twitter, and YouTube. Social services like Facebook and
Twitter are viral marketing machines. Instagram, Pinterest, and Spotify are just some of the firms
that have built thriving businesses with millions of followers by increasing its public awareness
through social sharing. Early customer accolades for a novel service often mean that positive press
(a kind of free advertising) will also likely follow.
But show up late and you may end up paying much more to counter an incumbent’s place
in the consumer psyche. Google’s brand is so strong that it has become a verb, and the cost to
challenge it is astonishingly high. Yahoo! and Microsoft’s Bing each spent $100 million on Googlechallenging branding campaigns, but the early results of these efforts seemed to do little to grow
share at Google’s expense.[23] Branding is difficult, but if done well, even complex tech products can
establish themselves as killer brands. Consider that Intel has taken an ingredient product that
most people don’t understand, the microprocessor, and built a quality-conveying name recognized
by computer users worldwide.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
brand
The symbolic embodiment
of all the information
connected with a product
or service.
viral marketing
Leveraging consumers to
promote a product or
service.
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Scale
scale advantages
Advantages related to size.
economies of scale
When costs can be spread
across increasing units of
production or in serving
multiple customers.
Businesses that have
favorable economies of
scale (like many Internet
firms) are sometimes
referred to as being highly
scalable.
Many firms gain advantages as they grow in size. Advantages related to a firm’s size are referred to
as scale advantages. Businesses benefit from economies of scale when the cost of an investment
can be spread across increasing units of production or in serving a growing customer base. Firms
that benefit from scale economies as they grow are sometimes referred to as being scalable. Many
Internet and tech-leveraging businesses are highly scalable since, as firms grow to serve more customers with their existing infrastructure investment, profit margins improve dramatically.
Consider that in just one year during the firm’s early growth, the Internet firm Blue Nile sold
as many diamond rings with just 115 employees and one website as a traditional jewelry retailer
would sell through 116 stores.[24] And with lower operating costs, Blue Nile can sell at prices that
brick-and-mortar stores can’t match, attracting even more customers and further fueling its advantages in economies of scale. Profit margins improve as the costs to run the firm’s single website and
operate its one warehouse are spread across increasing jewelry sales. The firm has begun to experiment with “web rooms”—consumer-education–focused storefronts that carry samples for
inspection. “Web rooms” operate leanly with no for-sale inventory, no staff working for commission,
and even in-store sales are handled from an iPad. The no-pressure, lean, multichannel approach
and a thirty-day money-back guarantee help first-time diamond buyers gain confidence, offering
experiences and tools targeted at learning, inspection, and customization. The firm even encourages customers to comparison shop rivals with the Blue Nile app open, confident the firm’s prices,
touted as 20 to 40 percent below traditional retailers’ prices,[25] will beat the price of any rock certified by the industry-standard GIA ratings agency.[26] And the firm’s “Dream Box” mobile app uses
augmented reality to allow a customer to see how their hand will look with custom-designed Blue
Nile bling.[27] Blue Nile has helped fuel over half a million marriage proposals, making the firm the
largest online jewelry retailer, by far. With cost economics stacked against traditional jewelry stores,
it’s no wonder 465 of them closed in a single year during Blue Nile’s rise.[28]
A growing firm may also gain bargaining power with its suppliers or buyers. Apple’s dominance
of smartphone and tablet markets has allowed the firm to lock up 60 percent of the world’s supply
of advanced touch-screen displays, and to do so with better pricing than would be available to
smaller rivals.[29] Similarly, for years eBay could raise auction fees because of the firm’s market dominance. Auction sellers who left eBay lost pricing power since fewer bidders on smaller, rival services
meant lower prices.
The scale of technology investment required to run a business can also act as a barrier to entry,
discouraging new, smaller competitors. Although Google was started by two Stanford students
with borrowed computer equipment running in a dorm room, the firm today runs on an estimated
1.4 million servers. Any rival wanting to copy Google's model would need some serious coin. The
same dynamic is playing out in generative AI. The cost to train modern generative AI models is
upward of $5 million—well above the average seed-round investment in technology firms. And
costs to run these businesses can also be high—OpenAI, the firm behind ChatGPT, is estimated
to have well over $40 million in tech costs each month just from users asking it questions. This is
one of the reasons OpenAI rushed to accept $13 billion from Microsoft—a firm that now controls
49 percent of OpenAI, and that is the exclusive home for the company's AI models.[30] A rival firm,
Anthropic, started by ChatGPT alumni, raised over $1 billion in capital, and Amazon may invest
$4 billion in total.[31] Any firm wanting to compete with these emerging giants today will need to
raise an enormous amount of capital and almost certainly seek a partnership like OpenAI has with
Microsoft. The investments being made by Google and OpenAI would be cost prohibitive for almost
any newcomer to justify.
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Switching Costs and Data
Switching costs exist when consumers incur an expense to move from one product or service to
another. Tech firms often benefit from strong switching costs that cement customers to their firms.
Users invest their time learning a product, entering data into a system, creating files, and buying
supporting programs or manuals. These investments may make them reluctant to switch to a rival’s
effort.
Similarly, firms that seem dominant but that don’t have high switching costs can be rapidly
trumped by strong rivals. Netscape once controlled more than 80 percent of the market share in
Web browsers, but when Microsoft began bundling Internet Explorer with the Windows operating
system and (through an alliance) with America Online (AOL), Netscape’s market share plummeted.
Customers migrated with a mouse click as part of an upgrade or installation. Learning a new
browser was a breeze, and with the Web’s open standards, most customers noticed no difference
when visiting their favorite websites with their new browser.
Sources of Switching Costs
• Learning costs: Switching technologies may require an investment in learning a new interface and commands.
• Information and data: Users may have to reenter data, convert files or databases, or even
lose earlier contributions on incompatible systems.
• Financial commitment: Can include investments in new equipment, the cost to acquire
any new software, consulting, or expertise, and the devaluation of any investment in prior
technologies no longer used.
• Contractual commitments: Breaking contracts can lead to compensatory damages and
harm an organization’s reputation as a reliable partner.
• Search costs: Finding and evaluating a new alternative costs time and money.
• Loyalty programs: Switching can cause customers to lose out on program benefits. Think
frequent purchaser programs that offer “miles” or “points” (all enabled and driven by software).[32]
It is critical for challengers to realize that in order to win customers away from a rival, a new
entrant must not only demonstrate to consumers that an offering provides more value than the
incumbent, but also ensure that their value added exceeds the incumbent’s value plus any perceived customer switching costs (refer to Figure 3.4). If it’s going to cost you and be inconvenient,
there’s no way you’re going to leave unless the benefits are overwhelming.
Data can be a particularly strong switching cost for firms leveraging technology. A customer
who enters her profile into Facebook, movie preferences into Netflix, or grocery list into FreshDirect
may be unwilling to try rivals—even if these firms are cheaper or offer more features—if moving
to the new firm means she’ll lose information feeds, recommendations, and time savings provided
by the firms that already know her well. Fueled by scale over time, firms that have more customers
and have been in business longer can gather more data, and many can use this data to improve
their value chain by offering more accurate demand forecasting or product recommendations.
In commodity industries, data is increasingly the only substantive differentiator. Consider
financial services, where all firms face the same regulation and can employ the same technologies
with the same trading methods on the same securities. Forbes has reported that executives in
financial services firms see the intelligent use of data and analytics as developing into the only
source of differentiation in their industry.[33] This also underscores how tightly various competitive
resources are intertwined. The data asset isn’t created in isolation. Larger firms (i.e., firms with scale)
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
switching cost
The cost a consumer
incurs when moving from
one product to another. It
can involve actual money
spent (e.g., buying a new
product) as well as
investments in time, any
data loss, and so forth.
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Information Systems
can acquire more data, while firms that have been in business longer and that enjoy longer customer retention rates (i.e., lower churn) can gather more data on individual customers, as well.
FIGURE 3.4 Value of Service and Switching Costs
As demonstrated in the graphic, in order to win customers from an established incumbent, a late-entering rival
must offer a product or service that not only exceeds the value offered by the incumbent, but also exceeds the
incumbent’s value and any customer switching costs.
Source: John Gallaugher
Differentiation
Commodities are products or services that are nearly identically offered from multiple vendors.
Consumers buying commodities are highly price-focused since they have so many similar choices.
In order to break the commodity trap, many firms leverage technology to differentiate their goods
and services. Data is not only a switching cost, it also plays a critical role in differentiation. Each
time a visitor returns to Amazon, the firm uses browsing records, purchase patterns, and product
ratings to present a custom home page featuring products that the firm hopes the visitor will like.
Customers value the experience they receive at Amazon so much that the firm received the highest
score ever recorded on the University of Michigan’s American Customer Satisfaction Index (ACSI).
The score was not just the highest performance of any online firm; it was the highest ranking that
any service firm in any industry had ever received.
Apple is another firm that has distinguished itself through differentiation. Unlike rival offerings from Microsoft and Google, Apple mobile and computer operating systems only run on Apple
hardware. This allows the firm to tightly integrate the experience across Apple products. Apple
systems consistently receive high customer satisfaction ratings,[34] are considered easier to use, are
more secure, and have fewer privacy issues.[35] While Apple’s market share in computer operating
systems is less than that of Microsoft Windows, and Apple’s worldwide smartphone market share
is less than that of Google’s Android, Apple’s differentiation (and its ability to avoid price-eroding,
commodity-based competition of other hardware rivals) has helped make Tim Cook’s firm the most
profitable and valuable company in the United States.[36]
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103
Network Effects
Facebook is by far the dominant social network worldwide. Microsoft Windows has a 90 percent
market share in operating systems. eBay has an 80 percent share of online auctions. Why are these
firms so dominant? This is largely due to the concept of network effects (refer to Chapter 10). Network effects (sometimes called network externalities or Metcalfe’s Law) exist when a product or
service becomes more valuable as more people use it. If you’re the first person with a Facebook
account, then Facebook isn’t very valuable. But with each additional user, there’s one more person
to communicate with. A firm with a big network of users might also see value added by third parties. Apple’s iOS devices (the iPhone, iPod touch, and iPad) and Google’s Android dominate rivals
from Microsoft and BlackBerry in part because Apple and Google have tens of thousands more
apps that run on and enhance these devices, and most of these apps are provided by firms other
than Apple and Google. Third-party add-on products, books, magazines, or even skilled labor are all
attracted to networks of the largest number of users, making dominant products even more valuable.
Switching costs also play a role in determining the strength of network effects. Tech user
investments often go far beyond simply the cost of acquiring a technology. Users spend time learning a product; they buy add-ons, create files, and enter preferences. Because no one wants to be
stranded with an abandoned product and lose this additional investment, users may choose a
technically inferior product simply because the product has a larger user base and is perceived
as having a greater chance of being offered in the future. The virtuous cycle of network effects[37]
doesn’t apply to all tech products, and it can be a particularly strong asset for firms that can control
and leverage a leading standard. Consider Apple’s iPhone and iPad with their closed systems versus
the once-dominant but now rarely used Netscape browser, which was almost entirely based on
open standards. Yet, in some cases where network effects are significant, they can create winners
so dominant that firms with these advantages enjoy a near-monopoly hold on a market.
OpenTable: Network Effects That Fill Restaurants’ Seats
Network effects earned through making a market more efficient are at the center of OpenTable’s
dominance in restaurant reservations. By getting between restaurants and their customers, and
adding lots of value along the way, OpenTable has built the world’s largest online restaurant
reservation system, one so dominant it is effectively a monopoly. OpenTable can get you a reservation at over 60,000 restaurants worldwide.[38]
The system delivers high value to the industry by exposing inventory and lowering search costs,
thereby reducing frustration. Customers are attracted to the service that has the most restaurants, and restaurants are attracted to the service with the most customers. Strategists call this
a two-sided market, and the strong network effects that result often crown one clear winner
ahead of all other competitors. OpenTable’s captive audience of restaurants and diners effectively
creates a new distribution channel for introducing all sorts of additional value-added services,
including loyalty programs to encourage repeat use and payments to lower customer wait times
and free up more table inventory. The firm’s industry dominance is so complete that Booking
Holdings Inc. (a firm that includes over half a dozen brands, including Booking.com, Rentalcars.com, and Kayak.com in addition to Priceline.com) offered $2.6 billion to acquire the firm.[39]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
network effects
Also known as Metcalfe’s
Law, or network
externalities. When the
value of a product or
service increases as its
number of users expands.
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FIGURE 3.5 OpenTable Reservations
Roughly half of all reservations are made from the firm’s mobile apps. Network effects
make OpenTable the first place diners go for reservations. It is also the first choice for
restaurants seeking diners. This dynamic helped the firm build a business valued at over
$2.6 billion.
Source: OpenTable
Distribution Channels
distribution channel
The path through which
products or services get to
customers.
If no one sees your product, then it won’t even get considered by consumers. So distribution
channels—the path through which products or services get to customers—can be critical to a firm’s
success.
Apple Stores show firm-crafted retail distribution channels at their most effective. As mentioned earlier, one of Apple’s key competitive strengths lies in the firm’s differentiation versus rival
products; however, firms offering highly differentiated offerings may face difficulty convincing
potential customers of a product’s unfamiliar benefits. Apple gear at a Best Buy might face price or
simple feature checklist comparisons. However, Apple products offered at the Apple Store give firmtrained employees an opportunity to present advantages of the company’s unique products, how
they work together, and free on-site customer support. While many in the business press thought
the Apple Store would be a dismal failure (it was introduced at a time when PC maker Gateway was
shuttering its own failed retail experiment),[40] for Apple this formula has resulted in the single most
successful retail chain in the United States on a sales-per-square-foot basis. Apple Store sales dwarf
not just consumer electronics categories, but also clothing retailers, high-end jewelers, and every
other store regardless of category.[41]
TABLE 3.1 Top Retailers: Sales per Square Foot
Rank
Firm
Sales/Sq.
Ft. ($)
1
Apple Stores
5,546
2
Generation Next Franchise Brands (self-serve food and printing kiosks found in
malls, airports, and theaters)
3,970
3
Murphy USA (gas and convenience store)
3,721
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
Rank
Firm
105
Sales/Sq.
Ft. ($)
4
Tiffany & Co. (jewelry)
2,951
5
Lululemon (apparel)
1,560
Source: Data from L. Thomas, “Bucks from Bricks: These Retailers Make the Most Money per Square Foot on Their Real
Estate,” CNBC, July 29, 2017.
Apple also leveraged its iTunes platform as a distribution channel to launch the Apple
Music subscription service. Just nine months after launching Apple Music, the firm had attracted
over 13 million paying subscribers to its streaming service.[42] Subscribing was easy, as anyone who
had iTunes and who had bought something with Apple could sign up with a few taps, no download
required. Today Apple has over 88 million subscribers worldwide,[43] and while Spotify has more subscribers overall, Apple Music has, at times, overtaken its Swedish rival in the United States in terms
of paying subscribers.[44] Apple also has an additional distribution advantage that Spotify
doesn’t—bundling. Apple Music is now included as part of a more expensive AppleOne subscription, which also includes Apple TV+, Apple Arcade (Games), Apple News+, Apple Fitness+, and
iCloud+ storage. Apple Music is also the default streaming option that comes with every new Mac
and iOS device.
Technology also opens up opportunities to leverage products provided by others to create new
distribution channels to reach customers. Many firms offer APIs (application programming interfaces), essentially programming hooks that allow other firms to tap into their services. By
publishing APIs, Uber has managed to add its service to apps and websites provided by United Airlines, OpenTable, and Tripadvisor.[45]
Users can also be recruited to create new distribution channels for your products and services
(usually for a cut of the take). You may have visited websites that promote books sold on Amazon.
Website operators do this because Amazon gives them a percentage of all purchases that come in
through these links. Amazon now has over one million of these “associates” (the term the firm uses
for its affiliates), yet it only pays them if a promotion gains a sale. Google similarly receives some
$33 billion of its ad revenue not from search ads, but from its ad network that distributes advertisements to third-party sites ranging from lowly blogs to the New York Times, splitting the take with
content providers.[46]
Being dependent on distribution channels provided by other firms can present challenges if
distribution partners suddenly decide to cut you off. When the iPhone was introduced, Google was
Apple’s exclusive map provider. However, Apple eventually launched its own map service, kicking
out Google as a default option and relegating it to an iOS also-ran. Two years after the change, fewer
than one in six iOS users had installed the Google Maps app on their devices, even though Apple’s
mapping product was initially considered inferior.[47] Fear of losing out on access to iPhone users is
one reason why Google reportedly spends over $26 billion a year in a combination of flat fee and ad
revenue to be the default search engine for Apple products.[48] Over half of all Google searches come
from Apple devices.[49] One challenge for very large firms that have saturated markets and multibillions in revenues is to find new venues for growth, but Apple has regularly leveraged its platform
to surface new business opportunities. Also note that buying its way into market access isn’t the
only alternative—Google has created its own ways to reach customers. Even though Microsoft and
Apple embed their browsers with their operating systems, Google’s Chrome remains the most
widely used Web browser in the world, Gmail has emerged as the top free e-mail alternative, and
the firm’s Android OS is even more popular worldwide than iOS.[50]
The ability to distribute products and services by bundling them with existing offerings can
be a key advantage. Apple’s services business (think the AppleOne services mentioned above) now
account for about one-quarter of the firm’s total revenue—more than the iPad and wearables business.[51] But beware: Sometimes these distribution channels can provide firms with such an edge
that international regulators have stepped in to try to provide a more level playing field. European
regulators have forced Microsoft to unbundle the firm’s own Web browser and media player from
Windows, and Google has faced fines worldwide for allegedly favoring its own products in searches
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
bundling
Selling products available
separately as a single
package. Bundling can be
especially effective when a
software product or
service is included with a
hardware product.
Bundling can also be tricky
as it can raise a risk of
unfair competitive
practices, especially if a
firm has a monopoly or
otherwise large amount of
market control.
APIs
Programming hooks, or
guidelines, published by
firms that tell other
programs how to get a
service to perform a task
such as send or receive
data. For example,
Amazon provides APIs to
let developers write their
own applications and
websites that can send the
firm orders.
affiliates
Third parties that promote
a product or service,
typically in exchange for a
cut of any sales.
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Information Systems
over those provided by rivals, with some wondering if regulators may demand the firm be broken
up.[52]
How Apple and Google Formed One of Tech’s Most Powerful Partnerships
Apple and Google’s businesses are deeply entangled, with Google reliant on Apple for distribution
and Apple gaining major profits through its deals with Google. This video is informative, but the
stats are out of date. In a recent trial it was revealed that Google pays Apple 36 percent of its
search ad revenue for ads that come through Apple devices. This amounts to over $26 billion a
year. Are these deals anticompetitive? And if they were shut down, would Apple be allowed to
create its own search alternative, offering yet another service inside of its walled garden?
View in the online reader
What about Patents?
Intellectual property protection can be granted in the form of a patent for those innovations
deemed to be useful, novel, and nonobvious. In the United States, technology and (more controversially with certain restrictions) even business methods (processes) can be patented,[53] typically for
periods of twenty years from the date of patent application. Firms that receive patents have some
degree of protection from copycats that try to identically mimic their products and methods.
non-practicing
entities
Commonly known as
patent trolls, these
firms make money by
acquiring and asserting
patents, rather than
bringing products and
services to market.
The patent system is often considered to be unfairly stacked against startups. U.S. litigation
costs in a single patent case average about $5 million,[54] and a few months of patent litigation can
be enough to sink an early-stage firm. Large firms can also be victims. Non-practicing entities
(NPEs), more commonly known as patent trolls, hold intellectual property not with the goal of
bringing novel innovations to market but instead in hopes that they can sue or extort large settlements from others.[55] A $612 million settlement paid by BlackBerry (at the time known as Research
in Motion) to the little-known holding company NTP is often highlighted as an example of the pain
trolls can inflict.[56] Litigation threats are pushing rivals to cooperate in patent portfolio acquisition.
Apple, EMC, Ericsson, Microsoft, RIM, and Sony pooled resources for a $4.5 billion purchase of some
6,000 patents formally held by the bankrupt telecom equipment firm Nortel.[57]
Even if an innovation is patentable, that doesn’t mean that a firm has bulletproof protection.
Some patents have been nullified by the courts upon later review (usually because of a successful
challenge to the uniqueness of the innovation). Software patents are also widely granted, but
notoriously difficult to defend. The U.S. Supreme Court unanimously ruled that simply taking
an existing, well-known business method and applying technology to the process is no longer
patent eligible.[58] Also, in many cases, coders at competing firms can write substitute algorithms
that aren’t the same, but accomplish similar tasks. For example, although Google’s PageRank search
algorithms are fast and efficient, Microsoft, Yahoo!, and others now offer their own noninfringing
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
search that presents results with an accuracy that many would consider on par with PageRank.
Patents do protect tech-enabled operations innovations at firms like Netflix, and design innovations like the iPod click wheel. And because of patents that overlap with Google’s Android system
and related mobile innovations, Microsoft actually makes more money from Samsung than from
Skype, Windows Phone, and Xbox combined.[59] Patents can be extremely important and even
lucrative, but in a study of the factors that were critical in enabling firms to profit from their innovations, then Carnegie Mellon professor Wes Cohen found that patents were only the fifth most
important factor. Secrecy, lead time, sales skills, and manufacturing all ranked higher.[60]
Key Takeaways
• Technology can play a key role in creating and reinforcing assets for sustainable advantage
by enabling an imitation-resistant value chain; strengthening a firm’s brand; collecting useful
data and establishing switching costs; creating a network effect; creating or enhancing a
firm’s scale advantage; enabling product or service differentiation; and offering an opportunity to leverage unique distribution channels.
• The value chain can be used to map a firm’s efficiency and to benchmark it against rivals,
revealing opportunities to use technology to improve processes and procedures. When a
firm is resistant to imitation, a superior value chain may yield sustainable competitive advantage.
• Firms may consider adopting packaged software or outsourcing value chain tasks that are
not critical to a firm’s competitive advantage. A firm should be wary of adopting software
packages or outsourcing portions of its value chain that are proprietary and a source of competitive advantage.
• Patents are not necessarily a surefire path to exploiting an innovation. Many technologies
and business methods can be copied, so managers should think about creating assets like
the ones previously discussed if they wish to create a truly sustainable advantage.
• Nothing lasts forever, and shifting technologies and market conditions can render once
strong assets obsolete.
Questions and Exercises
1. Define and diagram the value chain.
2. Identify two firms in the same industry that have different value chains. Why do you think
these firms have different value chains? What role do you think technology plays in the way
that each firm competes? Do these differences enable strategic positioning? Why or why
not?
3. How can information technology help a firm build a brand inexpensively?
4. Describe Blue Nile’s advantages over a traditional jewelry chain. Can conventional jewelers
successfully copy Blue Nile? Why or why not?
5. What are switching costs? What role does technology play in strengthening a firm’s switching costs?
6. What are network effects? Name a product or service that has been able to leverage network
effects to its advantage.
7. What role did network effects play in your choice of an operating system, a social network, a
word processor, or a mobile phone?
8. How can technology be a distribution channel? Name a firm that has tried to leverage its
technology as a distribution channel.
9. How does Apple compete with rivals? What competitive assets does the firm leverage when
competing against Google, Microsoft, and others?
10. Do you think it is possible to use information technology to achieve competitive advantage?
If so, how? If not, why not?
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11. What are the potential sources of switching costs if you decide to switch cell phone service
providers? Cell phones? Operating systems? Pay TV service?
12. Why is an innovation based on technology alone often subject to intense competition?
13. Can you think of firms that have successfully created competitive advantage even though
other firms provide essentially the same thing? What factors enable this success?
14. What can a firm do to prepare for the inevitable expiration of a patent (patents typically expire
after twenty years)? Think in terms of the utilization of other assets and the development of
advantages through employment of technology.
3.3 Barriers to Entry, Technology, and
Timing
Learning Objectives
1. Understand the relationship between timing, technology, and the creation of resources for
competitive advantage.
2. Argue effectively when faced with broad generalizations about the importance (or lack of
importance) of technology and timing to competitive advantage.
3. Recognize the difference between low barriers to entry and the prospects for the sustainability of new entrants’ efforts.
Some have correctly argued that the barriers to entry for many tech-centric businesses are low.
This argument is particularly true for the Internet, where rivals can put up a competing website or
deploy a rival app seemingly overnight. But it’s absolutely critical to understand that market entry
is not the same as building a sustainable business, and just showing up doesn’t guarantee survival.
private
As in “to go private” or
“take a firm private.”
Buying up a publicly
traded firm’s shares.
Usually done when a firm
has suffered financially and
when a turnaround
strategy will first yield
losses that would further
erode share price. Firms
(often called private
equity, buyout, LBO,
or leveraged buyout firms)
that take another company
private hope to improve
results so that the
company can be sold to
another firm or they can
reissue shares on public
markets.
Platitudes like “follow, don’t lead”[61] can put firms dangerously at risk, and statements about
low entry barriers ignore the difficulty many firms will have in matching the competitive advantages of successful tech pioneers. Should Blockbuster have waited while Netflix pioneered? In a
year in which Netflix profits were up sevenfold, Blockbuster lost more than $1 billion, and today
Blockbuster is bankrupt.[62] Yet by 2018, Netflix briefly surpassed Disney in market capitalization.[63]
Should Sotheby’s have dismissed seemingly inferior eBay? In the first three months of 2018, eBay
made nearly half a billion dollars in profits. Sotheby’s lost $6.5 million and has since been
taken private.[64] Barnes & Noble waited seventeen months to respond to Amazon. By 2018, Amazon
became only the second U.S. firm to reach a $1 trillion market cap.[65] By comparison, in its last year
as a publicly traded company, 2019, Barnes & Noble lost over $125 million and was taken private.[66]
At that time Amazon’s market cap was over 1,500 times greater than the premium price paid for
Barnes & Noble.[67] Today’s Internet giants are winners because in most cases they were the first to
move with a profitable model and they were able to quickly establish resources for competitive
advantage. With few exceptions, established offline firms have failed to catch up to today’s Internet
leaders.
Timing and technology alone will not yield sustainable competitive advantage. Yet both of
these can be enablers for competitive advantage. Put simply, it’s not the time lead or the technology;
it’s what a firm does with its time lead and technology. True strategic positioning means that a firm
has created differences that cannot be easily matched by rivals. Moving first pays off when the time
lead is used to create critical resources that are valuable, rare, tough to imitate, and lack substitutes.
Anything less risks the arms race of operational effectiveness. Build resources like brand, scale, net-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
work effects, switching costs, or other key assets and your firm may have a shot. But guess wrong
about the market or screw up execution, and failure or direct competition awaits. It is true that
most tech can be copied—there’s little magic in eBay’s servers, Intel’s processors, Oracle’s database
software, or Microsoft’s operating systems that past rivals have not at one point improved upon.
But the lead that each of these tech-enabled firms had was leveraged to create network effects,
switching costs, and data assets, and helped build solid and well-respected brands.
But Google Arrived Late! Why Incumbents Must Constantly Consider
Rivals
Gmail is the dominant e-mail provider today, but it took Google eight years to finally top early
leaders Yahoo! Mail and Hotmail. Yahoo! and Hotmail were able to hold onto their lead in email market share for several years after Gmail’s introduction, likely because these firms quickly
matched and nullified Gmail’s most significant tech-based innovation (more free storage) before
Google could inflict real damage.[68] Perhaps Yahoo! had learned from prior errors. The firm’s
earlier failure to respond to Google’s emergence as a credible threat in search advertising gave
Sergey Brin and Larry Page the time they needed to build the planet’s most profitable Internet
firm.
By some accounts, Google was actually the twenty-first notable firm to enter the Internet search
market.[69] Yahoo! (and many Wall Street analysts) saw search as a commodity—a service the firm
had subcontracted out to other firms including AltaVista and Inktomi. Yahoo! saw no conflict in
taking an early investment stake in Google or in using the firm for its search results. But Yahoo!
failed to pay attention to Google’s advance. As Google’s innovations in technology, interface, and
advertising remained unmatched over time, the firm was able to build its brand, scale, and advertising network (distribution channel) that grew from network effects because content providers
and advertisers attract one another. These are all competitive resources that rivals have never
been able to match.
Now Google (and Apple, too) are once again running from this playbook—turning the smartphone
software market into what has become a two-horse race. Many rivals, including Microsoft, had
been trying to create a mobile standard for years, but their technical innovations offered little
durable strategic value. It wasn’t until app stores flourished, offered with a high-quality user experience, that dominant smartphone platforms emerged. Yes, Google and Apple arrived late, but
nothing before them had created defensible strategic assets, and that left an opening.
Google’s ability to succeed after being late to the search and mobile party isn’t a sign of the
power of the late mover; it’s a story about the failure of incumbents to monitor their competitive landscape, recognize new rivals, and react to challenging offerings. That doesn’t mean that
incumbents need to respond to every potential threat. Indeed, figuring out which threats are worthy of response is the real skill here. Video rental chain Hollywood Video wasted over $300 million
in an Internet streaming business years before high-speed broadband was available to make the
effort work.[70] But while Blockbuster avoided the balance sheet–cratering gaffes of Hollywood
Video, the firm also failed to respond to Netflix—a new threat that had timed market entry perfectly (refer to Chapter 5).
Firms that quickly get to market with the “right” model can dominate, but it’s equally critical for
leading firms to pay close attention to competition and innovate in ways that customers value.
Take your eye off the ball and rivals may use time and technology to create strategic resources.
Friendster was once known as the largest social network in the United States but has become
virtually irrelevant today. And even the King of social, Facebook, has been tripped up. Zuckerberg’s slow-to-execute mobile strategy led to the rise of SnapChat, Instagram, and WhatsApp.
Facebook eventually bought the latter two for $1 billion and $19 billion, respectively. Taking your
eye off the competition can have a high price, indeed.[71]
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Key Takeaways
• It doesn’t matter if it’s easy for new firms to enter a market if these newcomers can’t create
and leverage the assets needed to challenge incumbents.
• Beware of those who say, “IT doesn’t matter” or refer to the “myth” of the first mover. This
thinking is overly simplistic. It’s not a time or technology lead that provides sustainable competitive advantage; it’s what a firm does with its time and technology lead. If a firm can use
a time and technology lead to create valuable assets that others cannot match, it may be
able to sustain its advantage. But if the work done in this time and technology lead can be
easily matched, then no advantage can be achieved, and a firm may be threatened by new
entrants.
Questions and Exercises
1. Does technology lower barriers to entry or raise them? Do low entry barriers necessarily
mean that a firm is threatened?
2. Is there such a thing as the first-mover advantage? Why or why not?
3. Why did Google beat Yahoo! in search?
4. A former editor of the Harvard Business Review, Nick Carr, once published an article in
that same magazine with the title “IT Doesn’t Matter.” In the article he also offered firms the
advice: “Follow, Don’t Lead.” What would you tell Carr to help him improve the way he thinks
about the relationship between time, technology, and competitive advantage?
5. Name an early mover that has successfully defended its position. Name another that has
been superseded by the competition. What factors contributed to its success or failure?
6. You have just written a word processing package far superior in features to Microsoft Word.
You now wish to form a company to market it. List and discuss the barriers your startup
faces.
7. What kinds of strategic assets are Google’s Android and Apple’s iOS seeking to create and
exploit? Do you think these firms will be more successful than rivals? Why or why not?
3.4 Key Framework: The Five Forces
of Industry Competitive Advantage
Learning Objectives
1. Diagram the five forces of competitive advantage.
2. Apply the framework to an industry, assessing the competitive landscape and the role of
technology in influencing the relative power of buyers, suppliers, competitors, and alternatives.
Professor and strategy consultant Gary Hamel once wrote in a Fortune cover story that “the dirty
little secret of the strategy industry is that it doesn’t have any theory of strategy creation.”[72] While
there is no silver bullet for strategy creation, strategic frameworks help managers describe the
competitive environment a firm is facing. Frameworks can also be used as brainstorming tools to
generate new ideas for responding to industry competition. If you have a model for thinking about
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Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
111
competition, it’s easier to understand what’s happening and to think creatively about possible solutions.
One of the most popular frameworks for examining a firm’s competitive environment is
Porter’s five forces, also known as the Industry and Competitive Analysis. As Porter puts it, “analyzing [these] forces illuminates an industry’s fundamental attractiveness, exposes the underlying
drivers of average industry profitability, and provides insight into how profitability will evolve in
the future.”[73] The five forces this framework considers are (1) the intensity of rivalry among existing competitors, (2) the threat of new entrants, (3) the threat of substitute goods or services, (4) the
bargaining power of buyers, and (5) the bargaining power of suppliers (refer to Figure 3.6).
FIGURE 3.6 The Five Forces of Industry and Competitive Analysis
Source: John Gallaugher
New technologies can create jarring shocks in an industry. Consider how the rise of the Internet has impacted the five forces for music retailers. Traditional music retailers like Tower and
Virgin found that customers were seeking music online. These firms scrambled to invest in new ecommerce channels out of what was perceived to be a necessity. Their intensity of rivalry increased
because they not only competed based on the geography of where brick-and-mortar stores are
physically located, they began to compete online as well. Investments online are expensive and
uncertain, prompting some firms to partner with new entrants such as Amazon. Free from brickand-mortar stores, Amazon, the dominant new entrant, has a highly scalable cost structure while
the old brick-and-mortar guys were left straddling both online and offline models, unable to gain
the efficiency of the singularly focused Amazon that ran lean, free of retail stores. Add to this the
fact that in many ways the online buying experience is superior to what customers saw in stores.
Customers can hear samples of almost all tracks, selection is seemingly limitless (the long tail phenomenon—see this concept illuminated in Chapter 5), and data is leveraged using collaborative
filtering software to make product recommendations and assist in music discovery.[74] Tough competition, but it gets worse because CD sales aren’t the only way to consume music. The process of
buying a plastic disc now faces substitutes as digital music files become available on commercial
music sites. Who needs the physical atoms of a CD filled with ones and zeros when you can buy the
bits one song at a time? Or don’t buy anything and subscribe to a limitless library instead.
From a sound quality perspective, the substitute good of digital tracks purchased online is
almost always inferior to their CD counterparts. To transfer songs quickly and hold more songs on
a digital music player, tracks are encoded in a smaller file size than what you’d get on a CD, and this
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Porter’s five forces
Also known as Industry
and Competitive Analysis.
A framework considering
the interplay between (1)
the intensity of rivalry
among existing
competitors, (2) the threat
of new entrants, (3) the
threat of substitute goods
or services, (4) the
bargaining power of
buyers, and (5) the
bargaining power of
suppliers.
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Information Systems
smaller file contains lower playback fidelity. But the additional tech-based market shock brought
on by digital music players (particularly the iPod) has changed listening habits. The convenience of
carrying thousands of songs trumps what most consider just a slight quality degradation. iTunes
sales rose to make Apple the number one reseller of music, online or off. But Apple itself was hit by
a substitute product—music streaming. Spotify started outside the United States, where licensing
schemes were often more favorable and easier to obtain. To be clear, Apple Music is a giant, but it’s
still the number two service behind early mover Spotify, despite all of Apple’s advantages.[75] All this
choice gives consumers (buyers) bargaining power. They demand cheaper prices and greater convenience.
ChatGPT Is Killing Stack Overflow
Keep your eye on the new substitute good—generative AI (GenAI), the technology used to generate answers in services like ChatGPT. Some wonder if one day users will turn to generative AI for
answers rather than using search engines and clicking through links.[76] If this happens, it would
tank the most lucrative game in all of advertising—Internet search. While GenAI hasn’t yet eaten
into Google’s search market share (Microsoft has seen no noticeable uptick since baking GPT
into Bing),[77] nor has it noticeably lowered visitors to major news sites, results on some niche
sites have plummeted as GenAI becomes a clearly superior product. The programmer Q&A site
Stack Overflow saw a 50 percent drop off in the months following the introduction of ChatGPT.[78]
Less than a year after ChatGPT’s introduction, Stack Overflow’s parent had laid off nearly 30 percent of its workforce.[79] ChatGPT is actually a very good (although not perfect) programmer and
knows a lot of programming languages. Many programmers found they were likely to get better
advice, quicker, by consulting ChatGPT than by searching through Stack Overflow’s many, many
posts and dealing with its often hostile and sanctimonious seasoned posters who are quick to
chastise users when a question has already been answered. It’s early days for GenAI, but massive disruption could follow as the technology presents a series of superior substitute offerings in
a wide variety of industries.
Generative AI Is About to Reset Everything, and, Yes It Will Change Your Life,
Forbes
View in the online reader
The Internet can also create models that strengthen the bargaining power of suppliers. Consider the rise of taxi services such as Uber. In the old model, cab firms own the right to run a taxi
through the purchase of expensive medallions. Drivers work as independent contractors and pay
a “shift fee” to lease the cab from the medallion-owning cab firms. Drivers pay gas and insurance,
too, and all this expense can cost drivers $150 upward per twelve-hour shift. Because of this, it’s not
uncommon for traditional cab drivers to run a shift where they can’t even cover their costs.[80] By
contrast, ride-sharing services cut out the medallion-owning middleman for anyone who could use
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Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
113
their own car for transport, and the services often deliver enough fares to triple wages,[81] all while
offering fares that can (depending on the city and cab supply) undercut cab rates by 30 percent.[82]
According to the San Francisco Cab Drivers Association, one-third of its drivers ditched their registered cabs in a twelve-month span to drive for ride-sharing companies such as Uber and Lyft.[83] In
some cities where Uber operates, business for traditional cabs is down 35 to 40 percent.[84] (For more
about ride-sharing services, refer to Chapter 12.)
While it can be useful to look at changes in one industry as a model for potential change in
another, it’s important to realize that the changes that impact one industry do not necessarily
impact other industries in the same way. For example, it is often suggested that the Internet
increases bargaining power of buyers and lowers the bargaining power of suppliers. This suggestion is true for some industries like auto sales and jewelry where the products are commodities and
the price transparency of the Internet counteracts a previous information asymmetry, where
customers often didn’t know enough information about a product to bargain effectively. But it’s not
true across the board.
In cases where network effects are strong or a seller’s goods are highly differentiated, the Internet can strengthen supplier bargaining power. The customer base of an antiques dealer used to be
limited by how many likely purchasers lived within driving distance of a store. Now with eBay, the
dealer can take a rare good to a global audience and have a much larger customer base bid up the
price. Switching costs also weaken buyer bargaining power. Wells Fargo has found that customers
who use online bill pay (where switching costs are high) are 70 percent less likely to leave the bank
than those who don’t, suggesting that these switching costs help cement customers to the company
even when rivals offer more compelling rates or services.
Tech plays a significant role in shaping and reshaping these five forces, but it’s not the only significant force that can create an industry shock. Government deregulation or intervention, political
shock, and social and demographic changes can all play a role in altering the competitive landscape.
Because we live in an age of constant and relentless change, managers need to continually visit
strategic frameworks to consider any market-impacting shifts. Predicting the future is difficult, but
ignoring change can be catastrophic.
Key Takeaways
• Industry competition and attractiveness can be described by considering the following five
forces: (1) the intensity of rivalry among existing competitors, (2) the potential for new
entrants to challenge incumbents, (3) the threat posed by substitute products or services, (4)
the power of buyers, and (5) the power of suppliers.
• In markets where commodity products are sold, the Internet can increase buyer power by
increasing price transparency.
• The more differentiated and valuable an offering, the more the Internet shifts bargaining
power to sellers. Highly differentiated sellers that can advertise their products to a wider customer base can demand higher prices.
• A strategist must constantly refer to models that describe events impacting their industry,
particularly as new technologies emerge.
• We’re still in the early days of generative AI, but it may present a compelling substitute good
that can be trained to disrupt many services. ChatGPT is already blamed as a reason for
programmer Q&A site Stack Overflow laying off nearly 30 percent of its workforce.
Questions and Exercises
1. What are Porter’s “five forces”?
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
price transparency
The degree to which
complete information is
available.
information
asymmetry
A decision situation where
one party has more or
better information than its
counterparty.
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Information Systems
2. Use the five forces model to illustrate competition in the newspaper industry. Are some competitors better positioned to withstand this environment than others? Why or why not? What
role do technology and resources for competitive advantage play in shaping industry competition?
3. What is price transparency? What is information asymmetry? How does the Internet relate to
these two concepts? How does the Internet shift bargaining power among the five forces?
4. How has the rise of the Internet impacted each of the five forces for music retailers?
5. In what ways is the online music buying experience superior to that of buying in stores?
6. What is the substitute for music CDs? What is the comparative sound quality of the substitute? Why would a listener accept an inferior product?
7. Based on Porter’s five forces, is this a good time to enter the retail music industry? Why or
why not?
8. What is the cost to the music industry of music theft? Cite your source.
9. Consider generative AI like ChatGPT—which industries might this technology disrupt? What
do you think will need to occur before this can happen? Why is ChatGPT blamed for the
drop in use of programmer Q&A site Stack Overflow?
10. Discuss the concepts of price transparency and information asymmetry as they apply to the
diamond industry as a result of the entry of Blue Nile. Name another industry where the Internet has had a similar impact.
11. Under what conditions can the Internet strengthen supplier bargaining power? Give an
example.
12. What is the effect of switching costs on buyer bargaining power? Give an example.
13. How does the Internet impact bargaining power for providers of rare or highly differentiated
goods? Why?
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 3
Strategy and Technology: Concepts and Frameworks for Achieving Success
Endnotes
1. J. Toonders, "Data Is the New Oil of the Digital Economy," Wired, July
2014.
2. Evans, B, "There’s no such thing as data," Ben-Evans.com, May 27, 2023.
3. T. O'Reilly, "Data Is the New Sand," The Information, Feb. 24, 2021.
4. C. Graham, "Artificial intelligence: The saviour of mankind or the end of the
world?" The Guardian, Feb. 21, 2018.
5. B. Weiss, “Groupon’s $6 Billion Gambler,” The Wall Street Journal,
December 20, 2010.
6. B. Evans, “Whatsapp and $19B,” Ben-Evans.com, Feb. 19, 2014.
7. J. Wu, "There are now 175 online mattress companies—and you can’t tell
them apart," CNBC, Aug. 18, 2019.
8. Mello, T. "Jeff Bezos Used to Mock This Marketing Strategy, But He's
Now Pouring Big Bucks Into It," Inc., Feb. 11, 2019—although the reader
should note today's irony, as Amazon has become not only the third
largest seller of digital advertising, but also the world's largest purchaser of
advertising. B. Johnson, "Amazon's Ad and Promo Spending Topped $20
billion in 2022, A New Industry Record," AdAge, Feb. 8, 2023.
9. J. Constine, “Instagram Stories hits 200M users, surpassing Snapchat as
it copies its AR stickers,” TechCrunch, April 13, 2017.
10. J. Constine, “Snapchat growth slowed 82% after Instagram Stories
launched,” TechCrunch, Feb. 2, 2017.
11. Note: Much of Snapchat’s loss was related to employee compensation following its IPO; however, even after considering this, the firm still lost more
than $188 million. P. Kafka, “Why Snap lost more than $2 billion in three
months,” Recode, May 10, 2017.
12. T. Zeller, "A Noun? A Verb? TiVo Says It's Neither," The New York Times,
Dec. 13, 2004.
13. J. Vincent,"TiVo agrees to $1.1 billion acquisition by Rovi," The Verge, April
29, 2016.
14. C. Gartenberg, "TiVo to merge with Xperi to create ‘one of the largest
licensing companies in the world’," The Verge, Dec. 19, 2019.
15. E. Rusli, “Cisco Shutters Flip, Two Years after Acquisition,” The New York
Times, April 12, 2011.
16. M. Porter, “What Is Strategy?” Harvard Business Review 74, no. 6
(November–December 1996): 61–78.
17. L. Kahney, “Net Speed Ain’t Seen Nothin’ Yet,” Wired News, March 21,
2000.
18. L. Endlich, Optical Illusions: Lucent and the Crash of Telecom (New York:
Simon & Schuster, 2004).
19. Staff, "Key dates in Nortel Networks' history," CBC News, Jan. 4, 2009.
Note there is an incorrect calculation you can find at sites like Snopes.
Here's how to show the actual comparison. $1,000 worth of shares valued
at $124.50 is, rounding up, 8.04 shares. 8.04 x $0.39 = $3.14. Now
assume a two-four of Molson (Nortel was a Canadian firm, after all) cost
$25. $1,000 buys you 40 cases. At 24 beers x 40 cases = 960 empties. Assuming you put down a $0.05 cent deposit (in some it's $0.10 or
higher), you'd have $40. Also note, your author is not advocating that you
drink heavily instead of invest—just be sure to pay attention to the role
of technology and industry dynamics and not invest with the uninformed
crowd.
20. M. Porter, “Strategy and the Internet,” Harvard Business Review 79, no. 3
(March 2001): 62–78.
21. B. Breen, “Living in Dell Time,” Fast Company, December 19,
2007, http://www.fastcompany.com/magazine/88/dell.html
22. T. Friscia, K. O’Marah, D. Hofman, and J. Souza, “The AMR Research
Supply Chain Top 25 for 2009,” AMR Research, May 28,
2009, http://www.amrresearch.com/Content/View.aspx?compURI=tcm:7-43469
23. J. Edwards, “JWT’s $100 Million Campaign for Microsoft’s Bing Is Failing,”
BNET, July 16, 2009.
24. T. Mullaney, “Jewelry Heist,” BusinessWeek, May 10, 2004.
25. H. Kanter, “Blue Nile CEO: Webrooms resonating well with Millennials,”
CNBC, Nov. 28, 2017. [Video]
26. H. Matthews, “A Cut Above the Rest,” DatingAdvice.com, Feb. 6, 2017.
27. J. MacDonald, “How Blue Nile Disrupted the Jewelry Industry by Selling
Online and Giving Consumers More Control Over the Buying Experience,”
DealCrunch, March 29, 2017.
28. T. Mullaney, “Jewelry Heist,” BusinessWeek, May 10, 2004.
29. S. Yin, “Report: Apple Controls 60% of Touchscreen Supply,”
PCMag.com, February 17, 2011.
30. J. Nouvet, "Microsoft’s $13 billion bet on OpenAI carries huge potential
along with plenty of uncertainty," CNBC, April 8, 2023.
31. M. Singh, "Amazon to invest up to $4 billion in AI startup Anthropic,"
TechCrunch, Sept. 25, 2023.
32. Adapted from C. Shapiro and H. Varian, “Locked In, Not Locked Out,”
Industry Standard, November 2–9, 1998.
33. G. Press, "AI Stats News: 46% Of Consumers Feel Better About AI,"
Forbes, March 15, 2020.
34. M. Andronico, “Apple Tops Customer Satisfaction Rankings, Again,” Laptop Magazine, Sept. 17, 2013. J. Khan, “Apple tops J.D. Power’s 2014
survey in smartphone satisfaction across all U.S. carriers,” 9 to 5 Mac,
April 24, 2014. AppleInsider Staff, “Apple's iPad ranks highest in overall
consumer satisfaction for tablets, says JD Power,” AppleInsider, May 7,
2014.
35. D. Morganstern, “Sorry to say that Apple platforms are still more secure,”
ZDNet, Feb. 28, 2014.
36. T. Mickle, "Apple’s Sales Drop Slightly While Profit Is Up 11 Percent," The
New York Times, Nov. 2, 2023.
37. A virtuous adoption cycle occurs when network effects exist that make a
product or service more attractive (increases benefits, reduces costs) as
the adopter base grows.
38. H. Bhardwaj, "How does OpenTable make money | Business model," The
Strategy Story, Jan. 6, 2022.
39. M. Merced, “Priceline to Buy OpenTable for $2.6 Billion,” The New York
Times, June 13, 2014.
40. C. Gallo, “Why The ‘Experts’ Failed To Predict The Apple Store’s Success,” Forbes, April 8, 2015.
41. B. Thau, “Apple And The Other Most Successful Retailers By Sales Per
Square Foot,” Forbes, May 20, 2014.
42. M. Singleton, “Apple Music now has 13 million subscribers,” The Verge,
April 26, 2016.
43. J. Warburton, "Apple Music (finally) has something that could kill Spotify,"
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44. A. Steele and T. Mickle, "Apple Music Overtakes Spotify in Paid U.S. Subscribers," The Wall Street Journal, April 5, 2019.
45. R. Lawler, “Uber Opens Its API With 11 Launch Partners, Including
OpenTable, TripAdvisor, and United Airlines,” TechCrunch, Aug. 20, 2014.
46. M. Peers, "Why the European Antitrust Case Against Google Might or
Might Not Matter," The Information, June 14, 2023.
47. A. Efrati, “The Hole in Google’s Mobile Strategy,” The Information, Dec. 9,
2014.
48. L. Feiner, "Google paid $26 billion in 2021 to become the default search
engine on browsers and phones," CNBC, Oct. 27, 2023.
49. B. Schwartz, "Report: Over 50% Of Google Search Business Flows
Through Apple Devices," Search Engine Roundtable, Feb. 24, 2023.
50. J. Graham, "Google antitrust: Just how much do you actually use it? Way
more than you think," USA Today, Oct. 20, 2020.
51. F. Larricchia, "Services revenue as share of Apple's total revenue
2015-2023, by quarter," Statista, Nov. 3, 2023.
52. T. Claburn, "Europe teases breaking up Google over ad monopoly," The
Register, June 14, 2023.
53. A. Liptak, “Justices Deny Patent to Business Methods,” The New York
Times, June 19, 2014.
54. B. Feld, “Why the Decks Are Stacked against Software Startups in Patent
Litigation,” Technology Review, April 12, 2009.
55. R. Abrahamsen, “Courts Are Drawing The Line On Business Method
Patents,” Forbes, Oct. 30, 2015.
56. T. Wu, “Weapons of Business Destruction,” Slate, February 6, 2006; R.
Kelley, “BlackBerry Maker, NTP Ink $612 Million Settlement,” CNNMoney,
March 3, 2006.
57. E. Mills, “DOJ Clears Apple-Microsoft-RIM Deal to Buy Nortel Patents,”
CNET, February 13, 2012.
58. R. Preston, “Supreme Court Toughens Business Process Patent Test,”
June 20, 2014.
59. K. Chibber, “Microsoft makes more money from Samsung than from
Skype, Windows Phone, and Xbox combined,” Quartz, Oct. 5, 2014.
60. T. Mullaney and S. Ante, “InfoWars,” BusinessWeek, June 5, 2000.
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2003): 41–49.
62. “Movies to Go,” Economist, July 7, 2005. http://www.economist.com/
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News, Sept. 4, 2018.
66. A. Alter, T. Hsu, "Barnes & Noble Is Sold to Hedge Fund After a Tumultuous Year," The New York Times, June 7, 2019.
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68. S. Ludwig, “Gmail finally blows past Hotmail to become the world’s largest
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69. M. O’Neill, “From 21st to 1st: How Google Won in a Saturated Market,”
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71. J. Hemple, “Why Facebook Has Entrusted Its Future to the CEO of PayPal,” Wired, Nov. 10, 2014.
72. G. Hamel, “Killer Strategies That Make Shareholders Rich,” Fortune, June
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73. M. Porter, “Strategy and the Internet,” Harvard Business Review 79, no. 3
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74. For more on the long tail and collaborative filtering, refer to Chapter 5.
75. B. Collins, "How Spotify stayed No. 1 in streaming audio even with Apple,
YouTube and Amazon aiming for it," CNBC, Nov. 10, 2022.
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78. A. Çelik, "The Fall of Stack Overflow," Observable HQ, Aug. 20, 2023.
79. A. Ghoshal, "Generative AI forces Stack Overflow to lay off 28% of its
workforce," InfoWorld, Oct. 17, 2023.
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80. I. Smith, “Another Lawsuit Filed on Wage Issues of Cab Drivers,” Dorchester Reporter, November 8, 2012.
81. M. McFarland, “Uber’s Remarkable Growth Could End the Era of Poorly
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82. Annika, “New Uber X Prices, Now 30% Cheaper than a Taxi!,” Uber Blog,
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83. M. McFarland, “Uber’s Remarkable Growth Could End the Era of Poorly
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84. T. Keane, “In Taxis’ Battle with Uber, Ugly Endgame Looms,” Boston
Globe, June 1, 2014.
CHAPTER 4
FreshDirect: A Tech-Heavy
Online Grocer Succeeds
Where Others Fail
4.1 Tech-Driven Strategic Positioning
for Market Dominance
Learning Objectives
1. Understand why earlier online grocery efforts failed, but FreshDirect has succeeded.
2. Recognize the key resources for competitive advantage that technology and a tech-enabled
business model offer FreshDirect.
3. Understand product-market fit.
4. Understand the role of time in strengthening these resources.
5. Recognize why FreshDirect can use technology products that others can buy and still realize
tech-created advantage.
For an example of the relationship between technology and strategic positioning, consider New
York City–based FreshDirect. The CEO during much of FreshDirect’s growth and expansion was
David McInerney, a co-founder of the firm and former chef who has worked in Michelin Star
restaurants. His main goal in launching the firm was addressing the gaping quality gap between
store-bought produce and the goods that restaurants were using.[1] The solution to this was an
e-commerce wonder that disrupted the grocery market and conquered the two most pressing problems for Big Apple shoppers: Selection is limited and prices are high. Both of these problems are a
function of the high cost of real estate in New York. The solution? Use technology to craft an ultraefficient model that provides farm-to-table freshness, massive product choice, and supply chain
savings that neither traditional grocery stores nor delivery firms can match.
In a market where so many earlier pioneers failed, FreshDirect grew to dominate over 60 percent of the New York City grocery market with just a single facility. While other retailers struggled
during the pandemic, FreshDirect was operating full-tilt, as it raced to keep up with the demand
of COVID-19-created home grocery shopping. The firm’s expansion at the expense of traditional
rivals, and its refined and superior tech-driven model, proved so tempting that Stop & Shop parent, Netherlands-based Ahold Delhaize, acquired a majority stake in the firm, even though Ahold
had been trying to grow a home delivery service, Peapod, for years.[2] It’s notable that in the same
year as this acquisition, Ahold closed Peapod in the midwestern United States due to poor performance.[3] Acquisitions can be tricky and often fail, and FreshDirect has since been sold to Turkish
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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delivery firm Getir.[4] At the end of this chapter we’ll also examine some of the issues FreshDirect
and its new parent will need to address to continue the firm’s success, and to get the most from the
new combination.
How Three Million Grocery Items Are Delivered to Homes Every Week
This video analyzes how FreshDirect is able to deliver millions of grocery orders every week. It
delves into the forms of technology and artificial intelligence that the company utilizes in order to
keep food fresh, as well as make sure that everything gets distributed where it needs to go.
View in the online reader
Ordering Online—Challenges but Advantages,
Too
product-market fit
A key concept in
entrepreneurship and new
product development that
conveys the degree to
which a product satisfies
market demand.
Successful efforts should
be desired by customers
and scale into large,
profitable businesses.
The online grocery business had long been the graveyard of ideas that were ahead of their time,
brought to market by entrepreneurs who overestimated consumer willingness to use their browser
to buy groceries. The billion-dollar failure of Webvan was one of the biggest crash-and-burns of the
dot-com era.[5] Other failed efforts included Streamline, Home Runs, and Shoplink.[6] Turns out, most
customers, especially suburban customers, were just fine with the conventional way of shopping.
Consumers are creatures of habit and benefit from the immediacy of jumping in a car to get food
on their own schedule. They also were unwilling to entrust someone else to pick their produce. All
this led to a lack of product-market fit, the bane of most failed startups that overestimate the
appeal of their great idea. The product—online grocery shopping—didn't fit the immediate need or
desire of target customers.
FreshDirect’s market was different, and customers were far more receptive to the “fit” of their
solution. In addition to suffering from high cost and low selection, New York–based consumers
were notoriously time-strapped, lacked cars, and often lived in walk-up apartments where schlepping home bags of heavy groceries was more of a burden.[7]
collaborative filtering
A classification of software
that monitors trends
among customers and
uses this data to
personalize an individual
customer’s experience.
While the FreshDirect selection is several times larger than that of a conventional store, items
can be found through search, and shopping can be simplified with more easily discovered, data-driven, Web- and app-delivered recommendations customized on-the-fly with collaborative filtering
software. FreshDirect's “storefront” is a website offering a product mix heavy on fresh produce, as
well as one-click menus and semi-prepared specials like “meals in four minutes.” Contrary to what
you might see on Manhattan-set sitcoms, many New Yorkers have kitchens the size of suburban
closets, so higher-margin semi-prepared foods are especially attractive to anyone with a tiny
kitchen.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 4
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
While setting up the initial order and becoming familiar with a firm's app and website take
time, once this is set up, consumers benefit from ultra-fast follow-up shopping by pulling up and
quickly modifying past orders. A week's shopping can be done from a subway platform in far less
time than even a suburban grocery shop with the family car. And once a customer has orders in the
FreshDirect system, re-creating orders at a rival site represents yet another switching cost that will
deter happy shoppers from trying a rival. A mobile app also changes buying habits by eliminating
the traditional grocery list. Instead, just enter order items as you need them, then when your order
is full, click a button to schedule next-day delivery.
The FreshDirect model also allows the firm to build a data asset that traditional grocers can't
match. If I walk into a grocery store, pay cash, and don't use a loyalty card, then the grocer has no
idea who I am, how good a customer I am, what I bought, or any leads on how to personalize their
market approach to lure me back. By contrast, an online retailer like FreshDirect is able to digitally
peer over the shoulder of website and app, browsing visitors as they shop, tying their clickstream
to their account, building a customer profile, leveraging this data in product recommendations and
marketing campaigns, building more accurate customer experiences by experimenting and learning from results on-the-fly, and further mining data-driven learning for machine learning and other
AI systems. Does the data show that customers who buy goat cheese also buy scallions? Modify
their shopping experience to place these items next to each other when browsing. See that a customer is vegetarian, buys kosher, shops for low-salt products, or favors gluten-free goods? All this
can customize an experience uniquely satisfying to the tastes of the individual. And since brands
are built through customer experience, a superior customer experience will strengthen the
brand asset in ways offline rivals can’t match. Understanding the value of data is key. Yes, FreshDirect does use some third-party tools, such as the customer profiling package Selligent,[8] and these
tools are also available to rivals. However, it’s FreshDirect’s data, collected on individual customers
over time, that creates a barrier that any new rival will need to overcome.
FIGURE 4.1 More Time = More Data = Strong Competitive Advantage
Source: John Gallaugher.
As an online grocer, FreshDirect is also more responsive to stockout issues and loses fewer
potential orders to items that simply can't be found. Chances are you've shopped for a product
in a grocery store, couldn't find it, and moved on to the next item on your list without following
up with a store employee. That item may have been out of stock or poorly placed—but the traditional grocer has no idea a service issue even occurred. FreshDirect immediately knows if an item
is approaching a stockout, and it can place follow-up orders so it will never run out of items. Customers can always find available products through search.
Finally, an online visit can help a customer gain far more useful information than a conventional visit to the grocer, helping consumers make more educated decisions and potentially helping
create better meals for home chefs. You’ve likely shopped at times when your neighbors are also
in the grocery store—after work, before a holiday or a big game. When lines are long, you're likely
to anger fellow customers if you start chatting up the butcher on how to best prepare your cut
of meat. But FreshDirect is able to offer one-click recipes, info on order size per person, nutrition
information, links to alternate meat cuts and semi-prepared options like marinated steaks or cedar
plank glazed salmon, and more. Here’s another advantage for FreshDirect customers: If you walk
into a typical grocery produce aisle, you have no idea which apple variety is the freshest. FreshDi-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
119
switching cost
The cost a consumer
incurs when moving from
one product to another. It
can involve actual money
spent (e.g., buying a new
product) as well as
investments in time, any
data loss, and so forth.
data asset
Competitive advantage
related to data which the
firm can leverage and
which rivals are not able to
match.
brand
The symbolic embodiment
of all the information
connected with a product
or service.
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Information Systems
rect, however, will deliver up a freshness rating, as well as information on which apples are best
for baking or a better choice for kids’ snacks. When compared with the shopping cart–crashing,
cramped grocery aisles, an online experience presents an appetizing alternative for a generation
that regularly turns to the Internet for recipe recs and to fuel “foodie” fantasies. FreshDirect has
become so popular that apartment buildings in New York have begun to redesign common areas to
include secure freezers that can accept FreshDirect deliveries, even when customers aren’t there.[9]
Cost Cutting and Fresher Food through a
Tech-Enabled Supply Chain
After sixteen years refining home delivery from Queens, the firm moved to a new South Bronx
facility that’s roughly eleven football fields in size and includes massive multi-story warehousing
alongside corporate offices and R&D labs. Known as the “Food Hive” internally,[10] this facility allows
FreshDirect to directly serve customers in the New York ’burbs, Connecticut, and New Jersey.
The FreshDirect model crushes costs that plague traditional grocers. Worker shifts are highly
efficient, avoiding the downtime lulls and busy rush-hour spikes of storefronts. FreshDirect workers have a steady, predictable shift, and it's not uncommon for a specialty skill, like a worker who
prepares fish, to cut over 1,000 pounds of product a day. The result? Labor costs that are 60 percent
lower than at traditional grocers. FreshDirect buys and prepares what it sells, leading to less waste.
Waste is otherwise a big risk among grocers, which often throw out one in seven truckloads of food
delivered to stores.[11] At FreshDirect, food waste is only about 1 percent, an advantage that the firm
claims is “worth 5 percentage points of total revenue in terms of savings.”[12] Any high-quality leftovers are donated to nonprofits like City Harvest.[13]
inventory turns
Sometimes referred to as
inventory turnover, stock
turns, or stock turnover. It
is the number of times
inventory is sold or used
during a given period. A
higher figure means that a
firm is selling products
quickly.
FreshDirect inventory turns (meaning the number of times the average warehouse inventory
sells out and is replenished) are 197 times a year versus 40 times a year at traditional grocers.[14] This
means the firm is selling product faster, so it collects money quicker than its rivals do. And those
goods are fresher since they’ve been in stock for less time, too. Consider that while the average grocer may have seven to nine days of seafood inventory, FreshDirect’s seafood stock turns each day.
Stock is typically purchased direct from the docks in order to fulfill orders placed less than twentyfour hours earlier, and the firm targets the last catch of the day so the product will be as fresh as
possible.[15]
Once items are shipped to FreshDirect, they are held in ideally acclimated storage. The firm has
thirty-eight separate storage rooms with perfectly tuned temperature and humidity. Produce is also
delivered in refrigerated trucks, so items hit outside temps only during the final steps of delivery.
The firm's execs estimate that this unmatched climate control can extend shelf life a further seven
days, on average, over the typical grocery store product, even though FreshDirect products rarely
sit on shelves this long.
Co-founder and former CEO David McInerney would share that FreshDirect’s supplier-integrated, super-fast “farm-to-fork” supply chain also allows food to be harvested for optimal freshness, yielding taste that far outpaces the competition.[16] The firm goes a step beyond conventional
grocery stores by regularly evaluating product taste and sharing these results with customers.
Every day, teams inspect and sample between four hundred and five hundred items and refine the
one-to-five freshness ratings you'll find on their website.
FreshDirect’s business is far more challenging than Amazon’s non-food e-commerce business.[17] The food that the firm specializes in selling is called perishable for a reason—wilted greens,
bruised fruit, cracked eggs, and temps that create reeking fish are all hazards faced by grocery
delivery. Screw up a delivery, and “hangry” customers will hunt for an immediate option to quiet
grumbly bellies. Artificial intelligence software, coupled with over nine miles of conveyor belts[18]
and over seven miles of fiber-optic cables,[19] link staff and produce with systems and sensors, and
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Chapter 4
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
support everything from walking staff through baking the perfect baguette to verifying orders
with 99.9 percent accuracy.[20] Workers offer skilled insight where AI can’t, with specialists responsible for twenty to thirty products hand-inspecting orders for optimal quality. Automated bins park
in front of workers along with a system-generated message stating exactly what’s needed from a
given station to fulfill an order. The bin has a barcode that refers to the specific order, and each item
placed in the bin has another barcode that's scanned and used to confirm the accuracy of what
goes in the bin. Conveyors bring bins to the next product station needed to fulfill the order, until all
groceries for a single order have been gathered and double-checked. Over time, operations data has
helped the firm improve layout for even more efficiency, positioning items more likely to be packed
together so they can be fulfilled by a single worker at a station.
Once completed, the system scoots conveyor-belt orders to be organized by neighborhood,
speeding along driver departures.[21] The highly tuned system used at their new facility has cut 75
percent from packing time,[22] allows an order be fulfilled in under thirty minutes,[23] and presents
a huge efficiency advantage over services like Instacart that may send a less efficient human on a
produce run and deliver the order in a standard, non-refrigerated automobile.
Climate-controlled warehouses not only keep food fresher and cut food waste, they also save
big bucks through energy efficiency. A traditional retailer has produce on display in money-sucking
open refrigerators that swap air with the store's customer-focused HVAC systems, inefficiently
fighting to keep products cool while not freezing out summer shoppers in shorts and flip flops. At
FreshDirect, staff dress for the “weather” they expect in the storage room where they work. The
firm also uses recycled biodiesel fuel to cut down on delivery costs and recyclable bags for delivery
(New Yorkers don’t want more cardboard boxes crowding their already limited living space). Scale
allows the firm to benefit from additional delivery savings. As the company has grown, a single
truck run serves more customers in a smaller geographic area. The firm now dispatches large trucks
that park near customer locations, with drivers fanning out to deliver groceries on foot. The result?
Less traffic, fewer traffic tickets (previously a multi-hundred-thousand-dollar problem for the firm),
and although trucks are larger, the firm can get by with one-seventh the comparable fleet size. Customers who would otherwise drive to the grocery store can also feel green about their decision to
order online. One study suggests delivery trucks produce 20 to 70 percent less emissions than trips
made in personal vehicles.[24]
Work with Suppliers, Don't Squeeze Them
The Direct in the firm's name doesn't just mean direct to consumers, it also means direct from suppliers. The three-tier model described “from farm or sea to our house to your house” eliminates
three to four additional wholesaling and warehousing steps that might slow product and increase
costs for traditional rivals.
FreshDirect buys directly from suppliers, eliminating middlemen wherever possible, but rather
than antagonizing suppliers by pitting one against another for the lowest possible price, the firm
develops closer partnership relationships, even developing specialty products (examples, staggered
planting schedules to extend the freshness season for available cantaloupes, blueberries sorted for
large size, or smaller eggs that are more flavorful).[25] The firm also offers suppliers several benefits
beyond traditional grocers, all in exchange for more favorable terms. These include offering to carry
a greater selection of supplier products while eliminating the “slotting fees” (payments by suppliers for prime shelf space) common in traditional retail, cobranding products to help establish and
strengthen supplier brand, paying partners in days rather than weeks, and sharing data to help
improve supplier sales and operations.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
FIGURE 4.2 The Advantages of Buying Direct
Sources: John Gallaugher; © Shutterstock, Inc.
Advantages Pay Off
Add all these advantages together, and the firm’s big, fresh selection is offered at prices that can
undercut the competition by as much as 35 percent.[26] And FreshDirect does it all with margins in
the range of 20 percent (to as high as 45 percent on many semi-prepared meals), easily dwarfing the
razor-thin 1 percent margins earned by traditional grocers.[27]
FreshDirect’s customer base has ballooned to over 600,000. That’s a population roughly the size
of metro Boston, served by a single grocer with no physical store. The privately held firm has been
consistently profitable since 2010, save for issues related to the botched move to the larger Bronx
facility (refer to Section 2), and has continued to raise capital to fuel geographic expansion.[28]
Key Takeaways
• While earlier online grocery efforts overestimated the appeal of online grocery shopping,
FreshDirect targeted a market where there was a high degree of product-market fit.
• The fundamentally different, tech-enabled, three-stage model is enabled using a value chain
that cuts out middlemen, speeds product to market, improves freshness and food safety,
and lowers costs in a way that rivals cannot match.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 4
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
• Many of the firm's tech-created assets grow over time. These include data used in collaborative filtering and other personalization efforts, and data used to train and refine machine
learning models.
• A data asset, like that gathered by FreshDirect by monitoring app and website use, supplier
interactions, product flow, and warehouse operations, is unique to the firm and strengthens
over time. Even if rivals use some similar software products, new entrants won't be able
to match results delivered by firm- and customer-specific data that has been acquired over
time.
Questions and Exercises
1. Examine the FreshDirect business model and list reasons for its competitive advantage.
Would a similar business work in your neighborhood? Why or why not? What strategic
resources are strengthened by FreshDirect's online model that aren't available to conventional retailers?
2. What effect did FreshDirect have on traditional grocers operating in New York City? Why?
3. Build a chart with columns for traditional grocers, Instacart, and FreshDirect. Add rows
showing various advantages to the firm and consumer and use the row/column intersection
to show whether the alternative in the column has an advantage over its rivals. Also list how
the advantage is realized (e.g., lower costs/higher profits, or strategic asset creation such as
improved brand, more data, switching cost creation).
4. FreshDirect uses some third-party software, like the customer profiling tool Selligent, that
other firms can also buy and use. Why is it less threatening if an online grocery newcomer
uses the same tool as incumbent FreshDirect?
4.2 The Model Moves Forward
Learning Objectives
1. Understand why FreshDirect struggled when switching from its Queens to the new, larger
Bronx facility.
2. Recognize how the firm used technology and nontechnology solutions to address initial systems failure.
3. Learn steps a firm might take to avoid a similar fate in rolling out a complex system.
4. See how COVID-19 presented challenges as well as opportunities for FreshDirect, and how
it leveraged its unique business to provide additional community benefits as a government
and nonprofit partner.
5. Understand the threats from nontraditional entrants in the online grocery market, and the
reasons why Stop & Shop's parent firm acquired FreshDirect.
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The Botched Bronx Move—Even the Skilled
Screw Up
FreshDirect's initially problem-plagued move from Queens to the Bronx also offers important
lessons for executives leveraging technology, on both the factors associated with a poorly handled
systems rollout, and the steps taken to regain customer trust. The move to larger, more modern
facilities was meant to herald a new era of firm growth. But instead, the Queens-to-Bronx facility
switch led to order mishaps, angry customers, brand damage, financial loss, and a plummeting market share. Even the skilled can screw up.
The firm turned on the Bronx system without sufficient testing or understanding problems
that might occur from the larger facility with far more complex systems. When the system went
live, the company switched orders immediately from old system to new. A phased rollout, ramping
up orders to see how systems and procedures responded to an increased workload and providing a
fallback from failed systems to older but reliable efforts, could have helped the firm catch and correct problems. Instead, problems immediately surfaced throughout a system that was handling 100
percent of orders. The firm was flooded with complaints of broken eggs, spoiled fruit, mispackaged
or missed orders, and more—the kind of gaffes that the firm prided itself on preventing.[29][30] Food
is at the base of the Maslow's Needs pyramid—screw this up and customers are likely to be very
angry. The firm's share of the New York grocery market fell from 66 percent to less than 46 percent.[31] Even worse, this created an opening for rivals that happy customers were unlikely to try.
Amazon saw their market share rise from 8 percent to 22 percent, and delivery from Instacart also
increased.[32] The firm's prior CEO stepped down, elevating co-founder McInerney to CEO so he
could better pilot the transition.
To stop the bleeding, McInerney brought in external consultants to work with problem-solving
internal teams. From a technical perspective, it was even difficult for FreshDirect to identify where
problems were occurring, let alone how to solve them. Systems were an unwieldy mix of separately
developed products that had been meant to work together, but that were failing. Fortunately, a tool
provided by software vendor Splunk was deployed to gather log data in a central repository, making
it easier to recognize, identify, and respond to problems throughout a mix of different systems.[33]
Flubbed orders also received priority service. The firm beefed up customer service and
launched a “Direct to David” feedback line to reach the CEO if problems persisted. Instead of offering a future credit for missing items, FreshDirect immediately dispatched a driver to fix the order,
sometimes even sending a worker in an Uber.[34] An order from a new customer was also packaged
in special bags, alerting drivers to take extra care and be prepared to answer questions and welcome
them to FreshDirect.[35] While such customer-focused error handling is money-losing in the short
run, it's potentially far less damaging than forgoing a lifetime of future orders from a churned-out
customer who switches to a rival, never comes back, and who may share a FreshDirect horror story
with others.
COVID-19: Crisis and Opportunity
While no one would wish for a pandemic, the timing of the crisis that emerged after FreshDirect
had corrected earlier systems and procedural issues not only helped the firm regain lost customers,
but also accelerated firm growth to an extent that was difficult to keep up with. The New York
metropolitan area was hit early and hard by the coronavirus. A city lockdown, work-from-home
mandates, and customers reluctant to shop in person led to a surge in online orders. Web traffic was
up 800 percent, and suburban orders, a customer base that typically required more persuasion to
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 4
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
try online grocery ordering, doubled overnight.[36] Just one month into the pandemic, FreshDirect
had difficulty fulfilling the increased volume of orders.
FreshDirect was subsequently deemed an “essential service” by New York City authorities, with
staff considered “frontline workers” vital to maintaining the food supply chain.[37] The firm quickly
shifted operations in ways that could help maintain existing orders. For example, the firm limited the variety of meat cuts so that its butcher staff could fulfill demand with an increased order
pace.[38] Work-from-home customers who were no longer eating out were increasing order size, but
FreshDirect's advantages were apparent here, as well. An order that might require two Instacart
employees to enter a grocery store could still be fulfilled as a single FreshDirect delivery.[39]
FreshDirect also became a vital partner to a city in crisis. Through “Operation 5-Borough Food
Drive,” the firm collaborated with borough presidents on a $9 million contract to deliver 4.3 million
pounds of food to address rising city food insecurity, while creating an additional forty jobs.[40]
The firm also partnered with on-site dining management firm Restaurant Associates to
employ laid-off food service employees to prepare ready-to-eat meals. When a FreshDirect customer ordered one of the prepared meals, a second was also prepared and donated, free-of-charge,
through New York City Food Pantries.[41] While no single-firm effort can make up for the restaurant
workers displaced by COVID-19 kitchen shutdowns, nor feed every hungry belly in America's
largest city, FreshDirect was uniquely positioned to have an outsized impact in a time of desperate
need in an unprecedented crisis. FreshDirect’s impact was so significant that the Bronx Borough
President honored FreshDirect employees for courage and service, reiterating that the company
provided essential employees critical to helping the region weather the crisis.[42]
FreshDirect Gives Back to Community
FreshDirect’s CEO and co-founder describes FreshDirect’s response to the COVID-19 pandemic.
View in the online reader
Better than Traditional Grocers, but Other
Rivals?
The FreshDirect model is superior to conventional grocery stores in just about every way, and the
firm has devastated the competition while delivering on quality, selection, and value. However, one
threat successful firms face is the potential entry of even better-funded, growth-seeking rivals to
try to squeeze them out of the current market. And many of these firms have profitable, non-grocery core businesses that can fund a costly fight to try to win FreshDirect customers. For years,
the king of e-commerce, Amazon, has expanded into the $700 billion market for grocery retail.
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The firm purchased Whole Foods and is integrating the chain into Amazon offerings, and also
bought a massive northern New Jersey distribution center formerly owned by grocer PathMark.
Estimates suggest the facility may be able to move ten times the dollar volume of FreshDirect’s new
Bronx distribution center. Amazon also offers same-day delivery free to Amazon Prime subscribers,
prompting FreshDirect to roll out a same-day service in many markets, as well as FreshDirect
Express, for a smaller selection of curated products, takeout-alternative semi-prepared foods, and
beer and wine.[43] Even more troubling: Many delivery items are cheaper from Amazon Fresh than
from FreshDirect (a firm once known for its low prices, but now seen as a premium price for a
premium quality supplier). And Amazon Fresh can also deliver many of the non-grocery items
you can order on Amazon’s main website.[44] Walmart is also crowding in on FreshDirect’s turf. It’s
opened up its own Bronx-based food-focused warehouse for its Jet.com division, now rolled into
Walmart.com. Kroger, the largest pure-play grocery in the United States (Walmart is biggest overall),
has purchased a bigger stake in British online grocer Ocado and plans to use the firm’s tech to automate warehouses and process online orders.[45] There are other players in the market, too, including
Instacart, which leverages a network of Uber-style contract delivery workers to pick groceries from
popular retailers that include Whole Foods and Costco. Trader Joe’s has also begun dotting some
of the city’s most lucrative neighborhoods, bringing it’s hipster vibe and unique, curated goods to
FreshDirect turf. But market entry does not mean market success. Google shuttered its anemically
performing Google Express service.[46] Amazon has also begun shuttering some of its Amazon Fresh
and Amazon Go “just-walk out” convenience stores, including two in New York City[47] (although it
has also launched the tech in at least one Whole Foods store in Washington, DC).[48] FreshDirect’s
purchase by Stop & Shop parent Dutch grocery giant Ahold Delhaize[49] also illustrates challenges
of adapting traditional models, as the firm has struggled to achieve growth in its Peapod service despite years of experimentation and model refinement,[50] although the firm’s subsequent sale
might also show how unprepared Ahold was to leverage advantages of a model so radically different from its own. And the rise of meal-kit delivery firms such as Hello Fresh provide a different
alternative to conventional grocery shopping (FreshDirect has co-invested with Campbell Soup in
rival meal-kit firm Chef’d).[51]
Early reviews of Amazon Fresh in New York City have criticized the firm for a poor online
shopping experience and an uneven selection.[52] These are problems a well-funded and patient
giant may be able to iron out over time, but Amazon has clearly been dissatisfied with some of its
concepts and has begun shuttering some retail outlets.[53] It’s unclear if FreshDirect’s initial advantages will hold up as competition increases. FreshDirect’s technology, customer base, and supplier
savvy made it an attractive acquisition for grocery giant Ahold Delhaize, and we'll see if the firm's
new sponsor will enhance its staying power and growth. Says FreshDirect’s CEO: “In a $700 billion
industry, there’s plenty of space for a lot of different people to play. [The firm] is doing spectacularly, and we continue to see strong growth in this environment.”[54] Markets segment, and it's quite
possible that FreshDirect will leverage its advantages to nurture and grow a customer base valuing
high-quality produce and semi-prepared meals, while rivals pick up the low end of more price-sensitive customers or orders for non-perishable packaged goods.
Future Deliveries?
straddling
Attempts to occupy more
than one position, while
failing to match the
benefits of a more efficient,
singularly focused rival.
Technology is critical to the FreshDirect model, but it’s the collective impact of the firm’s differences
when compared to rivals, this tech-enabled strategic positioning, that delivers success. Over time,
the firm has also built up a set of strategic assets that not only address specific needs of a market
but are now extremely difficult for any upstart to compete against. Traditional grocers can’t fully
copy the firm’s delivery business because this would leave them straddling. Entry costs for wouldbe competitors are also high (the firm spent over $75 million building infrastructure before it could
serve a single customer), and the firm’s complex, highly customized, and mostly proprietary software, which handles everything from delivery scheduling to orchestrating the preparation of
thousands of recipes, continues to be refined and improved each year.[55] On top of all this comes
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 4
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
years of relationship building with suppliers, as well as customer data used to further refine
processes, feed even smarter machine learning and other AI models, speed reorders, and make helpful recommendations. Competing against a firm with such a strong and tough-to-match strategic
position can be brutal. Just five years after launch there were one-third fewer supermarkets in
New York City than when FreshDirect first opened for business.[56] FreshDirect's surge of suburban
growth also claimed once notable regional player Kings/Balducci as another victim, with that firm
filing for Chapter 11 bankruptcy in 2020.[57]
Acquisitions Are Tough: Watch This Space
Expansion-minded managers may also find that the pain for grocery delivery may not be as
acute in other markets as it is in NYC. In the suburbs, shopping may be less of a burden, so the
product-market fit that made FreshDirect so successful in its home market might not be replicable
elsewhere. FreshDirect also grew at a time where the New York market was made up of fragmented
local players, but now larger, financially stronger chains like Trader Joe's and Whole Foods have
come to town. Expanding to new geographies also requires growing scale to justify the large fixed
costs of warehouse and distribution facilities. For relatively satisfied local customers, getting them
to switch habits to an online grocery is difficult and costly. Many startups that require larger fixedcost investments in local regions simply don't have the cash and time to be able to expand.
It’s unclear how the Getir acquisition will play out. Ahold had stated their intention to integrate the firm's other warehouse capacity with FreshDirect, which may have helped the firm gain
low-cost, high demand goods but also risked diluting FreshDirect’s appeal as the favorite of the culinarily savvy. Does a Coke versus Pepsi choice and the ability to deliver Count Chocula make the
firm more desirable, or are the steps involved in making this happen a drain with little benefit or
even one that erodes the high-end caché that FreshDirect has enjoyed? Will we see FreshDirect in
even more locations following the Getir acquisition? Will the partnership help FreshDirect tech to
fend off massive rivals, including Amazon, Walmart, and Kroger, or will it distract the firm from the
sharp NYC focus that has thus far proved such a big hit with customers? Watching this market
will reveal not only the durability of competitive assets, but also the challenges in leveraging these
assets in new geographies with radically different, new competitors.
Key Takeaways
• FreshDirect migrated to a new, more complex system without adequate testing and with no
fallback mechanism that could take over if the new effort ran into problems.
• More thorough testing, slowly switching capacity from old to new systems, and maintaining
a mechanism to switch operations to the old system if the new system were to fail could all
have prevented the scope of FreshDirect's system migration problem.
• Tools like Splunk can help the firm query related data that is otherwise not linked, surfacing
problems and potential areas that require correction.
• COVID-19 led to a massive spike in business as more consumers ordered from home, and
suburban customers flocked to FreshDirect. The firm reduced offerings, such as limiting the
cuts of meat, so that existing, overworked staff could keep up with demand.
• The firm also worked with Restaurant Associates to employ area chefs to cook and package
ready-to-eat meals. This employed out-of-work restaurant staff and allowed FreshDirect to
staff up during an unexpected demand peak. The firm also partnered with New York City
borough governments and nonprofits to fund and deliver free meals to hungry New Yorkers.
• Amazon, Walmart, and experimenting traditional grocers all covet the growing online grocery
segment, and many have begun competing with FreshDirect. Stop & Shop's parent had
struggled with Peapod, a model not as efficient as FreshDirect, and lacking the latter’s
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product-market fit, so that parent firm (Dutch grocery giant Ahold Delhaize) purchased
FreshDirect but ended up selling the firm to Getir not very long after.
Questions and Exercises
1. What problems did FreshDirect encounter when switching from Queens to the new Bronx
facility?
2. What steps could have been taken to avoid these problems?
3. How did FreshDirect regain customer trust? Discuss the cost/benefit trade-off of this
approach versus doing nothing.
4. What did the Splunk tool provide for the FreshDirect team?
5. What challenges and opportunities were presented by the coronavirus pandemic, and in
what ways did FreshDirect capitalize on these—both financially and nonfinancially?
6. Why are new, nontraditional competitors more of a potential threat to FreshDirect than area
retail grocers? What advantages do they bring to the market, and what assets does FreshDirect still have to compete against them? What do you think will happen to FreshDirect's
growth and market share over the next five to ten years?
7. See if you can discover anything new following FreshDirect’s acquisition. Most mergers and
acquisitions are disappointing. How does it seem FreshDirect’s purchase has gone for its
new parent? Have you uncovered anything suggesting the acquisition has had benefits or
has been less valuable than predicted?
8. Do you think FreshDirect will be able to expand beyond NYC, or is its product-market fit too
specific to New York to work in other regions of the United States?
Endnotes
1. K. Thacker, "FreshDirect fights back," GrocerDive, March 25, 2019.
2. R. Redman, "Ahold Delhaize wraps up FreshDirect acquisition," Supermarket News, Jan. 5, 2021.
3. A. Elejalde-Ruiz, "Peapod, based in Chicago, is shutting down grocery
delivery in the Midwest and cutting 500 jobs," Chicago Tribune, Feb. 12,
2020.
4. I. Lunden, "More consolidation in grocery delivery: Getir acquires FreshDirect to beef up in the US," TechCrunch, Nov. 8, 2023.
5. D. Goldman, "10 big dot-com flops," CNN Business, Nov. 6, 2015.
6. A. Engst, "Where Webvan Went Wrong," TidBits, June 16, 2001.
7. J. Smith, "Inside FreshDirect’s Big Bet to Win the Home-Delivery Fight,"
The Wall Street Journal, July 19, 2018.
8. S. Tongco, "Leading Online Grocer FreshDirect Selects Selligent Marketing
Cloud to Drive Personalized Service and Engagement," GlobalNewswire,
Feb. 25, 2020.
9. J. Kaufman, "The Doorman’s Dilemma: What to Do With All Those Packages?," The New York Times, Aug. 7, 2015.
10. A. Cain, "FreshDirect beat Amazon to the grocery-delivery business by
years. Take a look inside its sprawling warehouse," Business Insider, May
5, 2019.
11. E. Main, “You're Throwing Away $2,275 Every Year,” Rodale’s Organic
Life, July 29, 2013.
12. P. Fox, “Interview with FreshDirect Co-Founder Jason Ackerman,” Bloomberg Television, June 17, 2009.
13. H. Carey, "The Behind-the-Scenes Series: UPS, Blue Apron, Amazon, and
FreshDirect’s Logistics and Supply Chains," ThomasNet, Aug. 27, 2018.
14. E. Schonfeld, “The Big Cheese of Online Grocers Joe Fedele’s InventoryTurning Ideas May Make FreshDirect the First Big Web Supermarket to
Find Profits,” Business 2.0, January 1, 2004.
15. K. Thacker, "FreshDirect fights back," GrocerDive, March 25, 2019.
16. D. McInerney, “Good Foods Taste Great,” TEDxManhattan, March 4,
2013.
17. J. Smith, "Inside FreshDirect’s Big Bet to Win the Home-Delivery
Fight," The Wall Street Journal, July 18, 2018.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
18. A. Narishkin, "How 3 Million Grocery Items Are Delivered To Homes Every
Week | Big Business," Business Insider Video, Nov. 24, 2020.
19. H. Carey, "The Behind-the-Scenes Series: UPS, Blue Apron, Amazon, and
FreshDirect’s Logistics and Supply Chains," ThomasNet, Aug. 27, 2018.
20. J. Black, “Can FreshDirect Bring Home the Bacon?” BusinessWeek, September 24, 2002; S. Sieber and J. Mitchell, “FreshDirect: Online Grocery
That Actually Delivers!” IESE Insight, 2007.
21. K. Thacker, "FreshDirect fights back," GrocerDive, March 25, 2019.
22. H. Carey, "The Behind-the-Scenes Series: UPS, Blue Apron, Amazon, and
FreshDirect’s Logistics and Supply Chains," ThomasNet, Aug. 27, 2018.
23. A. Narishkin, "How 3 Million Grocery Items Are Delivered To Homes Every
Week | Big Business," Business Insider Video, Nov. 24, 2020.
24. B. Walsh, “Why the Lazy Way to Shop for Groceries—Online—Is the Green
Way,” Time, April 29, 2013.
25. B. Ennis, "FreshDirect Preps for Holiday Crunch," Crain's New York, Nov.
25, 2019.
26. H. Green, “FreshDirect,” BusinessWeek, November 24, 2003.
27. S. Sieber and J. Mitchell, “FreshDirect: Online Grocery That Actually Delivers!” IESE Insight, 2007; D. Kirkpatrick, “The Online Grocer Version
2.0,” Fortune, November 25, 2002; P. Fox, “Interview with FreshDirect CoFounder Jason Ackerman,” Bloomberg Television, June 17, 2009.
28. A. Hirsch, “Online Groceries Retailer FreshDirect Raises $189 Million,” Reuters, Sept. 26, 2016.
29. D. Yaffe-Belleny, "FreshDirect, After Broken Eggs and Angry Customers,
Stages a Comeback," The New York Times, Feb. 21, 2020.
30. J. Smith, "FreshDirect Delivers Apologies as Grocery Shipments Stumble,"
The Wall Street Journal, Sept. 21, 2018.
31. D. Yaffe-Belleny, "FreshDirect, After Broken Eggs and Angry Customers,
Stages a Comeback," The New York Times, Feb. 21, 2020.
32. D. Yaffe-Belleny, "FreshDirect, After Broken Eggs and Angry Customers,
Stages a Comeback," The New York Times, Feb. 21, 2020.
33. "Case Study: FreshDirect," Splunk, https://www.splunk.com/view/casestudy-fresh-direct/SP-CAAACDB.
34. J. Smith, "Inside FreshDirect’s Big Bet to Win the Home-Delivery
Fight," The Wall Street Journal, July 18, 2018.
35. D. Yaffe-Belleny, "FreshDirect, After Broken Eggs and Angry Customers,
Stages a Comeback," The New York Times, Feb. 21, 2020.
36. A. Narishkin, et al., "How FreshDirect delivers 100,000 grocery orders
across NYC each week," Business Insider, Dec. 28, 2020.
37. A. Riquier, "Grocery delivery sales up 60%, FreshDirect CEO says, calling
his employees ‘first responders’," MarketWatch, March 28, 2020.
Chapter 4
FreshDirect: A Tech-Heavy Online Grocer Succeeds Where Others Fail
38. A. Narishkin, et al., "How FreshDirect delivers 100,000 grocery orders
across NYC each week," Business Insider, Dec. 28, 2020.
39. A. Riquier, "Grocery delivery sales up 60%, FreshDirect CEO says, calling
his employees ‘first responders’," MarketWatch, March 28, 2020.
40. P. Battle, "NYC Extends Food Drive in Partnership With FreshDirect to
Address Food Insecurity," NBC 4 New York, Aug. 13, 2020.
41. R. Redman, "FreshDirect to sell meals from Restaurant Associates,"
Supermarket News, April 20, 2020.
42. Bronx Times Staff, "BP Diaz honors essential FreshDirect employees for
service during COVID-19," Bronx Times, Feb. 19, 2021.
43. Unattributed, "FreshDirect Introduces Same-Day Service, Expands Delivery," Progressive Grocer, March 7, 2019.
44. A. Kadet, “New York City’s Grocery Delivery Wars: Who’s the Winner?” The Wall Street Journal, Feb. 6, 2015.
45. P. Sandle and L. Baertlain, "Kroger inks Ocado grocery delivery deal to
battle Amazon threat," Reuters, March 17, 2018.
46. S. Perez, "Google Express to close in a few weeks, will become part of
Google Shopping," TechCrunch, Sept. 11, 2019.
47. A. Bitter, "Amazon has closed 9 of its Go stores as part of a strategy overhaul. Here's the full list," Business Insider, June 23, 2023.
48. T. Rains, "I tried Whole Foods' 'Just Walk Out' technology and was
impressed that I could pay with my palm, but was not happy with the risk
of being overcharged," Business Insider, June 27, 2023.
49. A. Lucas, "FreshDirect CEO says customers will only see benefits after
Dutch grocer buys majority stake," CNBC, Nov. 24, 2020.
50. A. Semuels, "Why People Still Don’t Buy Groceries Online," The Atlantic,
Feb. 5, 2019. And A. Elejalde-Ruiz, "Peapod, based in Chicago, is shutting
down grocery delivery in the Midwest and cutting 500 jobs," Chicago Tribune, Feb. 12, 2020.
51. J. Springer, “Campbell Soup, FreshDirect, invest in Online Meal Kit
Retailer,” SupermarketNews, May 24, 2017.
52. A. Kadet, “New York City’s Grocery Delivery Wars: Who’s the Winner?” The Wall Street Journal, Feb. 6, 2015. Also S. Hoxie, “Online Grocer
FreshDirect Beats AmazonFresh and Google,” And Now You Know, April
14, 2014.
53. M. Hanbury, "Amazon is closing certain Amazon Fresh and Amazon Go
stores, suggesting that grocery hasn't been as fruitful as it hoped," Business Insider, Feb. 3, 2023.
54. T. McEnry, “Amazon Squeezes FreshDirect,” Crain’s New York Business,
Oct. 26, 2014.
55. C. Valerio, “Interview with FreshDirect Co-Founder Jason Ackerman,” Venture, September 18, 2009.
56. R. Shulman, “Groceries Grow Elusive for Many in New York City,” Washington Post, February 19, 2008.
57. R. Redman, "Parent of Kings Food Markets, Balducci’s up for sale with
Chapter 11 filing," Supermarket News, Aug. 25, 2020.
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© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 5
Netflix: Sustaining Leadership
in an Epic Shift from Atoms to
Bits
5.1 Introduction
Learning Objectives
1. Understand that although Netflix is one of the few firms to successfully pilot through disruption—becoming the top firm in streaming even as its original market, DVD-by-mail, was going
away—the firm has experienced wild swings in market perception and stock performance.
2. Appreciate that the dynamics at work in the old and new businesses are fundamentally different in many key ways that influence product offerings, operating cost, competitors, and
more.
3. Recognize that the breadth of disparately motivated competitors, many of whom have a
strong portfolio of competitive assets, presents uncertainty as Netflix seeks global growth in
hopes of remaining the world’s leading streaming service.
After more than 25 years as CEO, Netflix co-founder Reed Hastings stepped down from his leadership role in early 2023. Under Hastings, Netflix defined the DVD-by-mail business and, by building a
better customer experience, obliterated Blockbuster Video, that generational touchstone with over
nine thousand stores. Then Hastings accomplished a business rarity—in the face of a disruptive
technology (the shift to streaming) he recast and rebuilt the business nearly from scratch, with his
firm establishing itself as the clear leader in the newly recast market. In the switch from DVD-bymail to streaming, nearly everything was different—content acquisition, availability of inventory,
infrastructure required, the competitors involved, technology required for consumption, and the
underlying financials of success. Yet Hastings did it. Netflix today has subscribers in every nation,
save for China, Syria, North Korea, and (due to the war in Ukraine) Russia.[1] It has more subscribers,
247 million as of fall 2023,[2] than any other streaming service, and more consumers pay for Netflix
than pay for all premium cable TV channels.[3] Among U.S. teen viewing habits and viewership time,
Netflix beats the second most popular service, Hulu, by a factor of more than three. Only YouTube
garners more teen viewer time than Netflix and then, just barely.[4]
There have been doubters. The firm's stock tanked when Blockbuster and Walmart entered
DVD-by-mail. A mishandled attempt at splitting the DVD business from streaming (refer to the
"The Qwikster Debacle" later in this chapter) resulted in a painful subscriber hit. The flood of new
rivals, most notably Disney—which brought Marvel, Star Wars, Pixar, and The Princesses to compete for viewer attention—also led to a stock plunge. And a pull-back from the streaming bonanza
that took place during COVID, where it seemed there was little to do other than binge-watch, also
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The Story of Netflix:
25th Anniversary,
Netflix
Netflix recaps its first quarter
century in business.
View in the online reader
led to a stock slump. But in every case, Netflix has bounced back while rivals foundered. By fall 2023,
savvy moves, such as a more strict password policy, offering a free ad-supported tier, and implementing calculated price hikes, along with globally appealing content at a scale no other rivals can
match, led Netflix stock to gain 45 percent that year while rivals including Disney and Discovery
Time Warner wallowed about their fifty-two-week lows.[5]
Despite its track record and past success, the streaming industry’s drama continues to unfold
with the outcome uncertain. Lots of challenges suggest a brutal coming battle, and analysts are
concerned about Netflix maturity (is there much growth left in the firm’s core U.S. market?), rising
costs to license and create new content, and unprecedented competition.[6] There are currently over
one hundred streaming services, and clearly not all will survive.[7] Netflix’s streaming service rivals
now include content king Disney—which holds not only the widely loved intellectual property (IP)
mentioned above, but also owns ABC and ESPN; deep-pocketed Apple; Warner Bros Discovery (uniting HBO, Showtime, CNN, DC superhero films, and other Warner Bros. movies and TV
shows under the service Max); Paramount+ (with fan-loyal Star Trek and family-friendly Nickelodeon in its portfolio); Comcast, which not only offers streaming over Peacock, but also owns the
most widely available U.S. cable pipe, Europe’s Sky TV, NBCUniversal television and movie properties, and Olympics rights; and, of course, Amazon, which now offers ad-supported as well as a deeply
discounted streaming service for Prime subscribers. While Netflix vanquished all DVD-by-mail subscribers to become the single source favored above all, content fragmentation means there won’t be
the same single choice for the full slate of streaming offerings, and we won’t have one winner. With
most streaming services suffering from a lack of profitability and a lack of subscribers,[8] a shakeout
seems certain, and the competitive advantages that Netflix has built over more than a quarter century will be tough to dislodge.
long tail
In this context, it refers to
an extremely large
selection of content or
products. The long tail is a
phenomenon whereby
firms can make money by
offering a near-limitless
selection.
Netflix Concludes Its First Act
In fall 2023, Netflix finally shuttered its DVD-by-mail business, allowing customers to keep any
DVDs they already possessed, mailing them a “bonus surprise 10 DVDs” as a customer loyalty
gift, and bringing to an end a once dominant business. Yet this was a business disruption brought
about by the parent itself.
Hastings co-founded Netflix back in 1997 after becoming outraged that the late fees associated
with returning a VCR tape of the movie Apollo 13 were greater than the cost to buy the movie
itself. At the time, the industry was shifting from VCR tape to DVDs, a form factor that could be
easily mailed through the U.S. postal service—so discs became Netflix's exclusive focus. For a
flat fee, Netflix's core plan allowed customers to hold three DVDs at a time. Discs arrived in a
pre-paid envelope that customers sealed and dropped in the mail when they'd finished with a
title. No postage, no late fees, and, most notably, U.S. law let the firm rent out any video that it
purchased, so the company offered nearly every movie and television series available on DVD.
This turned what would normally be less-profitable offerings into potential money makers—a concept referred to by strategists as a long tail
tail.
The strategic benefits of the model were many-fold. Netflix built a network of fifty-eight highly
automated distribution warehouses that could deliver DVDs to over 97 percent of the country in
less than twenty-four hours.[9] Netflix even hired a former U.S. postmaster general to best understand how to maximize its distribution system for speed and profitability. Customers would drop
a disc in the return mail and have a new title by the next day. The Netflix distribution system was
a scale rivals failed to match. Even as firms like Blockbuster, Walmart, and Redbox tried to offer a
similarly large DVD-by-mail library, they faced the costly requirement to build a nationwide delivery
infrastructure simply to match Netflix and hope to siphon off customers from the leader. Fewer
customers at the same fixed costs meant rivals would lack economies of scale and would thus
have a vastly less-profitable business, while winning over Netflix customers rarely happened given
the switching costs Netflix enjoyed through a best-in-class recommendation engine powered
by massive data. An industry-leading recommendation system also helped customers surface
content they were more likely to love. The scale of fast delivery and nearly limitless selection combined with content recommendation led to industry-leading customer experience ratings and the
industry's lowest customer churn—proof Netflix had also built the best brand in the industry.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
You should recognize the value of concepts you're learning in this text. Both Wall Street analysts
and senior executives at well-funded rivals failed to understand the competitive advantages generated over time by the early-moving rival. Netflix had built scale (of distribution network and
breadth of offering), switching costs (through data-rich recommendation systems that would be
lost if a customer moved to a rival), and brand (a customer experience with unlimited selection,
next-day delivery of shows that were almost always in stock, low-cost, and no-late-fees)—a set
of assets that were valuable, rare, difficult to imitate, non-substitutable, and which no rivals could
profitably match. Yet from its founding, Hastings realized that one day this business would go
away when the Internet became fast and reliable enough and tech costs plummeted to enable
streaming to offer an even better model. Said Hastings, “We didn't call the firm DVD-by-mail
Flix.”[10]
Netflix Ending DVD-by-Mail Service with Disc Giveaway
View in the online reader
Why Study Netflix?
Studying Netflix gives us a chance to examine how technology helps firms craft and reinforce a
competitive advantage. Even more important, Netflix provides one of the very rare examples of a
firm that has continued to lead as the firm shifts from one technology-focused business model to
the next. The chapter focuses on Netflix, the sequel; the post-DVD business and the firm’s transition to video streaming. This section looks at the very significant challenges the firm continues to
face as its primary business shifts from shipping the atoms of DVDs to sending bits over the Internet. We’ll see that a highly successful firm can still be challenged by technical shifts, and we’ll learn
from Netflix’s struggles as well as its triumphs. This section gives us an opportunity to examine
issues that include digital goods, licensing, content creation, international growth and regulation,
supplier power, crowdsourcing, platform competition, legal and regulatory issues, and technology
infrastructure. We’ll also look at the kinds of competitive advantages that Netflix is crafting as the
world’s largest streaming service.
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Key Takeaways
• Many firms are forced to deal with technology-fueled disruption that can challenge the current way they do business. However, successfully transitioning to a new business model is
often extremely difficult, even for firms that were dominant under a prior operating model.
• Despite being the clear leader in global streaming, Netflix faces a daunting set of challenges,
including rivals that enjoy a set of assets that Reed Hastings’s firm lacks. These include existing distribution networks from telecom subscribers and hardware owners, popular media
libraries with loyal fans, and profitable businesses that can fuel the foray into streaming.
Questions and Exercises
1. Survey your class, friends, or family. How many subscription services do they have and how
many are they likely to have in the future? Have you or any relatives or friends ever dropped a
service? Which one and why? Have you ever “rejoined” a service you’d previously dropped?
If so, why? What would make you drop a service, switch services, or keep a service but
subscribe to a new one? What role does technology play (if any) in the likelihood that you’d
continue to subscribe to a service?
2. Can you think of once-successful firms that were forced to radically redesign their businesses based on technology change? How did the firms in your list fare with the new
model—better or worse than their prior success? Why do you suppose they experienced the
outcomes you’ve identified?
5.2 Netflix versus the Competition:
Big Players, Bold Plans, but It’s
Getting Crowded
Learning Objectives
1. Understand the shift from atoms to bits, and how this is impacting a wide range of industries.
2. Identify how digital products differ from physical products and specify how the streaming
business is substantially different from the DVD-by-mail business.
3. Know the methods that Netflix is using to attempt to address these differences.
4. Understand how the “First Sale Doctrine” applies to physical but not virtual products.
5. Understand key terms such as windowing and fixed versus marginal costs.
6. Discuss how Netflix is attempting to create competitive advantage through exclusive catalog
offerings, despite not being able to secure a “longest tail.”
7. Understand transfer pricing and its role in content licensing.
8. Identify the major issues driving what is widely considered to have been a disastrous rollout
and recall of the Qwikster service, and intelligently discuss options that may have limited the
fallout in transitioning the firm’s business.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
Atoms to Bits
Nicholas Negroponte, the former head of MIT’s Media Lab, wrote a now-classic essay on the shift
from atoms to bits. Negroponte pointed out that most media products are created as bits—digital
files of ones and zeros that begin their lives on a computer. Music, movies, books, and newspapers are all created using digital technology. When we buy a a “dead tree” book or newspaper, a
video game on disc or cartridge, or an old school CD or DVD, we’re buying physical atoms that
are simply a container for the bits that were created in software—a word processor, a software
development tool, a sound mixer, or a video editor.
The shift from atoms to bits is realigning nearly every media industry. Newspapers struggle as
readership migrates online and once-lucrative classified ads and job listings shift to the bits-based
businesses of Craigslist and LinkedIn. Apple and Spotify rule the new world of music without
selling a single CD, while the atom-selling “record store” chains of the past are gone. Amazon
jumped into the atoms-to-bits shift when it developed the Kindle digital reader. Who needs to kill
a tree, spill ink, fill a warehouse, and roll a gas-guzzling truck to get you a book? Kindle can slurp
your purchases through the air and display them on a device lighter than a paperback—in less
than four years, the firm was selling more electronic books than print titles.[11] With video games
shifting to digital downloads, any firm relying on the sale of physical game discs and cartridges is
also in a world of hurt. This is the chief reason behind the excessive short-selling that created the
GameStop frenzy in early 2021.[12] That chain had closed over 780 stores in the prior two years
and over 650 in the four years before that.[13]
Streaming needed an entirely new competitive playbook. Just about everything in the streaming business is different: content availability, content acquisition costs, the legal and regulatory
environments, potential opportunities for revenue and expansion, potential partners, competitors,
and their motivation. And while the DVD-by-mail business meant most customers would subscribe
to one winner-take-most victor, many consumers have multiple subscription services, each vying
to be your first-choice visit when hunting for entertainment.
The Qwikster Debacle
We can learn a lot from Reed Hastings’s deft management of Netflix in the firm’s ascendency
to industry-leading dominance in the DVD-by-mail and video-streaming businesses, but Hastings
has also presided over what some have called one of the worst product launches of all time,[14]
the announcement and repeal of the Qwikster service, and there are lessons to be learned from
examining the firm’s painful stumbles as well.
The damage started when the $10 base Netflix service was unbundled into two separate $8
plans: one for DVD-by-mail and one for streaming over the Internet. For customers who still used
both discs and streaming, the move effectively constituted a 60 percent price hike. Following
the plan change, the firm’s Facebook page quickly amassed over 44,000 negative comments,
“#DearNetflix” complaints became a trending topic on Twitter, and customers began referring
to the firm’s CEO as “Greed Hastings.”[15] Two months later, the firm announced it would split
into two distinct services with two separate websites. The switch reads as a primer on what not
to do when transitioning a business. The unpopular price hikes were followed by changes that
would have actually made the firm’s products harder to use by forcing customers to access two
different websites, each with a separate database of offerings. Adding to the pain was the embarrassment of a botched rebranding of the DVD-by-mail service under the new name Qwikster.
At the time of the rebranding announcement, Netflix had secured the domain Qwikster.com, but
not the Twitter handle @Qwikster. The latter was owned by a guy whose drug-referencing, foulmouthed tweets were accompanied by a profile picture of a blunt-smoking Elmo from Sesame
Street. Hastings, who had stood at the peak of the industry just a few weeks earlier, had become
both a target of customer vitriol and an industry laughing stock, the subject of Saturday Night
Live skits and comedian punch lines (refer to NBC’s website). Netflix quickly dropped plans for
the Qwikster split, but it chose to hold firm with the price increase that started the slide. Over the
course of ninety nightmarish days, Netflix lost over 800,000 customers, its stock tumbled from
$304 a share to below $75 (eventually falling to near $50), and its market value shed over $12
billion, including $2.3 billion in a single day.
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When announcing Qwikster, Hastings wrote in a blog post, “My greatest fear at Netflix has been
that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies
that are great at something—like AOL dialup or Borders bookstores—do not become great at
new things people want (streaming for us) because they are afraid to hurt their initial business. .
. . Companies rarely die from moving too fast, and they frequently die from moving too slowly.”
But in this case the poorly handled transition, served up with little user dialog or warning, was
too much, too soon. Hastings has since admitted, “We moved too quickly for our customers.”[16]
In 2014, the Netflix streaming price increase was handled with far more customer sensitivity. The
firm announced that while it was raising rates by $1 a subscriber, it would only apply to new customers; existing customers would be grandfathered in with a two-year grace period before seeing
their bills go up.[17] The result? There was no notable customer outrage or protest. Similar rate
increases were announced in advance with customers given ample warning on when to expect
change and the type of change that was coming. Lesson learned: When degrading a service or
raising rates, communicate clearly and don’t shock customers with sudden, unexpected change.
Oh, and also make sure you’ve secured domain and social media assets before a launch and
vetted any branding shifts for potential embarrassment.
fixed costs
Costs that do not vary
according to production
volume.
marginal costs
The costs associated with
each additional unit
produced.
coopetition
Coopetition or frenemies is
a situation where firms
may both cooperate and
compete with one another.
Digital Products and Marginal Costs
Imagine you’re an auto manufacturer. Before you can begin producing any vehicles, you’ll need
to make some investments to get started. These fixed costs might include buying land and building a manufacturing plant. There are also costs associated with each individual unit produced.
These are the marginal costs and would include things like the parts, materials, labor, and
energy used to produce each additional car.
It’s often argued that the marginal cost of digital goods is effectively zero. That’s because computers can make limitless duplicates of digital content—no material required—and the Internet
can be used to almost instantly distribute content to customers. In practice there are some costs
associated with digital distribution. These might include the costs that a firm must pay to telecommunications providers that connect them to the Internet (the more a firm transmits, the more it
typically has to pay), or the cost of running programs on the servers of other companies. For
example, to deliver streaming video, Netflix actually uses computers provided by the cloud computing services of Amazon (making Amazon and Netflix both partners and competitors, a
phenomenon often referred to as coopetition
coopetition, or frenemies).[18]
But here’s the thing—marginal costs for digital goods are (effectively) zero, but that’s for content
owners. When Disney spends over $300 million to make an Avengers sequel, it does that only
once (all fixed costs). But Netflix never owned Avengers, so it needs to license any titles that it
doesn’t own. The economics of licensing (marginal costs that need to be repeated for offering
more product in the future) versus content ownership (fixed costs that don’t need to be repeated)
provide a long-term advantage to firms that can continually squeeze revenue from the content
that it outright owns.
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Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
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Content Acquisition: Escalating Costs, Limited
Availability, and the “Long-Enough Tail”
The old DVD-by-mail business allowed Netflix to offer up the longest tail of video content that
money could buy. An over one-hundred-year-old U.S. Supreme Court ruling known as the First Sale
Doctrine made this possible. This ruling states that a firm can distribute physical copies of legally
acquired copyright-protected products. For Netflix this means that if studios sell their DVDs retail,
they can’t prevent Netflix or anyone else from buying DVDs at full price and distributing the discs
to others. (The ruling makes possible all sorts of efforts, including library lending and video rental.)
But the First Sale Doctrine applies only to the atoms of the physical disc, not to the bits needed in
streaming, so Netflix can’t offer Internet streaming without separate streaming licenses.[19] That’s a
continued big problem for Netflix. Licensing costs are skyrocketing, and some content producers—especially those with their own streaming services, like Disney and Warner’s Max—outright
refusing to make their content available for streaming on rival services.
First Sale Doctrine
A U.S. Supreme Court
ruling stating that an
individual who knowingly
purchases a copy of a
copyrighted work from the
copyright holder receives
the right to sell, display, or
otherwise dispose of that
particular copy,
notwithstanding the
interests of the copyright
owner.
While studios offer new films and television shows each year, the number of firms offering
high-demand content remains more or less fixed, essentially operating as an oligopoly with concentrated supplier power. In fact, just six firms control over 90 percent of U.S. media consumed.[20] Also
realize that video content is perfectly differentiated, and as we learned in the Strategy and Technology chapter, providers of differentiated goods also have stronger bargaining power. Want to license
the new Star Wars movie? There’s only one owner who can provide that content: Disney. By contrast, in the DVD days, content acquisition was more like buying a commodity since, even if studios
wouldn’t directly sell Netflix their discounted discs, Netflix could always buy discs from any retailer
selling to the public. Adding to the power-shift to content providers: While the number of influential studios has remained roughly the same, over the past several years the ranks of bidders jostling
elbows at the streaming media negotiating table have increased. Amazon, Apple, Hulu, Peacock,
Paramount (with Paramount+ and free Pluto), Roku, Tubi (owned by the Murdochs’ Fox Corporation—not the 21st Century Fox assets sold to Disney), and a host of overseas rivals are all in a mix
that can push content prices higher. Also, when you buy a DVD, you own it for life, but streaming
costs are usually licensed for a limited time period, and renewal costs have been increasing over
time. Consider that the Starz network initially licensed its content to Netflix for $30 million but
the network turned down ten times that amount to renew the deal just three years later.[21] The
trends are troubling. Netflix’s recent cost of acquiring streaming content rose to forty-three times
the amount it spent just five years earlier![22] After years of rising steadily, Netflix content spend has
leveled off at about $17 billion, with roughly $10 billion of this attributed to licensing content produced by others.[23]
Title availability is also complicated by a distribution practice known as windowing. Content
is available to a given distribution channel (in theaters, through hospitality channels like hotels and
airlines, on DVD, via pay-per-view, via pay cable, and later broadcast on commercial TV) for a specified time window, usually under a different revenue model (ticket sales, disc sales, and license fees
for broadcast). Other media businesses offer content windows as well. Book publishers release
more expensive hardcovers months before cheaper paperbacks are issued. Music artists window
content by limiting streaming, or only offering new-track streaming for paying subscribers.
Even though most studios welcome streaming revenue, most don’t want to undercut higherrevenue early windows. Adding to this complexity are exclusivity contracts negotiated by many key
channels—in particular, the so-called premium television networks like HBO, Showtime, and Starz.
This means that if HBO or Showtime has exclusive rights to broadcast a movie, it’s pulled from all
other services until any exclusive pay-television time window closes. Want to be a player in the
streaming media business? You’d better lawyer up.
Another problem: Some firms steadfastly refuse to offer Netflix streaming rights. HBO has
never licensed to Netflix. Who would pay for HBO’s service if Netflix could offer the same content
and more for a cheaper price? HBO did agree to take $300 million of Amazon’s money to offer up a
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
windowing
Making content available
to a given distribution
channel (in theaters,
through hospitality
channels like hotels and
airlines, on DVD, via
pay-per-view, via pay
cable, and later broadcast
on commercial TV) for a
specified time window,
usually under a different
revenue model.
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limited selection of HBO-back-catalog series, but the three-year deal left out current programming
which, at the time, included ultra-hot titles like Game of Thrones.[24]
In streaming, Netflix’s content acquisition has proven significantly more difficult, and more
costly, than buying DVDs and stacking them in a remote warehouse. This difference has forced Netflix to shift from offering the longest tail to a long-enough tail, a service that might not have all of
what you want but that consistently has something for everyone. In a statement to investors, Netflix makes this clear: “We are actively curating our service rather than carrying as many titles as we
can.”[25]
Supplier Power, Product Characteristics, and Customer Access
Critics’ opinion aside, video, books, and music can all be broadly defined as “art,” and art is
extremely differentiated—only the artist (or owner of the work) can supply that art. As we learned
in the strategy chapter, firms offering products that are rare or unique (i.e., highly differentiated)
gain more pricing power if they have access to a larger customer base bidding up prices.
But if access to customers is limited so that a single firm controls the vast majority of the market,
then suppliers may have to negotiate with a very strong intermediary that can hold back their
pricing power. Consider digital music and book purchases. In the pre-smartphone, pre-streaming era, Apple’s iPods were so dominant that they were effectively the only game in town. This
gave Apple the power to turn away record labels that wouldn’t offer songs at a price dictated
by Apple.[26] Amazon’s Kindle dominance had allowed the firm to exert similar price-setting influence.[27]
FIGURE 5.1 Price-Setting Power
A supplier of highly-differentiated art, like music or books, will see price-setting power
diminished if a single firm controls access to most of the market. The iPod and Kindle
concentrated distribution power with hardware providers (Apple and Amazon), giving these
firms the power to dictate the price of supplier goods (music and books) even though these
products are perfectly differentiated (e.g., there is only one supplier of a product).
Source: John Gallaugher.
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Chapter 5
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But Netflix is no iPod or Kindle. Even though Netflix has a huge customer base, many customers
are willing to subscribe to multiple streaming services if they can’t find product on Netflix. Few,
however, are willing to buy a second, non-Apple music player or non-Kindle eBook reader. And
multiple streaming services bidding on content (or hoarding their own work) means that any content put up for licensing will have its price pushed north by multiple bidders.
FIGURE 5.2 Distributing Streaming Services
When an artist (in this case a film studio) has multiple bidders for its unique content, it gains
pricing power and can charge more.
Source: John Gallaugher.
Exclusives and Original Content
One way Netflix has countered rivals with exclusive content is to offer exclusive content of its own.
The firm had secured the initial sole streaming rights for all seasons of several popular shows,
including NBC’s version of The Office (the most popular show on Netflix) and Friends, and inked
a $300-million-a-year deal with Disney, giving the service first-run exclusive streaming access to
Disney shows.[28] This was a key strategy for Netflix’s early streaming growth when the firm lacked
its own popular content. However, all of these deals have expired. The more successful a title, the
greater the chance suppliers will demand higher prices, or worse, take the content for themselves.
Comcast pulled The Office to anchor the launch of its Peacock streaming service.[29] Even after Netflix paid $100 million for an extra year of Friends,[30] AT&T next decided to keep the much-rewatched
sitcom for (HBO) Max, and Time Warner’s parent won’t renew the deal cut by subsidiary CW that
brought Riverdale, Crazy Ex-Girlfriend, and DC superhero shows to Netflix.[31] Disney also declined
to renew a deal with Netflix, opting to take its ultra-valuable movie assets (not only the beloved
Disney films, but also the Marvel and Star Wars franchises, the 20th Century Fox film library, plus
select television titles from ABC and ESPN) to its cheaper-than-Netflix Disney+ streaming service
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(and remember, Disney also controls Hulu). Starting a new streaming service is difficult (note the
examples of Walmart’s Vudu, Fandango streaming, and the shuttered Verizon/RedBox service), but
these deep, high-demand assets and intent to build more have made Disney streaming a force to be
reckoned with.[32] And the home of the Magic Kingdom would like to capture a bit of Netflix’s own
pixie dust for its share price.
transfer pricing
The price paid when
divisions of the same
company transact with
each other.
Transfer Pricing: “Wait—I’ve Gotta Pay for Stuff I Already Own?”
NBC actually had to pay parent Comcast half a billion dollars for the rights to stream The Office,
a property it already owned. The HBO Max service forked over $425 million to parent AT&T for
Friends, and also paid for those CW shows just mentioned.[33] Disney (and just about everyone
else) pays itself for rights to its own films, too. One division of a firm paying another division for
something the parent already owns is known as transfer pricing
pricing. Transfer pricing is actually subject to legal requirements, usually demonstrating that an arms-length open bid took place, so a
firm can demonstrate it hasn’t underpriced the value of a product. Transfer pricing is also important for accounting. Even though the money flows out of a firm’s wallet, then back into it, each
division needs to show where the money is coming from and where it goes, ensuring that it makes
decisions that justify its own contribution to the parent. Finally, even though a firm like Comcast
pays itself half a billion for The Office, that does not mean it keeps all of that money. The Office
was produced jointly by Universal Television, but also by non-Comcast entities Deedle-Dee Productions and Reveille Productions (you see these names in graphics at the end of each show).
Depending on the structure of existing contracts, firms may need to pay partners, re-license
music used as part of the show, and, following the 2023 writer and actor strikes, might even need
to make residual payments to writers, actors, and others who played a role in bringing the show
to market. A firm is the ultimate decider on the value of its existing property, and if it decides a
property is worth keeping in its ownership stable, it’ll typically be able to do so, but know that
there are “costs” associated with this kind of vertical integration. Transfer pricing also shows why
lawyers and accountants need to be increasingly digitally savvy and prepared to deal with techrelated issues throughout their careers.
Netflix realized early on that it couldn’t rely on partners for long-term relationships and consistent pricing, so the firm has aggressively backed the development of multiple original offerings for
debut on its service. As the first large-scale video-streaming service and one that has had to create
its own properties outside of broadcast or movie theater distribution, Netflix had to figure out on
its own what works and what's not worth paying for. This has led the firm to cast a very wide net,
targeting a cross section of demographics (drama, comedy, reality, kids’ programming, high brow
and low), reviving and rebooting broadcast TV shows, and creating titles released “when ready”
such as talk shows, weekly news programs, and programming focused on current events. The firm
has invested heavily in otherwise popular genres with loyal viewership, like anime, a genre considered niche by large studios.[34] At this relentless pace, Netflix has launched over 6,600 originals and
regularly releases more than one original program each day.[35] By comparison, Netflix alone created
more original content in 2019 than the entire television industry did in 2005.[36]
A Look at Netflix Originals
The incredibly broad library of Netflix originals attempts to provide something for everyone. A
few examples include Stranger Things, Wednesday, Bridgerton, The Crown, The Queen’s Gambit, The Umbrella Academy, Tiger King, and Love Is Blind, a run of now-canceled series based
on Marvel’s The Defenders superheroes franchise, and talkshows including those helmed by
Chelsea Handler and David Letterman. Reboots of classic TV have included Arrested Development, One Day at a Time, Full House, and Gilmore Girls. Documentaries such as 13th, Knock
Down the House, and The Great Hack have all received praise. Netflix movies are attracting
A-list stars and directors, and its list of Best Picture Oscar nominees include Alfonso Cuarón’s
Roma, the Martain Scorsese–helmed film The Irishman, and the Oscar-winning animated Pinocchio by Guillermo Del Toro. Exclusive children’s content includes shows based on DreamWorks
characters All Hail King Julian (from Madagascar) and The Adventures of Puss and Boots (from
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
Shrek), How to Train Your Dragon, the classic Magic School Bus, the tween-appealing Lemony
Snicket’s A Series of Unfortunate Events, and Cocomelon—the pre-K hit that’s actually the third
most streamed show across all networks.[37] Reality hits include the rebooted Queer Eye, Indian
Matchmaking, Love at First Sight, The Floor Is Lava, a live-action Squid Game, The Great British
Baking Show (via acquired U.S. licensing), and the cake-tastrophes of Nailed It. The company
has even experimented with interactive features that users drive via tablets and smartphones—a
sort of video version of “Choose Your Own Adventure”—offering the format in the sci-fi thriller
Black Mirror: Bandersnatch and in an episode of the comedy Unbreakable Kimmy Schmidt.
International content is important abroad, but also in nations like the United States that have
large markets of nonnative speakers. And the broad success of Korean-language Squid Game
proved that even U.S. consumers had an untapped appetite for appealing content, even if it
were dubbed. The Brazilian drama 3%, Spanish Money Heist, Germany's Dark, Denmark’s The
Rain, and the Irish comedy Derry Girls are among the shows Netflix has developed or acquired
for broader international exposure.
Netflix is the new King of Comedy, releasing a new stand-up special each week with a roster
of big-name comics that have included Amy Schumer, Sarah Silverman, Dave Chappelle, Aziz
Ansari, Pete Davidson, Jim Gaffigan, Hasan Minhaj, John Mullaney, Chris Rock, and Jerry Seinfeld.
The Obamas inked a deal to produce “scripted series, unscripted series, docuseries, documentaries and features” that focus on themes the president and first lady pursued during their eight
years in the White House; while the Sussexes, Harry and Meghan, their former Royal Highnesses,
have also appeared in a multi-part Netflix series.
Here's the thing about those first “Netflix Originals,” though—the firm didn’t really own that
programming. The first batch of Netflix-backed originals (including hits House of Cards and Orange
is the New Black) are actually owned by other studios. House of Cards distribution rights are owned
by Sony, and it was produced by Media Rights Capital. Lionsgate owns Orange is the New Black.[38]
Netflix only got the exclusive first-window U.S. streaming rights. That's why you may have seen
these titles available on Apple TV, Comcast, Amazon, and others. Netflix also can't stream these
titles in all of its international markets. Some European cable and satellite providers have secured
in-country rights to House of Cards, keeping it off Netflix in their markets; and in China, where Netflix isn't even available, the series has streamed on China’s Sohu service.[39]
So why didn’t Netflix structure these deals for full control? Because licensing costs only about
half of what Netflix would pay for full ownership,[40] and the initial value of owning this content
was unknown. Now that the value of original content is proven, and because Netflix has lost exclusive access to previously licensed shows like The Office and Friends, a significant amount of all
new spending on content goes toward original programming where Netflix controls the rights.[41]
Ownership keeps titles as worldwide-exclusive to Netflix, key since now the majority of Netflix
subscribers are outside the United States, and that’s where most future growth will come from.[42]
It also offers Netflix the possibility of pursuing additional revenue streams, such as DVD sales,
licensed merchandising, or even licensing content to other channels and services.
It's important to remember that if the artists behind a title are known hit-makers, then
Netflix will have to bid against deep-pocketed rivals to secure their exclusive content (a highly
differentiated good). And being sugar daddy to the biggest names in TV and movies doesn’t come
cheap. Talent that Netflix has lined up for new original shows include a $300 million, five-year deal
with Ryan Murphy, the creator of Glee, American Crime Story, and American Horror Story. Shonda
Rhimes, the mastermind behind Grey’s Anatomy, Scandal, and How to Get Away with Murder, will
get at least $150 million to produce eight Netflix shows over five years. Blackish producer Kenya
Barris scored $100 million for a three-year Netflix deal.[43] And Netflix beat out Amazon and Disney
with a $200 million deal with the Game of Thrones guys, David Benioff and D.B. Weiss. These deals
can be hit or miss. Rhimes scored with Inventing Anna, Bridgerton, and spinoffs, but Ryan Murphy
had less luck and has since struck a new deal with Disney.[44] After losing Marvel, Netflix also hopes
to create its own superhero studio, buying the comic-book publisher Millarworld, the firm behind
Kick-Ass and The Kingsman properties.[45]
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decision fatigue
A phenomenon, akin to
congestion effects for
attention, where
consumers avoid selection
decisions with an
overwhelming number of
choices.
congestion effect
When increasing numbers
of users lower the value of
a product or service.
Netflix-owned content accounts for a growing percentage of streams. At the time its most popular third-party titles left the service, Netflix originals still accounted for only about 40 percent of
what subscribers watched,[46] but now Netflix content accounts for over 55 percent of what its customers are watching.[47] Too much content can also be a problem. Behavioral psychologists point to
decision fatigue, where consumers avoid selection decisions with an overwhelming number of
choices and fall back on known standbys like Friends and The Office. We can also see this as a
congestion effect, mentioned in our network effects chapter, where the finite resource that is overconsumed is customer attention. By 2018, Netflix tied HBO in the number of Emmy wins,[48] and had
won two Oscars and four Golden Globes.[49] It has also been criticized for its library of low-quality
programming,[50] and for unexpected cancellations.[51] Creating must-see TV without the advantage
of promoting new shows in the commercial break of existing shows means the crafty use of data
will be even more important if Netflix hopes to profitably remain the top streamer worldwide.
[When we own our own content] we don’t have to go through the gun-to-your-head renegotiation every couple of years for them.
—Ted Sarandos, co-CEO and Chief Content Officer at Netflix[52]
Sports and Streaming
Netlix has experimented with some sports-related titles, including the golf series “Full Swing”, a
docuseries on sports such as Formula 1, pro tennis, and the NFL, but has so far been a nonplayer in live sports. Meanwhile, other streamers have been backing up their money trucks and
carving out chunks of online sports, fragmenting the market.
While you used to be able to tune into your cable provider to catch most NFL games, fans now
find the leagues’ games scattered across half a dozen services.[53] Amazon spent $1 billion for
broadcast rights to Thursday Night NFL games, formerly held by Fox. Amazon also has the rights
to certain WNBA games and the European Champions League, Europe's top tournament for
football (er, soccer for those in the United States). YouTube is now home to the NFL's Sunday
Ticket, and YouTube TV has the rights to broadcast local games, including those playing on ABC
and CBS. Comcast's Peacock gained rights to exclusively broadcast the first NFL playoff game in
2024, and Paramount+ has rights to some Premier League soccer games in Mexico and Central
America. Apple has spent $2.5 billion for the rights to Major League Soccer (a move credited with
helping persuade superstar Lionel Messi to join the league's Inter Miami CF),[54] and Apple also
paid over a half billion dollars more for Friday Night Major League Baseball.[55] Max has launched
a sports tier for carrying games from the NBA, NCAA's March Madness, and Major League Baseball. Disney's ESPN is still the sports leader, with sports broadcasts on its networks constituting
the top 11 cable programs, and holds rights including NFL exclusives, National Hockey League
games, and the SEC sports conference. Sports are that rarest of commodities, and more bidders
mean rights-holders can get ever-higher prices. Streamers are expected to spend over $24 billion
for live sports in 2024, nearly double what media firms spent just a decade earlier.[56] If live sports
become the catalyst for subscribers or a key to churn prevention, prices may go ever-higher, and
firms that otherwise might be left out of streaming's most successful top tier will spend big to
keep their seat at the table. And make no mistake—the decisions will be driven by data analysis on subscriber impact, advertising dollars (live sports nearly all have some slots for ads), and
return-on-investment. Let the games continue!
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Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
Key Takeaways
• The shift from atoms to bits is impacting all media industries, particularly those relying on
print, video, and music content. Content creators, middlemen, retailers, consumers, and
consumer electronics firms are all impacted.
• Netflix’s shift to a streaming model (from atoms to bits) is limited by access to content and
by methods to get this content to televisions.
• Netflix’s competitors in streaming are large, deep pocketed, and may have different motivations for offering streaming content (such as generating ad revenue, pay-per-view content
sales, or as an incentive to make existing hardware platforms more attractive).
• The firm was right to be concerned that it needed to quickly transition to a new business
model and that there are many potential advantages to the early mover who can create dominance in that space; however, the firm also made several blunders in its Qwikster attempt at
this migration, and the failure of the firm to execute this shift effectively offers many lessons
for firms considering customer-impacting changes.
• While the “First Sale Doctrine” allows Netflix to send out physical DVDs to subscribers, this
law doesn’t apply to streaming.
• Windowing, exclusives, and other licensing issues limit available content, and inconsistencies
in licensing rates make profitable content acquisitions a challenge. Although the marginal
cost for digital goods is zero, this benefit doesn’t apply to licensees.
• Licensing issues will make it impossible to create a long tail as long as it is enjoyed in the
DVD-by-mail business. Its new model is about providing a “long-enough tail” to attract and
retain subscribers.
• Netflix is attempting to secure exclusive content and to fund the creation of original programming for first-window rights. This makes the post-DVD, streaming-centric Netflix more like a
premium pay channel and has attracted a host of imitators who all have their own original
content.
• Transfer pricing refers to the price paid when divisions of the same company transact with
each other. Transfer pricing in the streaming business must be legally set at fair values. Also,
just because a firm owns a property doesn’t mean it has no additional costs. There may be
production companies, licensed music, and royalties paid to writers, actors, and other entities.
Questions and Exercises
1. Contrast Netflix’s original business, DVD-by-mail, with the current streaming business. How
did these two businesses differ? Few firms have successfully recast their business as conditions changed so radically. What has Netflix done right? What has it gotten wrong? What
lessons can managers learn from the firm’s efforts?
2. Who are the rivals to the Netflix streaming effort? Do any of these firms have advantages that
Netflix lacks? What are these advantages?
3. Make a chart of the various firms offering video-streaming services. List the pros and cons of
each, along with its revenue model. Which efforts do you think will survive a shakeout? Why?
4. Why can’t Netflix secure a long tail of streaming content that is the same size as its content
catalog from the old DVD-by-mail business? What is Netflix doing to make its streaming catalog more appealing than rival offerings?
5. Is streaming content provided by studios a commodity or differentiated good? How does this
influence supplier power? How has this changed in the shift from DVD-by-mail to streaming
subscriptions?
6. What advantages does Netflix have over rival services? What advantages do these channels
have over Netflix? Do you think this is a winner-take-all market, or is there room enough for
multiple players?
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5.3 Streaming to Win: Online Video
and Competitive Advantage
Learning Objectives
1. Identify opportunities for Netflix to further strengthen and leverage its data asset, and detail
how the asset can offer the firm competitive advantage.
2. Understand that while scale in DVD-by-mail differs from scale in streaming, some scale
advantages may be achievable.
3. Understand opportunities and challenges as Netflix seeks to expand its subscription streaming offerings to international markets.
4. Recognize how Netflix made streaming widely available on products offered by many different consumer electronics firms and why the Netflix approach offers advantages over
offerings from Apple or other consumer electronics firms.
Streaming and the Data Asset
Netflix has one very critical asset that is far stronger than what rivals, especially cable television
networks, can assemble: a growing and exquisitely detailed treasure trove of data. This data asset
is used to make more accurate recommendations, improve user interface design, and help the firm
determine the appropriate cost for acquiring content, and it can even shape creative decisions in
original program offerings.
collaborative filtering
A classification of software
that monitors trends
among customers and
uses this data to
personalize an individual
customer’s experience.
The data gathered via streaming can be more revealing than ratings received via DVD-by-mail.
Even if someone doesn’t rate a given title, if they binge-watch multiple episodes, Netflix has a pretty
good indicator that the user likes the show. The reverse is usually true for the unrated property
that a user streamed for the first fifteen minutes and never came back to.[57] In the DVD-by-mail
days, if you didn’t take the time to rate a show, the firm had no idea if you’d actually watched shows
you’d received, watched them multiple times, finished watching titles you started, and so forth. In
fact, viewing behavior is such a strong indicator that Netflix has completely scrapped the five-star
ratings system it had previously used. Users have the option to give a “thumbs up/thumbs down”
rating, but the real interest is revealed in streaming behavior. Once captured, this data can be fed
into the firm’s collaborative filtering software to classify viewers with what the firm’s VP of product refers to as “taste doppelgangers”—clusters of customers who have the most similar content
preferences. The way collaborative filtering works at Netflix is that these clusters are then combined with over 76,000 (and climbing) micro genres (examples: “Critically Acclaimed Emotional
Underdog Movies” or “Gritty Chinese Action & Adventure from the 1970s”), and while a genre formula is not public, one analyst suggests something akin to: “Region + Adjectives + Noun Genre +
Based On . . . + Set In . . . + From the . . . + About . . . + For Age X to Y.”[58] The wealth of growing and
more fine-grained user data and additional content classification is then filtered to help subscribers
discover the content they haven’t seen, but that their most similar-in-taste peers seemed to enjoy.[59]
Each user’s Netflix screen is the result of analyzing terabytes of data. Every recent click, view, pause,
rewind, early abandon, rating and response while browsing a personalized guide page, as well as
other data, is considered in order to identify the content the firm believes users will most likely
want to see, considering your tastes alongside the tastes of those that the data says are most like
you in their viewing habits. Says the firm’s VP of innovation, “If one member in this tiny island
expresses an interest for anime, then we’re able to map that person to the global anime commu-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
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nity.”[60] You might think that new streamers will also be able to grow their own data assets, and
while this may be true over time, Disney’s woes with Disney+ (estimated to have cost the firm over
$10 billion so far)[61] show that Mickey either doesn’t yet have the data or needs to go back for an
analytics degree.
Finding content that you’ll like is only part of the customer satisfaction equation. Netflix also
has to present recommendations in an enticing way so that you’ll actually be persuaded
to select and start watching a title. Some 75 to 80 percent of what people watch on the service
comes from Netflix recommendations, not search,[62] and so everything from the row categories
and the order in which you see them in your recommendation carousel, to the trailers and thumbnails that a user sees for each recommendation, are also driven by data analysis.[63] Image choice is
especially critical since 82 percent of a customer’s focus is on the image.[64] If Netflix thinks you’ll
like Good Will Hunting and pegs you as a romance fan, then you’ll see a thumbnail of Minnie Driver
and Matt Damon going in for a smooch, but if the data says you’re more of a comedy connoisseur,
then the Good Will Hunting rec comes with a thumbnail featuring Robin Williams.[65]
Netflix believes it only has 90 seconds to help a user find a show before they move on to
another alternative; users spend only about 1.8 seconds lingering over a given image, so every bit
of persuasion counts. Netflix ultra-personalization—from title and genre suggestions to thumbnail
images to the choice of video that will automatically pre-roll as a customer browses titles—are customized by individual user. Even the row labeled “Popular on Netflix” isn’t the universal ranking
you might think it is. That section is customized by user and really shows “what's popular among
people who have similar viewing histories as you.”[66] The “row” is collaborative filtering results
delivered in real-time. Creating an experience that convinces customers to open Netflix first and to
stay whenever they have free time is core to how the firm defines competition. Rather than consider itself as simply competing with streaming rivals or with more broadly defined alternatives
like YouTube, Netflix considers itself in battle with all other choices a customer can make instead
of choosing to watch its shows. Hastings once wrote in a communication to investors: “Our North
Star is to win more of our members’ ‘moments of truth’ . . . when our member wants to relax, enjoy
a shared experience with friends and family, or is just bored. They could play a video game, surf
the Web, read a magazine, channel surf, buy a pay-per-view movie, put on a DVD, turn on Hulu
or Amazon Prime, or they could tap on Netflix. We want our members to choose Netflix in these
moments.”[67] Comparing the choice between continuing to binge a series or go to bed, Hastings has
said: “We’re competing with sleep . . . and we’re winning!”[68]
Netflix estimates that the strength of the personalization engine saves the firm about $1 billion
a year, mostly in the customer satisfaction that prevents churn. If a customer can’t find something
they like in about a minute of viewing one or two screens, “risk of the user abandoning our service increases substantially.” Netflix is now crunching and comparing user preferences across 190
nations, worldwide—a level of profile detail and user preferences that no one can come close to
matching.[69]
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machine learning
(ML)
A type of artificial
intelligence that leverages
massive amounts of data
so that computers can
improve the accuracy of
actions and predictions on
their own without
additional programming.
A/B test
A randomized group of
experiments used to
collect data and compare
performance among two
options studied (A and B).
A/B testing is often used in
refining the design of
technology products, and
A/B tests are particularly
easy to run over the
Internet on a firm’s
website. Amazon, Google,
and Meta are among the
firms that aggressively
leverage hundreds of A/B
tests a year in order to
improve their product
offerings.
data warehouse
A set of databases
designed to support
decision-making in an
organization.
The kind of data analysis that refines Netflix algorithms is largely done via artificial intelligence—specifically machine learning. In this approach, more and better categorized data is
regularly examined by software that improves predictive power without additional human intervention. But sometimes managers want to dive in and explore firm data to uncover additional
insights. They might, for example, want to examine hunches that may become future A/B
tests—experiments that compare two alternatives, A and B, to find out which performs better;[70] or
managers might seek to inform other ad hoc decision-making. So Netflix regularly extracts, formats, and summarizes data from massive transactional systems so that it is available for
managerial access, not just machine learning use. A pool of data accessible for human-led query
and analytics is often referred to as a data warehouse. You'll learn more about these concepts
in Chapter 17. The Netflix philosophy toward its data warehouse is driven by three core tenets that
are useful for any manager to consider when framing a firm's data asset: (1) data should be accessible, easy to discover, and easy to process for everyone; (2) whether your dataset is large or small,
being able to visualize it makes it easier to explain; and (3) the longer you take to find the data, the
less valuable it becomes.[71] The firm makes good on these tenets through the use of third-party
tools, as well as custom products tailored to the specific needs of the firm.
“Hey! This Isn’t a Film with Black Leads!” When AI Might Go Too Far
The Shein chapter provides examples of AI making insensitive recommendations—prompting the
firm to manufacture offensive products with objectionable images and text. Netflix might have
experienced the same sort of situation with the artificial intelligence that automates thumbnail
image selection. Users have accused the firm (really meaning its independently acting technology)
of generating recommended movie thumbnails featuring Black characters even when those
actors only played minor roles in the film. One user shared online: “It’s weird to try to pass a film
off as having a Black principal cast (by creating a movie poster-like as featuring just the Black
people) when it’s a white movie.”[72] Netflix claims it does not use race-based data in its personalization tech, but the “black box” of machine learning (meaning the opaque nature of the multilayered weighted nodes of neural network versus explicitly coded and interpretable conventional
decision-making systems) could make recommendations that use factors that weigh race, even
if no one explicitly coded it to do so.
Data accessible to Netflix managers also leads to better content investments. When licensing
new work, Netflix examines a variety of inputs, including things like actors’ names and title genre,
to determine the likely size of an audience and that property’s value to the firm.[73] When content
comes up for renewal, Netflix crunches the data, including how often a given title has been viewed,
its user rating score, and key viewing trends. All this helps the firm determine just how much a
given asset is worth, and it directly informs decisions on choosing projects and setting budgets.[74]
Says co-CEO Sarandos, “I can justify the spend with our data and do so with a far greater degree of
confidence than the television networks.”[75]
Data also informs the original content investments that Netflix is making. For example, Netflix
made the decision to revive Arrested Development in part based on its ability to monitor customer
attitudes toward the original series over time. The series was a cult hit—it was one of the most popular programs and data clearly showed that interest had steadily grown since cancellation.[76] Says
Sarandos, “We can bring to the table really factual and data-based information.” By one estimate,
Netflix shows have an 80 percent success rate, versus 30 to 40 percent for traditional television network shows.[77]
While Netflix management has clearly said they won’t let data interfere with the creative
process or dictate terms to showrunners,[78] Netflix’s data-driven insights can offer value if artists
request a look. The firm’s VP of data science and analytics, Caitlin Smallwood, states the firm creates special analytics models at various times in the production process that are used by both
managers and creatives. Models used in earlier, pre-launch planning phases are harder to validate
since one can’t run real-time A/B-style experiments. There is a time lag in refinement, but results
of model-driven decision-making are pumped back through machine learning for refinement once
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Chapter 5
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147
data is available—improving accuracy over time. Decision-makers can play with predictive models
and see suggested influence of changes made during various stages of the production life cycle,
including the pitch, which includes mining the script for keywords and categorizing genre and plot
points (do we create the title, and if so, should we license it or own it outright?); development and
production (could a plot tweak or casting change possibly influence popularity, and is that justifiable?); pre-launch (how should we market this title to various groups, and how much should
we spend on promotion?); and launch (where does the title end up in individual personalization?).[79] Some decision-makers may be skeptical of machine-derived insights (i.e., can I really trust
this thing?), but Netflix puts visual decision-making tools in the hands of content executives and
creatives that allow them to manipulate input variables and see the influence on results. Smallwood claims this has not only helped managers and artists tweak variables, but also spurred new
ideas that had not previously come up.[80] Data-driven decision-making isn’t perfect, but it’s a lot
more reliable than the gut instinct of studio heads that still drives many media industry deals.
Netflix Research—Analytics
In this recruiting video, members of the Netflix Analytics Team discuss their role at the firm and
their approach to empowering decision-making.
View in the online reader
disintermediation
Disintermediation: Data, Digital Distribution, and Conflicted StakeHolders
When Comcast bought NBCUniversal, the largest cable television provider in the United
States consolidated content and distribution in a single firm. This move can be described as both
vertical integration (when an organization owns more than one layer of its value chain) and
disintermediation (removing an organization from a firm’s distribution channel).[81] You can also
consider Netflix’s move into the content creation business a form of vertical integration as it
moves backward in the value chain.[82] Disintermediation in the video industry offers two potentially big benefits. First, studios don’t need to share revenue with third parties; they can keep all
the money generated through new windows. Also critically important, if a studio goes directly to
consumers, then studios get to collect and keep a potentially valuable data asset. If another firm
sits between a supplier and its customers, the supplier loses out on a key resource for competitive advantage. For more on the value of the data asset in maintaining and strengthening
customer relationships, refer to Chapter 17.
Netflix and Comcast have had a contentious relationship, with the cable giant accusing Netflix of
free-riding on cable infrastructure and Netflix labeling Comcast net neutrality as public enemy
number one. But with Netflix available from so many television-connected alternatives (“smart”
TV apps, video games, devices such as Apple TV, Chromecast, and Fire TV), Comcast risked
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Removing an organization
from a firm’s distribution
channel. Disintermediation
collapses the path
between supplier and
customer.
channel conflict
Exists when a firm’s
potential partners see that
firm as a threat. This threat
could come because it
offers competing products
or services via alternative
channels or because the
firm works closely with
especially threatening
competitors.
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losing its slot as the first screen customers brought up when hunting for video entertainment.
When Comcast isn't front-and-center, it knows less about the choices customers are making
and it misses out on an opportunity for customer engagement (advertising, offering up its own
content, etc). Netflix is now integrated into Comcast's Xfinity X1 search platform, including voice
search. Comcast will even sell Netflix and take a finder’s fee (although apparently no other
revenue is swapped from the agreement). Dish Network and other providers have a similar relationship with Netflix. The desire to be the “one screen to find them all” (and gather data) has led
Apple and Amazon to end their feud and bring Amazon Video to Apple TV, and Amazon has also
mimicked Comcast and Apple by integrating premium cable content and selling subscriptions to
cable channel streaming from within the Prime Video interface.[83]
As studios have shifted to offer streaming products, this has also created conflicts with previous
partners. Cinemas are being squeezed as studios shrink the window between first-run theatrical
release and premium pay-per-view purchase.[84] When Warner announced they would release
its 2021 first-run titles simultaneously in theaters and to its streaming customers, cinema chain
operators screamed channel conflict with a supplier that’s now competing directly with their
ticket sales. Directors and artists have long evaluated success in terms of box-office ticket sales,
and many have publicly chided Warner for betraying expectations.[85] Those who sign on to work
with Netflix know their titles will (with few exceptions) never appear in theaters, but the new disintermediators have to balance streaming customer demands with partner discontent.
Streaming Changes Viewing Habits and Frees
Creative Constraints
binge-watching
Viewing several episodes
of a program in a single
sitting.
Conventional, schedule-driven television viewing is being replaced by the new “WWW”—the ability
to view what you want, when you want it, on whatever screen is available.[86] As apps replace channels and content is available at all times across all screens, the streaming experience is liberating
both consumers and content creators from constraints of channel-driven “linear TV.” Consider the
phenomenon of binge-watching, or viewing several episodes of a program in a single sitting. As
Sarandos puts it, “In the world of weekly serialized television you get fifty minutes of joy watching
a show and then 10,000 minutes of waiting for the next one.”[87] Over that time, users can lose track
of characters and complex plot lines, and they may be distracted, miss an episode, and stop viewing
altogether. With streaming, users are likely to watch multiple episodes at once, and this has become
a “new normal”, with over 62 percent of Americans claiming they regularly binge-watch programming.
For producers, writers, and directors, the creative side feels less constrained, too. Netflix execs
state, “If you give people a more creative format, then they can tell their stories better.”[88] With
streaming, there’s no need to plan cliffhangers at the end of a program or even write for the
standard time lengths, like the twenty-two-minute standard for commercial sitcom television. The
revived Arrested Development has one episode that’s just fifteen minutes long. Binge-watching also
works well for programming with dense and complicated storytelling, such as the Netflix-backed
sci-fi series The Three Body Problem. A blog post from Netflix underscores the appeal of working
for the streaming service rather than a traditional network: “Because we are not allocating scarce
prime-time slots like linear TV does, a show that is taking a long time to find its audience is one we
can keep nurturing. This allows us to prudently commit to a whole season, rather than just a pilot
episode.”[89] The kind of artistic creativity offered by streaming makes Netflix, as stated by the Hollywood Reporter, “one of the most attractive buyers of original programming in town.”[90] Netflix has
also built large movie studios in Georgia, Toronto, Hollywood, Brooklyn, and a massive new facility at the former army base in New Jersey.[91] The benefit of having studios close to the world’s two
largest hubs for entertainment industry professionals—LA and New York—help in luring the very
best creative talent with an incentive to not leave home for months at a time. In the words of one
industry observer, “If you are an A-list actor or a mid-career TV creator at your professional peak,
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
the idea that you can make your show and still kiss your kids at night—without moving them to
another state—means Netflix would become an all-powerful magnet.”[92]
I don’t think you’d be sitting here interviewing me if it weren’t for Netflix. In its third
season, ‘Breaking Bad’ got this amazing nitrous-oxide boost of energy and general public
awareness because of Netflix. Before binge-watching, someone who identified him- or
herself as a fan of a show probably only saw 25 percent of the episodes.
—Breaking Bad creator Vince Gilligan in a New York Magazine interview[93]
Maximizing Profits in Saturated Markets:
Password Crackdowns and Introducing a
Lower-Cost, Ad-Supported Service
For years Netflix had avoided offering an ad-supported tier. The company regularly claimed offering only ad-free options simplified consumer choice and frankly, with most customers willing to
pay for a Netflix subscription, a lower-priced tier with advertising seemed unnecessary. However,
with so many rival services offered and consumers increasingly willing to turn services off or on
to binge on the latest hit, Netflix has finally introduced a lower-priced, ad-supported tier (initially
$6.99 in the United States and Canada, £4.99 in the United Kingdom). Disney, Paramount, Hulu, and
even Amazon are all firms that also offer an ad-supported tier. The average American consumer is
only willing to sign up for a maximum of three streaming services at a total monthly cost of $50 or
less,[94] and perhaps the biggest advantage of a lower-cost ad tier is to reduce churn and keep a firm's
service in the mix when considering content options. A canceled Netflix subscriber can't choose to
get in on the buzz of the latest Wednesday or Stranger Things season, but one who has adopted an
ad-only tier keeps the firm on a customer's choice options. An ad-supported tier also helps give the
firm some cover when introducing price hikes. The most price-sensitive consumers can now “trade
down” to an ad tier without opting out. Binge-watch a show on the ad tier, and you'll get an adfree episode after you view three ad-supported episodes in a row. And if you get hooked on binging
again, Netflix will gladly upgrade you to a pay tier.
While at the moment many firms look at the ad tier as being “revenue neutral”[95] and churn
reducing, advertising could grow into a substantial business. Streaming firms have incredibly
detailed knowledge of viewing habits and can deliver targeted ads in new, more-engaging formats
in ways that traditional broadcasters can't. And advertisers who have lost engagement from traditional TV commercials as their customers have embraced streaming are eager to get back in front
of those eyeballs. Remember, streaming ads provide more interactive options than passive TV (e.g.,
click to receive more info, a sample, or a coupon via text or e-mail), and the firm offers at least five
different ad lengths from 10 to 60 seconds, plus the ability for an advertiser to sponsor an episode.
Netflix's deep tech skillset also allowed it to be the first firm to incorporate targeted ads into downloads as well as over-Internet streams.
The lower-cost ad tier was introduced at a critical time when Netflix was also implementing
a stricter password-sharing policy. Customers that felt frustrated by being shut out of binging on
a friend's password could now keep the binge going through the lower-cost ad option. The ad tier
seems to be working. Over 10 million new ad tier subscribers were added in just three months in
2023,[96] while Netflix continues to have the lowest churn of any of the major streaming services
and, despite price hikes and password enforcement, was the only streaming service that did not see
churn increase.[97]
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FIGURE 5.3 Streaming Service Churn
Netflix has the lowest churn among major streaming services.
Sources: FlatWorld; data from Antenna and A. Canal, “Americans Are Canceling More Streaming Plans as Prices Balloon,” Yahoo!
Finance, August 23, 2023.
Streaming and Scale Advantages
Despite rising costs, a difficult-to-control cost structure, and increased competition, there are still
key advantages that can be created by a leading player in the streaming business, and Netflix hopes
that its advantages will be large enough to sustain it as the dominant firm for years to come. First,
regarding scale, while studios may charge more for deals involving more users, the firm with more
users is likely to be able to pay far more than smaller rivals. A studio would rather accept a $200 million check from Netflix than three $50 million checks from smaller players. Start talking exclusives,
and advantage once again goes to the biggest player.
Size-based advantages come from both the scale of a firm’s streaming library (a longer tail) and
the scale of the customer base (the ability to pay for that tail). Once a firm gets big, there’s a virtuous
cycle where more titles attract more customers, and more customers increase a firm’s ability to bid
on and produce attractive content. A larger, more profitable firm also gains pricing advantages (the
Netflix basic service was once cheaper than most rivals, and the firm is in a better place to lower
costs if a price war begins). Netflix doesn’t just see growth as a way to advance profitability; it sees it
as a vital competitive asset to keep competitors at bay. Netflix can spend so much more than competitors because it has more subscribers than its rivals. And while Amazon’s content spend is nearly
the same as the Neflix bill,[98] Netflix is seeing roughly double the total viewership hours in most
major markets[99]—scale economies in action. Amazon’s rising content costs have pushed the firm
to begin a modest charge for ad-free Prime content—a service it previously offered free to Amazon
Prime subscribers.[100]
Netflix clearly understands scale advantage, having shared in a letter to shareholders: “We have
more content, more viewing, a broader brand proposition, are on-demand on all devices, and are
less expensive . . . [As] we grow, our content and service can continue to get better.”[101] Since new cus-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
tomers often gravitate toward the best-known firms and favor products recommended by friends,
dominant firms should also see customer acquisition costs, as a percentage of sales, go down.
FIGURE 5.4 Netflix Share versus Other Streaming Services
Time spent with Netflix is more than twice that spent with its closest streaming rival and is only surpassed by
YouTube.
Sources: FlatWorld; data from “Letter to Shareholders,” Netflix 2023 Third Quarter Earnings.
The March to Global Dominance
Global expansion plays a key role in the Netflix drive for scale-driven dominance. Netflix sees the
magic number for long-term profitable scale in any given market as 20 to 30 percent of households,[102] and getting there is a land grab. Global expansion is complicated by powerful regional
players such as Claro video, Sky NOW TV, LOVEFiLM (the Amazon-owned “Netflix of Europe”), and
HBO Nordics. Disney has global ambitions and globally recognized brands, but Disney+ is currently
available in only a handful of countries and may be rebranded, depending on region (e.g., Disney
Hotstar in India, Star rolling out in select Eastern European and East Asian markets). Netflix is the
biggest global player—by far.[103] By January 2016, Netflix announced that the service was available
in over 190 countries around the world.[104]
Expanding internationally is not without cost. Entering new markets involves heavy up-front
expenses, including ramping up marketing campaigns to create awareness and securing licenses for
both American and local content. Some Netflix content is already locked up by foreign rivals (e.g.,
France’s Canal Plus scored the rights to House of Cards). The firm’s drive to be the world’s streaming
platform is one reason it is now focused on full ownership of its original content. If Netflix owns
a show, it can premiere the title worldwide and make it available in all markets. Only 5 percent of
the world’s population are native English speakers, so the Netflix content team can dub a title in
upward of twenty-seven languages, and is investing heavily in regional content. The firm spends
roughly $2 billion annually on East Asian-focused titles, alone.[105] Spain-produced Money Heist was
the firm’s most successful non-English offering, and Netflix has invested over $300 million a year
just in Mexican Spanish-language production.[106] Netflix also has a deal to bundle the service with
India’s largest mobile provider, Jio, a company with 450 million users[107]—about 100 million more
than the number of U.S. citizens. Data assists in this decision-making, too. The firm’s VP of data
science has stated Netflix is using data models to identify whether it’s worth localizing content
(dubbing or creating subtitles) for a given market—especially if it is outside of the twenty-seven
languages that Netflix covers via its in-house localization teams. Data may also help managers
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decide whether a title created in one market might justify promotion and advertising campaigns to
bring it to a broader audience.[108]
FIGURE 5.5 Netflix Domestic/International Subscriber Mix
The profitable international subscribers segment makes up over two-thirds of all Netflix subscribers.
Sources: FlatWorld; data from “Netflix Long Term View,” Netflix Investor Relations Document, April 25, 2013.
Legal issues can present a country-by-country challenge as well. For example, French law
requires a wait time of three years after a film is released in theaters before it can be streamed
online (similar rules at Cannes led Netflix to pull out of the film festival).[109] France also requires
distributors to invest in local production[110] (a reason why Netflix has produced shows such as Marseille, billed as a French House of Cards).[111] French legal issues and taxation policies proved so
onerous that they prompted Netflix to move its European headquarters from France to Amsterdam.[112] Nations with heavy censorship laws (like China) will also pose challenges. But Netflix’s
global bet is paying off. Netflix’s international segment is solidly profitable, and international subscribers now make up more than half the firm’s user base.[113]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
Games Are Finally Included with Netflix. Does Anyone Care and Will
Games Ever Have an Impact?
Did you even know Netflix offered free games? You can be forgiven if not—less than one percent
of Netflix customers play the firm's free-to-play games on a regular basis.[114] Netflix first rolled
out free games as a perk to subscribers in November 2021. These titles required users to use
an iOS or Android smartphone. Accessing games was clunky, and since most viewing happens
on televisions rather than smartphones, the perk remained hidden to most users. But starting in
2023 Netflix began offering games on certain TVs and web browsers.
Games are going to be a tougher sell. Amazon and NVidia have been trying to break into cloud
gaming, while Google has shuttered its Stadia gaming effort. Watching video content is a passive
experience, while games require active participation. The user still needs to download a controller
app to use on their smartphone. Not all televisions will support Netflix TV-based gaming. And
deciding to play a game on unproven Netflix versus a familiar console, smartphone, or PC game
option is a much bigger sell. Still, Netflix has made some bold investments to show a commitment
to gaming. The firm has an in-house gaming staff of over 450 employees and has hired execs
from EA and from Microsoft's hit Halo series. The firm has acquired and further built up its own
in-house gaming studio to crank out titles based on Netflix shows like Stranger Things, Wednesday, Black Mirror, Queens Gambit Chess, Too Hot to Handle, and Squid Game. And the firm has
partnered with third parties to deliver established titles such as Tomb Raider and Monument Valley.[115] Netflix maintains it's committed to a long-term strategy to get gaming right, where it will
“crawl, walk, then run.”[116] This steady focus and improvement over time as technologies mature
and tastes change helped the company move from DVD to streaming. But the ability of the firm
to repeat this success in the highly different gaming space is not at all clear.
Netflix's Side Quest: A Deep Dive into Its Ambitious Plans to Become a
Gaming Giant
View in the online reader
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It’s a Multiscreen World: Getting to Netflix
Everywhere
Another major challenge in the migration from DVD to streaming involved getting content to
the television. While Apple had its own low-cost television add-on and Amazon had partnered
with TiVo, Netflix was still streaming only on PCs. An internal team at Netflix developed a prototype set-top box that Hastings himself supported offering. But most customers aren’t enthusiastic
about purchasing yet another box for their set top, the consumer electronics business is brutally
competitive, and selling hardware would introduce an entirely new set of inventory, engineering,
marketing, distribution, and competitive complexities.
APIs
An API (application
programming interface) is
a set of programming
hooks, or guidelines,
published by firms that tell
other programs how to get
a service to perform a task
such as send or receive
data. For example,
Amazon provides
application programming
interfaces (APIs) to let
developers write their own
applications and websites
that can send the firm
orders.
Netflix eventually decided to think beyond one hardware alternative and instead recruit others to provide a wealth of choice. The firm developed a software platform and a rich set of privately
controlled APIs and makes this available to manufacturers seeking to include Netflix access in
their devices. It was an especially smart move given the explosion in content watching that occurs
on screens that are not televisions, and Netflix tools made it easier to build apps. Today, Netflix
streaming is available either as an app or baked directly into over 2,200 consumer electronics products, including televisions, DVD players, video game consoles, phones, and tablets.[117] And that
internally developed Netflix set-top box? The group was spun out to form Roku, an independent
firm that launched its own low-cost Netflix streamer, and which today is a publicly traded firm with
the largest share among television streaming devices.[118]
By working with consumer electronics firms, offering Netflix streaming as a feature or an app,
Netflix has ended up with more television access than either Amazon or Apple, despite the fact that
both of these firms got their streaming content to the television first. Today, Netflix access is considered a must-have component for any Internet-connected media device. Partnerships have
helped create distribution breadth, giving Hastings an enviable base through which to grow the
video-streaming business.
While you can get Netflix from your TV, game system, phone, DVD player, or streaming-specific
hardware like Chromecast, Fire TV, or Roku, cable providers had been reluctant to bake Netflix
access into their set-top boxes. However, as Netflix grew larger than any single cable channel, cable
providers gave in. Comcast now includes Netflix (and other streaming services) in its set-top box
search. The reason for this is largely driven by data. Any Netflix searches that happen outside the
set-top box are unknown to cable firms, and those firms would like to gain at least some sense of
how popular Netflix is compared to their offerings and which Netflix titles consumers are searching for. Providers would also like to put their own offerings side-by-side with Netflix. A television
search service without Netflix has a lower chance of being the first and last place customers will go
when they seek to be entertained.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
So What’s It Take to Run This Thing?
It might surprise many to hear that the bulk of the Netflix computing infrastructure runs on Amazon’s servers. But using Amazon Web Services (AWS—refer to Chapter 8 for more details) has
enabled Netflix to grow its services by millions of customers without adding any data center
capacity since 2008. Lots of firms offer cloud services, and Microsoft may have seemed a more
logical partner than Amazon. Hastings was a Microsoft board member at the time Netflix was
shopping for cloud providers, and Microsoft was seen as less of a competitor than Amazon. But
Netflix engineers determined that Amazon was the “biggest and baddest” cloud house around,
with unmatched expertise in providing computing scale and power (Netflix does keep some infrastructure in Google’s cloud, largely as a fallback). Netflix doesn’t see owning its own data centers
as a way to create a substantial, defensible advantage.[119] Instead, it lets Amazon handle the
hardware while the Netflix engineering staff of over 700 focuses on creating the second-to-none
software needed by the video-streaming giant.
Netflix is the biggest AWS customer, drawing on “many tens of thousands” of servers at a
time.[120] This barrage of bits collectively represents three trillion events per day, including streaming 250 million hours of TV shows and movies each day,[121] recording user actions for use in
personalization, calculating collaborative filtering recommendations for each Netflix user, video
encoding, digital rights management, and additional number crunching. The Netflix chief cloud
architect has boasted, “We’re using Amazon more efficiently than the retail arm of Amazon is. . .
. We’re pretty sure about that.”[122]
Netflix also made the decision to eschew the monolithic architecture used by most firms, where
a single, large computer program handles the firm's business needs. Instead it uses a microservices architecture, a system over 700 smaller programs that control their own resources. Each
microservice publishes an API so that other programs known exactly what they can ask a service
to do and what they can expect to get from it. As an example of how these might work together,
a microservice for collaborative filtering might make an API call to the microservice that records a
user's viewing history and use the results returned to predict the best content to recommend.
The microservice that configures a user's scroll screen might then request these recommendations from the collaborative filtering microservice and use this to arrange and display titles and
images for videos a user is most likely to be interested in.[123] Breaking up its software into so
many little chunks is a challenge. One Netflix engineer estimates that it takes up about 25 percent
of the firm's engineering effort.[124] But the siloed nature of what each bit of code can and can't
do makes its systems more reliable and it less likely that a change in one piece of code will cause
a crash in another. While firms with more monolithic architectures will coordinate the release of
software updates (say weekly or bi-weekly), Netflix performs thousands of production-release
software updates each day—yes, thousands[125]—allowing the firm to constantly tweak its systems with efficiency, reliability, and predictive strength.
Netflix’s storage appetite is voracious. The master copies of all the shows and movies that the
firm streams, plus all the additional data cataloged and used for personalization and machine
learning, collectively amount to upward of 12 petabytes (PB) of data per day routed through an
Amazon S3 data warehouse that itself contains 100 PB of highly compressed chunks of Amazon cloud storage.[126] Each time a studio uploads a file to Netflix, the firm leverages the Amazon
cloud to rapidly configure more than 100 specially sized copies (for example, large HD files for
big screens and files that are much smaller for streaming to phones over a 3G network). Netflix
also uses so-called complexity-based encoding, which shrinks files based on the type of content being streamed. This technique keeps all the high-definition bits needed for a fast-paced
movie action sequence (think an Avengers fight scene) but strips out excess data from simpler
titles like color-uniform children’s cartoons (like the uniform character colors in My Little Pony).
Technology used to compress and decompress multimedia is known as a codec
codec, and Netflix has
worked with other firms to establish royalty-free codec standards, most recently AV1, which can
save bit transmission by 20 to 50 percent without a noticeable degradation in video quality.[127]
The benefits? Streaming quality gets a boost and less bandwidth is used, potentially speeding up
connections while saving money for Netflix and its data-plan-limited customers, especially important for Netflix customers in developing markets.[128]
While Amazon handles the bulk of the code that “runs” Netflix, and AWS also stores the vast
library of Netflix-encoded video files, the video that is actually streamed to you comes from one
of thousands of Netflix-built, red, pizza box–sized servers scattered throughout the world and
placed side-by-side with the networking equipment of leading telecom firms. When a user
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
155
codec
Technology used in media
compression. Codec
stands for coder-decoder
(or think
compression-decompression).
A given codec standard
will make files smaller for
storage and streaming by
doing things like removing
adjacent identical colors
and replacing this with
math to draw the image
without storing the
redundant bits. A codec
might also remove sounds
that are canceled by other
noises in a recording, or
delete sounds that can't
be heard by the human
ear. The process of
compressing files is known
as encoding, and
decompressing files is
called decoding.
colocation facility
Sometimes called “colos,”
or carrier hotels; provides
a place where the gear
from multiple firms can
come together and where
the peering of Internet
traffic can take place.
Equipment connecting in
colos could be high-speed
lines from ISPs, telecom
lines from large private
data centers, or even
servers hosted in a colo to
be closer to high-speed
Internet connections.
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Information Systems
presses play, their Netflix app might instantly test as many as ten nearby streaming locations
before deciding which one will provide the fastest, most reliable streaming experience.[129] A
nightly analysis predicts which titles are going to be most popular at a given location and
places the most high-demand content (say, the new installment of a recently released popular
television series) in flash storage, which is more expensive but faster than conventional hard drives.[130] There are firms that Netflix could hire to distribute its content at caching locations close to
users—this is the business of so-called content delivery network (CDNs) companies like Akamai,
CDNetworks, and Limelight. But Netflix has such a high volume of traffic that scattering its own
special-purpose servers around the globe helps keep a fast film flow while holding costs limbolow.[131] This worldwide server network is called Open Connect, and Netflix has actually open
sourced the hardware design (it’s built using commodity parts), as well as most of the software
that makes it work. Want to see a look at their global map that places cached Netflix content
at Internet service providers and colocation facilities worldwide? Visit “How Netflix Works with
ISPs Around the Globe to Deliver a Great Viewing Experience” on the Netflix Technical Blog.[132]
Pro Tip for the Technical
Technical: Nearly every firm we’re studying has a public blog
posted by its technical staff. Many also post technical talks on YouTube and
slides on SlideShare. In years past, firms would hold their technology cards
close to their vests, but in a tough job market, many firms see that publicizing their work, especially things that rely on additional assets like a massive
data store or scale, won’t compromise competitiveness, and may help lure
intrigued talent. Search online. You’ll see sites offering inside tech insights
at Airbnb, Amazon, Facebook, Google, Netflix, Rent the Runway (their blog is
called “The Dress Code”), Uber, and more. You may find additional blogs for
data science and analytics, and if you’re interviewing with a firm, spending time
in their blogs is a basic expectation among interviewers.
Also surprising—Netflix gives away a huge portion of software that its team has developed.
Source code relating to competitive advantage in the media streaming industry remains under
wraps (think collaborative filtering systems and the firm’s decision-driving analytics), but Netflix
has been especially generous in sharing tools that it feels will also be useful to a wide variety
of cloud users across industries. Among the firm’s better-known open source contributions is
code that tests the robustness of systems running in the cloud. Examples include the playfully
named “chaos monkey,” which simulates random system failure, and the “security monkey,”
which probes for hacking holes (there’s a whole “simian army” of these primate-named tools).[133]
Intel and eBay are among the multibillion-dollar firms leveraging Netflix software, and the Obama
campaign directly attributed Netflix code with helping shift computing needs to the West Coast
when East Coast operations were taken out by Hurricane Sandy.[134] With more geeks worldwide
using this open source code, there’s a greater chance the tools will be improved upon by others,
which would eventually benefit Netflix as well.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
How Netflix Serves 167M Users
While the stats in the video is a bit out of date, it offers a solid overview of the technology
used to run Netflix in the AWS cloud.
View in the online reader
A Crowded Field of Rivals and Other
Challenges
While Netflix has a strong global lead, picking a winner in the race for delivering bits to a multiscreen world is still very much an uncertain bet. The market remains highly fragmented, with a
long list of potential competitors and a varied list of models for reaching consumers. Netflix is often
mentioned among the talking heads on business networks as part of the FAANG stocks, but all of
the other firms in that group—Facebook (Meta), Amazon, Apple, and Google (Alphabet)—which at
times have collectively represented nearly 30 percent of Nasdaq’s market value,[135] have very different business models, with streaming being a secondary line of business in every firm not starting
with an “N.” While new startups seem unlikely to threaten Netflix given the firm’s scale advantages,
the more significant threat is from firms that have thriving businesses in other areas. These firms
can come to market with cash that lets them credibly crash the Netflix party, and they may be more
willing to endure short- and midterm losses as they try to steal share from the leader.
Amazon is integrating its own streaming service into televisions and consumer devices,
putting Amazon instant video into its successful Kindle Fire products, adding a TV-based gaming
offering, and selling a sub-$40 Fire TV streaming stick, and it’s aggressively expanding its content
library. Amazon is spending over $16.6 billion a year on content that is largely an add-on to another
subscription service that some argue customers would sign up for even without the video content.[136] Amazon already broke the record for the most expensive series (previously held by Netflix’s The Crown), when the firm dropped a quarter of a billion just for the rights to a series based
in the Lord of the Rings universe,[137] and reportedly spent a billion more to film the series.[138] Apple
remains committed to high quality, rather than high-volume content, but the most profitable firm
in the Fortune 500 still spent $6 billion on original content leading up to the launch of Apple TV+.[139]
Apple has made content freely available for many months after launch, and the service may be a
subscription winner without content volume by leveraging bundling as Apple customers choose
an Apple One subscription that includes the unique Apple Fitness+ offering, news, games, Spotifyrivaling music, and Apple TV+ shows. Comcast has Peacock, combining popular titles like The Office
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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with a slate of originals, and the service is bundled with Comcast cable offerings.[140] ViacomCBS has
rebranded the CBS “All Access” streaming service as Paramount Plus, bringing together CBS-owned
shows, Star Trek originals, movie franchises including Transformers and Mission Impossible, Nickelodeon kids’ programming, plus MTV and VH1.[141] And the rebranded Max has everything HBO
has, plus the Warner movie catalog, exclusive content beyond HBO, and a rich television library
headlined by exclusive streaming of Warner-owned Friends. The most significant of the new players is Disney+, which leveraged the world’s most recognized content pool, franchise-based originals
(multiple Star Wars– and Marvel-based series considered much-watch events for loyal fans), and
direct-to-service movies to hit its four-year goal of 90 million subscribers in its first year after
launch.[142] One key question is—just how many services are users willing to subscribe to? YouTube
Premium tried a run at original content but is now out of the scripted content business, after
attempts like Cobra Kai (now on Netflix) failed to attract a following. Disney’s multibillion-dollar
losses have prompted it to begin combining Hulu and Disney+ offerings.[143] Netflix doesn’t have to
win, but the rise of popular rivals increases the chances that Netflix won’t be the first stop when
someone is looking to be entertained, and each time the firm loses these “moments of truth” potentially degrades the value of the service in the eyes of subscribers. Another concern: Binge-watching
and the rise of must-see content across an increasing number of services might prompt users to
subscribe and unsubscribe to services based on series they plan to consume in a given month. Done
with the last season of Stranger Things and ready to start the new season of The Mandalorian?
Cash-conscious customers might churn out of Netflix in favor of Disney+. And if they do, will Netflix keep producing enough compelling content to win back the service flippers?[144]
Among the threats Netflix faces are unhappy consumer Internet service providers. Netflix
streaming uses up more broadband traffic than any other service, including YouTube.[145] Netflix
pays its own ISPs (internet service providers) to connect the firm to the Internet and to support
its heavy volume of outbound traffic, but cable companies that control the so-called last mile to
your home (usually with little to no competition) want Netflix to pay more, and U.S. net neutrality
rules have fluctuated—at times favoring content providers and others favoring ISPs—depending
on which party controlled the White House.
Still, with Netflix the clear leader in global subscribers and viewing hours, and with the firm
finally controlling debt, generating positive cash flow, and constantly posting profits, a post–Reed
Hastings Netflix has so far had others beat. And as of fall 2023, Netflix was the only firm actually
turning a profit in streaming.[146] Disney, once hailed as a Netflix killer, has acknowledged it has
overspent on streaming content, has lost billions since the launch of Disney+, and lags way behind
Netflix in all key metrics. Amazon is moving from free Prime Video for Prime subscribers to advertising or additional subscriber fees, Max suffered subscriber loss with a widely panned rebranding
that dropped “HBO” from the service title, and it’s quite likely many smaller services won’t survive
in their current form. Given the firm’s continued success in a brutally competitive market, it seems
that Netflix will continue be the lead protagonist in the streaming saga for years to come. As the
networks say, stay tuned!
Key Takeaways
• Netflix has begun offering an ad-supported tier at a lower subscription rate. This has allowed
the firm to minimize churn (lower than any of its rivals) while raising prices on core offerings.
Advertising also allows the possibility for new revenue streams and additional, highly targeted
high-value ad offerings to advertisers who have felt left behind as viewers have moved from
linear television viewing to streaming.
• Netflix has a larger customer base and more viewing hours than rivals, is available in more
countries worldwide, can stream to customers who don’t have a cable TV subscription, has
a massive data asset on customer preferences to use for recommendations and in evaluating investments, and has titles dubbed in over twenty-seven languages with a growing,
successful library of international content.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
• Streaming allows the firm to collect and leverage data for improved customer targeting, to
help build models on content value, to promote original content in highly targeted ways, to
allow for “binge-watching,” and to potentially serve the needs of original content producers,
who are freed from distribution timing and content length constraints that conventional networks place on their work.
• Data science drives decision-making at every stage of the production lifecycle, including
pitch, development and production, pre-launch, and launch. Insights that don’t have realtime data (e.g., script analysis for pre-launch) can be harder to validate (you can’t run A/B
experiments on a one-off decision); however, model results are used as new inputs to further
refine models over time.
• Managers are skeptical about “black box” results from machine learning, but Netflix has
offered graphical decision-making tools to managers and creatives that let them manipulate
inputs to see the results of changing decision-making variables. Netflix claims this results
not only in better decisions, but also in brand-new insights that would have otherwise not
occurred to model users.
• Netflix makes its streaming technology available to hardware firms, and it has facilitated the
development of streaming apps for a host of consumer electronics devices. As a result, Netflix streaming is available on more devices than any competing rival service.
• International expansion offers the prospect of significant growth but is complicated by many
issues, including increased licensing costs and disparate legal requirements.
• Data is also helping Netflix make decisions on whether a title should be localized (dubbed or
subtitled) for a given market, or whether it should be aggressively promoted in certain global
markets. The use of data at a firm with the unique scale of Netflix should create a firm with
far more efficient assets than a company focused on just a handful of English-speaking markets.
• Netflix has begun experimenting with a games business, but this is a very different competitive model, with different user expectations and technology needs than streaming. It remains
to be seen if this is a worthwhile investment for the firm, or if it will turn out to be a distraction.
• Many of Netflix’s rivals have invested heavily in sports content—a big motivator for subscription choice. Netflix has yet to make large moves into sports content licensing.
• The massive networks streaming delivery and operations infrastructure are largely hosted on
the Amazon Web Services (AWS) cloud computing platform. This platform is available to all
competitors, and it represents a cost that is potentially more variable as the firm grows than
would be the case with a series of fixed-cost data centers. However, Netflix frees itself from
dealing with many operational issues by contracting with Amazon, and it frees the firm to
focus on proprietary systems that are a source of competitive advantage for the firm.
• Netflix is a significant creator of and contributor to open source software offerings—especially those that can be used to support cloud computing. This can also help the firm identify
potential staffers and partners.
Questions and Exercises
1. What is disintermediation, and what incentives do studios have to try to disintermediate Netflix? What problems has disintermediation created for some studios, and why?
2. Why did Netflix offer an ad-supported tier? How has this worked out for the firm? What benefits does this offer the firm, advertisers, and consumers?
3. How does Netflix build its data asset? In what ways does it leverage this data asset? Why is
the data asset stronger under streaming than it was for the DVD-by-mail business?
4. If you are a Netflix subscriber, take a good look at the first page of default Netflix personalization recommendations. Is this accurate? If you are not a subscriber, find a friend,
classmate, or relative that is and ask them for help. If you’re comfortable, compare your recommendations to those of a friend or classmate who also has Netflix. How similar are your
recommendations? Are the same titles recommended to you in different ways (say with different images, genre classifications, or pre-roll video)? What kind of technology is at work
5. behind the scenes to pull off this degree of personalization?
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Why is streaming potentially better for consumers and for content producers? Why is Netflix
a potentially attractive partner for content creators (producers, writers, directors)?
6. Can scale be achieved in the streaming industry? If so, how? Or if not, why not?
7. What challenges does Netflix face as it expands internationally? What advantages does international expansion offer?
8. Why didn’t Netflix vertically integrate and offer its own set-top box for content distribution?
9. How does Netflix rank in terms of customer satisfaction today? What factors do you suppose
are behind this ranking?
10. Investigate Netflix’s stock price. One of the measures of whether a stock is “expensive” or
not is the price-earnings (P/E) ratio (share price divided by earnings per share). P/Es vary
widely, but historic P/Es are about fifteen. What is the current P/E of Netflix? Do you think
the stock is fairly valued based on prospects for future growth, earnings, and market dominance? Why or why not? How does the P/E of Netflix compare with that of other well-known
firms, both in and out of the technology sector? Arrive in class with examples you are ready
to discuss.
11. What are the risks and benefits to Netflix in using Amazon’s cloud computing platform?
12. Have you played games on Netflix lately? If not, try this out (either on your own account or
find a friend who has Netflix). What did you like or dislike about the service? What will Netflix
need to do to make this a success?
13. Watch this presentation below by Caitlin Smallwood, VP of data science and analytics at
Netflix, especially beginning at around the eleven-minute mark. What are the stages where
Netflix uses data for decision-making? At which stages in the process is data-driven decision-making faster and more accurate, and why? What sources of data are mined? How
does Netflix convince skeptical managers that the “black box” of machine learning can be
helpful? What additional data insights have managers gained from using Netflix tools?
How Netflix Data Science Powers Global Entertainment
Caitlin Smallwood, Netflix VP of data science and analytics, presents on How Netflix Data Science
Powers Global Entertainment.
View in the online reader
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 5
Netflix: Sustaining Leadership in an Epic Shift from Atoms to Bits
Endnotes
1. "Countries where Netflix is available," Netflix, https://help.netflix.com/en/
node/14164—accessed Nov. 7, 2023
2. C. King, "Netflix: Revolutionizing The Entertainment Industry," Ticker TV,
Nov. 5, 2023
3. Evans, B. "The New Gatekeepers], ben-evens.com, Feb. 2023
4. K. Lesswig, "YouTube passes Netflix as top video source for teens,"
CNBC, Oct. 11, 2023.
5. J. Bowman, "The Netflix Buy Case Just Got Even Stronger," The Motley
Fool, Nov. 5, 2023.
6. E. Lee, "Netflix Will No Longer Borrow, Ending Its Run of Debt," The New
York Times, Jan. 19, 2021.
7. N. Nguyen, "Netflix Wants To Change The Way You Chill," Buzzfeed News,
Dec. 13, 2018.
8. T. Telford, "In the streaming wars, it feels like everybody’s losing," The
Washington Post, July 21, 2023.
9. N. Sperling, "Netflix Prepares to Send Its Final Red Envelope," The New
York Times, Sept. 23, 2023.
10. Z. Mejia, "Why being company founders helped Bill Gates, Jeff Bezos and
Reed Hastings succeed as CEOs," CNBC, Aug. 2. 2017.
11. M. Hamblen, “Amazon: E-Books Now Outsell Print Books,” Computerworld, May 19, 2011.
12. R. Valentine, "GameStop has closed 462 stores so far this year, 783 in last
two years," GameIndustry.Biz, Dec. 8, 2020.
13. K. Kezar, “GameStop closing all stores in Puerto Rico; opening new U.S.
distribution center,” Dallas Business Journal, Jan. 14, 2016; and L. Rittenhouse, “GameStop is Plunging,” TheStreet.com, May 26, 2017.
14. S. Steinberg, “Is Qwikster the Worst Product Launch Since New Coke?”
Rolling Stone, October 3, 2011; and A. Goth and J. Yarrow, “15 Disastrous
Product Launches That Were Quickly Killed,” Business Insider, October
11, 2011.
15. D. Pogue, “Why Netflix Raised Prices,” The New York Times, July 14,
2011; E. Mack, “‘Dear Netflix: Price Hike Ignites Social-Media Fire,” CNET,
July 12, 2011; and G. Sandoval, “Don’t Call Netflix’s CEO ‘Greed’ Hastings Just Yet,” CNET, July 25, 2011.
16. R. Hastings, "An Explanation and Some Reflections," The Netflix Blog,
September 11, 2011.
17. J. Kastrenakes, “Netflix Raises Streaming Price by $1 for New Subscribers,” The Verge, May 9, 2014.
18. A. Brandenberger and B. Nalebuff, Co-opetition: A Revolution Mindset
That Combines Competition and Cooperation: The Game Theory Strategy
That’s Changing the Game of Business (New York: Broadway Business,
1997); and S. Johnson, “The Frenemy Business Relationship,” Fast Company, November 25, 2008.
19. D. Roth, “Netflix Everywhere: Sorry Cable, You’re History,” Wired, September 21, 2009.
20. A. Lutz, “These 6 Corporations Control 90% of the Media in America,”
Business Insider, June 14, 2012.
21. W. Donckles, “Netflix and Starz Can’t Strike a Deal over Streaming,” Technorati, September 7, 2011.
22. T. Cheredar, “Netflix’s Hastings Says Amazon Prime Losses $1B Annually,” VentureBeat, November 17, 2012.
23. J. Stoll, "Content spend of Netflix 2012-2024," Statista, Sept. 25, 2023.
24. P. Kafka, “HBO’s Amazon Haul Is Big—But Not as Big as You Might
Think,” Re/code, April 23, 2014.
25. Netflix Investor Relations Document, “Netflix Long Term View,” April 25,
2013.
26. J. Leeds, "Universal in Dispute With Apple Over iTunes," The New York
Times, July 2, 2007.
27. M. Rich and B. Stone, "E-Book Price Increase May Stir Readers’ Passions," The New York Times, Feb. 10, 2010.
28. V. Luckerson, “Star Wars Is Coming to Netflix,” Time, February 13, 2014.
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33. J. Adalian, "Netflix Will Be Fine Without Friends or The Office," Vulture, July
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34. M. Gault, "Netflix Doubles Down on Anime," Vice, March 13, 2019.
35. The Feed, "What advantages does Netflix have over rival services? What
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38. A. Sherman, "How Netflix sent the biggest media companies into a frenzy,
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40. N.C. Palermino, “Netflix is Finally Planning to Own Its Original Shows, Not
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42. D. Etherington, "Netflix reports first net subscriber loss in the US, misses
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43. T. Spangler, "How Netflix Accounts for Huge Deals With TV Creators Like
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44. N. Jarvey and D. Canfield, "Report: After a Bumpy Netflix Run, Ryan Murphy Is Departing for Disney," Variety, June 20, 2023.
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CNet, Aug. 7, 2017.
46. A. Keshner, "Netflix CEO Reed Hastings may have missed the real reason
why U.S. subscriber numbers plunged," MarketWatch, July 22, 2019.
47. The Feed, "55 percent of Netflix US comprises Netflix Originals; currently
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48. T. Umstead, "Emmys 2018: HBO, Netflix's Emmys Battle Ends In Tie,"
Multichannel News, Sept. 18, 2018.
49. D. Libby, “Netflix Has Won Its First Feature Oscar,” CinemaBlend, March,
2018; R. Hastings and D. Wells, “Letter to Shareholders,” Netflix, Jan. 19,
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50. R. Jones, "Netflix's Garbage Programming Blamed for Stock Falling Off a
Cliff," Gizmodo, July 16, 2018.
51. C. Smith, "Why Netflix canceled ‘The OA,’ and why your favorite streaming
show might be on death row too," BGR, Aug. 5, 2019.
52. A. Rodriguez, "Netflix didn’t make many of the “originals” that made it
famous. That’s changing," Quartz, Feb. 26, 2019.
53. A. Watercutter, "The Anticlimactic Death of the Streaming Wars," Wired,
Aug. 25, 2023.
54. R. Jones, "The biggest sports battle isn’t on the field. It’s at the negotiating
table as Big Tech fights Big Media for dominance in streaming major
league athletics," Fortune, Oct. 8, 2023
55. J. Young, "Apple may bid for MLB weekday package, marking its first foray
into live sports," CNBC, Jan. 12, 2022.
56. T. Mickle, et al. "Why Big Tech Is Making a Big Play for Live Sports," The
New York Times, July 24, 2022.
57. L. Rose, “Netflix’s Ted Sarandos Reveals His ‘Phase 2’ for Hollywood,”
Hollywood Reporter, May 22, 2013.
58. V. Lanaria, "Netflix Has More Than 76,000 Micro-Genres Of Movies And
TV Shows: Here’s How To Unlock Them,"
," Tech Times, Jan. 9, 2016.
59. N. Nguyen, "Netflix Wants To Change The Way You Chill," Buzzfeed News,
Dec. 13, 2018.
60. N. MacAlone, "Why Netflix thinks its personalized recommendation engine
is worth $1 billion per year," Insider, June 14, 2016.
61. S. Delouya, "Disney plans to slash costs by another $2 billion as it aims to
make streaming profitable," CNN, Nov. 8, 2023.
62. D. Grandoni, “Netflix’s New ‘My List’ Feature Knows You Better Than You
Know Yourself (Because Algorithms),” Huffington Post, August 21, 2013.
63. J. Blattmann, "Netflix: Binging on the Algorithm," UX Planet, Aug. 2, 2019.
64. N. Nguyen, "Netflix Wants To Change The Way You Chill," Buzzfeed News,
Dec. 13, 2018.
65. N. Nguyen, "Netflix Wants To Change The Way You Chill," Buzzfeed
News, Dec. 13, 2018.
66. N. Ngyuen, "Netflix Wants To Change The Way You Chill," BuzzFeed
News, Dec. 13, 2018.
67. “Netflix Long Term View,” Netflix Investor Relations Document, April 25,
2013.
68. M. Chafkin, "What If the Next Big Social Media App Is ... Nothing?"
Bloomberg, July 13, 2023
69. N. McAlone, “Why Netflix Thinks Its Personalized Recommendation Engine
Is Worth $1 Billion Per Year,” Business Insider, June 14, 2016.
70. Netflix Investor Relations Document, “Netflix Long Term View,” April 25,
2013.
71. P. Simons, "Big Data Lessons from Netflix," Wired, March, 2014.
72. @slb79. "It’s weird to try to pass a film off as having a Black principal cast
(by creating a movie poster-like as featuring just the Black people) when
it’s a white movie. A very white movie. I’d already watched this one last
month so I knew it was a marketing trick. Still." X, Oct. 18, 2018, 12:26AM.
https://twitter.com/slb79/status/1052777866784645120.
73. Caitlin Smallwood, VP Data Science and Analytics at Netflix, "How Netflix
Data Science Powers Global Entertainment", DataBricks Presentation,
April 25, 2019. https://youtu.be/0CGQvdAbNcc
74. Netflix Investor Relations Document, “Netflix Long Term View,” April 25,
2013.
75. A. Vance, “Netflix, Reed Hastings Survive Missteps to Join Silicon Valley’s
Elite,” Bloomberg Businessweek, May 9, 2013.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
161
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Information Systems
76. L. Rose, “Netflix’s Ted Sarandos Reveals His ‘Phase 2’ for Hollywood,”
Hollywood Reporter, May 22, 2013.
77. Orcan Intelligence, “How Netflix Uses Big Data,” The Startup via Medium,
Jan. 12, 2018.
78. S. Lacy, “Reed Hastings Won’t Use Data to Mess with TV Plots, and That’s
Why Netflix Will Win,” PandoDaily, May 29, 2014.
79. Caitlin Smallwood, VP Data Science and Analytics at Netflix, "How Netflix
Data Science Powers Global Entertainment", DataBricks Presentation,
April 25, 2019. https://youtu.be/0CGQvdAbNcc
80. Caitlin Smallwood, VP Data Science and Analytics at Netflix, "How Netflix
Data Science Powers Global Entertainment", DataBricks Presentation,
April 25, 2019. https://youtu.be/0CGQvdAbNcc
81. J. Gallaugher, “E-Commerce and the Undulating Distribution Channel,”
Communications of the ACM 45, no. 7 (July 2002).
82. P. Cohan, “How Netflix Reinvented Itself,” Forbes, April 23, 2013.
83. T. Spangler, “Comcast to Offer Unlimited Netflix Free for One Week to All
X1 Customers,” Variety, March 20, 2017.
84. G. Szalai and E. Vessing, "Comcast CEO Says Breaking Theatrical Window Was "Right Move," The Hollywood Reporter, January 28, 2021.
85. E. Lee, "Who’s Behind the Fight Between Warner Bros. and Hollywood?
It’s AT&T," The New York Times, Dec. 8, 2020.
86. S. Rosenbaum, “Why I Was Wrong about Netflix’s House of Cards,”
Forbes, February 18, 2013.
87. M. Sweney, “Netflix’s Ted Sarandos: ‘We See an Incredible Appetite for
TV,’” Guardian, May 26, 2013.
88. A. Vance, “Netflix, Reed Hastings Survive Missteps to Join Silicon Valley’s
Elite,” Bloomberg Businessweek, May 9, 2013.
89. “Netflix Long Term View,” Netflix Investor Relations Document, April 25,
2013.
90. L. Rose, “Netflix’s Ted Sarandos Reveals His ‘Phase 2’ for Hollywood,”
Hollywood Reporter, May 22, 2013.
91. D. Radel, "Netflix buys former Army base to create $850 million production
studio in New Jersey," USA Today, Dec. 22, 2022.
92. C. O’Falt, “Netflix’s Big New Pitch to Lure Top Talent: You Don’t Have to
Leave Home,” IndieWire, April 11, 2017.
93. L. Brown, “In Conversation: Vince Gilligan on the End of Breaking Bad,”
Vulture, May 12, 2013.
94. B. Katz, "Are Original Streaming TV Shows Really As Good As Licensed
Ones?" Observer, July 3, 2020.
95. . Bowman, "The Netflix Buy Case Just Got Even Stronger," The Motley
Fool, Nov. 5, 2023.
96. D. Richardson, "Netflix ad-supported tier has 15 million subscribers, triple
the previous count," CNBC, Nov. 1, 2023.
97. A. Canal, "Americans are canceling more streaming plans as prices balloon," Yahoo! Finance, Aug. 23, 2023.
98. L. Forristal, "Amazon ramped up content spending to $16.6B in 2022,
including $7B on originals," TechCrunch, Feb. 3, 2023.
99. K. Nissen, "Netflix, Amazon Prime Video and Disney+ dominate global
SVOD viewing hours," S&P Global, Aug. 31, 2023.
100. A. Chapman, "Amazon Prime Video will soon come with ads, or a $2.99
monthly charge to dodge them," ABC News, Sept. 22, 2023.
101. R. Hastings and D. Wells, “Letter to Shareholders,” Netflix Investor Relations Document, January 23, 2013.
102. R. Hastings and D. Wells, “Letter to Shareholders,” Netflix Investor Relations Document, January 23, 2013.
103. R. Empson, “With Overseas Subscribers Topping 6M, Netflix Puts a Hold
on Expanding into International Markets,” TechCrunch, January 23, 2013.
104. E. Minaya and A. Sharma, “Netflix Expands to 190 Countries,” The Wall
Street Journal, Jan. 6, 2016.
105. P. Frater, "Netflix to Increase Asia Content Spending by 15% in 2023
as Revenue Growth Accelerates in the Region—Study," Variety, March 5,
2023.
106. A. Fuente, "Netflix Touts New Pics from Mexico’s Rodrigo Prieto, Fernando
Frias, Ernesto Contreras (EXCLUSIVE)," Variety, Aug. 11, 2022.
107. M. Singh, "Netflix inks deal with Ambani’s Jio to expand India presence,"
TechCrunch, Aug. 18, 2023.
108. Caitlin Smallwood, VP Data Science and Analytics at Netflix, "How Netflix
Data Science Powers Global Entertainment", DataBricks Presentation,
April 25, 2019. https://youtu.be/0CGQvdAbNcc
109. T. Spangler, “Netflix Booms in Q1 to Hit 125 Million Streaming Subscribers, Again Beating Forecasts,” Variety, April 16, 2018.
110. “Netflix Faces Hurdles, Country by Country, in Bid to Expand in Europe,”
The New York Times, May 21, 2014.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
111. J. Greenberg, “Netflix Stock Hits Record as Wall St. Sees World Domination,” Wired, May 19, 2015.
112. I. Lapowski, “Netflix Faces Tough Battles in its Push to Rule Europe,”
Wired, Aug. 12, 2014.
113. T. Spangler, “Netflix Booms in Q1 to Hit 125 Million Streaming Subscribers, Again Beating Forecasts,” Variety, April 16, 2018.
114. D. Richardson, "Netflix aims to ‘crawl, walk, run’ when it comes to video
games. It’s still crawling," CNBC, Oct. 23, 2023.
115. J. Peters, "Netflix finally streams video games, too," The Verge, Aug. 14,
2023.
116. D. Richardson, "Netflix aims to ‘crawl, walk, run’ when it comes to video
games. It’s still crawling," CNBC, Oct. 23, 2023.
117. D. Hahn, "A Day in the Life of a Netflix Engineer," AWS re:Invent Conf., Las
Vegas, NV, Nov. 28, 2017.
118. T. Kim, “Buy Roku shares because it's the dominant leader in streaming
video players: KeyBanc,” CNBC, May 1, 2018.
119. B. Darrow, “Netflix: We Don’t Need No Stinkin’ Data Centers!” GigaOM,
March 28, 2012.
120. J. Brodkin, “Netflix finishes its massive migration to the Amazon cloud,”
ArsTechnica, Feb. 11, 2016.
121. D. Hahn, "A Day in the Life of a Netflix Engineer," AWS re:Invent Conf., Las
Vegas, NV, Nov. 28, 2017
122. A. Vance, “Netflix, Reed Hastings Survive Missteps to Join Silicon Valley’s
Elite,” Bloomberg Businessweek, May 9, 2013.
123. M. Nair, "How Netflix works: the (hugely simplified) complex stuff that happens every time you hit Play," Medium, Oct. 17, 2017
124. C. Limpalair, "How Netflix handles 36% of the U.S. bandwidth, and how
reddit handles 160M users," Scale Your Code, July 28, 2015.
125. D. Hahn, "A Day in the Life of a Netflix Engineer," AWS re:Invent Conf., Las
Vegas, NV, Nov. 28, 2017.
126. A. Woodie, “How Netflix Optimized Flink for Massive Scale on AWS,”
Datanami, April 30, 2018.
127. B. Munson, "Deeper Dive—Why Netflix running AV1 on Android is a big
deal," Fierce Video, Feb. 14, 2020.
128. J. Roettgers, “Inside Netflix’s Plan to Boost Streaming Quality and Unclog
the Internet (Exclusive),” Variety, Dec. 14, 2015.
129. D. Hahn, "A Day in the Life of a Netflix Engineer," AWS re:Invent Conf., Las
Vegas, NV, Nov. 28, 2017.
130. A. Vance, “Netflix, Reed Hastings Survive Missteps to Join Silicon Valley’s
Elite,” Bloomberg Businessweek, May 9, 2013.
131. M. Nair, "How Netflix works: the (hugely simplified) complex stuff that happens every time you hit Play," Medium, Oct. 17, 2017.
132. K. Florence, “How Netflix Works With ISPs Around the Globe to Deliver a
Great Viewing Experience,” The Netflix Blog, March 17, 2016.
133. Y. Izrailevsky and A. Tseitlin, “The Netflix Simian Army,” The Netflix Blog,
July 19, 2011.
134. A. Vance, “Netflix, Reed Hastings Survive Missteps to Join Silicon Valley’s
Elite,” Bloomberg Businessweek, May 9, 2013.
135. B. Kochkodin, “FAANG Stocks Swallow Up More of the Nasdaq Than Ever
Before,” Bloomberg, May 4, 2018.
136. T. Spangler, "Amazon Content Spending Soared 28% in 2022, to $16.6
Billion," Variety, Feb. 3, 2023. Note this spend does include spending for
Amazon Music.
137. E. Price, “Amazon's 'Lord of the Rings' Will Be the Most Expensive Television Show Ever Made,” Fortune, April 6, 2018.
138. J. Weaver, "Rings of Power could cost $1B. What's making TV so expensive?" CBC News, Sept. 4, 2022.
139. G. Bridge, "Entertainment Companies Spend $121 Billion on Original Content in 2019," Variety, Jan. 6, 2020.
140. N. Jarvey, “YouTube Orders Ad-Supported Originals From Will Smith,
Priyanka Chopra,” The Hollywood Reporter, May 3, 2018.
141. B. Bajgrowicz, "What is Paramount+? Everything to know about the new
streaming service," Mashable, Feb. 8, 2021.
142. T. Spangler, "Disney Plus to Increase Prices in Early 2021, Eyes Up to
260M Subscribers by End of 2024," Variety, Dec. 10, 2020.
143. D. Chmielewski, "Disney begins integrating Hulu into Disney+ streaming
service," Reuters, Dec. 6, 2023.
144. W. North, "Netflix: Carrying Capacity, Competition, And Cash Burn," Seeking Alpha, Aug. 16, 2019.
145. CNBC Staff, "Netflix is responsible for 15% of global internet traffic consumption," CNBC, March 2, 2023.
146. L. Rizzo and S. Whitten, "Hollywood is paying a steep price for never really
figuring out the streaming model," CNBC, Sept 17, 2023.
CHAPTER 6
Moore’s Law and More: Fast/
Cheap Computing and What
This Means for the Manager
6.1 Introduction
Learning Objectives
1. Define Moore’s Law and understand the approximate rate of advancement for other technologies, including magnetic storage (disc drives) and telecommunications (fiber-optic transmission).
2. Understand how the price elasticity associated with faster and cheaper technologies opens
new markets, creates new opportunities for firms and society, and can catalyze industry disruption.
3. Recognize and define various terms for measuring data capacity.
4. Consider the managerial implications of faster and cheaper computing on areas such as
strategic planning, inventory, and accounting.
Faster and cheaper—those two words have driven the computer industry for decades, and the
rest of the economy has been along for the ride. Today it’s tough to imagine a single industry not
impacted by more powerful, less expensive computing. Faster and cheaper puts mobile phones in
the hands of peasant farmers, puts a free video game in your Happy Meal, translates your spoken
restaurant order into a waiter’s native language, and drives the drug discovery that may very well
extend your life.
Moore’s Law and How Managers Interpret It
This phenomenon of “faster, cheaper” computing is often referred to as Moore’s Law, after the late
Gordon Moore, Intel co-founder. Moore didn’t show up one day, stance wide, hands on hips, and
declare “behold my law,” but he did write a four-page article for Electronics magazine, a give-away
trade paper targeted at radio hobbyists,[1] in which he described how regular advances in the process
of chip making enabled more powerful chips to be manufactured at cheaper prices.[2]
Moore’s Law isn’t really a law—not like the Newtonian Laws, Boyle’s Law, or others you may
have learned about in physics class. Some get confused by this because Moore’s Law has “Law” in
the name and is often presented in graphs that have neatly and consistently marched forward dur-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Moore’s Law
Chip performance per
dollar doubles every
eighteen months.
164
Information Systems
ing the early decades of computing. Moore’s Law is really just an observation that led to a prediction
of future events based on past outcomes. In hindsight, Moore seemed like a fortune teller, writing
that the rate of fast/cheap computing will “lead to such wonders as home computers,” “terminals
connected to a central computer, automatic controls for automobiles, and personal portable communications equipment”—a bold prediction made at a time when computers were room-sized and
cost nearly $200,000 in today’s dollars.[3]
It was Gordon Moore’s friend, legendary chip entrepreneur and Caltech professor Carver Mead,
who later coined the “Moore’s Law” moniker. That name sounded snappy, plus as one of the
founders of Intel, Moore had enough geek cred for the name to stick. Moore’s original paper offered
language only a chip designer would love, so we’ll rely on the more popular definition: chip performance per dollar doubles every eighteen months (Moore’s original paper stated transistors per
chip, a proxy for power, would double every two years, but many managerial sources will refer to
the eighteen-month figure, so we’ll stick with that since managers are often blindsided by unanticipated rate and disruptive capabilities of technology change).
microprocessor
The part of the computer
that executes the
instructions of a computer
program.
Moore’s Law applies to chips—broadly speaking, to processors as well as to chip-based storage.
Think of this as the stuff in your consumer electronics that’s made out of silicon.[4] The
microprocessor is the brain of a computing device. It’s the part of the computer that executes the
instructions of a computer program, allowing it to run a Web browser, word processor, video game,
or virus. Using our definition, for processors, Moore’s Law means that next-generation chips should
be twice as fast in about eighteen months, but cost the same as today’s models (or from another
perspective, in about a year and a half, chips that are the same speed as today’s models should be
available for half the price). Intel has speculated that Moore’s Law may slow to a doubling every 2.5
years.[5] Even at that rate, we’re still talking about ridiculously accelerating power and plummeting
costs, a concept vital for managers to be aware of. But in some ways, computing performance today
is advancing even faster than Moore predicted.
AI and Machine Learning—Faster than Moore’s Law
It’s important to recognize that while we have some evidence that Moore’s Law is slowing,
we’re also seeing many key areas of computing improve on cost/performance curves at rates far
greater than Moore’s Law. One area is in how quickly and cost effectively we can use technology to develop artificial intelligence (AI) and machine learning models. According to Stanford’s AI
Index Report, the cost to train an image recognition model to the industry-standard 93 percent
top-five accuracy on Imagenet, the benchmark dataset of 14 million labeled images in 2017, was
$1,000 (cost of a decent laptop). Just three years later in 2020 it was $7.43 (less than a sandwich). In 2018 the time it took to train the model was 6.2 minutes. Two years later it was only 47
seconds.[6]
Another study by researchers at the University of Aberdeen (United Kingdom) has shown that
the performance of AI systems has been doubling every six months or so for the past decade.[7]
That’s much faster than Moore’s Law’s performance increases. AI is especially tricky to track
since all of the “brains,” the processors, exist in the cloud. And for costs to stay low, the number
of users and the revenue from those users needs to increase significantly, as well. But so far, it
looks like the cloud and its artificial intelligence goodness will keep the spirit of Moore’s Law, fast/
cheap computing—advancing at the same rates that keep us “well fertilized” in a hothouse of
innovation. So if you ever hear old timers or doomsday articles forecasting “The End of Moore’s
Law” (we’ve been seeing this since before the turn of the century), keep in mind the spirit of
Moore’s prediction—fast/cheap computing advances, and with it, the manager’s corollary—that
along with it are exploitable promise and devastating peril. Stay alert, continually monitor advancing technologies and their implication, and hopefully you’ll land on the “promise” side of the
potential outcomes.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
The End of Moore’s Law, but Not Really an End to Fast/
Cheap Computing
Moore’s Law in terms of the density of transistors that we can pack onto chips is slowing down.
As we get nearer the measured-in-molecules paths that guide electrons inside of chips, at some
point we’ll hit the unyielding hand of Mother Nature where we simply can’t build components that
are any smaller. When Apple introduced the A17Pro chip in its iPhone Pro line, the firm also stated
that the 3nm process had electrical pathways that were only ten atoms wide.[8] Pundits have been
predicting the end of Moore’s Law by dates we’ve since zoomed past.[9] And while the ability to pack
logic into tiny spaces will meet its end at some point, squeezing chips into smaller spaces isn’t the
only way to make computing faster and cheaper, and it’s important not to miss the forest because
of the trees, or in this case, miss advancing performance improvement because we’re overly focused
on transistor density.
When today’s managers talk about Moore’s Law, they’re not really referring to the transistor
density and cost that Gordon Moore laid out in his 1965 paper; they’re referring more broadly to the
relentless advance in fast/cheap computing. And this continues because of improved chip architectures, among other factors. Two ways we're seeing fast/cheap computing advance beyond predicted
limits are improved chip design and offloading computing to the cloud. When Apple decided to
abandon industry-standard Intel chips and instead go with its own custom silicon brains (dubbed
M1, M2, etc.), it achieved dramatically faster computing with an additional bonus—the chips sipped
less power. Apple did this not through some sort of Moore's Law–defying manufacturing breakthrough, but by designing chips better than Intel. Intel processors, while improved over time, are
based on a standard that was introduced four decades earlier (this Intel standard is sometimes
called the x86 standard). By abandoning old designs, Apple was free to make loads of improvements.
To see how Apple might boost performance, imagine that instructions on an Intel chip require
traveling a microscopic distance of X, but Apple's design moves components around so those mostused instructions are now half the distance. All of a sudden Apple enables that instruction to
happen at twice the speed! Also, Apple doesn't use Intel's old instructions; it has designed a new
set of logic best suited for the current needs of its PCs, laptops, tablets, and mobile devices. Apple's
chips are planned from the ground up around needs for more power-efficient computing, while
Intel's original x86 designs were created before there were any laptop computers. Apple also designs
special components—either on the chips inside the same package or added as custom “supporting processors” placed adjacent to the microprocessor—that are optimized for things that include
graphics, machine learning, and security.
They are in fact some of the fastest laptop processors we’ve ever seen, and they deliver
this performance with incredibly low power consumption. The M1 chip is so impressive,
it’s been referred to as “black magic.”
—C. Schodt, Engadget, February 3, 2021 (on Apple’s First Generation of Intel-replacing M1
Chips)[10]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
165
166
Information Systems
emulator
A software-based
interpreter that allows
programs designed to run
on one standard to be run
on devices using a
different standard. Using
an emulator will be slower
than executing code on
the native, new standard,
since this translation adds
a step to accomplish
before instructions can be
run.
compiler
One downside of radical redesign is that older software is not compatible with the instruction
sets of these new chips. Code written for an old standard can act as a switching cost that limits
moving to a new standard, so managers need to think through how switching costs can be lowered
to the point where the new tech's benefits outweigh the burden of switching. Apple made making
the switch easy by adding an emulator to each new Mac with the new chip. The emulator acts as a
sort of real-time software interpreter so that programs created for Intel Macs could run on the new
Apple silicon. Apple also provided software developers with new tools to take the programs they've
written and translate them into native instructions optimized for new chips. The program that
turns the code that a software developer writes into the instruction sets that a processor understands is called a compiler. Once software developers compile their code for the new chip, an
emulator isn't needed, so their programs run even faster.
FIGURE 6.1 Emulators and Compilers Make It Easier to Switch to a New Standard
A program that turns the
code that a software
developer writes into the
instruction sets that a
processor understands.
Source: John Gallaugher
latency
In computing, latency
means delay. Low-latency
tasks have less delay, so
they are faster.
Another way faster computing is made available is by off-loading the most complex tasks to the
cloud. For example, while Apple does quite a bit of AI for things like voice recognition on the device
itself, most of the implementation of Siri is “in the cloud” since a smartphone doesn't have enough
processing power or storage to efficiently handle natural language interpretation or translation
between dozens of languages.[11] Offloading complex calculations is like giving a processor thousands of additional “brains” to complete complex tasks. The downside of using the cloud for
processing is that this involves an Internet round trip, taking what was said onto a phone and sending it to the cloud, then pumping the answer back to the user. The delay in performing a task is
referred to as latency, and while 5G and home broadband are fast, it's nowhere near as fast as the
electronics darting ultra-small distances on the silicon in a phone or a laptop. The task for the managers and engineers designing products is to identify which new tasks can be enabled by offloading
them to the cloud, or if anything is happening on the device that can be better handled by the cloud.
A game manufacturer may keep low-latency tasks like collision detection on the device, but offload
the rendering of complex backgrounds to the cloud to be streamed to the device when needed.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
167
Some Definitions
Here are some more definitions related to chip technology that every manager (and computer user)
should know: random-access memory (RAM). The RAM inside your personal computer is volatile
memory, meaning that when the power goes out, all is lost that wasn’t saved to nonvolatile
memory (i.e., a more permanent storage media like a hard disc or flash memory). Think of RAM as
temporary storage that provides fast access for executing computer programs and files. When you
“load” or “launch” a program, it usually moves from your hard drive or flash storage to those RAM
chips, where it can be more quickly executed by the processor.
Cameras, MP3 players, USB drives, mobile phones, and even many lightweight notebook computers often use flash memory (sometimes called flash RAM or flash storage). It’s not as fast as the
RAM used in most traditional PCs, but holds data even when the power is off (so flash memory is
also nonvolatile memory). You can think of flash memory as the chip-based equivalent of a hard
disk. The big advantage? Chips are solid state electronics (meaning no moving parts), so they’re
less likely to fail, and they draw less power. In fact, a chip-based hard drive is often called an SSD,
for solid state drive. A hard disk is a magnetic storage that spins inside its housing, so it’s not solid
state, and that makes it less reliable and more likely to fail. Data can also be accessed faster from
flash memory than from conventional hard disks. For RAM chips and flash memory, Moore’s Law
means that in eighteen months you’ll pay the same price as today for twice as much storage.
FIGURE 6.2 Advancing Rates of Technology (Silicon, Storage, Telecom)
random-access
memory (RAM)
The fast, chip-based
volatile storage in a
computing device.
volatile memory
Storage (such as RAM
chips) that is wiped clean
when power is cut off from
a device.
nonvolatile memory
Storage that retains data
even when powered down
(such as flash memory,
hard disc, or DVD
storage).
flash memory
Nonvolatile, chip-based
storage, often used in
mobile phones, cameras,
and MP3 players.
Sometimes called flash
RAM, flash memory is
slower than conventional
RAM but holds its charge
even when the power goes
out.
solid state
electronics
Semiconductor-based
devices. Solid state
components often suffer
fewer failures and require
less energy than
mechanical counterparts
because they have no
moving parts. RAM, flash
memory, and
microprocessors are solid
state devices. Hard drives
are not.
SSD
Solid state drive—a
chip-based, nonvolatile
storage device.
Source: Adapted from Shareholder Presentation by Jeff Bezos, Amazon.com, 2006.
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semiconductor
A substance such as
silicon dioxide used inside
most computer chips that
is capable of enabling as
well as inhibiting the flow
of electricity. From a
managerial perspective,
when someone refers to
semiconductors, they are
talking about computer
chips, and the
semiconductor industry is
the chip business.
optical fiber line
A high-speed glass or
plastic-lined networking
cable used in
telecommunications.
Computer chips are sometimes also referred to as semiconductors (a substance such as silicon
dioxide used inside most computer chips that is capable of enabling as well as inhibiting the flow
of electricity). So if someone refers to the semiconductor industry, they’re talking about the chip
business. The term semiconductors is often used to refer to microprocessors and/or chips used for
data storage.
Strictly speaking, Moore’s Law does not apply to other non-silicon-based technology components. But other computing components are also seeing their price-versus-performance curves
skyrocket exponentially.[12] Data storage doubles every twelve months. Networking speeds also consistently get faster over time. With just an equipment change at the ends of the cables, the amount
of data that can be sent over an optical fiber line has, at times, doubled every nine months.[13] These
numbers should be taken as rough approximations and shouldn’t be expected to be strictly precise
over time. And predictability precision is tough to achieve. For example, some think the advance in
hard-drive storage (sometimes referred to as Kryder’s Law)[14] is decelerating,[15] while others think it
is poised to accelerate.[16] Others have claimed that network speeds are now doubling about every
twenty-one months.[17] And as mentioned earlier, some say the rate of microprocessor performance
relative to Moore’s predictions is either slowing or accelerating, depending on if you’re looking at
the same chip architectures or comparing them against newer designs. Despite any fluctuation, it’s
clear that the price/performance curve for many technologies has consistently and dramatically
increased, offering astonishing improvement over time. While the pace of change may vary, these
graphs (or recalibrated versions, if you like) are useful to managers as rough guides regarding future
computing price/performance trends. As so many examples in this text have illustrated, managers
without an eye on technology’s advancing capabilities are often leading candidates for professional
roadkill.
Bits and Bytes
Computers express data as bits that are either one or zero. Eight bits form a byte (think of a byte
as being a single character you can type from a keyboard). A kilobyte refers to roughly a thousand bytes, or a thousand characters, megabyte = 1 million, gigabyte = 1 billion, terabyte = 1
trillion, petabyte = 1 quadrillion, and exabyte = 1 quintillion bytes.
While storage is most often listed in bytes, telecommunication capacity (bandwidth) is often listed
in bits per second (bps). The same prefixes apply (Kbps = kilobits, or one thousand bits, per
second, Mbps = megabits per second, Gbps = gigabits per second, and Tbps = terabits per second).
These are managerial definitions, but technically, a kilobyte is 210 or 1,024 bytes, mega = 220,
giga = 230, tera = 240, peta = 250, and exa = 260. To get a sense for how much data we’re talking
about, refer to Table 6.1.[18]
TABLE 6.1 Bytes Defined
Managerial
Definition
Exact Amount
To Put It in
Perspective
1 Byte
One keyboard
character
8 bits
1 letter or number = 1
byte
1 Kilobyte (KB)
One thousand bytes
210 bytes
1 typewritten page = 2
KB
1 digital book (Kindle)
= approx. 500–800
KB
1 Megabyte (MB)
One million bytes
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
220 bytes
1 digital photo (7
megapixels) = 1.3 MB
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
Managerial
Definition
Exact Amount
To Put It in
Perspective
1 MP3 song = approx.
3 MB
1 CD = approx. 700
MB
1 Gigabyte (GB)
One billion bytes
230 bytes
1 DVD movie =
approx. 4.7 GB
1 Blu-ray movie =
approx. 25 GB
1 Terabyte (TB)
One trillion bytes
240 bytes
Printed collection of
the Library of
Congress = 20 TB
1 Petabyte (PB)
One quadrillion bytes
250 bytes
Master copies of the
shows and movies
available on Netflix
(2013) = 3.14 PB[19]
1 Exabyte (EB)
One quintillion bytes
260 bytes
Estimated total data
stored in the NSA’s
Bluffdale, Utah, data
center (includes data
from hard drives,
overseas data
centers, cell phones,
and more) = 12 EB[20]
1 Zettabyte (ZB)
One sextillion bytes
270 bytes
Estimated total annual
amount of data
transmitted over the
Internet by 2018 = 1.6
ZB[21]
1 Yottabyte
One septillion bytes
280 bytes
It’s predicted that
by the 2030s, about
one yottabyte of data
each year will be
generated—if a
yottabyte were etched
onto DVDs and
stacked vertically, it
would reach all the
way to Mars.[22]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
Get Out Your Crystal Ball
price elasticity
The rate at which the
demand for a product or
service fluctuates with
price change. Goods and
services that are highly
price elastic (e.g., most
consumer electronics) see
demand spike as prices
drop, whereas goods and
services that are less price
elastic are less responsive
to price change (think
heart surgery).
One of the most important managerial implications of fast/cheap computing is that it makes possible the once impossible. As a manager, your job will be about predicting the future. First, consider
how the economics of Moore’s Law opens new markets. When technology gets cheap, price
elasticity kicks in. Tech products are highly price elastic, meaning consumers buy more products
as they become cheaper.[23] And it’s not just that existing customers load up on more tech; entire
new markets open up as firms find new uses for these new chips, technology becomes embedded in
new products, and fast/cheap technology enables new services.
Just look at the evolving waves of computing we’ve seen over the previous decades.[24] In the
first wave in the 1960s, computing was limited to large, room-sized mainframe computers that only
governments and big corporations could afford. Moore’s Law kicked in during the 1970s for the second wave, and minicomputers were a hit. These were refrigerator-sized computers that were as
speedy as or speedier than the prior generation of mainframes, yet were affordable for work groups,
factories, and smaller organizations. The 1980s brought wave three in the form of PCs, and by the
end of the decade nearly every white-collar worker in America had a fast and cheap computer on
their desk. In the 1990s, wave four came in the form of Internet computing; cheap servers and networks made it possible to scatter data around the world at the same time that fast/cheap PCs
became mouse-click easy and PC ownership became common in the industrialized world. The following decade saw mobile phones drive what can be considered computing wave five. Cheap
processors enabled billions of low-end phones, while the march of Moore’s Law is driving the smartphone revolution. Some say the sixth wave of computing is the era of pervasive computing, where
technology is fast and so inexpensive that it is becoming ubiquitously woven into products in ways
few imagined years before. And we may be in a seventh wave, where AI via computing in the cloud,
enabled by fast telecom, pushes remote brains out to all sorts of “edge” devices. This is bringing
about an era of artificial intelligence everywhere, from vision systems in driverless cars to brilliant
chatbots in your home speakers, wearable pins, and spatial computing headsets to AI companions
that monitor your app use and coding, providing instruction along the way to systems as complex
as stock exchanges. Silicon is everywhere! It’s in the throwaway radio frequency identification
(RFID) tags that track your luggage at the airport. It’s the brains inside robot vacuum cleaners, it’s
built into Legos, it’s in the locks that allow hotel rooms to be opened with a guest’s phone, it’s in the
iBeacon sensors that help you find a hot dog and beer at the ballpark and the AirTag that helps you
find your misplaced backpack, it’s in smart speakers like Echo and HomePod, and it’s empowering
wearables from smartwatches to smart glasses to in-shirt sensors.
For managers, it's important to realize that these digital shifts often constitute disruptive technologies that rearrange entire industries. None of the firms that dominated mini-computing made
the transition to other waves of computing. For example, no manufacturers of film cameras successfully lead in digital photography (which most consumers now enjoy as an “add-on” in their
mobile phones). The leader in cloud computing is Amazon—a firm that started as an e-commerce
retailer. Its still early, but as AI and machine learning grow in prominence, many wonder if OpenAI
(behind ChatGPT) will be a new giant, or if AI/ML is simply a feature of the already existing wave
of cloud computing. No one said predicting the future would be easy, but too bad, manager. That’s
now part of your job!
Tech: A Helping Hand to Escape Poverty
Another tech product containing a microprocessor—the cell phone—is transforming the lives of
some of the world’s most desperate poor. Today, some 93 percent of the world’s population
has access to a mobile broadband network.[25] That’s more of the world’s population than has
access to clean water or electricity,[26] and Moore’s Law, paving the way for sub-$20, Internetaccessing phones, has fueled this availability.[27] According to economist Jeffrey Sachs, “The cell
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Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
phone is the single most transformative technology for world economic development.”[28] A London Business School study found that for every ten mobile phones per 100 people, a country’s
GDP bumps up 0.5 percent.[29] Think about the farmer who can verify prices and locate buyers before harvesting and transporting perishable crops to market; the laborer who was mostly
unemployed but with a mobile is now reachable by those who have day-to-day work; the mother
who can find out if a doctor is in and has medicine before taking off work to make the costly trek
to a remote clinic with her sick child; or the immigrant laborer serving as a housekeeper who was
“more or less an indentured servant until she got a cell phone,” enabling new customers to call
and book her services.[30]
Three-quarters of the world’s poorest people get their food and income by farming.[31] But isolated
rural farmers often suffer from an information asymmetry problem (refer to Chapter 3). These
farmers traditionally don’t have accurate information on what their products are worth, and in
many communities, less scrupulous traders will buy up harvests at far-below-market rates, only to
resell them and pocket the profits for themselves. Coming to the aid of farmers, the Ghanaian firm
Esoko delivers market prices, farming tips, and other key information via text message on even
the lowest-end cell phones. In one study, farmers using Esoko reported a 10 percent increase
in revenue.[32] Other reports have revenue increases as high as 25 to 40 percent.[33] Esoko offers
a breadth of services that range from helping farmers find transport services to helping buyers
locate farmers with goods to sell.
Somaliland Economy—Cashless Economy Transforms Lives
The breakaway region of Somaliland is not recognized by any nation, and its self-printed
currency has plummeted in value, resulting in customers’ needing wheelbarrows of cash to
make purchases. Mobile money such as Zaad and e-Dahab eliminate the need for paper
cash, increase security, and simplify money transfer.
View in the online reader
When phones can be used as currency for purchases or payments, who needs Visa or, for
that matter, a wallet and cash? The M-Pesa mobile banking service, run by Kenya’s Safaricom,
allows customers to transfer cash using text messages. Nearly every Kenyan adult has an MPesa account, paying for everything from groceries to cab rides to school tuition. The service can
also allow family members to quickly and securely send cash across the country. Only four million
Kenyans have traditional bank accounts, but twenty-five million use M-Pesa, and upward of 44
percent of Kenya’s GDP flows through the service.[34] M-Pesa is spreading to other regions and
is even used in Afghanistan, while similar schemes are offered by firms such as WIZZIT in South
Africa, Zaad and e-Dahab in Somaliland, and GCash in the Philippines. The “mobile phone as
bank” may bring banking to a billion unserved customers in a few years.
One of the most agile surfers of new generations of computing waves is Apple, Inc.—a firm
with a product line that grew so broad, it dropped the word “Computer” from its name. Apple’s keen
insight on where trends in computing power and performance are headed is captured in this statement by the firm’s co-founder, the late Steve Jobs: “There’s an old Wayne Gretzky quote that I love.
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Information Systems
‘I skate to where the puck is going to be, not where it has been.’ And we’ve always tried to do that at
Apple.”[35] The curves above aren’t perfect, but they can point to where the puck is headed, helping
the savvy manager predict the future, plan for the impossible to become possible, and act as the
disruptor rather than the disrupted.
Apple’s breakout resurgence owes a great deal to the iPod. At launch, the original iPod sported
a 5 GB hard drive that Steve Jobs declared would “put 1,000 songs in your pocket.” Cost? $399. Less
than six years later, Apple’s highest-capacity iPod sold for fifty dollars less than the original, yet
held forty times the songs. By the iPod’s tenth birthday, Apple was giving away 5 GB of storage (for
music or other media) for free via its iCloud service. Apple’s high-end iPod models have morphed
into Internet browsing devices capable of showing maps, playing videos, and gulping down songs
from Starbucks’ Wi-Fi while waiting in line for a latte.
The original iPod has also become the jumping-off point for new business lines, including the
iPhone, Apple TV, Apple Watch, iPad, iTunes, the App Store, HomePod, and VisionPro. Surfing the
ever-evolving waves of computing has turned Apple into the most valuable company in the United
States and the most profitable firm on the planet.[36] Ride these waves to riches, but miss the power
and promise of Moore’s Law, and you risk getting swept away in its riptide. Apple’s rise occurred
while Sony, a firm once synonymous with portable music, sat on the sidelines unwilling to get on
the surfboard. Sony’s stock stagnated, barely moving in six years. The firm has laid off thousands of
workers while ceding leadership in digital music (and video) to Apple. We’ll see if Apple can replicate
this success with the firm’s VisionPro platform. While the first generation of the product sports a
hefty U.S. list price of around $3,500, recall that the first-generation iPhone was $700.
TABLE 6.2 Tech’s Price/Performance Trends In Action: Amazon Kindle and Apple Music
Storage
Amazon Kindle
Apple
First Generation
Fourth Generation
iPod
iCloud
250 MB
2 GB
5 GB
5 GB
November 2007
September 2011
October 2001
October 2011
$399
$79
$399
Free
Amazon’s Kindle also dramatically demonstrates Moore’s Law–fueled evolution. The first Kindle sold for nearly $400. Less than four years later, Amazon was selling an updated version for
one-fifth that price. Other factors influence price drops, such as being able to produce products
and their components at scale, but Moore’s Law and related price/performance trends are clearly
behind the price decreases we see across a wide variety of tech products and services.
While the change in hard drive prices isn’t directly part of Moore’s Law (hard drives are magnetic storage, not silicon chips), as noted earlier, the faster and cheaper phenomenon applies to
storage, too. Amazon provides another example of creating a once-impossible offering courtesy of
the trajectory of price/performance technology curves. The firm’s “Search Inside the Book” feature
required digitizing the images and text from thousands of books in Amazon’s catalog. Not only
did making books searchable before purchase help customers; titles supporting “Search Inside the
Book” enjoyed a 7 percent sales increase over nonsearchable books. Here’s where fast/cheap technology comes in. When the feature launched, the database to support this effort was twenty times
larger than any database used by any commercial firm just eight years earlier. For Amazon, the
impossible had not just become possible; it became good business.
Here’s another key implication for the curves shown earlier: If you are producing products subject to radically improving price/performance, then these products will rapidly fall in value over
time. That’s great when it makes your product cheaper and opens up new markets for your firm,
but it can be deadly if you overproduce and have excess inventory sitting on shelves for long periods of time. Dell claims its inventory depreciates as much as a single percentage point in value each
week.[37] That’s a big incentive to carry as little inventory as possible, and to unload it, fast!
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Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
IoT—the Internet of Things: Tech Is Everywhere!
FIGURE 6.3 Take Your Meds!
Want to build your own “smart” medicine cabinet? You can do so for less than $20 in parts
by following the tutorial and build videos at Gallaugher.com.
Source: Gallaugher.com: https://gallaugher.com/pi-cabinet/
Fast/cheap computing is showing up in all sorts of products. Digital thermostats are commonplace (Google even bought Nest, maker of smart home tech, for $3.2 billion when that firm was
only four years old—at the time Google’s second most costly acquisition, ever).[38] Smart billboards in Japan peer back at passersby to guess at their demographics and instantly change
advertising for on-the-spot targeting.[39] Dubai’s smart license plates contact paramedics when a
car crashes.[40] I teach a course in physical computing (refer to the Circuit Python Tutorials playlist
on YouTube) that uses the Raspberry Pi Pico W—a Wi-Fi device that can be programmed in
Python and can be used to build robots, art projects, and much more. The Pico starts at just $4,
with the Wi-Fi version costing $6—you’ve likely bought coffees that are more expensive. In one
exercise, I have my students replicate some of the functionality in the “smart pill bottle” mentioned
here, using less than $20 in parts.
Some refer to these new smart devices as the “Internet
Internet of Things (IoT)
(IoT),” where low-cost sensors, computing, and communication put embedded smarts in all sorts of mundane devices so
that these products can communicate with one another for data collection, analysis, and collective action.[41] We’ve already learned that buying a product from Zara that has an RFID tag
attached to it will trigger a message to restock shelves, ship more products from a warehouse,
and spin up factories for a new order. And there’s more to come. A driver can now speak to their
car to trigger a script that will open a smart garage door, turn on lights so one won’t return to a
creepy dark house, reset the thermostat for a person-friendly temperature, and even play relaxing
music from your smart speaker. Experimental smart tags in clothing communicate with washing
machines and dryers and warn the operator if settings could ruin a shirt. The Internet of Things
has also opened new marketplace battlefronts among tech giants, with Google’s IoT standards
competing with those used by Apple (HomeKit) and Amazon (via Alexa). We’ll cover competitive
issues in the creation of such platforms in Chapter 10, as well as key security implications of IoT
in Chapter 21.
FIGURE 6.4 The Raspberry Pi
The $6 Raspberry Pi Pico W is a Wi-Fi device that allows you to program IoT projects using
the Python programming language.
Source: John Gallaugher
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Internet of Things
(IoT)
A vision where low-cost
sensors, processors, and
communication are
embedded into a wide
array of products and our
environment, allowing a
vast network to collect
data, analyze input, and
automatically coordinate
collective action.
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Information Systems
Beyond consumer devices, IBM (you’ve seen those “Smarter Planet” ads) and General Electric
(GE) are among firms pushing to create technology and common languages to turn this vision
into a reality. Cities are using smart devices as constant monitors that share information on traffic,
available parking spaces, and water quality. GE is outfitting almost everything it builds—from
medical equipment to jet engines—with sensors and software so that these devices can share
data and coordinate automatically to drive efficiency.[42] GE thinks efficiency gains across multiple
sectors—transportation, health care, energy—could boost global GDP by as much as $10 trillion
to $15 trillion by 2030.[43] Research firm IDC estimates that the 35 billion IoT devices in use in
2021 will more than double to 75 billion by 2025, generating an astonishing 79.4 zettabytes of
data.[44]
Moore’s Law inside Your Medicine Cabinet . . . and Your Colon
Moore’s Law is coming to your medicine cabinet, and several efforts show the potential for lowcost computing to improve health care quality while lowering costs. GlowCap from Vitality, Inc.
(now part of NantHealth), and AdhereTech are just two firms offering a “smart” pill bottle. These
firms offer bottles that are programmed to know a patient’s dosage schedule, to trigger refills,
and to notify patients, caregivers, or pharmacies when a dosage is missed. Devices might flash,
chime, send a text, or prompt a phone call from someone on a person’s health care team.
Sometimes the reason for a missed dose is “I forgot,” while other times a patient might stop
taking a med due to side effects or a complex insurance reason. AdhereTech’s system will dispatch expert follow-up to help resolve issues so that patients stay on their meds. Incident data
is collected for analysis and used in improving care regimes. The AdhereTech system is also
free. The business case for that? The World Health Organization estimates drug adherence at
just 50 percent, but patients who used “smart” pill bottles reported medication adherence of 98
percent.[45] Analysts estimate that up to $300 billion in increased medical costs[46] and 125,000
annual deaths are due to patients’ missing their meds.[47]
America’s Problem with Getting Patients to Take Their Pills
This CNBC video has good information on the scale of the problem of getting Americans to
take their medication and on possible solutions.
View in the online reader
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
FIGURE 6.5 PillCamTM
Swallow the PillCamTM and the device’s twin cameras will relay live video of your insides,
helping diagnose gastrointestinal problems.
Source: ©2019 Medtronic. All rights reserved. Used with the permission of Medtronic.
And there might also be a chip inside the pills, too! While there is a lot of talk about “wearable”
technology, it’s now common for doctors to employ ingestible tech in their practices. Pills with
smart sensors are now being used for clinical monitoring, smart drug delivery, and endoscopy
diagnostics in fields as diverse as mental health treatment, oncology, and heart disease.[48] The
Medtronic PillCam™️ comes with two cameras that, once swallowed, can relay images of your
innards, and used to diagnose intestinal and colon problems. During the pandemic, patients
received Amazon deliveries of the PillCam so that doctors could perform remote telemedicine by
taking a video-tour of a patients intestines and diagnose issues without an office visit.[49]
Your textbook author has ingested a similar device, a Medtronic Bravo™️ Reflux Capsule. No
cameras in this one, but it does have sensors and communication smarts to monitor and report
on stomach acid. I wore a receiver device around my neck for a weekend, while the heartburn
sensor beamed messages through my body from its perch at the end of my esophagus (verdict—no ulcer, but a stomach hernia, ugh). It’s also likely that members of your class (or perhaps
you) have an implanted device called a CGM for Continuous Glucose Monitoring—a critical way
for patients with diabetes to manage their condition. As the CEO of one ingestible tech pioneer
states, you can now think of your body as “the ultimate game controller.”[50]
FIGURE 6.6 BravoTM Reflux Capsule
This tweet shows the lengths I’ll go to in capturing a teachable moment for you, dear
reader.
Source: ©2019 Medtronic. All rights reserved. Used with the permission of Medtronic.
While the strategic side of tech may be the most glamorous, Moore’s Law impacts mundane
management tasks, as well. From an accounting and budgeting perspective, as a manager you’ll
need to consider a number of questions: How long will your computing equipment remain useful?
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If you keep upgrading computing and software, what does this mean for your capital expense budget? Your training budget? Your ability to make well-reasoned predictions regarding tech’s direction
will be key to answering these questions.
Key Takeaways
• Moore’s Law applies to the semiconductor industry. The widely accepted managerial interpretation of Moore’s Law states that for the same money, roughly eighteen months from now
you should be able to purchase computer chips that are twice as fast or store twice as much
information. Or over that same time period, chips with the speed or storage of today’s chips
should cost half as much as they do now.
• It’s important to note that even though Moore’s Law in its purest interpretation—the density
of transistors on a chip—is slowing down, changes in computing architecture and chip
design are still significantly accelerating price and performance while lowering power consumption.
• Nonchip-based technology also advances rapidly. Disc drive storage doubles roughly every
twelve months, while equipment to speed transmissions over fiber-optic lines has doubled
every nine months. While these numbers are rough approximations, the price/performance
curve of these technologies continues to significantly advance.
• These trends influence inventory value, depreciation accounting, employee training, and
other managerial functions. They also help improve productivity and keep interest rates low.
• From a strategic perspective, these trends suggest that what is impossible from a cost or
performance perspective today may be possible in the future. Fast/cheap computing also
feeds a special kind of price elasticity where whole new markets are created. This fact provides an opportunity to those who recognize and can capitalize on the capabilities of new
technology. As technology advances, new industries, business models, and products are
created, while established firms and ways of doing business can be destroyed.
• Managers must regularly study trends and trajectory in technology to recognize opportunity
and avoid disruption.
• Moore’s Law (and related advances in fast/cheap technologies in things like storage and
telecommunications) has driven multiple waves of disruptive, market-transforming computing. The cloud-based seventh wave is delivering AI smarts to enterprises and consumers,
and the capabilities of these “exo-brains” is also advancing ahead on its own curves.
Questions and Exercises
1. What is Moore’s Law? What does it apply to?
2. Are other aspects of computing advancing as well? At what approximate rates? What is Kryder’s Law?
3. What is a microprocessor? What devices do you or your family own that contain microprocessors (and hence are impacted by Moore’s Law)?
4. Why is Moore’s Law slowing? How was Apple to achieve results that were so significant
when it launched the M1 chip? Which sorts of devices was the core technology in the M1
chip originally developed for?
5. What is a semiconductor? What is the substance from which most semiconductors are
made?
6. How does flash memory differ from the memory in a PC? Are both solid state?
7. What is the difference between volatile and nonvolatile memory? Give examples of each, noting any products that you or your family might own.
8. Which of the following are solid-state devices: an iPhone, a USB flash drive, a set-top box
with a DVR, a typical laptop PC? Which devices that you or your family have owned have
gone from containing moving parts to become solid-state, or now contain more solid state
components? Why is this a good thing?
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Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
177
9. Why is Moore’s Law important for managers? How does it influence managerial thinking?
10. What is price elasticity? How does Moore’s Law relate to this concept? What’s special about
falling chip prices compared to price drops for products like clothing or food?
11. Give examples of firms that have effectively leveraged the advancement of processing, storage, and networking technology.
12. What are the seven waves of computing? Give examples of firms and industries impacted by
the sixth and seventh waves.
13. As Moore’s Law advances, technology becomes increasingly accessible to the poor. Give
examples of how tech has benefited those who likely would not have been able to afford the
technology of a prior generation.
14. How have cheaper, faster chips impacted the camera industry? Give an example of the leadership shifts that have occurred in this industry.
15. What has been the impact of “faster, cheaper” on Apple’s business lines?
16. How did Amazon utilize the steep decline in magnetic storage costs to its advantage?
17. How does Moore’s Law impact production and inventory decisions?
18. Research the impact of mobile phones on poor regions of the world. Come to class prepared
to discuss examples that demonstrate the potential for fast/cheap technology to improve
society, even for individuals with extremely low incomes.
19. The “Internet of Things” is neat, but what implications does this raise for business and society
with respect to issues such as privacy and security? If you were GE, would you seek to keep
the communication language among smart devices proprietary or open? Why or why not?
6.2 The End of Moore’s Law? Not the
End of Fast/Cheap Computing!
Learning Objectives
1. Describe why Moore’s Law continues to advance, and discuss the physical limitations of this
advancement.
2. Name and describe various technologies that may extend the life of Moore’s Law.
3. Discuss the limitations of each of these approaches.
As mentioned, Moore’s Law isn’t a precise scientific truth, like Boyle’s Law or relativity. Moore simply observed that we’re getting better over time at squeezing more stuff into tinier spaces, he made
a prediction, and it has proven remarkably accurate in pointing to the advance of fast/cheap silicon-based computing across five decades. Moore’s Law is possible because the distance between the
pathways inside silicon chips gets smaller with each successive generation. While chip factories
(semiconductor fabrication facilities, or fabs) are incredibly expensive to build, each new generation
of fabs can crank out more densely packed silicon wafers. And since the pathways are closer
together, electrons travel shorter distances. If electronics now travel half the distance to make a
calculation, that means the chip is twice as fast.
While shrinking silicon pathways creates better chips, packing pathways tightly together creates problems associated with three interrelated forces—size, heat, and power—that together are
threatening to slow down Moore’s Law’s advance. When you make processors smaller, the more
tightly packed electrons will heat up a chip—so much so that unless today’s most powerful chips
are cooled down, they will melt inside their packaging. To keep the fastest computers cool, many
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
fabs
Semiconductor fabrication
facilities; the
multibillion-dollar plants
used to manufacture
semiconductors.
silicon wafer
A thin, circular slice of
material used to create
semiconductor devices.
Hundreds of chips may be
etched on a single wafer,
where they are eventually
cut out for individual
packaging.
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Information Systems
PCs, laptops, and video game consoles need fans, and most corporate data centers have elaborate
and expensive air conditioning and venting systems to prevent a meltdown. A trip through the
Facebook data center during its early growth would have shown that the firm was a “hot” startup in
more ways than one. The firm’s servers ran at temperatures so high that the Plexiglas sides of the
firm’s server racks were warped and melting![51] The need to cool modern data centers draws a lot of
power, and that costs a lot of money.
Keep Cool, Server Farm
Keeping data centers cool is an expensive challenge and has prompted firms to try some very
creative approaches. Microsoft has submerged over 850 servers on a patch of seabed, 117 feet
underwater off the coast of Scotland’s Orkney Islands, where a clever design lowers temps to
about 10 degrees cooler than land-based data centers.[52] Facebook has a data center in Sweden, just 70 miles from the Arctic Circle (average winter temperatures –12°C);[53] data firm Green
Mountain has a data center inside a Norwegian mountain, where tech uses a fjord-chilled cooling system; IBM puts heat to good use by warming a public pool outside Zurich; and the Dutch
startup Nerdalize says it'll put a mini data center in your home and use the heat to warm your
house and heat your bathwater.[54]
These massive data centers, sometimes referred to as server farms, are thought to already draw
5 percent of all energy use in the United States[55] and 18 percent of electricity generated in Ireland.[56]
Google’s chief technology officer has said that the firm spends more to power its servers than the
cost of the servers themselves.[57] Apple, Facebook, Microsoft, Yahoo!, and Google have all built massive data centers in the Pacific Northwest, away from their corporate headquarters, specifically
choosing these locations for access to cheap hydroelectric power. Google’s location in The Dalles,
Oregon, is charged a cost per kilowatt hour less than one-fifth the rate the firm pays in Silicon Valley.[58] This difference means big savings for a firm that runs more than a million servers.
And while these powerful shrinking chips are getting hotter and more costly to cool, it’s also
important to realize that chips can’t get smaller forever. At some point Moore’s Law will run into the
unyielding hand of God, or the laws of physics, if you prefer. While we’re not certain where these
limits are, chip pathways certainly can’t be shorter than a single molecule, and the actual physical
limit is likely larger than that. Get too small and a phenomenon known as quantum tunneling kicks
in, and electrons start to slide off their paths. Yikes! While the death of Moore’s Law has been predicted for years, as mentioned, technologists are advancing fast/cheap computing through better
chip design. While not related to Moore’s density of transistors prediction, cloud computing is very
much related to the managerial focus on fast/cheap computing. It’s fair to consider the benefit of
augmenting a chips’ on-device performance by farming tasks out to massive banks of silicon when
contemplating computing performance. Scientists also continue to squeeze advancement through
new manufacturing techniques, logical gate design, packaging, and the use of advanced materials.[59]
Manufacturing Chips: Fab Isn't Easy
Silicon smarts and storage are now going into so many devices that by one estimate, the semiconductor industry manufactures more objects in a single year than have been produced by
all other factories in all industries in world history.[60] But building high-end chips is becoming
increasingly expensive. The cost of a next-generation high-end chip fab can cost upward of $20
billion.[61] Just one component—photo lithography machines that etch ultra-small paths on silicon—can cost as much as $400 million.[62] These machines are the size of a house and require
four jumbo jets for delivery.[63] The world’s most precise diamond wire saws are also used to carve
wafers from silicon ingots, creating the flattest objects in the world. And fabs are thirsty! A single
plant can use millions of gallons of water in a single day, about the same amount of water that a
small city uses in an entire year. And this water needs to be ultra-purified before use. Pure water
goes in, but doesn’t come out—that water needs to be heavily treated before it can be reused
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Chapter 6
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179
or safely released into the environment. No new fab will get that much water without building
an entirely new water processing facility.[64] And water isn't the only pure input for chip manufacture—the air on a chip factory floor is filtered to the point where it's probably a thousand times
“more pure” than the air you're breathing now.[65]
This amount of cost requires economies of scale—a plant is only worth it if production can be
maxed out. Only eight or fewer firms can afford plants this advanced.[66] Most firms outsource
chip manufacturing to specialty firms like TSMC (Taiwan Semiconductor Manufacturing Corporation). Intel is pretty much the only firm with the volume to remain vertically integrated and own its
own means of chip production. But concentrating such a large amount of production in a small
number of firms creates a defacto oligopoly as well as a security risk. Tension between China and
Taiwan and the prospect of technology vital to the economy as well as high-end defense systems
has prompted the United States to pass the “Chips and Science” act to encourage the location
of semiconductor manufacturing facilities in the United States. It includes roughly $52 billion in
subsidies for U.S.-based production, about $24 billion in investment tax credits for domestic chip
manufacturing, and over $170 billion for U.S. scientific research.[67] And relocating a fab from Taiwan to the United States isn't as easy as building a multi-billion-dollar plant. TSMC has delayed
the opening of a U.S. plant until 2025 because there simply isn't the local talent to run the plant,
and a massive workforce will need high-skill training.[68]
How Are Microchips Made?
View in the online reader
Buying Time
One way to address the problem of densely packed, overheating chip designs is with multicore
microprocessors, made by putting two or more lower power processor cores (think of a core as the
calculating part of a microprocessor) to work simultaneously on a single chip. Philip Emma, IBM’s
manager of systems technology and microarchitecture, offers an analogy. Think of the traditional
fast, hot, single-core processors as a 300-pound lineman, and a dual-core processor as two
160-pound guys. Says Emma, “A 300-pound lineman can generate a lot of power, but two 160-pound
guys can do the same work with less overall effort.”[69] For many applications, the multicore chips
will outperform a single speedy chip, while running cooler and drawing less power. Multicore
processors are now mainstream, and today nearly all smartphones, PCs, and laptops sold have multicore chips.
Know that two brains doesn’t always mean twice as fast. Multicore processors can run older
software written for single-brain chips, but they usually do this by using only one core at a time.
To reuse the metaphor above, this is like having one of our 160-pound workers lift away, while
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
multicore
microprocessors
Microprocessors with two
or more (typically lower
power) calculating
processor cores on the
same piece of silicon.
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Information Systems
the other one stands around watching. Multicore operating systems can help achieve some performance gains. Writing code for this “divide and conquer” approach is not trivial. In fact, developing software for multicore systems has been described by Shahrokh Daijavad, software lead for
next-generation computing systems at IBM, as “one of the hardest things you learn in computer
science.”[70] However, tech firms have come to the rescue, as well. Many software development environments will automatically offload functions to different cores—say playing sound through one
core, handling network through another, performing intense calculation through yet another. And
most modern operating systems will also divide up tasks they’ve learned to recognize as “divisible.”
Another way of accelerating processing speed is to use chips that are designed to be really
good at a subset of tasks. The graphics chip firms Nvidia (pronounced “en-VID-ee-ah”) and AMD
were originally designed to do lots of simultaneous calculations necessary for animation and other
image work. Many graphics chips have been built with hundreds or in some cases thousands of
cores to handle such tasks. And it turns out those multiple, small calculations, while not good
for running end-user apps like Word or Excel, are especially well suited for artificial intelligence/
machine learning tasks like image and voice recognition. These tasks are usually performed by a
bank of interconnected processors located in the cloud, as opposed to on your smartphone or computer. Speak to Siri, Alexa, or say “OK Google,” and your voice is sent over the Internet to be decoded
by a collection of computers at Apple, Amazon, or Google, which will then work to find the best
result for your query, then send the answer back from the cloud to your device.
While Nvidia dominates the market for AI chips, firms including Google and Amazon have
begun designing their own chips to handle their specific AI needs.[71] Terms you might hear in
this space include ASICs (pronounced “ay-sicks”), which means “application-specific integrated circuits,” chips specifically designed to be really good at a specific kind of task; and field-programmable
gate arrays (FPGAs), which are chips that can be programmed after purchase, rerouting logical
pathways for application-specific efficiency in ways that aren’t possible with a general purpose
microprocessor like the Intel chip in your laptop (an approach preferred by Microsoft).[72] And while
writing “divide and conquer” code to split up tasks to get single, best results is still tricky, new programming environments, such as Nvidia’s CUDA, are making this easier.[73]
The design of transistors themselves has also changed. Engineers have learned to shift the
orientation of the transistor vertically, for more space and less leakage, while a technique called
RibbonFET wraps the transistor’s gate with material on all four sides. Among the benefits is the
ability to change chip design from being paper-flat devices to built-up 3D affairs.[74] Speed increases
are achieved from some instructions traveling a small vertical distance rather than a longer endto-end flat distance. By building up as well as out, firms are radically boosting speed and efficiency
of chips. 3D chips are one reason why Philip Wong, vice president of corporate research at chip
giant TSMC, states: “Moore’s Law is well and alive. It’s not dead, it’s not slowing down, and it’s not
even sick.”[75] Other firms are taking components that had previously been on separate chips, like a
portion of RAM that could be used in calculation, or a specialty chip for making fast numerical calculations, and placing these all inside a single, packaged chip.[76]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
TABLE 6.3 Comparison Chart
Comparison of Microprocessors, ASICs, and FPGAs.
Microprocessors
ASICs
FPGAs
General Purpose
Microprocessors
Microprocessors: Sometimes
called CPUs for central
processing units.
ASICs
ASICs: Application-specific
integrated circuits are chips
designed to do a subset of tasks
very quickly and efficiently.
Can handle most any tasks, so
you'll find them as the “main
brain” in your PC (Intel-based)
and smartphone (ARM-based).
Pros
Pros: Very fast and power
efficient. Great for graphics and
AI/machine learning.
FPGAs
FPGAs: Field-programmable
gate arrays can have their
on-chip logic re-routed to get
better performance for a specific
task.
Pros
Pros: Can do just about
anything, so they are far better
generalists than ASICs or
FPGAs. Supported by a large
base of existing software.
Cons
Cons: Are slower for many
tasks, and chips are
power-hungry, requiring more
energy.
Players
Players: Intel (leader in PCs and
servers), ARM (designs are the
basis of most smartphone
microprocessors, including
Apple, Samsung, and
Qualcomm).
Cons
Cons: Can be costly to design
and expensive to manufacture a
very custom product.
Players
Players: Nvidia and AMD.
Google has built its own
AI-specific chip (the Tensor
processing unit), but only the
biggest firms with a specific
need for a massive amount of
such chips could justify the
expense of doing this.
Pros
Pros: Faster and more
energy-efficient than general
purpose microprocessors. Can
be upgraded via software “in the
field” after installation. A cheaper
alternative than designing and
manufacturing a custom but
unchangeable ASIC.
Cons
Cons: ASICs designed from
scratch for specific tasks can be
faster/more efficient.
Players
Players: Intel-owned Altera,
Xilinx. Microsoft uses FPGAs for
Bing and other cloud tasks.
Sources: Intel, https://newsroom.intel.com/press-kits/intel-core-x-series-processors/; Altera, https://www.altera.com/about/news_
room.html.
Quantum Leaps? Thinking beyond Moore’s Law’s BinaryCalculating Silicon
Think about it—the triple threat of size, heat, and power means that Moore’s Law, perhaps the
greatest economic gravy train in history, will likely come to a grinding halt in your lifetime. Multicore and 3D transistors are here today, but what else is happening to help stave off the death of
Moore’s Law?
One yet-to-be-proven technology that could blow the lid off what’s possible today is quantum
computing. Conventional computing stores data as a combination of bits, where a bit is either a
one or a zero. Quantum computers, leveraging principles of quantum physics, employ qubits that
can exist in some percentage of both states simultaneously in a state known as superposition,
rather like a coin spinning in midair being both one and zero at the same time.[77] Add a bit to
a conventional computer’s memory and you double its capacity. Add a bit to a quantum computer and its capacity increases exponentially. For comparison, consider that a computer model
of serotonin, a molecule vital to regulating the human central nervous system, would require 1094
bytes of information. Unfortunately there’s not enough matter in the universe to build a computer that big. But modeling a serotonin molecule using quantum computing would take just 424
qubits.[78]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
181
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Information Systems
It’s worth noting that most don’t believe quantum computing will replace all digital computing;
rather, quantum computers will be used for specialized tasks that they are well suited for. Some
speculate that quantum computers could one day allow pharmaceutical companies to create
hyperdetailed representations of the human body that reveal drug side effects before they’re
even tested on humans. Quantum computing might also accurately predict the weather months
in advance, reroute traffic for the most efficient paths,[79] generate more accurate AI, or offer
unbreakable computer security.[80] Opportunities abound. Of course, before quantum computing
can be commercialized, researchers need to harness the freaky properties of quantum physics
wherein your answer may reside in another universe, or could disappear if observed (Albert
Einstein himself referred to certain behaviors in quantum physics as “spooky action at a distance”). Quantum computers are also large and require components to be super-cooled to
almost absolute zero[81]—meaning for the foreseeable future quantum will exist in the cloud, not
inside your smartphone (for a look at an actual quantum computer, refer to the video below, or
take a tour of Google’s Quantum Campus).
It can be difficult to assess where we are with quantum computing. Google has already claimed
one of its designs has achieved “quantum supremacy”—a term that refers to performing a task
that would be practically impossible with conventional computing. Google claims Sycamore, its
53 qubit machine, completed a calculation in just a few minutes that would have taken the world's
most powerful supercomputer at the time over 10,000 years to replicate.[82] That's enough to give
you the geek goosebumps, but don't get too excited. The task performed was virtually worthless—generating a series of random numbers in a very specific way. IBM, a major Google rival
that has more working quantum computers than all other firms combined, hotly disputes the way
Google has interpreted its test.
Another problem with quantum computers is that qubits “decohere” or lose their state very
quickly, and often contain errors, so advances need to be made to create truly fault-tolerant
quantum computers. IBM estimates that to build a computer with the power of 1,000 qubits
would require 1 million actual ones.[83] Google and IBM have rival methods to deal with error
correction, but no clear winner has emerged. Also, programming quantum computers is entirely
different from developing programs for conventional binary devices, so you can't take your
Python or Swift code and just drop it on a quantum device. So, simulating advanced pharmaceutical chemistry isn't just around the corner.
IBM already has several paying clients for its quantum computer, including Mercedes, Volkswagen, and the U.S. Department of Energy.[84] You can also try out quantum programming at
educational sites from both Google and IBM. And firms are constantly advancing the processing
capacity of quantum computers. IBM has already dubbed a sort of Quantum Moore's Law named
“Gambetta’s Law,” after Jay Gambetta, its chief quantum theoretician. The “Law” (like Moore’s
Law, it's actually just an observation) states that quantum volume is doubling every year.[85] So far
so good, but we're still in the very early stages of figuring out if this technology will really deliver on
promised super-breakthroughs and industry disruptions. If or when the full promise of quantum
computing will become a reality is still unknown, but scientists and engineers are hoping that by
the time Moore’s Law runs into Mother Nature’s limits, a new way of computing may blow past
anything we can do with silicon, continuing to make possible the once impossible.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
The Hype over Quantum Computers, Explained
The quantum computer may become a genuinely disruptive technology, or it may never
realize its potential. Here’s a look at the current state of quantum computing, produced by
CNBC.
View in the online reader
AI: Moore's Law Is Being Decimated
While the video contains lots of speculation, it does a good job of discussing various ways in
which the performance curve of technology should continue to advance forward. It also seems
quite likely that we’ll see performance in many ways that outstrips what Moore had predicted, if
we take transistor density as a proxy for computer performance.
View in the online reader
Key Takeaways
• As chips get smaller and more powerful, they get hotter and present power-management
challenges. And at some point, Moore’s Law will stop because we will no longer be able to
shrink the spaces between components on a chip.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
183
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Information Systems
• Multicore chips use two or more low-power calculating “cores” to work together in unison,
but to take optimal advantage of multicore chips, software must be rewritten to “divide” a
task among multiple cores.
• 3D transistors are also helping extend Moore’s Law by producing chips that require less
power and run faster.
• New materials may extend the life of Moore’s Law, allowing chips to get smaller. Entirely new
methods for calculating, such as quantum computing, may also dramatically increase computing capabilities far beyond what is available today.
Questions and Exercises
1. What three interrelated forces threaten to slow the advancement of Moore’s Law?
2. Which commercial solutions, described in the previous section, are currently being used to
counteract the forces mentioned? How do these solutions work? What are the limitations of
each?
3. Will multicore chips run software designed for single-core processors?
4. As chips grow smaller, they generate increasing amounts of heat that needs to be dissipated.
Why is keeping systems cool such a challenge? What are the implications for a firm like Amazon or Google? For a firm like Apple or Dell?
5. What are some of the materials that may replace the silicon that current chips are made of?
6. Search online to assess the current state of quantum computing. What kinds of problems
might be solved if the promise of quantum computing is achieved? How might individuals
and organizations leverage quantum computing?
7. Watch the video below, which appeared in a recent issue of Scientific American online. This
call to action suggests that we are underestimating the implications of quantum computing, and the related ethical implications. Brainstorm social, business, governmental, security,
and other challenges that may appear if quantum computing becomes a reality. What should
businesses and governments do to prepare for the possibility of quantum computing?
Quantum Ethics: A Call to Action
In this video, The Quantum Daily takes a look at ethics in the field of quantum technology and
development, including how the technology can be used for the benefit of the most people possible.
View in the online reader
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Chapter 6
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185
6.3 The Power of Parallel:
Supercomputing, Grids, Clusters, and
Putting Smarts in the Cloud
Learning Objectives
1. Understand the differences between supercomputing, grid computing, cluster computing,
and cloud computing.
2. Describe how remote, distributed computing changes how we think about computing
capacity and what devices can do.
3. Recognize that these technologies provide the backbone of remote computing resources
used in cloud computing.
4. Understand the characteristics of problems that are and are not well suited for parallel processing found in modern supercomputing, grid computing, cluster computing, and multicore
processors. Also be able to discuss how network latency places limits on offloading computing to the cloud.
As Moore’s Law makes possible the once impossible, businesses have begun to demand access to
the world’s most powerful computing technology. Supercomputers are computers that are among
the fastest of any in the world at the time of their introduction.[86] Supercomputing was once the
domain of governments and high-end research labs, performing tasks such as simulating the explosion of nuclear devices or analyzing large-scale weather and climate phenomena. But it turns out
that with a bit of tweaking, the algorithms used in this work are profoundly useful to business.
supercomputers
Computers that are among
the fastest of any in the
world at the time of their
introduction.
While some firms own their own supercomputers, others lease capability from cloud providers
or even governments. Having vast amounts of computing power is especially advantageous in
training and running artificial intelligence models (for more on AI refer to Chapter 18). Other
examples (many of which use some type of AI) include simulations, with aerospace firms using
supercomputing to design jet engines and aircraft. Appliance manufacturers and auto firms also
use supercomputers in product design. Pharma companies use supercomputing in drug simulations and genetic sequencing, and to hunt for previously unidentified behavior in existing drug use.
The financial industry regularly uses supercomputing in market and risk simulation, and the oil
and gas industry uses these technologies to identify candidate locations for drilling.[87]
You’ll often hear modern supercomputing referred to by the acronym “HPC” for high performance computing. This type of computing is performed via a technique called massively parallel
processing (computers designed with many microprocessors that work together, simultaneously, to
solve problems). The hardware used in supercomputing can vary—some machines use massive
numbers of off-the-shelf processors that can be found in conventional corporate servers, while others use a new generation of hardware. Parallel devices targeted at AI, in particular, will often use
specialized chips that are optimized for the type of calculations used in artificial intelligence. Top
supercomputers may have chips tweaked for supercomputer use, or contain additional processors
that help calculating cores work in unison at high speeds. The hardware used doesn’t look like a
conventional desktop computer. Instead, computing hardware are typically mounted vertically on
single boards known as blades. Many blades can be slid into several shelves of server racks—shelving that’s stacked inside of individual cabinets about the size of a large refrigerator (refer to video
below). The world’s fastest supercomputer as of mid-2023 was Frontier, run by the U.S. Oak Ridge
National Lab. Frontier was the first computing device to break the so-called exascale barrier, performing an astonishing 1 quintillion calculations per second (that’s a 1 followed by
18 zeros).[88] Frontier consists of 8,776 chips with 64 cores each, for a staggering 561,664 computing
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
massively parallel
Computers designed with
many microprocessors
that work together,
simultaneously, to solve
problems.
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Information Systems
cores working in unison. Specialized networking equipment and cabling, overseen by software
designed to support massively parallel tasks, links components so they can act as one.[89] And
this bad boy runs hot, requiring six thousand gallons of water to prevent overheating, albeit using
a new “green” technique that doesn’t require costly additional cooling.[90]
A Sneak Peek inside Intel’s Supercomputing Lab
Intel’s Aurora computer—built in a partnership with HP Enterprise and the U.S. Department of
Energy—will be one of the world’s fastest massively parallel HPCs. Blade computers containing
multiple processors are slid into mounted racks and will create a unit capable of performing a
billion-billion calculations per second.
View in the online reader
grid computing
A type of computing that
uses special software to
enable several, often idle
computers to work
together on a common
problem, as if they were a
massively parallel
supercomputer.
cluster computing
Connecting server
computers via software
and networking so that
their resources can be
used to collectively solve
computing tasks.
Another technology, known as grid computing, has allowed organizations to engage in scavenging, or enlisting idle compute time from servers and desktops when they are not in use. Grids
can consist of completely different hardware not initially designed to work together, but a software
layer allows a computing node in a grid to receive a portion of a common problem and return the
calculation for final presentation when done.[91] For example, many firms have created grids that
run by turning on idle desktop computing during the evening when employees are away.[92] Organizations have leveraged grid computing to harness supercomputing-caliber capabilities at a low cost
and solve all sorts of problems, including Monsanto’s use in biotech modeling, Pratt & Whitney in
jet engine design, and Procter & Gamble in consumer product simulation. While grids can offer savings, many of the technologies that lash computers together as a vast, virtual brain have migrated
to the cloud, allowing major providers such as Amazon, Google, and Microsoft to offer HPC inexpensively and with more reliability than a firm might gain by CPU scavenging.[93]
Another term you might hear is cluster computing. Computing clusters are built with commodity servers, but unlike grids, which often use disparate idle resources, clusters are usually made
up of groups of similar server computers using special software and networking hardware to more
tightly link them together to function as one. The geeky details of how tightly or loosely coupled
devices are—and whether this classifies as a grid or a cluster—are less important, but as a manager
you should be able to recognize these terms and think critically about their potential use and limitations.
Multicore, massively parallel HPC, grid, and cluster computing are all related in that each
attempts to lash together multiple computing devices so that they can work together to solve problems. Think of multicore chips as having several processors in a single chip. Think of massively
parallel supercomputers as having several chips in one computer, and think of grid and cluster computing as using existing computers to work together on a single task (essentially a computer made
up of multiple computers), with clusters being more “tightly coupled” than grids, with additional
software and networking hardware to facilitate their coordination. While these technologies offer
great promise, they’re all subject to the same limitation: Software must be written to divide existing
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187
problems into smaller pieces that can be handled by each core, processor, or computer, respectively.
Some problems, such as simulations, are easy to split up, but for problems that are linear (where,
for example, step two can’t be started until the results from step one are known), the multiple-brain
approach doesn’t offer much help.
Massive collections of computers running software that allows them to operate as a unified
service also enable new service-based computing models, such as software as a service (SaaS) and
cloud computing. In these models, organizations replace traditional software and hardware that
they would run in-house with services that are delivered online. Google, Microsoft, Salesforce.com,
and Amazon’s AWS are among the firms that have sunk billions into these Moore’s Law–enabled
server farms, creating entirely new businesses that promise to radically redraw the software and
hardware landscape while bringing gargantuan computing power to the little guy (refer to Chapter
16). Researchers have leveraged the technology to, as New Scientist states, “make discoveries scientists can’t” by scanning massive databases of research and hunting for patterns humans have
missed.[94] Moving “brains” to the cloud can help increase calculating performance even when we
can’t pack more processing brawn into our devices, but the cloud requires a long-distance connection that’s a lot slower and perhaps less reliable than the quick hop from storage to processor that
occurs inside most consumer electronics. In tech circles, delay is sometimes referred to as
latency—and low latency is good. It means communications are speedy. Anyone who has experienced a streaming hiccup, has been frustrated by networking speeds’ impacting a video game, or
felt that Alexa was just a little too slow in answering a question has likely seen the impact of data
round-tripping from a computing device to the cloud and back. Any slow hop along the way—from
your local Wi-Fi to something in the server farm, can add latency. But Moore’s Law offers help here,
as well. Advances such as chip-based neural engine co-processors used for years in Apple devices
have allowed processing that used to require cloud-level parallel work to be performed on the
device. This is how your iPhone can snap open when it sees your face, and do this without an Internet connection.[95]
Key Takeaways
• Most modern supercomputers use massive sets of microprocessors working in parallel.
While it was common for past supercomputers to use large amounts of server chips that one
might have found in high-end corporate computers, today’s AI-focused data centers often
use specialty chips targeted specifically to optimizing tasks related to artificial intelligence.
• With the advent of cloud computing, which allows HPC (high performance computing) to
be “rented” as needed, organizations as diverse as financial services firms, industrial manufacturers, consumer goods firms, film studios, university researchers, and even startups can
now afford access to supercomputer capabilities without having to outright own, run, and
maintain the hardware.
• Grid-computing software uses existing computer hardware to work together and mimic a
massively parallel supercomputer. Using existing hardware for a grid can save a firm the millions of dollars it might otherwise cost to buy a conventional supercomputer, further bringing
massive computing capabilities to organizations that would otherwise never benefit from this
kind of power.
• Cluster computing refers to collections of server computers that are linked together via software and networking hardware so that they can function as a single computing resource.
• Massively parallel computing also enables the vast server farms that power online businesses
like Google and Facebook, and creates new computing models, like software as a service
(SaaS) and cloud computing.
• The characteristics of problems best suited for solving via multicore systems, parallel supercomputers, or grid or cluster computing are those that can be divided up so that multiple
calculating components can simultaneously work on a portion of the problem. Problems that
are linear—where one part must be solved before moving to the next and the next—may
have difficulty benefiting from these kinds of “divide and conquer” computing. Fortunately,
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
software as a service
(SaaS)
A form of cloud computing
where a firm subscribes to
a third-party software and
receives a service that is
delivered online.
cloud computing
Replacing computing
resources—either an
organization’s or
individual’s hardware or
software—with services
provided over the Internet.
server farm
A massive network of
computer servers running
software to coordinate
their collective use. Server
farms provide the
infrastructure backbone to
SaaS and hardware cloud
efforts, as well as many
large-scale Internet
services.
latency
A term often used in
computing that refers to
delay, especially when
discussing networking and
data transfer speeds.
Low-latency systems are
faster systems.
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Information Systems
many problems such as financial risk modeling, animation, manufacturing simulation, and
gene analysis are all suited for parallel systems.
• Many computer tasks can be offloaded to the cloud, but networking speeds (latency)—that
is, the time needed to send results back and forth—can limit instances where collections of
off-site computing hardware can replace or augment local computing.
Questions and Exercises
1. Show your familiarity with key terms: What is High Performance Computing? What are the
differences between supercomputing, grid computing, and cluster computing? How are
these phenomena empowered by Moore’s Law?
2. How does grid computing’s using slack or excess computing resources change the economics of supercomputing?
3. Name organizations that are using supercomputing and grid computing. Describe these
uses and the advantages they offer their adopting firms. Are they a source of competitive
advantage? Why or why not?
4. What are the characteristics of problems that are most easily solved using the types of parallel computing found in grids, clusters, and modern-day supercomputers? What are the
characteristics of the sorts of problems not well suited for this type of computing?
5. You can join a grid, too! Visit the SETI@home website. What is the purpose of the
SETI@Home project? How do you participate? Is there any possible danger to your computer if you choose to participate? (Read their rules and policies.) Do some additional
research on the Internet. Are there other interesting grid efforts that you can load onto your
laptop or even game console?
6. Search online to identify the five fastest supercomputers currently in operation. Who sponsors these machines? What are they used for? How many processors do they have?
7. What is the advantage of using computing to simulate an automobile crash test as opposed
to actually staging a crash?
8. Moore’s Law may limit the amount of computing done on the PC, smartphone, AR/VR headsets like Oculus and VisionPro, or gaming consoles that you may own. How can cloud
computing make these devices seem more powerful? Give examples of when using a powerful, remote, cloud computing resource might work well to enhance computing on a local
device, and mention when the cloud might be less effective. What is the main constraint in
your example?
6.4 E-waste: The Dark Side of
Moore’s Law
Learning Objectives
1. Understand the magnitude of the environmental issues caused by rapidly obsolete, faster,
and cheaper computing.
2. Explain the limitations of approaches attempting to tackle e-waste.
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3. Understand the risks firms are exposed to when not fully considering the lifecycle of the
products they sell or consume.
4. Ask questions that expose concerning ethical issues in a firm’s or partner’s products and
processes, and that help the manager behave more responsibly.
We should celebrate the great bounty Moore’s Law and the tech industry bestow on our lives. Costs
fall, workers become more productive, innovations flourish, and we gorge at a buffet of digital
entertainment that includes music, movies, and games. And we’ve seen that tech offers an opportunity to improve lives in emerging economies.[96]
But there is a dark side to this faster and cheaper advancement. A laptop has an expected lifetime of around two to four years. A cell phone? Eighteen months or less.[97] Rapid obsolescence
means the creation of ever-growing mountains of discarded tech junk, known as electronic waste
or e-waste, and represents the fastest-growing waste stream on the planet.[98] Each year, we create
more than 57 million tons of e-waste.[99] To put that in perspective, the amount of e-waste discarded
in just one year is the equivalent of throwing away all of the commercial aircraft ever built throughout history.[100] The outlook is grim—consider that the upgrade to 5G is magnitudes larger than
shifts from black-and-white to color TV, or many of the earlier analog-to-digital shifts.[101] Without
radical intervention, annual e-waste is expected to more than double in the next three decades, and
the results aren’t pretty. Consumer electronics and computing equipment can be a toxic cocktail
that includes cadmium, mercury, lead, and other hazardous materials.[102] And crushing flammable
lithium-ion batteries in with paper, cardboard, and other fire fuel has led to an uptick in recycling
center fires.[103]
Consider how much tech you touch in your lives—not just at home, but at school, work, shopping. In the United States, the e-waste volume amounts to about forty-two pounds per person
annually, and while e-waste is only about 2 percent of waste, it represents more than two-thirds of
discarded toxic, heavy metals.[104] This “effluent of the affluent” will only increase with the rise of living standards worldwide.
The quick answer would be to recycle this stuff. Not only does e-waste contain mainstream
recyclable materials we’re all familiar with, like plastics and aluminum, but it also contains small
bits of increasingly valuable metals, such as silver, platinum, and copper. In fact, a ton of discarded
iPhone components contains the amount of precious metals that would require more
than 2,000 tons of mined material.[105] Done right, recycling produces far less CO2 emissions and
other pollution than mining, and it’s thirteen times cheaper to extract precious and rare earth metals from discarded electronics than it is to mine it from the earth.[106]
“Done right” being the key. There’s often a disconnect between consumers and managers who
want to do good and those efforts that are actually doing good. The complexities of the modern
value chain, the vagaries of international law, and the nefarious actions of those willing to put profits above principle show how difficult addressing this problem will be. Sending e-waste abroad can
be ten times cheaper than dealing with it at home, and through 2017, China was recycling some
70 percent of the world’s e-waste, much of it processed in dreadful conditions.[107] The Silicon Valley Toxics Coalition, the Basel Action Network (BAN), and Greenpeace have documented workers
without protective equipment, breathing clouds of toxins generated as they burn the plastic skins
off of wires to get at the copper inside. Others used buckets, pots, or wok-like pans (in many cases
the same implements used for cooking) to sluice components in acid baths to release precious metals—recovery processes that create even more toxins. The area around one site had lead and heavy
metal contamination levels some four hundred to six hundred times greater than what international standards deem safe.[108] It was so polluted that drinking water had to be trucked in from
eighteen miles away. Pregnancies were six times more likely to end in miscarriage, and 70 percent
of the kids in the region had too much lead in their blood.[109] Think you’re working with one of
the “good ones”? Each year BAN (the Basel Action Network) exposes the e-waste flow overseas by
hiding GPS tracking devices inside equipment dropped off at various recyclers and charity drives
(refer to the documentary, “The Circuit: Tracking America’s Electronic Waste”). BAN investigators
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
e-waste
Discarded, often obsolete
technology; also known as
electronic waste.
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in Lagos, Nigeria, documented mountains of e-waste with labels from schools, U.S. government
agencies, and even some of the world’s largest corporations. And despite Europe’s prohibition on
exporting e-waste, many products originally labeled for repair and reuse end up in toxic recycling
efforts.[110] The reality is that e-waste management is extraordinarily difficult to monitor and track,
and loopholes are rampant.
Tired of being the world’s toxic trash bin, China’s “National Sword” policy put an end to accepting “loathsome foreign garbage” and moved to correct practices in its most notorious recycling
regions. However, much of what once went to China simply migrated to other parts of Southeast
Asia or Africa.[111] One of the world’s most notorious e-dumps was Agbogbloshie, located in Accra,
the capital of the West African nation of Ghana. In Agbogbloshie, “burner boys” as young as twelve
eked out a living as electronics scavengers, torching wires to strip casing off metals and breathing
smoke clouds and other toxins in conditions just as dreadful as those that had been previously
exposed in China.[112] “Shut it down” is often not the best nor easiest solution, and often simply
disperses the problem while creating economic hardship for those displaced. When the Ghanaian
government raided and plowed over Agbogbloshie, hundreds lost their homes along with their
only way of earning a living. Within months, many of the scrappers had simply crossed the river
into an area called Old Fadama, or dispersed to smaller centers in the country’s poor north where
toxic efforts became even more difficult to uncover and shut down. Sometimes Western outrage
captured in a YouTube video doesn’t produce anywhere near the desired solution. Would a more
responsible way to address the issue task tech companies to do something like ensuring money
paid to a central fund for recycling would end up in the global south, creating industrial zones
instead of slums, with health and safety rules, actual jobs, pensions, and other social support?[113] Managers take note—requiring companies to make stronger commitments to the end-oflife (EOL) of their products is almost certainly coming.
American Recycling: Why the United States Is Doing Worse, Not Better
The United States is far worse than other wealthy nations when it comes to recycling. And in
many ways the problem is getting worse.[114] With China no longer a buyer of trash, there is now
far too much supply of all recyclables. Unlike in the past, when recyclables could be sold for raw
material, they have now become worthless waste that municipalities need to pay to have carted
away.[115] You can also blame fracking. Natural gas is a key component in producing plastics, and
the plummeting cost of natural gas, due to extraction methods like fracking, has made producing new plastics far cheaper, further cratering the market for recyclables.[116] While the European
Union and other nations have improved environmental legislation, things in the United States
seem to be moving in the other direction. While the Basel Convention on hazardous waste, a
treaty that restricts the exports of e-waste, has some 186 signatories, the United States is the
only industrial nation that hasn’t signed on. There is no U.S. legislation covering e-waste. The
issue is handled by states, and as of 2018 fifteen states didn’t have any e-waste legislation at
all.[117]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
How 6 Million Pounds of Electronic Waste Gets Recycled a Month
Tour Sims Lifecycle Services in Sims, Tennesee, a woman-owned business on the forefront of
automating the gnarly problem of electronics recycling.
View in the online reader
Yes, You Do Have to Pay Attention to This
Garbage, but the “Internet of Trash” May Help
No solutions are big enough to make e-waste issues go away completely, but tech itself will increasingly present solutions to trash problems. It's only in the last year or two that robotics and AI have
gotten good enough to be economically viable for high-volume recycling. Waste Management, one
of the biggest players in the trash and recycling game worldwide, now uses three different types of
robots to separate recycling from contaminants, and in specific tasks they’re doing their job better,
quicker, and more cost-effectively than humans.[118]
Moore’s Law means sensors used for detection are now cheaper and more accurate, while
machine learning in the cloud continuously improves computer vision and other models so the
bots do a better job. This enables tech to help you put garbage in the right place, and can enforce
responsibility. The firm Compology makes a smart dumpster that detects if regular garbage has
been mixed in with recyclables. Since a single contaminated piece could spoil a whole truckload,
recycling firms get a heads up to not haul away the bad stuff, ensuring that corporations take their
recycling more seriously.[119] As tech gets cheaper, expect RFID and similar technology to be embedded in products to assist with trash separation. “Smart garbage” would make it easier to separate
recyclables, and “smart trash cans” can help do a better job right when items are first thrown away.
Managers will need to think proactively to stay ahead of legislators. While the United States
has been lagging in trash law, some regions have been especially aggressive. The push to ban plastic
bags, Styrofoam, and drinking straws often makes it easier for a firm to implement a more environmentally friendly policy in all operations, rather than in just the states impacted, so laws passed in
one region may have a far larger impact. Globally, European legislation is requiring many tech firms
to reclaim products at end-of-life. Already sixty-seven countries have enacted legislation to deal
with the e-waste they generate.[120] Managers and product designers are beginning to think about
end-of-life as part of the overall design process. It's not much of a leap to imagine a requirement
to equip the most toxic or high-valued equipment with yet-to-be-set standard sensor technologies
that would make it easier to refuse an item at pickup or separate an item before it hits the landfill.[121]
Apple, Google, Samsung, and many other brands have set ambitious targets for recycling and for
the use of recycled and renewable materials. Apple claims its Daisy recycling robot can take apart
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200 iPhones every hour, and says it diverted 48,000 metric tons of electronic waste from landfills
in its first year.[122] Apple has set a goal to make all of its products only from recycled or renewable
material. Many of its products are now carbon neutral and use only recycled metals for certain key
components, such as aluminum frames and product bodies.[123]
How a Robot Recycles
Our Electronic Waste
Apple has built several
robots. Here is one
code-named Daisy, that
helps recycle iPhones. One
Daisy robot can break
down twenty-four models of
iPhone, recycling 2.4 million
units a year.
Thinking deeply about the ethical consequences of a firm’s business is an imperative for the
modern manager. Big firms are big targets, and environmentalists have been quick to push the
best-known tech firms and retailers to take back their products for responsible recycling and to
eliminate the worst toxins from their offerings.
Environmentalists see this pressure to deal with e-waste as yielding results: Most tech firms
have continually moved to eliminate major toxins from their manufacturing processes. All this
demonstrates that today’s business leaders have to be far more attuned to the impact not only of
their own actions, but also to those of their suppliers and partners. How were products manufactured? Using which materials? Under what conditions? What happens to items when they’re
discarded? Who provides collection and disposal? It also shows the futility of legislative efforts that
don’t fully consider and address the problems they are meant to target.
Finding Responsible E-waste Disposers
A sting operation led by the U.S. Government Accountability Office (U.S. GAO) found that fortythree American recyclers were willing to sell e-waste illegally to foreign countries, without gaining
EPA or foreign-country approval. Appallingly, at least three of them held Earth Day electronicsrecycling events.[124]
View in the online reader
So how can firms and individuals choose proper disposal partners? Several certification mechanisms can help shed light on whether the partner you’re dealing with is a responsible player. The
Basel Action Network (BAN) e-Stewards program certifies firms via a third-party audit, with compliant participants committing to eliminating e-waste export, land dumping, incineration, and toxic
recycling via prison labor. The International Association of Electronics Recyclers (IAER) also offers
audited electronics recycler certification. And firms certified as ISO 9001 and ISO 14001 compliant attest to quality management and environmental processes. Standards, techniques, and
auditing practices are constantly in flux, so consult these organizations for the latest partner lists,
guidelines, and audit practices.[125]
FIGURE 6.7 e-Stewards
The e-Stewards program can help you find a vetted, responsible recycler.
Source: e-Stewards.org; http://e-stewards.org/find-a-recycler/.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Which brings us back to the late Gordon Moore. To his credit, Moore was not just the founder
of the world’s largest microprocessor firm and the first to identify the properties we’ve come to
know as Moore’s Law; he was also one of the world’s leading supporters of environmental causes.
The generosity lives on in the Gordon and Betty Moore Foundation, which, among other major contributions, has given the largest single gift to a private conservation organization.[126] Indeed, Silicon
Valley, while the birthplace of products that become e-waste, also promises to be at the forefront
of finding solutions to modern environmental challenges. The Valley’s leading venture capitalists,
including Sequoia and Kleiner Perkins (where former Vice President Al Gore, an early environmental activist, served as a partner), have started multimillion-dollar green investment funds targeted
at funding the next generation of sustainable environmental initiatives.
Key Takeaways
• E-waste may be particularly toxic since many components contain harmful materials such as
lead, cadmium, and mercury.
• Managers must consider and plan for the waste created by the products, services, and technology used by their organization. Consumers and governments are increasingly demanding
that firms offer responsible methods for the disposal of their manufactured goods and the
technology used in their operations.
• Managers must audit disposal and recycling partners with the same vigor as their suppliers
and other corporate partners. If not, an organization’s equipment may end up in environmentally harmful disposal operations.
• In some ways, fast/cheap computing is also offering solutions. Robotics and AI can combine
to improve waste sorting and resource extraction. New smart bins and other ways to track
waste using package bins will also help.
Questions and Exercises
1. What is e-waste? What is so dangerous about e-waste?
2. What sorts of materials might be harvested from e-waste recycling?
3. Many well-meaning individuals thought that recycling was the answer to the e-waste problem. But why hasn’t e-waste recycling yielded the results hoped for?
4. What lessons do the challenges of e-waste offer the manager? What issues will your firm
need to consider as it consumes or offers products that contain computing components?
5. Why is it difficult to recycle e-waste?
6. Why is e-waste exported abroad for recycling rather than processed domestically?
7. What part does corruption play in the recycling and disposal of e-waste?
8. What part might product design and production engineering play in the reduction of the
impact of technology waste on the environment?
9. What are the possible consequences should a U.S. firm be deemed “environmentally irresponsible”?
10. Name two companies that have incurred the wrath of environmental advocates. What might
these firms have done to avoid such criticism?
11. Research online to find ways, beyond those shown in videos above, in which technology is
helping improve the handling of e-waste. Present your finding to your instructor or in class,
as requested.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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6.5 Mickey’s Wearable: Disney’s
MagicBand
Learning Objectives
1. Illustrate the value that Disney accrued from embedding technology in otherwise manual
experiences.
2. Recognize how the experience improved the value of the customer’s Disney World experience.
3. Understand some of the issues involved in deploying large-scale information systems in a
corporate environment.
Disney executives had a problem—the firm's flagship theme park, Walt Disney World in Orlando
Florida, was becoming significantly less fun. Customer surveys cited complaints over long lines, and
pricey tickets, and about half of first-time visitors said they would never visit the park again. Ouch!
Not good for a theme park self-described as “the most magical place on earth.”
Concerned Disney executives launch the Next Generation Experience project to reverse the
trend. The team realized it had very little real-time data on what was happening at the park at
a given time in a given location, and data insight would be vital to improving park experiences.
The team saw some sort of low-cost electronic wristband as the answer.[127] Moore's Law and other
advances in fast/cheap technology were making wireless, wearable products a reality, and a wearable device could provide the real-time data the firm craved, plus all sorts of additional benefits,
from identifying customers for hotel, restaurant, ride passes, interaction with staff and attractions,
and payment. Years later, the solution was the Disney MagicBand, now a staple of Disney World,
Disneyland (the firm’s original California park),[128] Disney Cruise lines,[129] and the product became
an onramp for expanding smartphone technologies worldwide.[130] Thanks to the MagicBand, Disney is now armed to leverage tech to streamline your experience, delight you at every turn, and
keep you spending money. Satisfaction is boosted along with efficiency and profits, all while cutting
costs. The MagicBand provides a useful case study in how Disney pulled off a billion-dollar investment, leveraged Moore’s Law capabilities not just on wrists, but also in phones, hotel door locks,
turnstiles, restaurants, and interactive experiences. Data collected from the band provided a massive amount of previously unknown data that could be leveraged in analytics and AI for predictions, park scheduling, operations, service improvements, marketing, and more.[131] In just the
first two years after launching, Disney distributed over 30 million MagicBands, making Disney the
fourth largest provider of wearable technology.[132]
haptics
Relates to touch. Haptic
feedback is usually
expressed as a tap or
vibration delivered by a
device as part of the user
interface, offering a cue
that actions have been
taken or a result is
available.
Bands are used for park and attraction admission, for keyless entry into your Disney hotel or
cruise line state room, to pay for rides, whisk luggage to your room, locate your group to deliver
restaurant meals, personalize character greetings, match you to photos taken by park photographers and attraction cameras, and more. With MagicBand, ticket fraud is virtually eliminated, as is
customer frustration from lost, ripped, or unreadable paper tickets that can occur over multi-day
visits.[133] And of course, the tech is tied to your credit card, so you can pay for everything, from an
in-park Starbucks fix to gourmet restaurant meals to mouse ears and Frozen dolls, all with a wave
of your wrist. Tap-to-pay can be convenient and more secure than wallets or cash that could be lost
or more time consuming to use. Studies have also shown that, in general, users of mobile payments
spend more—in part because a quick tap detaches consumers from physically handling cash or its
plastic representation.[134] The original MagicBand was only offered to guests of Disney World in
Orlando, and bands were mailed for free in advance to guests’ homes. The MagicBand is now on
its third iteration, known as MagicBand+, and customers are now willing to pay for the device
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
(prices start at $35). MagicBand+ offers color-changing lights, haptic feedback, and gesture recognition, with park attractions from the Star Wars Batuu Bounty Hunters to 50 Year Character statues
and 100 Year Anniversary Medallions using bands for additional customer experiences. MagicBand+ even syncs to fireworks displays and the Harmonious Nighttime Spectacular at EPCOT.
Premium customers willing to shell out for premium services such as Lightning Lane line-skipping
services are more likely not to bat an eye at the extra price for wrist-tap entry convenience, but
even for customers who don’t choose to buy MagicBands, much of the tech pioneered by the product is available through smartphone apps.[135]
Those opting for bands can choose bands in a rainbow of options customized across the
breadth of Disney character offerings. The band box arrives for the family with each guest’s name
etched inside their custom wearable. Each band is packed with low-cost, high-powered tech, courtesy of Moore’s Law. MagicBand devices can transmit in a radius of forty feet. The newer MagicBand+ devices have both short- and long-range RFID chip, and a 2.4 GHz radio, akin to what you’d
find in an old cordless phone.[136] Devices also have programmable LED lights, a haptic motor for
providing vibrating feedback, and an accelerometer for gesture sensing. The new tech draws more
power, but bands can now be recharged so guests can start their day at full power.[137]
MagicBands are part of a broader set of technologies that Disney calls MyMagic+ that link various systems that include the Web and mobile My Disney Experience app to plan and share your
vacation itinerary, manage your schedule, and deliver GPS park maps and schedules to smartphone
apps; the Genie+ ride reservation system; Lightning Lane line-skip premium services; and the Disney PhotoPass that stitches together a custom media album gathered from your visit (with an
option to purchase prints, of course).[138] The mandate from Meg Crofton, previous president of Walt
Disney World Resort, was to remove the friction in the Disney World experience. Says another Disney exec, “If we can get out of the way, our guests can create more memories.”[139]
With every tap, scanner read, and geo-tracking datapoint, Disney learns more about its customers and can potentially serve them better and more efficiently than competitors who lack
similar services. A band or app that tracks users and contains payment information can lead to
privacy concerns, but Disney seems to have this covered. Any data collected is anonymized and
encrypted. The band itself doesn’t store any personal information; instead, it contains a code that
identifies users within Disney’s internal encrypted databases. Lose a band and it can be disabled
and replaced. Purchases also require a PIN, and parents concerned with free-spending children can
disable purchasing on their bands or set a spending limit.[140]
MagicBand+ Overview
View in the online reader
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Experience Examples
Enhancing customer experience and delivering more “surprise and delight” moments was at the
heart of the MagicBand launch. The debut of MagicBand in Disney World’s Be Our Guest restaurant, inspired by the fairy-tale dining experience in Beauty and the Beast, launched to glowing
reviews. Guests arriving at the restaurant are greeted by name by a host who gets a heads-up on
their modified iOS device. The welcome is followed by a suggestion to sit wherever you want. The
kitchen already has the order you’ve made online. Wireless receivers on the table and in the walls
know where you are, so your food is whisked right to you, as if you were Belle herself. All in all, a
seamless experience that won top innovation honors from the National Restaurant Association.[141]
MagicBand can also turn a long ride wait into a time-filling interactive experience. Photos
taken by park photographers and other in-experience cameras are linked to your band’s ID and will
feed images to your My Disney Experience smartphone app, ready for saving or social sharing—a
nice way to kill time while waiting in line.[142] The popular EPCOT Test Track ride is notorious for
its lines, but clever design fills the wait with a touch-screen auto-design session where users create
their own car for integration into the attraction when they’re ready to roll. Guests can also create a
custom car commercial. Disney survey data suggests a thirty-five-minute wait time for Test Track
feels like it’s only been fifteen to twenty minutes.[143]
Some MagicBand+ experiences will occur automatically. For example, enter the Haunted Mansion and the MagicBand+ will begin pulsing red, like a creepy heart beat. Other locations prompt
the user to tap or wave devices next to statues or other attractions, which prompt customers to
wave their arms or give another gesture to hear a character message or see a light show. When fireworks start, customers can wave MagicBand+ in front of the display to see their wrists light up
and pulse in time with the show. Still others link the MagicBand+ with a smartphone. MagicBand+
devices will pulse green or red, sort of like the child’s game “you’re getting hotter, you’re getting
colder” so you can hone in on the location of bad guys to capture when acting as a Star Wars bounty
hunter. Hold your smartphone up to nearby walls to nab your quarry, Boba Fett–style.[144]
The Magical Express service is now retired but, for a time, guests could also use their MagicBands as part of the 'Magical Express' luggage transfer service. If packed bands were in your
luggage, it would be forwarded to the hotel where an RFID scanner (the UHF chip could be read
as far as 10 meters away) identified bags so hotel staff could drop them in your room.[145] You could
drop your bags off before boarding your plane, and you wouldn't have to touch them again 'til they
showed up in your room when you arrived at a Disney resort, just like magic!
Big Data and Big Benefits
Disney World is really more of a city than a resort. It occupies twice as much land as Manhattan,
contains four major theme parks, some 140 attractions, 300 dining locations, and 36 hotels. The fifteen-mile monorail alone hosts an average of 150,000 rides each day.[146] Driving far-reaching delight
alongside efficiency at scale is the major goal of the MyMagic+ system that contains the MagicBand+ trip planning and operations technology.
Guests use the park’s website and apps before they show up in Orlando as well as during
their stay. The MyDisneyExperience App can be used to plan your itinerary, complete with predicted wait times. Like the MagicBand, the app can also act as your theme park entry, link to credit
cards for in-park purchases, and can be used to redeem prescheduled Lightning Lane rides. The
app also organizes park photos, including those taken by roaming park photographers as well as
sessions with Disney characters.[147] Information from these systems, when coupled with real-time
data collected from MagicBand-wearing guests, delivers more insight to tailor many more service
improvements than if guests were free-ranging around Disney World without prior planning.[148]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
Disney analysts saw that some guests were traversing the park upward of twenty times a day to
see all the rides they were most interested in. Now park systems crunch data so the Mouse House
can craft a custom guest itinerary that eliminates a frustrating zigzag across the many realms of
the Magic Kingdom. It also allows booking ride reservations to minimize wait times and spreads
out guests to further cut line time. With an average of 8,000 to 10,000 guests flowing through the
park’s main entrance every hour, Big Data analytics and efficient scheduling algorithms keep everyone happier. Another benefit to satisfied customers? They’re less likely to decamp for nearby rival
parks such as Universal Studios, Sea World, and Legoland.
Data helps Disney know when to add more staff at rides and restaurants; how to stock restaurants, snack bars, and souvenir stands; and how many costumed cast members should be roaming
in various areas of the park. If a snafu arises, such as an unexpectedly long line or a restaurant
menu change, a custom-crafted alert with alternative suggestions can go out via text or e-mail.[149]
At some point, systems might be able to detect when guests have waited too long or otherwise had
an unexpectedly frustrating experience, offering a treat coupon or a pass to another ride. These
kinds of systems have allowed casinos to turn negative experiences (losing big in slots) into positive
ones.[150]
And experiences pioneered at theme parks may turn into other Disney products. For example,
some Disney Resorts installed a special Amazon Alexa device that responded to the “Hey Disney!”
keyword and could be set up to interact with Disney, Pixar, and Star Wars character voices. The Disney Magical Companion is now available as an Alexa add-on for Amazon Echo and devices offers
story telling, interactive adventures, trivia, and more. Are the kids going to have a snow day tomorrow? You might get the update in the voice of Olaf, the snowman from Frozen.[151]
Disney says the MagicBand and supporting systems have cut turnstile transaction time by 30
percent, guests are spending more money, and systems have increased efficiency to the point where
Disney World can serve 3,000 to 5,000 additional guests per day.[152] Real-time customer data pumped
through Disney machine learning algorithms also improves scheduling of over 80,000 employees
across 240,000 shifts each week. When Disney knows when and where a family will eat, they can
shift chefs and servers to meet demand and start food so pre-orders are ready right when guests
arrive. Accurate staffing where and when employees are needed further boosts customer satisfaction and cuts loss from over-scheduling.[153]
Magical Experiences Cost Serious Coin
These systems don’t come cheap. It’s estimated that Disney spent $1 billion on MyMagic+.[154] Over
one hundred systems needed to be integrated to make the park function in a unified, guest-delighting way.[155] The cost just to redesign and integrate the DisneyWorld.com website with MyMagic+ is
said to have cost about $80 million.[156]
Moore’s Law turns embedded technology at scale, a once-impossible proposition, into a nowjustifiable business-enhancing expense (albeit a big one). More than 28,000 hotel doors needed
replacement locks to work with MagicBand. Two dozen workers spent eight months upgrading 120
doors per day, trying to be unobtrusive in properties that boast an 80 percent average guest occupancy rate. Two hundred eighty-three park-entry points also had to be upgraded. More than six
thousand mobile devices (mostly iPod Touch and iPads with custom apps) were deployed to support new park systems. Disney World also needed to install more than 30 million square feet of
Wi-Fi coverage.[157] According to a source in a Fast Company article, “It was a huge effort to wire a
communications infrastructure that was basically the same size as San Francisco.”[158] And you can’t
roll out a major tech initiative without making sure your staff knows how to use it. Over 70,000
“cast members” (Disney’s name for its employees) received MyMagic+ training, with 15,000 skilledup in specifics such as the FastPass+ ride reservation system and later the Genie+ Lightening Lane
system ride reservation system and MagicBand merchandising.[159]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
197
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Information Systems
Putting tech on the wrist of every guest also adds a marginal cost to everyone coming through
the door. The firm spent only four cents each to print paper tickets, but the early prototype for MagicBand came in at $35. Fortunately[160] Moore’s Law, savvy engineering, and buying at scale kicked
in, and manufacturing costs for bands fell below $5 for the original MagicBand,[161] a much more tolerable price when tallied against the myriad benefits delivered to each visiting guest. And while
customers shell out at least $35 for MagicBand+, Disney has also learned that superfans are willing
to spend even more to trick out their wrists. Custom options for MagicBand+ sell for even more,
as do an array of personal add-ons such as “MagicBandits”—tiny tags of character themes that clip
around the spare holes in your MagicBand strap (think Croc Jibbitz charms, but for your wrist).
Magical Experiences Can Require Magical
Coordination
Political challenges can also arise when designing and deploying large-scale systems. Lots of groups
have a stake in the outcome, and coordinating differing ideas, opinions, and agendas can be taxing.
The MagicBand systems impacted park operations, infrastructure, hotels, and marketing, among
many other areas. Disney’s IT group was heavily involved in systems development and operation,
and needed to lead integration with many existing systems and the replacement of others. The
powerful Imagineering team, the group that designs much of the theme park wizardry that puts
the magic in the Magic Kingdom, was also deep into the decision-making. Add to this additional
work from third parties, including frog design, a renowned high-end global design consultancy
whose prior clients include Apple, Lufthansa, and UNICEF; and tech consulting from Accenture, HP,
and Synapse, among others.[162] In such a disparate group, conflict, even among the well intended,
was inevitable.
Fortunately, the project benefited from strong executive leadership—a key to many successful
transformative projects. The effort was led by Disney’s vice president of business development[163]
and had the full support and backing of Disney CEO Bob Iger, who regularly discussed the project
with the firm’s board of directors. Iger’s involvement sent a clear message: We’re doing this, and the
resources will be there to support the effort. The exploratory team for the Next Generation Experience project, or NGE (the early name for what would develop into MyMagic+ and MagicBand),
included some of the firm’s most senior execs in theme park and Disney World management.[164]
The core team for the project included senior execs in technology, Imagineering, theme parks, and
business development.[165] Disney’s COO has stated the project actually came in a bit under budget,
although delays and a staged rollout left many of the originally envisioned features to be introduced over time.[166]
Expanding Offerings and Looking to the
Future
Additional services on deck include sharing data so that hosts and costumed cast members can
issue birthday greetings, and rollout of even more interaction, such as animatronics that call you
by name as you walk up to them.[167] Look for even deeper integration with Disney World areas
Pandora, World of Avatar, and Star Wars: Galaxy’s Edge. Disney’s theme park and resort destinations are, collectively, a roughly $29 billion business.[168] The Disney attractions empire is massive
and includes theme parks in Anaheim, Paris, Shanghai, Tokyo, and Hong Kong; cruise lines; adventure travel; arcades; and ESPN properties. MagicBands and related technologies are already in
use in U.S. theme parks, coast to coast, and on Disney Cruise Lines, but technologies can benefit other attractions even without MagicBand+. Shanghai Disneyland visitors can leverage much
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 6
Moore’s Law and More: Fast/Cheap Computing and What This Means for the Manager
of this technology via a mobile phone experience, which better matches with the smartphone use
of Chinese customers.[169] Innovations started in the MagicBand initiative have also led to Disney
Genie—an app that makes planning a trip to massive Disney World far easier. Simply tell the system your interests—princess experiences for the little ones, EPCOT foodie tours, thrill rides for
adults or older kids, and the app will evaluate millions of options and arrive at an optimal plan (no
doubt AI is involved behind the scenes). The app will dispense tips and advice throughout a guest’s
stay, and will respond to last-minute changes if a guest modifies their interests on-the-fly.[170] Disney
parks have an annual admission of over 157 million guests a year.[171] At that scale, innovations and
bar-setting experiences have a massive influence on overall customer expectations.[172]
Rivals undoubtedly will adapt versions of Disney’s success to their own offerings. Universal has
already introduced its TapuTapu wearable, which vibrates with alerts and includes a screen notifying users when it’s time for their ride—no long queue needed![173] And Carnival Cruise Lines Expect
hired the Disney vice president who led the MagicBand effort.[174] But while players in other hospitality and entertainment markets study Disney in hopes of creating a bit of sorcery of their own,
Disney’s fast/cheap tech and data-fueled insights act as rocket fuel to propel their scale and brand
advantages toward even more impact than they’d realize without tech magic.
Key Takeaways
• The Disney MagicBand handles many tasks, including park and attraction admission, payment, staff notification for improved service, and security such as hotel room admission.
• These devices aren’t just used for fast “ticket-like” scanning, they also gather data, which is
used in analytics and artificial intelligence efforts to further cut costs and improve efficiency.
Remember, the front end of the Moore’s law-enabled device also leverages an enormous set
of back-end technologies for data capture, analysis, and outbound coordsination.
• Deploying a project like MagicBand involves integrating over 100 existing and new systems
into the firm’s overall set of information systems. The experience cost roughly $1 billion to
deploy.
• Many internal and external groups were involved. Differing opinions and agendas often make
large projects politically challenging to coordinate. Having the CEO champion the effort, and
senior executives from various groups lead development, helped reduce debilitating infighting and helped the project come in under budget.
Questions and Exercises
1. What is the MagicBand? What technology is inside it and what does it do? How do the bands
benefit the customer experience? What benefits does Disney realize from the system?
2. In addition to designing and creating bands, what else did Disney need to do to pull off this
effort? How many systems were involved? What infrastructure needed to be upgraded?
3. There’s a lot you can do with technology, but Disney is also crafting a very special, branded
experience. Do you think Disney got it right, or does the technology seem like it would interfere with the experience? Why or why not?
4. What more can and should Disney do with this technology?
5. Large technical projects can be a challenge to design and deploy. Why? How did Disney cut
through some of these challenges and eventually deliver a project within goals and within
budget?
6. How does Disney deal with security and privacy concerns? Do you think these precautions
are enough? Why or why not?
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
Endnotes
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134. L. Liang, "Does e-money make you spend more?" BBC, Dec. 5, 2019.
135. A. Kaptagayev, "Disney Magic with Big Data," Harvard Business Review,
March 22, 2021
136. Unattributed, "10 Lessons Disney's MagicBand Can Teach Other Theme
Parks,"
ID&C—https://www.idcband.com/en-us/blog/10-lessons-disneys-magicband-can-teach-other-theme-parks/
137. Unattributed, "Everything PLUS About MagicBand+ in Walt Disney World
and Disneyland Resort," The Disney Food Blog, Oct. 26, 2022.
138. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
139. C. Kuang, “Disney’s $1 Billion Bet on a Magical Wristband,” Wired, March
10, 2015.
140. B. Cha, “Tomorrowland Today: Disney MagicBand Unlocks New Guest
Experience for Park Goers,” AllThingsD, May 29, 2013.
141. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
142. C. Smith, “A Day Out With Disney’s Magic Band 2,” Wareable, April 11,
2017.
143. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
144. C. Caramanna, "Is Disneyland's MagicBand a waste of money? Maybe,
but it's fun," SFGate, July 10, 2023.
145. Unattributed, "10 Lessons Disney's MagicBand Can Teach Other Theme
Parks,"
ID&C—https://www.idcband.com/en-us/blog/10-lessons-disneys-magicband-can-teach-other-theme-parks/
146. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
147. Unattributed, “My Disney Experience,” https://disneyworld.disney.go.com/
guest-services/my-disney-experience/mobile-apps/.
148. C. Kuang, “Disney’s $1 Billion Bet on a Magical Wristband,” Wired, March
10, 2015.
149. C. Palmeri, “Disney Bets $1 Billion on Technology to Track Theme Park
Visitors,” Bloomberg Businessweek, March 7, 2014.
150. C. Kuang, “Disney’s $1 Billion Bet on a Magical Wristband,” Wired, March
10, 2015.
151. J. Weatherhead, "‘Hey Disney!’ voice assistant is now available on US
Echo devices," The Verge, June 15, 2023.
152. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015; and C. Palmeri, “Disney Bets $1 Billion on Technology to Track
Theme Park Visitors,” Bloomberg Businessweek, March 7, 2014.
153. A. Kaptagayev, "Disney Magic with Big Data," Harvard Business Review,
March 22, 2021
154. K. Shehy, "Should Disney Have Made These Billion Dollar Bets?" Disney
Food Blog, May 25, 2021.
155. C. Kuang, “Disney’s $1 Billion Bet on a Magical Wristband,” Wired, March
10, 2015.
156. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
157. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
158. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
159. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
160. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
161. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
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162. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
163. J. Hollander, "Disney’s MagicBand: Breaking Down One of Hospitality's
Greatest Innovations," Hotel Tech Report, Oct. 28, 2022
164. C. Kuang, “Disney’s $1 Billion Bet on a Magical Wristband,” Wired, March
10, 2015.
165. C. Kuang, “Disney’s $1 Billion Bet on a Magical Wristband,” Wired, March
10, 2015.
166. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
167. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
168. Staff, "Revenue of the Walt Disney Company in the fiscal year 2022, by
operating segment," Statista, Aug. 29, 2023.
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169. A. Carr, “The Messy Business of Reinventing Happiness,” Fast Company,
May 2015.
170. M. Patches, "Disney Parks announces Disney Genie, a super app that will
plan your trip," Polygon, Aug. 25, 2019.
171. C. Smith, "Annual Disney Park Attendance Statistics and Charts | Disney
Parks Resources," DisneyNews, June 4, 2023.
172. C. Kuang, “Disney’s $1 Billion Bet on a Magical Wristband,” Wired, March
10, 2015.
173. M. Schneider, “Universal Orlando Resort’s new wristband lets you skip
lines, pays for food at new water park,” The Associated Press, May 17,
2017.
174. J. Jainchill, "John Padgett named Princess Cruises president," TravelWeekly, Oct. 12, 2021.
CHAPTER 7
Disruptive Technologies:
Understanding Giant Killers
and Tactics to Avoid
Extinction
7.1 Understanding Truly Disruptive
Innovation
Learning Objectives
1. Identify the two characteristics of disruptive innovations.
2. Understand why dominant firms often fail to capitalize on disruptive innovations.
3. Recognize examples of past disruptive technologies and learn from the disruption that faced
once-dominant firms, including Kodak and, currently, Intel.
Kodak once had 145,000 employees, a market share near 90 percent,[1] and profit margins so good an
executive once bragged that any products more lucrative than film were likely illegal.[2] No firm was
closer to photographers. No brand was more synonymous with photographs. Emotionally moving
images were known as “Kodak moments.” And yet a firm with so much going for it was crushed
by the shift that occurred when photography went from being based on chemistry to being based
on bits. Today Kodak is bankrupt, it’s selling off assets to stay alive, and its workforce is about onethirty-fourth what it used to be.[3]
The fall of Kodak isn’t unique. Many once-large firms fail to make the transition as new
technologies emerge to redefine markets. And while these patterns are seen in everything from
earthmoving equipment to mini mills, the tech industry is perhaps the most fertile ground for
disruptive innovation. The market-creating price elasticity of fast/cheap technologies acts as a catalyst for the fall of giants.
The Characteristics of Disruptive Technologies
The term disruptive technologies is a tricky one because so many technologies create market shocks
and catalyze growth. Lots of press reports refer to firms and technologies as disruptive. But there is
a very precise theory of disruptive technologies (also referred to as disruptive innovation—we’ll use
both terms here) offered by the late Harvard professor Clayton Christensen that illustrates giant-
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killing market shocks, allows us to see why so many once-dominant firms have failed, and can shed
light on practices that may help firms recognize and respond to threats.
In Christensen’s view, true disruptive technologies have two characteristics that make them
so threatening. First, they come to market with a set of performance attributes that existing customers don’t value. Second, over time the performance attributes improve to the point where they
invade established markets.[4] (Refer to Figure 7.1.)
These attributes are found in many innovations that have brought about the shift from analog
to digital. The first digital cameras were terrible: Photo quality was laughably bad (the first were
only black and white), they could only store a few images and did so very slowly, they were bulky,
and they had poor battery life. It’s not like most customers were lined up saying, “Hey, give me more
of that!” Much the same could be said about the poor performance of early digital music, digital
video, mobile phones, tablet computing, and Internet telephony (Voice over IP, or VoIP), just to name
a few examples. But today all of these digital products are having a market-disrupting impact. Digital cameras have all but wiped out film use, the record store is pretty much dead, mobile phones
for many are their only phone, in many living in emerging markets the smartphone is one’s only
personal computer, Internet phone service is often indistinguishable from conventional calls, and
while Internet voice calls are now common in many services, VoIP enabled Skype to be acquired for
several billion dollars and at one time be considered the world’s largest long-distance phone company.[5] All of these changes were enabled by fast/cheap technologies, largely by the trends we see
in the chart from the prior chapter labeled Figure 6.2.
FIGURE 7.1 The Giant Killer
Incumbent technologies satisfy a sweet spot of consumer needs. Incumbent technologies often improve over time,
occasionally even overshooting the performance needs of the market. Disruptive technologies come to market with
performance attributes not demanded by existing customers, but they improve over time until the innovation can
invade established markets. Disruptive innovations don’t need to perform better than incumbents; they simply need
to perform well enough to appeal to the customers of the incumbents (and often do so at a lower price).
Source: Adapted from C. Christensen, The Innovator’s Dilemma (Boston, Mass.: Harvard Business School Press, 2013).
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
Some Examples of Disruptive Innovation
The technology industry, in particular, tends to fuel disruptive innovation as fast-cheap technology
creates that special kind of price elasticity where whole new markets open up, allowing the
impossible become possible. Here are just a few examples to get you thinking.
• Web Video for TV and Movies
• This technology was initially terrible—wired and wireless broadband were not widely
available, and broadband was expensive and often unreliable. Also, few consumer
electronics devices could connect to the Internet to offer streaming.
• Cheaper processors allowed for Internet-accessing smarts to be embedded into televisions, DVD players, and many other products. Mobile devices became ubiquitous, and
consumer broadband came to the home, plus high-speed wireless helped to make
streaming quality far more reliable. Consumers also valued new traits, such as availability through mobile devices and time-shifting so they could watch shows on their
schedule rather than rely on network programming.
• Netflix was one of the few firms to navigate through a radical, tech-fueled disruption. It
leveraged its dominance in one industry to create a new business within its business
that could respond to the completely different demands of the disruptive innovation
(and today streaming is the firm’s only business). Netflix also had the foresight to make
investments ranging from APIs for hardware providers to unique content, doubling
down with more investment when the value of these innovations became apparent.
• Digital Audio
• Portable MP3 players were initially terrible. They were expensive and held less music
than a CD, and it took time to “rip” music from a CD, then transfer it to devices. Storing
music on a hard drive was also more expensive and less reliable. The leading consumer electronics firm at the start of this shift, Sony, was also a player in music, and
didn’t want to see its retail partners threatened by disintermediation, and it was concerned about potential piracy and the devaluation of album sales if songs could be
unbundled.
• Apple timed its arrival to the market as storage became smaller and cheaper, and did
so with the easiest-to-use solution available. The launch of iTunes made even more
digital music available and gave the firm a near monopoly on digital music hardware
and music distribution—to the point where it could dictate pricing terms to suppliers. Disrupted firms included consumer electronics firms that were locked out of using
iTunes-compatible tech, as well as record and CD shops.
• Apple’s reliance on the U.S. market, where consumers preferred to buy music, where
mobile broadband was less reliable, and where licensing deals for music differed from
global markets, led the firm to ignore streaming music. As a result, a Swede in his
twenties, Daniel Ek, launched Spotify—a firm that grew to dominate the market before
it became available in the United States. By the time Apple responded with Apple
Music, Spotify already had millions of customers and had created data- and switching-cost–based advantages. Other disrupted firms included radio stations, which are
a less attractive alternative as consumers and AI smarts helped handpick commercialfree entertainment targeted directly at a user’s tastes.
• Ride-Sharing Services
• Get in a stranger’s car? That sounds crazy. And there wasn’t enough availability to
make ride-sharing a reliable alternative for the familiarity of taking a cab, an industry
that had enjoyed regulatory advantage in many cities.
• Uber helped usher in the sharing economy and gig work. As its brand grew, there were
many more Uber drivers in an international brand than there were taxis. Ride prices fell,
and reliability and security all proved superior to anything offered by cab firms.
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Why Big Firms Fail
Those running big firms fail to see disruptive innovations as a threat not because they are dumb
but, in many ways, because they do what executives at large, shareholder-dependent firms should
do: They listen to their customers and focus on the bottom line. And because of the first characteristic mentioned, the majority of a firm’s current customers don’t want the initially poor-performing
new technology. The most disruptive technologies also often have worse margins than the initially
dominant incumbent offerings. Since these markets don’t look attractive, big firms don’t dedicate
resources to developing the potential technology or nurturing the needs of a new customer base.
Your best engineers are likely going to be assigned to work on cash cow offerings, not questionable
new stuff. This results in a sort of blindness created by an otherwise rational focus on customer
demands and financial performance.
Those early customers for a disruptive technology are part of a different “value network” than
anything addressed by incumbent market leaders.[6] These customers care about different features
and attributes than incumbent customers (e.g., a free call over a quality call; portable music over
high-fidelity music). But over time, the disruptive technology becomes good enough to appeal to
customers of incumbent products and invades these markets. By the time the new market demonstrates itself, startups have been at it for quite some time. They have amassed expertise and often
benefit from increasing scale and a growing customer base. The brands of firms leading in developing disruptive innovations may also now be synonymous with the new tech. If this happens, big
firms are forced to play catch-up, and few ever close the gap with the new leaders.
There’s no chance that the iPhone is going to get any significant market share. No
chance.
—Steve Ballmer, at the time Microsoft’s CEO, shortly after the launch of the iPhone[7]
Referring to the preceding quote, how could Ballmer have gotten the market so wrong? While
Microsoft experimented with phone and mobile operating systems both before and after the
launch of the iPhone, analysts suggest that as a software-focused firm, Microsoft saw mobile
devices as a lower-margin niche market that was easily overlooked when compared to markets
where it currently played. At the time, Microsoft was focused on new releases of its cash cow Windows desktop and server operating systems, and it was racking up record profits with products
ranging from the Xbox to the Enterprise market.[8] As for Ballmer's prediction, the iPhone went on
to become the most profitable line of consumer electronics devices in the world and catapulted
Apple past Microsoft and all other firms to the number one ranking in lists of both the most profitable and most valuable public companies in the United States.
Intel—a Study of Disruption in Progress
One firm threatened by disruptive innovation brought about by the advent of new fast/cheap
technology and an unforeseen shift in demand for product categories it had not invested in
is, ironically, processor giant Intel. Intel’s recent woes are due to an incursion from two significant and initially ignored rivals. One is ARM, a firm known for developing chips for mobile
phones, which were considered less-powerful, lower-margin products than Intel’s high-performance, high-margin laptop and server processors. Second is the meteoric rise of Nvidia—a firm
initially known for developing graphics chips and which is now valued at over $1 trillion and
dominates the high-margin, fast-growing market of the future—chips that power AI and machine
learning.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
Chips based on Intel rival ARM power nearly all of the smartphones on the planet. Samsung,
Apple, Motorola, and Xiaomi all use chips with ARM smarts. ARM designs are especially attractive
to smartphone manufacturers because they are far more power-efficient than the chips Intel sells
for PCs, laptops, and servers. Intel chips were never designed for power efficiency; they evolved
from markets where computers were always plugged in. But thanks to Moore’s Law, a market where Intel never had much success, chips for mobile phones, has grown to invade Intel’s
most lucrative products for desktop computing and the server farms that enable cloud computing. Note that ARM is a decidedly different kind of chip firm. While Intel is highly vertically
integrated—entirely designing its own chips and even manufacturing them in its own fabs—ARM
is more of an arms merchant (no pun intended). It sells intellectual property—super-efficient and
very powerful core processor designs—to firms like Apple, Samsung, and Qualcomm, who adapt
designs to their own needs. ARM doesn’t manufacture chips; every firm using ARM designs
farms chip production out to third parties like TSMC. Firms licensing ARM technology tweak the
firm’s core technology and may incorporate as many cores as needed. For example, a firm needing a simple, low-power, low-cost temperature sensor might create a chip with just one ARM
core. Apple uses up to sixteen ARM cores in its M3 Max chip, and customizes this with a further
forty custom GPU (graphics processing unit) cores.[9] Firms building custom ARM-based chips for
use in cloud server farms may have ninety-six or more cores.[10]
When Apple was developing the iPhone, the firm had initially asked Intel’s then CEO Paul Otellini
to create a mobile chip for Apple.[11] At the time, Apple was one of Intel’s highest profile customers, having standardized on the firm’s laptop and desktop processors for Macs. But the
market for mobile was a lower-margin space than laptop, desktop, and server chips, and Apple
was proposing that Intel dedicate scarce development and manufacturing resources to the unreleased and unproven iPhone, making Apple Intel’s only large mobile client. It’s easy to see how
Intel execs would view this as a bad business decision for the chip giant. Of course, the iPhone
went on to be a multi-billion-unit global juggernaut. Even worse, as Moore’s Law advanced, ARM
chips (once computational weaklings) became fast enough to invade the established market for
laptop and server chips. Apple had opted to use ARM technology as the basis for the Ax chips
used in its smartphones, but then gained so much chip design expertise that it eventually introduced its own “better-than-Intel” homemade rival for the Mac—the chip known as the M1 in
its first generation. The consequences for Intel were devastating. Apple’s first laptop/desktop
chip was as much as 3.5 times faster than Intel chips used in earlier Macs, with graphics processing up to 6 times faster. M1 chips also included special machine learning capabilities that
were up to fifteen times faster than what could be done using Intel chips, all while achieving
25 percent better power efficiency.[12] Ironically, the switching cost that had bolted customers to
Intel’s standard had become an albatross for the firm’s designs. One reason M1 was so much
faster than Intel chips is that Apple engineers didn’t have to conform to the decades-old Intel chip
architecture and could use entirely different designs that leveraged cores for things like parallel
computation, power consumption, and on-chip machine learning and AI. Existing owners had
software written for Intel chips, and running these programs on non-compatible ARM-based M1s
required slowing things down a bit by using a software translation layer. And it would take a few
years to get all Mac developers to recompile and release updated programs for Apple’s new M1
standard. But in this case, the benefits of the new M1 technology far outweighed any temporary switching cost burden. Intel not only lost one of its best customers, but was also humiliated
by astonishing gains a firm could make if they dropped the world’s most widely used processor standard. Other firms are also pushing ahead with non-Intel processors. HP offers a line of
servers that use ARM logic, and AMD, an Intel rival that has long made chips compatible with
Intel’s x86 standard, has created server chips based on the incompatible but power-stingy ARM
logic. Microsoft has committed to using ARM chips in its data center, offers an ARM-compatible version of Windows that run on everything from tablets to servers. HP, Google, and even
Amazon have adopted ARM chips and in many cases used ARM technology to design their own
custom silicon for high-end cloud installations—a dagger blow aimed right at the heart of Intel’s
most lucrative markets.[13] Further insult occurred when the world’s supercomputing crown was
at one time taken by Japan’s Fugaku, which relied on computational power from special fortyeight-core ARM-based chips[14] running a massively parallel architecture harnessing upward of 8
million simultaneously computing cores.[15]
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The Competition for ARM’s Technology Is Ferocious
The Financial Times discusses ARM’s business, the firm’s acquisition by the private equity
firm Softbank, the acquisition attempt by Nvidia, and prospects for the firm’s IPO.
View in the online reader
Intel has also been surpassed in both value and profits by Nvidia. The firm has grown from
a virtual unknown (one analyst stated the company's name “looks like someone fell asleep on
a keyboard”), but today Nvidia is the undisputed leader in AI and machine learning chips.[16] If
you've used generative AI, for example, asking DALL-E to create an image for you, the result
was almost certainly produced using Nvidia chips. OpenAI, the firm behind ChatGPT, used some
10,000 Nvidia processors to train its industry-changing AI model.[17] Advances in AI started from
Nvidia's then-core product, graphic chips. Turns out that chips that split up the calculations used
by PC games to build scenes in pieces and reassemble them as smooth animations were also
great at generating and testing models for machine learning and artificial intelligence. Today,
Nvidia has an over 80 percent share of the graphics chip market[18] and by some estimates an
over 90 percent share of the AI-focused boards used in high-end AI and machine learning.[19] By
Spring 2023 Nvidia's market cap soared over $1 trillion—once again David has become Goliath.
In true disruptive tech style, Nvidia has consistently placed early bets on markets that had barely
existed when it entered, including making chips for PC gaming and machine learning. Jensen
Huang, the firm's co-founder and CEO, refers to these as “$0 billion markets.” But getting the
timing right to disrupt markets can be tough. The firm was nearly bankrupt in 1997 just before
it released its first graphic processor for PCs—a move that saved the company. The firm was
forced to pull out of the mobile market when its ARM rival was a product no one wanted (turning
lemons into lemonade, that chip led to a product now used in robots and autonomous vehicles).
Nvidia’s foray into machine learning chips for server farms came in 2007, before today's redhot AI market existed. A year later, during the financial crisis, Nvidia’s market cap slipped below
$5 billion. But at one point in 2023 Nvidia was growing by “a Netflix every few hours”,[20] as the
firm's market cap soared above $1 trillion, a business achievement at the time enjoyed only by
household name firms like Apple, Amazon, and Google (er, or at least Google's parent, Alphabet). At one point, Nvidia even tried to buy ARM, but global regulators put the kibosh on having
a single firm control so much of the microprocessor market.[21] Nvidia's approach to AI is quite
strategic. Rather than simply being a firm that provides chips that run fast algorithm, Huang has
powered ahead with a platform strategy (refer to Chapter 10), with Nvidia offering a full ecosystem around its chips including additional hardware, operating systems, SDKs, and services.[22]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
How Nvidia Grew from Gaming to AI Giant, Now Powering ChatGPT
CNBC provides an overview of Nvidia and its rise to become a $1 trillion market cap firm.
View in the online reader
Another development that all firms in the microprocessor space should watch is the rise of RISCV (pronounced “risk five”). This is an open source chip architecture that started at the University
of California Berkeley's Parallel Computing Lab and that is already being used in microcontrollers
that power Internet of Things devices—a market where ARM cores currently dominate. Companies can modify RISC-V core designs and choose whether or not they want to release the
modifications as open source, but firms that start with RISC-V designs don't pay a licensing fee
as they would if they used ARM's proprietary technology. Notably, the nonprofit that oversees the
RISC-V consortium is based in Switzerland, where it's not subject to U.S. or EU export controls,
and several prominent Chinese firms, including Alibaba and Huawei, are members alongside wellknown multinationals; Google, Intel, IBM, and Samsung are among them. Russian and Indian
firms also have RISC-V efforts, at least in part aimed at gaining “processor independence” by
relying on RISC-V’s “sanction-free” technology.[23] Many firms are interested in an open source
alternative to ARM. While Nvidia's attempt to acquire ARM failed, some licensees were spooked
that the vital IP they bought from a neutral third-party might have been acquired by a potential
competitor. The global supply chain crisis that severely impacted the semiconductor industry also
raised concern about the vulnerabilities of relying on a single firm for key components. While as
of this writing we haven't seen significant RISC-V competitors to ARM, Intel, or Nvidia in their
core mobile, laptop, or server markets, commercial firms have already shipped billions of chips
based on RISC-V,[24] and Samsung was one of the first firms to incorporate RISC-V chips into AI
image sensors and 5G modules, and new hardware in all categories is in the works from dozens
of firms.
In an attempt to fight back, Intel has developed lower-power chips to attack the smartphone
market where ARM dominates, and had developed a Curie chip for the wearables market but
has since pulled back after failing to realize any substantive success.[25] Intel’s acquisition of
Altera was meant to give it a strong offering in the FPGA chips popular with the data center
machine learning crowd, and it has refocused low-power chip offerings on the industrial Internet of Things—hoping it can offer system-on-a-chip 5G mobile capabilities that aren’t already
locked up by ARM.[26] Even more notably, Intel has doubled-down on competition in the AI market, creating its own AI chips and AI platform, which it plans for an accelerated set of product
rollouts for the coming years.[27] Who wins remains to be seen, but Intel’s battle cry comes from
the title of a book written by a former Intel CEO, the late Andy Grove—Only the Paranoid Survive.
An adherent to the power of the Disruptive Innovation framework (Grove and Christensen once
appeared together on the cover of Forbes magazine), Grove stated, “[The] models didn’t give us
any answers, but they gave us a common language and a common way to frame the problem so
that we could reach consensus around a counterintuitive course of action.”[28]
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Key Takeaways
• Many dominant firms have seen their market share evaporate due to the rise of a phenomenon known as disruptive technologies (also known as disruptive innovations). While this
phenomenon occurs in a wide variety of industries, it often occurs when the forces of fast/
cheap technology enable new offerings from new competitors.
• Disruptive technologies (also called disruptive innovations) come to market with a set of
performance attributes that existing customers do not demand; however, performance
improves over time to the point where these new innovations can invade established markets.
• Managers fail to respond to the threat of disruptive technologies, because existing customers
aren’t requesting these innovations and the new innovations would often deliver worse financial performance (lower margins, smaller revenues).
• Intel, a firm that had a near monopoly on the microprocessor market for laptops, desktops,
and servers, is in the process of being displaced by disruptive technology posted by technologies once used in mobile phones and graphic chips. The firm’s ability to pilot through
disruption is uncertain.
Questions and Exercises
1. What are the two characteristics of disruptive innovations?
2. Make a list of recent disruptive innovations. List firms that dominated the old regime and
firms that capitalized after disruption. Are any of the dominant firms from the previous era the
same as those in the post-disruptive era? For those firms that failed to make the transition,
why do you think they failed?
3. Why do leading firms fail to recognize and react to potentially disruptive innovations? How
can a firm avoid the kind of blindness that leads to disruption?
4. Which firms are disrupting Intel? How did these firms come to threaten dominant Intel?
5. What is RISC-V and why does it appeal to some firms? What forces will it need to overcome
if it is to become a dominant player in microprocessor standards?
7.2 Recognizing and Responding to
Disruptive Innovation
Learning Objectives
1. Suggest techniques to identify potentially disruptive technologies.
2. Understand how incumbent firms might more effectively nurture their experimentation with
and development of potentially disruptive technologies.
3. Contrast the approaches used by Yahoo! and Intuit when encountering disruptive technologies, and understand how firms might learn from these examples.
4. Examine several potentially disruptive technologies, brainstorm what it might take for their
potential to be realized, and consider the potential positive and negative impacts of these
innovations across industries, workers, consumers, and governments.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
Managers: Don’t Fall Victim to the McNamara Fallacy!
Some analysts look at the past and assume this is the best guidance for the future. Doing this is
sometimes referred to as the McNamara fallacy
fallacy, after U.S. Secretary of Defense Robert McNamara, who tragically failed to see how warfare had changed during the conflict in Vietnam. The
McNamara fallacy—that is, basing decisions based on past data and examples—is especially
risky when dealing with disruptive innovation.[29] As an example, consider Uber. Many early analysts dismissed ridesharing, claiming it would never reach a size of the overall taxi market.[30] In
fact, profitable Uber, that as of this writing sports a $125 billion plus market cap, grew several
times larger than the total world taxi market.[31] What analysts making this error had done was
look at the known data—people pay for rides, so the taxi market must represent how big Uber
will be. What they failed to see was the impact that a firm with superior product-market fit and
exceptional convenience could have. Uber grew the market worldwide. Where in the past people
would ask to be “picked up at the airport,” now ride sharing is vastly more convenient. Many have
abandoned car ownership in favor of ride share. Part-time gig economy workers have flooded
areas that lacked adequate taxi service with fast-arriving ride-share. And the app-based ridesharing businesses improve just about everything, from payment to trust and safety to knowing
exactly when your ride arrives so that you can stay inside when the weather is bad. Many folks
who'd never consider a cab ride began calling on Uber, allowing the firm to achieve world-wide
two-sided network effects (more riders attract more drivers attract more riders, etc.), and now
the firm has a seemingly insurmountable lead in areas where it grew faster than rivals. As we
come to grips with new disruptions (those fueled by artificial intelligence come immediately to
mind), it's important to recognize that entire new markets will open up, creating disruptions where
past experiences provide few metrics or guidance.
Don’t Fly Blind: Improve Your Radar
So how can a firm recognize potentially disruptive innovations? Paying attention to the trajectory
of fast/cheap technology advancement and new and emerging technologies is critical. Seeing the
future involves removing shortsighted, customer-focused, and bottom-line–obsessed blinders. Having conversations with those on the experimental edge of advancements is key. Top-tier scientific
researchers and venture capitalists can be particularly good sources for information on new trends.
Increasing conversations across product groups and between managers and technologists can
also be helpful. It’s common for many firms to regularly rotate staff (both management and engineering) to improve idea sharing and innovation. Facebook, for example, requires employees to
leave their teams for new assignments at least once every eighteen months.[32]
Note that many disruptive firms were started by former employees of the disrupted giants. The
founders of Adobe, for example, came from Xerox; Apple’s founders worked for Hewlett Packard;
Marc Benioff worked for Oracle before founding software-as-a-service giant Salesforce.com. Prior
to founding Nvidia, Jensen Huang worked for chip firms LSI Logic and AMD. Eric Yuan was one
of the early developers of the WebEx video conferencing product and eventually rose to vice president of engineering for the WebEx Cisco division. But when the firm failed to listen to his ideas
on improving the product to fix flaws and improve service to existing and additional customers,
Yuan left, taking forty engineers with him, and eventually created Zoom—the multibillion-dollar
firm that would win video calling in the midst of the pandemic.[33] AnthropicAI, a firm that has garnered a $1 billion investment from Amazon and that is often named as a competitor to OpenAI, was
started by former OpenAI employees who had felt the firm was not heeding their input.[34] Employees who feel so passionate about a trajectory for future technology that they are willing to leave the
firm and risk it all on a new endeavor may be a signal that a development is worth paying attention
to.
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McNamara fallacy
When one falls victim to
decision-making based
solely on quantitative
observations linked to past
events. In disruptive
innovation, in particular,
new occurrences are
happening that change
consumer behavior,
markets, and the nature of
competition.
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Yahoo! and the Squandered Mobile Opportunity
A Bloomberg Businessweek cover story on former Yahoo! CEO Marissa Mayer’s challenges
stated that at the time Mayer took over, Yahoo! was a particularly weak player in mobile because
it “ran into a classic Innovator’s Dilemma”[35] (the name sometimes is ascribed to disruptive innovation theory, which is the title of one of Clayton Christensen’s books). Yahoo!’s success had
been built on the desktop, browser-based Web. While the firm had built a mobile team, the mobile
group was disbanded by a former CEO who struggled to justify keeping talented engineers on
underperforming projects. The mobile team leader left the company, while other members of the
pioneering mobile unit were scattered to other teams and had trouble convincing browser-centric
managers that mobile was the future. In many ways, Yahoo!’s mobile team was premature, but
more importantly, it didn’t have an executive champion to protect and nurture the team during the
pioneering phase, when financial results couldn’t be realized. It couldn’t show substantial results,
so managers were reassigned while upstarts built multibillion-dollar businesses on increasingly
powerful computers we carried in our pockets. Imagine if Yahoo!’s mobile team had been protected and allowed to experiment and grow. Could Flickr have morphed into Instagram? Could
Yahoo! Messenger have become WhatsApp?
Potential Disruptor Spotted: Now What?
All these conversations will simply expand a manager’s radar—they don’t necessarily offer insight
on how to deal with potentially disruptive innovations once spotted. Navigating this next step is
really tough. There’s no guarantee that a potentially disruptive innovation will, in fact, become
dominant. Trying to nurture new technology in-house is also a challenge. Top tech talent will often
never be assigned to experimental products, or they may be pulled off emerging efforts to work on
the firm’s most lucrative offerings if the next version of a major product is delayed or in need of
staff. And as disruptive technologies emerge, by definition they will eventually take market share
away from a firm’s higher-margin incumbent offerings. The result of the transition could contract
corporate revenues, lower profits, and incur losses—a tough thing for many shareholders to swallow.
Christensen suggested a few tactics to navigate the challenges. One is that a firm can build a
portfolio of options on emerging technologies, investing in firms, startups, or internal efforts that
can focus solely on what may or may not turn out to be the next big thing. An option is a right,
but not the obligation, to make an investment, so if a firm has a stake in a startup, it may consider acquiring the firm, or if it supports a separate division, it can invest more resources if that
division shows promise. It’s also important that these experimental efforts are nurtured in a way
that is sufficiently separate from the parent—geographical distance helps, and it’s critical to offer
staff working on the innovation a high degree of autonomy. Christensen used the analogy of the
creosote bush to explain what often happens to new efforts in big firms that don’t break out potentially disruptive innovations. The desert-dwelling creosote bush excretes and drops a toxin that
kills nearby rival plants that might otherwise siphon away resources like water or soil nutrients.
Threatened managers can act just like the bush—they’ll pull high-quality engineers off emerging
projects if a firm’s top offerings need staff to grow. Lucrative old tech has a credible case for big
budget allocations and is first in line when planning corporate priorities. But by nurturing potentially disruptive innovations in protected units (or even as separate firms), engineers and managers
focusing on new markets can operate without distraction or interference from resource-coveting
or threatened staff on other projects. This kind of separation can be vital for startups, but some
firms maintain arms-length autonomy even as their investments in potential disruptors grow quite
large. And there can be competition among investors. Both Google and Microsoft invested in OpenAI, but the latter eventually secured a 49 percent stake in the firm, gaining significant (and in some
cases exclusive) access to OpenAI’s ChatGPT/GPT tech. It’s noted that while Microsoft is in Red-
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213
mond, Washington, OpenAI’s major development office is in San Francisco, and while the firms are
close, there is no way for Microsoft to poach OpenAI staff for Redmond’s projects.
While these techniques are easy to mention in a management textbook, they are extraordinarily difficult to get right. Facebook was famously late to the mobile revolution and felt forced to make
billion- and multibillion-dollar purchases of Instagram and WhatsApp. And Google News exec
Richard Gingras has stated, “We’re just as subject as anyone else to missing key trends. The speed of
mobile, we missed that. We also missed the powerful trends in social, where frankly we’re catching
up. That’s an ongoing challenge.”[36] Sometimes consulted experts get it wrong, too. At the dawn of
commercial mobile phone technology, AT&T hired storied consulting firm McKinsey & Company to
forecast U.S. cell phone use. The McKinsey prediction of 900,000 subscribers was less than 1 percent of the actual figure of 109 million (worldwide mobile subscribers would balloon to roughly 5
billion a decade later). Despite having invented the cell phone in its Bell Labs unit, AT&T cut future
investment in the technology based on McKinsey’s wildly incorrect prediction. In order to make
up for the mistake, AT&T eventually acquired McCaw Cellular for $12.6 billion.[37] The need to further expand into mobile was also credited with AT&T’s $67 billion merger with Bell South.[38] Buyer
beware: Many times firms can’t acquire themselves out of missing a market. Microsoft bought
Nokia after its continued attempts at mobile missed the mark, deeply lagging behind Apple and
Google. Just two years after making the purchase, Microsoft wrote down the Nokia acquisition by
over 7.6 billion dollars (a loss that was more than its purchase price).[39] Identifying and nurturing
potentially disruptive technologies requires constant vigilance and relentless and broad environmental scanning.
KPIs
Intuit Pilots a Course through Disruption
One firm that has repeatedly navigated the rough waters of disruptive innovation is Intuit. The
highly profitable, multibillion-dollar firm is the leader in several packaged software categories,
including personal finance (Quicken), small business (QuickBooks), and tax prep (TurboTax) software. But the future is in the cloud, and for conventional packaged software firms, this could be
threatening. Acquisitions are one way Intuit has dealt with disruption. Mint.com is a personal
finance offering delivered over the Web and in an app that wasn’t just cheaper than Intuit’s
Quicken product—it was offered for free. (Mint makes money by making recommendations of
ways to improve your finances—and takes a cut from these promotions.) Intuit decided to buy
the upstart rival even though it was clearly cannibalizing Intuit’s efforts. It even killed an internally
developed but less successful rival product following the acquisition. Mint today remains as a
separate brand and is helping inform the rest of the firm on how to succeed with alternatives to
packaged software. The firm’s TurboTax now has cloud-based offerings and a free SnapTax
app—take a photo of your W2 and the app fills out your taxes for you automatically (you pay to
electronically file). And engineers are able to use 10 percent of their work time to explore new,
experimental ideas.[40]
Migration to the cloud also allows the firm to lean more heavily on AI smarts to automate the kind
of financial advice business owners would previously seek out from a human expert. For example,
QuickBooks Online Advanced uses AI-driven learning models to do things like detecting trends
and anomalies across a firm’s key accounting metrics, including revenues, expenses, and profits.
Tools present a custom dashboard of widgets graphically demonstrating the status of key performance indicators (often called KPIs in industry). Since many small and mid-sized businesses use
additional third-party tools to run their businesses, the firm has worked with other vendors to integrate their data into Intuit products (e.g., Amazon and Shopify storefronts, payments from Square
and PayPal), so that Quickbooks can become the platform that provides the single “source of
truth” to business owners and managers who use QuickBooks products.[41] The firm’s $7 billion+
acquisition of Credit Karma will improve the company’s ability to provide financial advice and
recommend financial products to consumers and small business owners (and earn commissions
from sales),[42] while an acquisition of Australian firm OneSaas will further the firm’s deep integration with online stores, helping companies shift online or provide better support for omnichannel
store and online sales models.[43] While you’d think that a pandemic-hobbled 2020 would have
pushed small-business-centric Intuit into crisis, the firm’s broad offerings and market-savvy shifts
helped the company revenues grow 14 percent during what many thought would be a downturn
year, with the firm’s share price up nearly 40 percent.[44]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Key performance
indicators—measurable
values defined by a firm to
demonstrate progress
toward a given goal.
Examples are quite broad
and could include
customer acquisition, cost
reduction, or improvement
in the ROI of online ad
campaigns.
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While so many firms have been thwarted by listening to existing customers and clinging to old
models that are about to become obsolete, Intuit has managed to find growth through disruption.
So-called connected services that either run in the cloud or enhance existing offerings make up
over 65 percent of the firm’s revenues.[45]
No Easy Answers
Sometimes there aren’t any easy answers for transitioning a firm that lies in the path of disruptive
innovation. The newspaper industry has been gutted by Internet alternatives to key products, and
online ad revenue for newspapers isn’t enough to offset the loss of traditional sources of income.
As an example of how bad things have been for newspapers, consider the San Jose Mercury News,
the paper of record in Silicon Valley. In a span of five years, the Merc saw revenue from classified
ads drop from $118 million to $18 million. Says Scott Herhold, a former Mercury News columnist,
“Craigslist has disemboweled us.”[46] We can relate this chapter to the five forces model covered
previously: Fast/cheap technology fueled the Internet and created a superior substitute for newspaper classifieds—ads that were unlimited in length, could sport photos, link to an e-mail address,
be modified or taken down at a moment’s notice, and, in many cases, free. There aren’t any easy
answers for saving an industry when massive chunks of revenue evaporate overnight.
Even for firms that are well armed for a battle with an emergent and disruptive newcomer, a
transition from old models to new can be costly. Consider that Disney’s streaming video effort has
lost money every quarter since Disney+ debuted, all at a time when Netflix posted positive operating income quarter after quarter.[47] Creating infrastructure and investments to play on a new,
disruptive field can be costly, and public companies trying to make the transition are likely to take
a profit hit along the way.[48] Disney may create a thriving and profitable streaming business to complement its other offerings, but it has core businesses that to some extent are cannibalized by new
offerings, and the transition has caused quarterly profit pain felt by the firm’s shareholders.
For every Kodak that suffers collapse, new wealth can be created for those who ride the wave
of disruptive innovation. Consider the thirteen guys behind Instagram. In about eighteen months,
they built a billion-dollar business that now has over 500 million users worldwide.[49] Word to the
wise: For your best bet at being a tech victor and not a tech victim, keep your disruption-detecting
radar dialed up high and watch the trajectory of fast/cheap technology curves.
additive
manufacturing
Another term for 3D
printing. A technology
where parts are built by
adding material, rather
than carving, milling, or
machining parts from a
larger block of material. In
additive manufacturing,
waste is minimized and
techniques can sometimes
produce products that are
impossible to replicate
with conventional
methods.
Potential Disruptive Technologies
Predicting the future is always a challenge, but the following are just a small number of potentially
disruptive innovations. Note these differ from the list in the prior section because these are potential disruptors and it remains to be seen if the weak performance attributes that hold back many
of these innovations will improve to the point where they can invade established markets. Discuss
with classmates why these technologies might fail or succeed. If they succeed, how might they
impact society and a broad swath of industries? Also try to identify additional potentially disruptive technologies, and make the case for their impact and which firms should be considering
investing in this tech today.
• 3D printing—Most consumer 3D printing used today is just plastic trinkets or small-market
hobbyist work. High-end 3D printers (often referred to as additive manufacturing
manufacturing) with
stronger materials are available, but they are both expensive and slow. But what happens
if you can print and assemble products instead of buying them? What if you can repair
products easily from home? Are there dangerous products that can be 3D printed? Are
there categories that go beyond parts that might also be 3D printed—clothing, food, others?
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
• Augmented reality (AR)—Today the tech is clunky when implemented through a mobile
device, and headsets are cumbersome, often expensive, and devoid of fashion. But if lowcost headsets could be worn like glasses, how might an AR overlay change industries?
Could you be coached through a plumbing or electrical repair so a technician wouldn’t
need to come to your home? Would you recognize acquaintances as they approached?
Could “gait analysis” or other machine learning techniques tip you off to an approaching
criminal or con artist? Will we need to update laws to prevent immediate integration with
things like facial recognition, dating sites, and other data? How would AR impact sports,
entertainment, education, fitness, wellness, and health care?
• Cryptocurrencies and blockchain—Today’s products offer unstable values, are difficult to
transact with, and are favored by cybercriminals. But could the regulation-free, mostly
private, instantly transferable blockchain usher in microtransactions that are better than
high-fee credit and debit cards, or fee-heavy cross-border money transfers? Could they
enable commerce in regions that aren’t served by credit cards and other banking services? Could blockchain technology create more secure transaction and asset ownership
tracking? How might this technology present a societal danger?
• Gene editing—This technology hasn’t proven widely impactful yet, but could re-programmed cells eliminate the need for huge swaths of the pharmaceutical industry and
upend health care? As prices fall, what threats might occur if disparate groups have
access to gene-editing technologies?
• Driverless cars—We’re seeing more driverless tech embedded in consumer vehicles, but
still haven’t seen widespread adoption of the technology. Will roads become more or less
congested? How will this impact car ownership, urban centers, traffic, parking real estate
needs, and public transportation? Will driverless recreational vehicles cause some people
to opt to live without permanent homes, and would that create additional infrastructure
needs/shifts/opportunities? How many jobs will be displaced by autonomous trucking and
shipping, and are autonomous flights a possibility?
• Wireless technologies—Will satellite Internet or “next-gen” wireless technologies eliminate
the need for wired homes? Create increased opportunities for ubiquitous smart devices?
Allow things like reliable remote robotic surgery and autonomous vehicles?
• Battery and related renewable fuel technologies—When we can reliably store and
recharge renewables, what will happen when the entire fossil fuel industry becomes
unnecessary? What are the implications for climate, extraction industries, waste management, and geopolitics?
• Generative AI—Today’s generative AI like ChatGPT can be inaccurate and hallucinate, but
AI capabilities are increasing at a staggering clip. If generative AI becomes more reliable,
how will this impact fields like tax prep and accounting, programming, graphic design,
legal professions, medical diagnosis, teaching, and more?
• Robotics—What disruptions will occur as robotics become less expensive and more common? How will robots impact factory work, lawn-care industries, farming, and other types
of manual labor from house painting to construction? Can you imagine robotics and AI
teaming to replace entire segments of health care? Consider optometrist—can you imagine a day where you’d sit for an AI-administered eye exam, then have machines mill or
print custom eyewear on the spot?
• Quantum computing—Currently quantum computers are massive, expensive devices that
have to be cooled to roughly –460°F (that’s not a typo, it’s below –270°C).[50] Some of
what have been touted as significant advances in quantum computing are also algorithmic
demonstrations with no practical use case.[51] But if the promise of quantum computing
can be realized, calculations and simulations could be performed that would require more
computing power than could be built by all molecules in the universe.[52]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Sweetgreen Infinite Kitchen Naperville Walkthrough
For several years, your author has brought students to meet the founders of the robotic
restaurant startup, Spyce, founded by twenty-something MIT college students. Spyce has
since been purchased by the salad chain sweetgreen (itself founded by twenty-something
college students from Georgetown), and Spyce restaurants in Boston and Cambridge have
since closed. However, Spyce technology has made its debut in sweetgreen stores. Watch
as the sweetgreen “infinite kitchen” in Naperville, Ilinois, leverages Spyce tech from ordering
through meal preparation.
View in the online reader
Key Takeaways
• Some firms that rely heavily on past quantitative data to predict the future suffer from the
McNamara fallacy and are incapable of seeing changes being brought about by disruptive
innovation.
• Several techniques can help a firm improve its monitoring ability to recognize and surface
potentially disruptive technologies. These include seeking external conversations with pioneers on the frontier of innovation (researchers and venture capitalists) and internal conversations with the firm’s engineers and strategists who have a keen and creative eye on technical
developments that the firm has not yet exploited.
• Once identified, the firm can invest in a portfolio of technology options—startups or inhouse efforts otherwise isolated from the firm’s core business and management distraction.
Options give the firm the right (but not the obligation) to continue and increase funding as a
technology shows promise.
• Having innovation separated from core businesses is key to encourage a new market and
technology development focus, while isolating the firm from a “creosote bush” type of
resource sapping from potentially competing cash cow efforts.
• Piloting a firm through disruptive innovation is extremely difficult, as the new effort will cannibalize existing markets, may arrive with lower margins, and can compress revenues.
• Yahoo! is a firm that attempted to invest in potentially disruptive innovation but lost its lead
due to poorly supported efforts and underinvestment. Intuit, by contrast, saw disruption on
the horizon and invested heavily in both internal efforts as well as acquisition, weathering the
shift to free products, cloud-based products, and now leveraging AI and machine learning.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
Questions and Exercises
1. Once a firm can detect disruptive technologies, what techniques can it use to nurture and
develop these technologies?
2. Intuit seems to have successfully transitioned from a world of packaged software to one
based in the cloud, apps, and AI, and even offers some free products. Are there other firms
that have failed to make this transition? Others that haven’t? Discuss the reasons for their
success or failure.
3. Research the role of technologies listed as potentially disruptive in this section, or identify
additional potentially disruptive technologies. How do these technologies fit with the first part
of our definition of disruptive technologies, and what will it take for them to realize the next
part that makes them truly disruptive?
4. Play the role of an industry analyst or consultant. Identify a potentially disruptive technology
and make predictions on its likelihood, timeline, and industries that it will impact. Make recommendations for investment by various parties that might be impacted by this disruption.
If there are societal or governmental issues to consider, also mention those. Present your
results to your classmates and open the floor up for comments and discussion.
7.3 Tech to Consider: Additive
Manufacturing—Is 3D Printing Ready
to Disrupt?
Learning Objectives
1. Understand why early predictions of consumer 3D printing haven’t panned out.
2. Recognize how modern additive manufacturing works.
3. Understand how 3D-printed homes offer benefits over conventional manufacturing, presenting a potential disruption to several industries while creating opportunities for many.
4. Learn the circumstances and conditions where industrial additive manufacturing can make
sense, as well as areas where it might not be a good choice.
5. Understand how additive manufacturers like VulcanForms are using additive manufacturing
to produce parts for a variety of firms from aerospace to life sciences, and recognize why
companies choose Vulcan’s products over conventional manufacturing approaches.
Three-dimensional printing has certainly ridden the hype cycle. Initial forecasts from the prior
decade where nearly every home would have a 3D printer, eliminating the need to buy all sorts of
finished products, never panned out.[53] Breathless predictions of 3D printed food and even printed
body parts fueled sci-fi dreams. A decade on, and consumer 3D-printing is not the mass market many predicted. Home-based 3D printing floundered largely due to quality and complexity.
Low-cost printers couldn't really produce durable products for useful, practical purposes. Low-end
plastic materials used by these products produced prints that easily broke; printed products often
looked cheap, with visible layers and rough edges where printed supports were snapped off; print
heads would often fail, leading to wasted time and material; and configuration was difficult, with
operators struggling to choose the right printing layer size and needed support prints to generate a
given part. Material choice also presented problems, with different filaments used for solid, flexible,
and food-safe materials. Today's image of a home-based 3D printer is of something used by nerdy
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hobbyists who crank out plastic trinkets like action figures, Yodas, and Pokémon characters. But
consumer-focused 3D printing might not be where disruption occurs.
additive
manufacturing
A type of industrial 3D
printing where material is
built up, layer by layer, as
material is progressively
added to shape an object.
First, understand what we're talking about. Three-dimensional printing is now often referred
to as additive manufacturing. In additive manufacturing, material is built up, layer by layer, as
material is progressively added to shape an object. Low-end home 3D printers create parts by heating plastic (usually spooled out as spaghetti-width filament), which is pushed though a 3D print
head that moves along a surface horizontally and vertically, building the product upward in printed
layers. This differentiates it from subtractive manufacturing, like milling, where parts are ground
down or carved from a larger block of material, or techniques such as casting (material poured into
a mold), extruding (squeezing material through a die or mold to give it shape), and stamping (pressing sheets of material against a die or mold). While you've likely seen low-end 3D printers that spool
and melt plastic from a moving print head, there are many other techniques for additive manufacturing, including resin printing, which uses light to solidify liquid resin into 3D pieces (often raising
prints built from top to bottom), as well as various forms of metal printing, some which build material up from layers of powder and then bake material layer by layer to form a solid part, as well as
others that use lasers to melt layers of powdered metal and other materials to progressively build
up a single output product.
Little Printed Houses for You and Me
And 3D printing isn’t only about metals and plastics. One of the more exciting new developments is
the use of cement in additive manufacturing to 3D print houses. In this approach, an on-site, very
large printing device moves around a site, just as a smaller nozzle might be moved on a personal
printer’s 3D print bed. A device used to 3D print buildings extrudes a thin layer of liquid cement
that hardens before the nozzle returns to add another layer. Cement houses with their layered
walls look a bit quirky, but this can be covered with stucco, wood, or siding, while interior walls
can be covered with wood or sheetrock so all looks like a conventional house. Printing cement can
be tricky and is weather dependent. Rain, humidity, temperature, and the position of the sun can
all influence the concrete mix that’s best to use, as well as cure time, but to be fair, weather also
impacts conventional construction teams. And the advantages of early 3D printed homes are significant. Long Island, New York–based SQ4D has printed a three-bedroom, two-bathroom house
with a two-car garage in Riverhead, New York, which sold for $299,000, where a conventional home
of the same size would cost roughly half a million dollars.[54] Two to three employees worked onsite during the SQ4D construction, versus the twenty to thirty employees that one might find at
a typical home construction. The printing was done in about forty hours over eight days, allotting
for layer curing time. Materials cost roughly $80,000 versus $150,000 for a comparable conventional
home. This sort of cost advantage is nearly unheard of for an emerging technology.[55] And there are
some additional advantages of additive manufacturing for home construction. Homes printed this
way use less energy during the build than traditional home fabrication, and also consume fewer
harvested materials like timber. SQ4D claims parts of its process are carbon-neutral and that the
3D printer uses as much power as a home hair dryer.[56] Such 3D-printed homes also offer designers
and architects a new type of creativity since structures can contain curved walls that can't be fabricated with wood and sheetrock. Concrete homes are structurally very strong and hold up better
than wood houses when faced with wind, fire, and pests, and concrete is a very good insulator. A
low-cost 3D-printed concrete home also addresses issues associated with a lack of affordable housing, a lack of skilled construction workers, and reduces the likelihood of the kinds of supply-chain
problems that plagued builders as pandemic quarantine wound down.[57]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
3D Printing a Home: Step-by-Step Overview, SQ4D
View in the online reader
When Does Additive Manufacturing Make
Sense?
While printing homes is a fairly new development waiting to be proven for widespread use and
scale deployment, other types of additive manufacturing have already hit the mainstream. Nearly
all custom hearing aids are 3D-printed using acrylic resin. Dentists and orthodontists increasingly
use 3D printed teeth aligners, replacing the need for braces in many patients. Adidas, Nike, and
Puma are among several firms that have 3D printed parts of their athletic shoes.[58] And if you fly in
a recently built Boeing or Airbus jet, or if you have gotten a lift in a late-model automobile, there's a
good chance there are 3D-printed parts in those products, as well.[59]
As for using additive manufacturing for metal, alloy, and advanced materials parts, it's possible
to create some 3D-printed components that are impossible to create via conventional techniques. A
single printed part can often be stronger and lighter than a piece that needed to be assembled from
multiple cast or stamped pieces later joined together with structurally weaker seals. The minimal
waste in additive manufacturing can be important when using materials that are either toxic or
costly. While 3D printing can take longer than casting or extruding a part, additive manufacturing
really shines during the design process. Firms with access to an additive printer don't need to work
with a separate part-casting or machine shop to create prototype parts. A line of code can change
the part that an additive manufacturing machine changes, as opposed to older approaches that
required the creation of new molds or tools and equipment redesign.[60] And if it makes more sense
to cast or extrude a part, the components used to more quickly mass manufacture using these techniques can also be 3D printed and sent to factories and partner fabricators.
Granny Might Have a 3D-Printed Hip
One 3D printing startup, the unicorn-valued VulcanForms, has been called “the most interesting
startup in America.” The firm uses lasers to craft single-piece metal parts using half the energy
and a tenth of the material of a traditional factory. Parts start out as metal powder—it could
be an alloy, composite, or ultra-strong titanium. Then 150 lasers simultaneously melt powdered
metal so it solidifies in layers thinner than a human hair.[61] And unlike a conventional manufactur-
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ing floor where you'd need to wear noise-suppressing ear covers, the VulcanForms plant is quiet
enough to carry on a conversation and clean enough to look more like an Apple Store than a parts
plant.[62] Medical firm Stryker uses Vulcan to create spinal implants as well as parts for knee and
hip replacements. Vulcan parts can be created with intricate surface structures that bone can more
easily graft onto.[63]
GE Aerospace is also a VulcanForms customer. The firm uses additively printed jet engine fuel
nozzles that are now a single part, where as the prior iteration required twenty components. The
new piece is stronger and lighter—two big bonuses for any aerospace firm.[64] COVID and the war in
Ukraine have demonstrated the vulnerability of the global supply chain, especially when firms are
reliant on overseas manufacturing partners. The prospect of a trade war with China and tensions
over Taiwan further raise security concerns and are part of the push to manufacture domestically.[65] And while VulcanForms acts as the parts plant rather than selling 3D printing equipment
like some firms, a simple change of input material powder and reprogramming of machines can
tweak printers to shift from building components for the F3 Joint Strike Fighter jet to ones that are
used for healing applications in life sciences.[66]
Conventional wisdom suggests that the longer time needed to print a part versus the speed
of high-volume stamping, extruding, and casting means that additive manufacturing will remain
targeted at prototyping and lower-volume, more complex specialty parts, but perhaps that's about
to change, as well. Apple has quietly made several investments in 3D printing[67] and is rumored to
be planning to use 3D-printed components in upcoming designs for a new Apple Watch Ultra and
could even use additive manufacturing for customizing the VisionPro.[68]
And the inability to hit the predictions of early pundits hasn’t stopped innovation on 3Dprinted life sciences, organs,[69] or food. GSK and AstraZeneca are actively working on 3D printing
pills that include multiple medications in a single dose, tailored to the needs of a given patient. The
hope is this will lower the complexity of adhering to a treatment plan and improve prescription
compliance in a way that lowers health-care costs[70] (an issue also mentioned in Chapter 6). Threedimensional printing may also prove vital for space travel, where sending out for replacement parts
or takeout is impossible. NASA is actively working on 3D printers that would take materials from
the moon or Mars as 3D-printed input, as well as recycle urine or feces for astronaut nutrients.
Space travel might not be appetizing, but might actually be possible, thanks to off-Earth additive
manufacturing.[71]
Why 3D Printing Is Vital
to Success of U.S.
Manufacturing
Scan this video by Financial
Times for a look at
3D-printed houses by SQ4D,
and a peek inside a
VulcanForms factory.
Key Takeaways
• Complexity and quality make personal 3D printing unattractive for most consumers.
• Additive manufacturing can be used with many different materials, including metals and concrete, to create high-quality products for industrial purposes.
• Concrete homes 3D printed using concrete can be made quicker, at lower cost, and with
less environmental impact that conventional housing. This development has the potential to
help address the need for low-cost housing, the lack of skilled carpenters and other homebuilders, and supply-chain constraint issues.
View in the online reader
• It can take longer to 3D print an individual part than it would to create a part via stamping,
casting, or extruding; however, 3D printing can create parts that are impossible to produce
using conventional methods. Three-dimensional parts can also contain fewer components
for more solid builds, and can be produced with less waste and requiring less energy than
conventional products. These parts can also be produced locally, lowering the risk of global
supply-chain constraints.
• Parts that are 3D printed are useful in prototyping as firms are iterating through designs. If
a firm needs to mass manufacture a part, firms can often 3D print components that can be
used by factories that cast, stamp, or extrude parts in large volumes.
• VulcanForms has been called “the world’s most exciting startup,” using additively manufactured parts for industries as diverse as surgical implants to defense. Lasers are used to fuse
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
powdered materials into super-strong, single parts in a low-power, low-waste facility that
operates radically quieter than conventional manufacturing plants.
• The true disruption in additive manufacturing is difficult to forecast, but early developments
show targeted best-use cases in specific fields and applications. Additive manufacturing may
soon arrive in mass manufacturing and may even make long-term space travel possible.
Questions and Exercises
1. Do you or does someone you know have a 3D printer? What do they use it for? Do they feel
their purchase was worthwhile? Why or why not?
2. What are the advantages of additive manufacturing in industries mentioned above, like construction and health care?
3. Why might 3D printing be more appealing in the design phase but less appealing in some
manufacturing situations?
4. Research the current state of 3D printing and additive manufacturing. Are there other successes not mentioned above that are providing real business value? Have other firms failed?
7.4 Tech to Consider: Crypto,
Blockchain, and DeFi—Cesspools of
Scammers or Disruptive
Technologies?
Learning Objectives
1. Understand what Bitcoin is, to whom it appeals and why, its strengths, and its limitations.
2. Understand blockchain technologies—their potential benefit, current weaknesses, and areas
of promising and impactful use.
3. Learn about the DeFi movement and how this relates to cryptocurrency and blockchain technologies.
4. Gain additional insights into evaluating the trajectory of technology and its disruptive capacity.
5. Understand the failure of FTX and Alameda Research, and how this has led to the “crypto
winter” and impacted the adoption and use of crypto and blockchain technologies.
6. Understand CBDC efforts and how these relate to stablecoins, and learn about how China’s
e-CNY has struggled domestically, but presents an alternative to the U.S. dollar for the global
financial system.
Trying to parse out potentially promising disruptive technology in the face of criminal activity
and absurd speculation is a challenge, but this is what crypto, NFT, blockchain, and DeFi (for definance) observers faced after 2022. In that year, the NFT market saw full-blown weirdness—where
in just one example, pop star Justin Bieber saw his $1.3 million investment in a digital cartoon
chimpanzee from the “Bored Ape Yacht Club” tank in value by over 95 percent in just a few
months.[72] The crypto used by Snoop Dogg in his metaverse effort, Snoopverse, also lost over 94
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
221
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percent of its value.[73] A series of high-profile hacks in nascent blockchain and crypto support software led others to grow cautious.[74] A so-called stablecoin, TerraUSD, which was supposed to be
algorithmically pegged to the U.S. dollar, instead entered a death spiral where it lost roughly 95
percent of its value—leading to roughly $45 billion in losses by consumers who thought they held
something “stable.”[75] The firm’s founder, Do Kwon, was eventually arrested in Montenegro using a
faked Costa Rican passport to try to catch a private jet flight to Dubai.[76] Then there's the bungled
management and outright fraud committed by one-time billionaire wunderkind, now locked-up
scammer, Sam Bankman-Fried. The misdeeds of SBF, as he was known in the industry, fueled a
crypto bank run that led to at least $4 billion in customer losses and fueled a collapse in crypto
valuations, putting the brakes on investment in an industry and technologies that were now seen
as a hothouse for scammers.[77] Snoop and the Biebs weren’t the only celebrities burned by crypto.
Lindsey Lohan, Lil Yachty, Akon, and Jake Paul are among the celebs fined by the SEC for failing to
disclose they were paid to promote crypto.[78] Tom Brady, Shaq, Larry David, and Kevin O’Leary from
Shark Tank are among other names facing legal action for endorsing FTX (perhaps one take-away
is don’t take financial advice from a paid celeb endorser).[79] The video below explores some of the
more high-profile events that brought about the “crypto winter,” but we'll also introduce concepts
and technologies behind a group of related technologies, including cryptocurrencies, blockchain,
and DeFi, so that we can make more intelligent assessments of their technical promise, risks, and
challenges so you can consider what, if any, aspects of this new tech landscape might end up as disruptive technologies, and, if so, what firms should do to capitalize on shifts. With all the downside
press of debacles and the crypto winter, it can be easy to lose sight of the fact that many firms continue to invest in both crypto and blockchain technologies, which we’ll describe below. As just one
example, by fall 2023, Fidelity Investments, the world’s third largest mutual fund and asset management firm, had a crypto group of over six hundred employees and had pioneered multiple financial
innovations using these technologies.[80]
The FTX Collapse, Explained
The Wall Street Journal reports the collapse of FTX and how this soured many on cryptocurrencies and related markets. Among the issues addressed: FTX, a large crypto exchange that also
held customer assets, was caught using its customers’ funds to back risky bets made by another
company, Alameda Research. It would be as if a bank took your money and gave it to a separate firm that gambled on speculative bets without your knowledge. Both firms were run by Sam
Bankman-Fried, who has since jailed after a trial citing multiple counts of conspiracy, fraud, and
even violations of campaign finance laws.
View in the online reader
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223
Bitcoin is the transaction method favored by cybercriminals and illegal trade networks like the
Bitcoin
now-shuttered Silk Road drugs bazaar.[81] It’s not backed by gold or government and appeared seemAn open source,
ingly out of thin air as the result of mathematics performed by so-called miners. It’s been a wildly
decentralized payment
volatile currency and a magnet for speculators, where an amount that could purchase a couple of
system (sometimes
controversially referred to
pizzas would, in three years, appreciate to be worth over $6 million.[82] Its one-time largest exchange
as a digital, virtual, or
handled hundreds of millions in digital value, yet it was originally conceived as the “Magic: The
cryptocurrency) that
Gathering Online eXchange” (Mt. Gox), and that service suffered a massive breach where the digital
operates in a peer-to-peer
environment, without bank
equivalent of roughly $450 million disappeared.[83] Many don’t even know what to call Bitcoin. Is it a
or central authority.
[84]
cryptocurrency, a digital currency, digital money, or a virtual currency? The U.S. government has
ruled that Bitcoin is property (U.S. marshals have auctioned off Bitcoins seized from crooks).[85] The
governments of El Salvador and the Central African Republic (CAR) were the first two nations to
accept Bitcoin as legal tender, but the CAR has backed out[86] and it might be generous to even
describe El Salvador’s experience as “mixed.”[87]
Despite this checkered start, many think Bitcoin and similar efforts (often
FIGURE 7.2 Bitcoin
referred to as cryptocurrencies) could upend money as we know it. Other cryptocurrencies, such as Ethereum, Ripple, and Litecoin, have all grown to the point
where the value of tokens in circulation is well into the billions of dollars for
each. Deloitte has written that early negative hype surrounding Bitcoin and
related technologies has underestimated its potential to revolutionize not just
payments but all sorts of asset transactions.[88] The Bank of England has issued a
report describing Bitcoin as a “significant innovation” that could have “far-reaching implications.”[89]
The B symbol with two bars is used to refer to
Bitcoin.
Others look beyond crypto as a money substitute, instead focusing on an
Source: © Shutterstock, Inc.
enabling technology known as the blockchain. Blockchains are highly secure,
cryptocurrency
decentralized, distributed transaction recording and verification mechanisms that have been
A digital asset where a
adapted for all sorts of uses, including stock sales and digital document signing.[90] The blockchain
secure form of
underpins a series of related technologies broadly discussed in the industry under an umbrella
mathematics
(cryptography) is used to
term DeFi (for decentralized finance). DeFi proponents hope to upend traditional financial instituhandle transactions,
tions and structures, allowing individuals and organizations to trade directly with one another,
control the creation of
using computer code to speed transactions, lower costs, ensure trust, eliminate middlemen, and creadditional units, and verify
the transfer of assets.
ate a host of new products.[91]
How It Works
Although you might see news reports that include a graphic of a Bitcoin token, that’s all just the
graphic arts department. In reality there is no such physical representation—it exists only and
entirely online. Bitcoins and other cryptocurrencies are transferred from person to person electronically. Instead of using a bank as a middleman, transactions are recorded in a distributed,
decentralized public ledger (known as a blockchain). In Bitcoin and many other blockchain
schemes, verification and time-stamping of transactions on a blockchain is performed across the
network by a pool of users known as miners. The miners get an incentive for being involved: They
can donate their computer power in exchange for the opportunity to earn additional tokens in the
cryptocurrency—for example, fractions of Bitcoin—and sometimes miners earn modest transaction fees. This means Bitcoin and similar crypto is a peer-produced financial instrument. Also note
that there is no single blockchain software used by all efforts. While Bitcoin has its own
blockchain, other cryptocurrencies have their own versions, often involving different software.
Many firms have also developed their own technologies or created solutions built on existing open
source efforts. A blockchain is simply a distributed database that’s spread across certain network
participants, and it is possible to create a blockchain without requiring miners, but there must be
distributed participants who share in holding and updating copies of the blockchain database, and
who provide the technical task of verifying the integrity of transactions—the kind of stuff that Bitcoin employs using miners.[92] While the blockchain ledger records transactions, no one can transfer
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Cryptocurrencies usually
take advantage of a
technology known as a
blockchain.
blockchain
A distributed and
decentralized ledger that
records and verifies
transactions and
ownership, making it
difficult to tamper with or
shut down.
DeFi
Decentralized finance. An
industry term for a bucket
of blockchain-enabled
financial services
that function without the
need for a central
authority, such as a bank
or government.
Proponents believe that
DeFi can be more
transparent, secure, and
efficient than traditional
financial systems.
224
Information Systems
the asset without a special password (called a private key, which is often stored in what is referred
to as a cryptocurrency wallet, which is really just an encrypted holding place). The technology
behind most crypto and blockchain technologies is open source and considered rock solid. Passwords are virtually impossible to guess, and verification makes sure no one spends the same
currency in two places at once. And the decentralized nature of the system makes it extremely
unlikely that the system can be directly tampered with or altered.
Introduction to Blockchain Technology
A video introduction to blockchain technology offered by IBM, a firm with a thriving practice offering blockchain technology and consulting to organizational clients.
View in the online reader
The blockchain also underpins a set of technologies often referred to as DeFi for decentralized
finance. There's no formal definition for DeFi; rather, it's an umbrella term for technologies built on
top of a blockchain that will allow people and institutions to provide and access financial services
directly, without the need for a central authority, such as a bank or government.[93] DeFi proponents envision a world where you, as an individual, can use your own holdings to issue loans and
earn interest, just like a bank does. Such an effort would also allow individuals to use these pools
for personal loans, mortgages, or for organizations to seek commercial loans. Others see opportunities for DeFi insurance or for creating trading platforms for complex financial products like
derivatives. DeFi advocates believe that since these efforts use a blockchain, transactions will be
transparent, fast, and secure, and will eliminate middlemen who currently offer financial services
with a substantial markup or transaction fees.[94] Lots needs to come together before DeFi efforts
go mainstream. Robust, reliable, and secure transaction platforms need to be developed, with players agreeing to participate in running the shared infrastructure. Note that while the blockchain
that underpins efforts like Bitcoin and Ethereum is considered extremely secure (the Ethereum
blockchain is used in many early DeFi firms), the support infrastructure for early efforts was not,
and several high-profile hacks led to participants’ losing billions of dollars.[95] Most DeFi efforts
also lack consumer protection and other beneficial regulation provided by traditional financial
products and markets. Participation in early DeFi efforts is a wild west of risk, and might even
be considered illegal under some laws. Governments and international regulatory bodies are also
concerned with the anonymity and immediacy built into this system, fearing a decentralized and
high-speed trading network will facilitate money laundering and criminal funds transfers, and
be used by bad actors like terrorists and rogue regimes. That said, most major banks have DeFi
research groups,[96] and many have begun to experiment with DeFi efforts for things like trading
and contract execution.[97] The billions lost and the free-for-all of early efforts in this space have
raised caution, brought useful skepticism, and furthered an understanding that key factors such
as system-wide security need to be in place for these efforts to take off. But the early fools, fail-
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Chapter 7
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225
ures, and fraudsters don't diminish that technical solutions likely exist to make money and banking
more efficient for a broader group of participants.
What Is DeFi, and Could It Upend Finance as We Know It?
View in the online reader
CBDC
Can China's Digital Currency Disintermediate the Dollar?
Cash isn't dead, but it's definitely falling out of favor. Bills and coins are cumbersome and easy
to lose, and during COVID, the ability to avoid passing cash between people led to a further
explosion in digital payments worldwide.[98] While central banks throughout the world continue to
issue paper money and coins, over one hundred governments are now actively exploring efforts
known as CBDC
CBDC, for Central Bank Digital Currencies.[99]
CBDCs are the digital equivalent of central bank money—although instead of issuing paper
money, central banks (meaning a government's own banking system, akin to the U.S. Treasury)
would issue bits directly into the money supply. Blockchain technologies are typically used to
verify ownership, transaction, and prevent counterfeiting of CBDCs.[100] Technology should allow
CBDC money to be exchanged person to person and business to business without the high
transaction fees typically associated with credit card transactions. CBDCs aren't the same as
stablecoins
stablecoins, which are cryptocurrencies that don't independently float in value, but instead have
their value tightly pegged to a hard currency like the U.S. dollar. Stablecoins are issued by independent entities, not government central banks, and stablecoins have had their own host of
problems, including at times being not as stable as backers have claimed[101] (this is especially the
case when stability is maintained via algorithms balancing a shadow cryptocurrency that fluctuates).[102]
One of the most significant major economies to launch a CBDC trial is China, with a digital currency known as the e-CNY (sometimes called the e-yuan. China's currency is referred to as the
yuan, renminbi, or RMB). China isn't an entirely cashless society, but it's already close. However,
this isn't because of government efforts—the e-payments boom in China comes from the private
sector. Over 90 percent of people in China's urban centers use digital payments, with payment
via the super app WeChat holding over 55 percent of the market, and AliPay taking nearly 40
percent of what's left.[103] China has tried to introduce the e-CNY as an alternative, but existing
efforts are so entrenched, few have seen a reason to switch to a system that offers no clear benefit. Privacy advocates are also concerned that a widely adopted e-CNY would give the Chinese
government unprecedented surveillance capabilities, including the ability to know who paid how
much, when, where, to whom, and the ability to mine trends among payments.[104]
China has recently shifted to experimenting with its e-CNY CBDC as an alternative to the U.S.
dollar. The dollar has long been considered the most stable foreign currency, especially in times
of war or global crisis. But concern over the U.S. deficit, trade imbalance, and U.S. government
instability has raised concern worldwide. Some governments are also seeking independence
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A digital form of a
government-issued
currency.
stablecoins
Cryptocurrencies that have
their value pegged to a
currency or commodity,
rather than have currency
value float independently.
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Information Systems
from U.S. political influence. Russia's rapid exclusion from the global financial system, including
being banned from the SWIFT network for global financial transactions, demonstrated the consequences that nations may face for policies that are opposed by Western governments.
China has begun running trials using the digital yuan in international trade, and has partnered
with the central banks of Hong Kong, the United Arab Emirates, Thailand, and the Bank of International Settlements in an effort called mBridge. While CBDC efforts aren't crypto, most use
blockchain technology to secure and verify transactions.[105] If it’s successful, the e-CNY could
challenge the U.S. dollar’s position as the world’s dominant reserve currency and allow foreign
governments to make an end-run around the influence of the United States in global financial
systems.
China’s Digital Currency Revolution
The Australian Broadcast Company (ABC) examines China’s e-CNY CBDC effort, including
it’s motivation, challenges, and the effort to use the e-CNY as a legitimate alternative to the
U.S. dollar in global transactions.
View in the online reader
Benefits
Much of the blockchain’s appeal comes from the fact that asset ownership records are transferred
from person to person like cash, rather than using an intermediary like banks or credit card companies if a cryptocurrency is used as a cash replacement. Getting rid of card companies cuts out
transaction fees, which can top 3 percent—not insignificant in some retail markets where profit
margins can be 2 percent or lower.[106] Crypto also opens up the possibility of micropayments (or
small digital payments) that are now impractical because of fees (think of everything from gum to
bus fare to small donations).
It’s often thought that cryptocurrencies could be a boon for international commerce, especially
for cross-border remittance and in expanding e-commerce in emerging markets. Family members
working abroad often send funds home via services like Western Union or MoneyGram, but these
can cost $10 to $17 for a $200 transfer and take up to five days to clear in some countries.[107] A
blockchain-based transfer would be immediate and could theoretically eliminate all transaction
fees, although several firms are charging small fees to ease transactions and quickly get money
moved from national currency to a cryptocurrency and back. In such a case, the Bitcoin or other
cryptocurrencies used are less about the currency itself and more about that quick and low-cost
transfer of ownership. For example, if someone in the United States wishes to send dollars to Nige-
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
ria, a service could buy Bitcoin in the United States for dollars, then immediately sell these Bitcoin
in Nigeria in the local naira currency. Firms looking at cross-border funds transfers are going after a
big market; global remittances total over half a trillion dollars.[108] Cryptocurrencies might also lubricate the wheels of commerce between nations where credit card companies and firms like PayPal
don’t operate, and where internationally accepted cards are tough to obtain. Less than one-third
of the population in emerging markets has any sort of credit card, but cryptocurrencies could provide a vehicle to open this market up to online purchases. Remember, credit cards aren’t just about
cash, they’re also about credit, and currently credit works for most people in highly industrialized
economies. But unique, albeit limited, use cases are often the first step in the march taken by eventually disruptive technologies.
Civil libertarians like the idea of transactions happening without the prying eyes of data miners inside card companies, having their transaction history shared by others, or the government.
As Wired points out, blockchain technologies straddle the line between transparency and privacy.
All transactions are recorded in the open, via the blockchain, but individuals can be anonymous.
You can create your anonymous private key and have someone transfer funds to you, or earn cryptocurrency via mining, and no one can see who you are. This also means that these distributed,
decentralized blockchains have no single controlling entity where fraud, corruption, damage, hacking, or government shutdown could occur. While governments can try to shut down or legislate
blockchain activity within their borders, there’s no single “Bitcoin” company, no “blockchain” organization to take to court and force their servers to be unplugged. It’s been noted that following
the revelations in WikiLeaks, Visa, Mastercard, and PayPal refused donations to WikiLeaks. In that
aftermath, Bitcoin became the go-to vehicle for those supporting WikiLeaks’ efforts.[109] If a Bitcoin
transaction is not permitted in your country, go abroad and you’ve got full access to everything in
your wallet.
A paper by Deloitte University sees the blockchain as far more than a replacement for
money—it could make all sorts of financial transactions better by (potentially) making them
cheaper, faster, and more secure. At its core, blockchains are a standard for securely exchanging
value and recording ownership over a network without an intermediary. Most new blockchain technologies use software that exists outside of Bitcoin (network effects are at work here—success will
depend on the widespread adoption of any new blockchain standard). Blockchain technology has
the potential to disrupt all sorts of systems that rely on intermediaries, including the transfer of
property, execution of contracts, and identity management. The paper’s authors envision using the
blockchain as a sort of ownership stamp that is attached to things like vehicles, where repair history and accidents can be referenced to an ownership-representing cryptocoin fragment in the
way registry paperwork happens now, and where vehicle titles can be transferred by passing the
ownership token from one person to another—no lawyers, no notaries, no vehicle registration
required—and hence the predictions of less expensive, faster, and more secure transactions.[110] As
The Wall Street Journal points out, most documents “can be digitized, codified and inserted into the
blockchain, a record that is indelible, cannot be tampered with, and whose authenticity is verified
by the consensus of a community of computer users” and not by the “discretionary order of a centralized authority.”[111]If blockchain transactions are to emerge as mainstream, governments would
likely want to link to such systems when ownership needs to be verified, but all this is technically
possible to build, and if it works, the disruption across industries would be massive.[112]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Information Systems
NFT
Non-fungible token. The
NFT can be embedded in
digital products, such as
art and images, identifying
ownership, which is
recorded on a blockchain.
The blockchain can verify
authenticity, and
transferring the token
transfers ownership, in
theory creating more
secure markets for digital
artwork, and providing a
way for digital product
owners to enforce
copyright and ownership
claims.
NFTs and the $69 Million JPEG
Want to own a meme, a work of art, a sports photograph, an album? You might be able to secure
your ownership with an NFT
NFT. An NFT is a non-fungible token. The author of the work creates an
NFT on the blockchain, verifying its initial authenticity. The ownership is transferred when sold,
and the blockchain records the sale. In theory, counterfeiting should never be an issue with NFTs,
since there is only one verifiable NFT (that’s the non-fungible part), and the blockchain always
verifies when an owner transfers ownership to someone else. NFTs have been around since
2015, but they exploded into the public zeitgeist in 2021. Even Saturday Night Live created an
NFT rap (refer to SNL’s YouTube channel).
It is a cool idea and perhaps a good way to ensure rights ownership of unique digital content.
Early enthusiasm led to lots of experimental efforts—some of which seemed impressive. The NBA
began selling NFTs that were sort of like digital trading cards, recording about $338 million in
about five months[113] (is that really any weirder than pogs or Pokémon?). The band Kings of Leon
released an album using an NFT and raised $2 million (admirably donating the take to support
live music workers put out of work by the pandemic).[114] NFTs may be the future of things like
sports memorabilia or concert tickets that seek to maintain authenticity and track ownership as
an item changes hands. Most NFTs need to be purchased with some type of cryptocurrency (and
technically may be tracked by that bit of “crypto” used for the purchase), but some of the more
early mechanisms are more consumer-friendly than Bitcoin, allowing you to pay by credit card
that's converted to the crypto used by the system (most don't use Bitcoin), then immediately
swapped for the NFT.
But in early 2021 things got a little freaky. The Nyan Cat GIF—that Pop-Tart cat that was huge
around 2011—sold for $590,000, even though the Internet was full of easily downloadable copies
and no “hey, stop using my meme” enforcement.[115] A ten-second video clip was auctioned for
$6.6 million.[116] Fabled art auction house Christie’s sold an NFT JPEG by the pop artist Beeple
for $69 million (that’s not a typo).[117] Yikes! Smells like a bubble, and it was! At the height of the
early NFT craze the total market was valued at $4.8 billion. One year later the market value fell by
roughly 95 percent.[118] It’s unclear how much the burst bubble will set back the use of blockchain
technology for digital asset tracking and trade. NFTs still hold promise for all sorts of things,
including fraud-free event tickets, membership cards, and video libraries.
NFTs Are Fueling a Boom in Digital Art—Here’s How They Work
A video that discusses the use of NFTs, non-fungible tokens, in the digital art world, and
how they are used in said transactions.
View in the online reader
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
Examples of Blockchains in Action
Real-world examples of blockchain technology can be found across industries—from banking to
entertainment—practical examples and experiments that point to disruptive possibilities.
• PepsiCo Labs is using blockchain technology to identify, sort, and pack waste and to track recycling and verify partner sustainability claims.[119]
• The Nasdaq stock exchange has tested blockchain technology for transactions in its private
market subsidiary, stating the exchange could eventually use the technology for Nasdaq trades
in the public market.[120] Nasdaq is also using the technology to allow private companies to
issue stock and stockholders of public companies to vote their shares.[121]
• A collection of over forty-five of the world’s leading financial institutions, including Bank
of America, Citigroup, HSBC, and ING have formed R3CEV to build infrastructure based on
blockchain technology, and have engaged several national central banks, including the government of Singapore and the Bank of Canada, in participation.[122]
• IBM has a growing blockchain practice, including efforts focused on managing products in
the firm’s supply chain, tracking items’ location and ownership from sourced raw materials
through distribution to customers. IBM is also creating a whole new firm with shipping giant
Maersk (look for their name along the side of container ships) to commercialize blockchain use
in shipping.[123]
• Insurer Nationwide wants to put the blockchain on your side with a solution to help verify
insurance coverage in real time, benefiting the insured, insurers, and even law enforcement.[124]
• De Beers, a firm that mines, trades, and markets about one-third of the world’s diamonds, is
developing blockchain technology for tracing diamonds from the mine to customer purchase,
a practice that should reduce fraud and help ensure that gems in the age of “Blood Diamonds”
are indeed conflict free.[125]
• Spotify acquired the blockchain startup Mediachain Labs to help the firm build attribution
systems so that music rights holders are tracked and paid.[126]
• Kodak, the poster child for the disrupted market leader, is developing a blockchain system for
tracking rights and payments for photographers.[127]
The availability of tools and services from mainstream suppliers is likely to spread blockchain
use. Blockchain services, which might include do-it-yourself software and cloud services or consulting and setup for creating a functioning market using blockchain, are now offered by mainstream
tech firms like Amazon, Google, IBM, and Microsoft.
Tastes Like Blockchain
Food-borne illness and a tainted food supply can be a terrifying problem with serious financial and
societal implications. The U.S. romaine lettuce E. coli epidemic sickened people across twentyfive states, and estimates of its impact run into the hundreds of millions of dollars.[128] In China,
a compound used in plastics production had tainted milk, sickening some 300,000 dairy customers and killing at least six infants. Other recent examples of food foul play include wood pulp
blended with Parmesan cheese, horse meat passed off as beef, and plastic found in chicken
nuggets.[129] While RFID tags are being used throughout the agricultural industry to track items,
another method of following food from farm to fork is the blockchain.
One firm experimenting with the technology is French department store giant Carrefour. The
retailer sells over a million chickens under its house brand,[130] and now the life story of those birds
is available by scanning a quick response (QR) code on the package. Carrefour’s supply chain
is set up so that each step along the way, from hatchery to producer to store, is tracked via a
blockchain entry. And the blockchain isn’t just for the birds. The World Wildlife Fund is using an
RFID-plus-blockchain solution to track tuna from boat to processing plant, potentially keeping
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your sushi ocean friendly and healthy. IBM is bringing together major players worldwide, including food suppliers Dole, Nestlé, Unilever, and Tyson Foods, plus retailers Walmart, Kroger, and
China’s JD.com, in a similar scheme to track items through the food supply.[131]
Of course, blockchain is just software, so procedures and auditing need to be put in place to
ensure that the data that goes into the system is, in fact, valid, but the societal impact may
be massive. Insurance lowered, supplier and restaurant bankruptcy avoided, jobs saved, illness
avoided, and of course, lives saved. One study estimates that every 1 percent reduction in foodborne diseases in the United States, would prevent half a million people from getting sick,[132]
resulting in a net $700 million benefit from reduced sick days and work interruptions.[133]
Concerns
Blockchain technology’s future could be bright, or it could fizzle as another overhyped, underperforming technology. We’re likely to see failed applications in some areas while other areas thrive.
There are several challenges faced by cryptocurrencies, blockchain technologies, or both that need
to be overcome before it makes it in the mainstream.
For cryptocurrencies, consumer benefit needs to be stronger. While international remittance
customers and those otherwise left out of the banking and credit card systems can see immediate
benefit from crypto cash replacements, most of the population isn’t impacted by this market. For
most, cryptocurrency is a difficult to understand and often difficult to use technology that offers little benefit. Slick apps and firms offering streamlining support services that allow, for example, the
easy and quick conversion from dollars (or other currencies) to cryptocurrencies and back will help,
but unless this offers consumer value beyond the credit card, few will bother to switch from plastic
or plastic-linked mechanisms like ApplePay and Google Pay.
Cryptocurrencies have a reputation problem. Being embraced by drug dealers, extortion hackers, tax evaders, and fringe libertarians doesn’t instill a lot of confidence. And it doesn’t help that
Bitcoin was created by a mysterious, unknown entity referred to as Satoshi Nakamoto.[134]
Security concerns also pose a problem. While Bitcoin software is considered to be solid, it’s not
a guarantee that other entities are as secure. The multimillion-dollar theft from Mt. Gox is a prime
example.[135] The wallets that hold your private key are also potentially vulnerable. If your computer
is wiped out by a virus and you haven’t written down your password or saved a backup copy in
another secure and accessible location, you’re hosed; it’s like money burned up in a fire. Hackers
that steal passwords—whether they’re on your computer or the cloud—effectively have access to
anything in your crypto wallet; they can walk away with all your cash and it’s unlikely that there’ll
be a way to recover the loot. And for all of the security and anonymity promised by the blockchain,
if the sender or receiver of any data is compromised, information could escape into the wild or be
captured by the nefarious.
Many firms that hope to strengthen cryptocurrency and blockchain technologies (including
rival currencies, wallet builders, exchanges, and payment processors) have struggled under an
ambiguous cloud of not knowing how they will be regulated and what legal issues apply to them.[136]
China has banned bitcoin,[137] but California has moved forward to legalize the use of alternative currencies.[138] New York has announced bitcoin-friendly initiatives.[139] The government of Japan now
recognizes bitcoin as a legal payment method, Russia has reversed its initial anti-bitcoin stance, and
Australia has eliminated a double-taxation penalty impacting bitcoin.[140] The U.S. government has
also created regulations around bitcoin that make it less amorphous and safer for investors, while
the IRS ruled that bitcoins are property.[141] Trends seem to be moving in the right direction, but
financial institutions don’t work well in environments of uncertainty, and clear operating guidelines and legal protections will be vital for bitcoin to thrive.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
Volatility is also an issue. As an example of volatility, consider that in the twelve months prior
to publication, the price of bitcoin shot up sixfold, then fell by nearly half (refer to Figure 7.3). The
world’s second largest cryptocurrency, Ethereum, saw its value increase fiftyfold during the first
half of 2017, but lost 20 percent of its value shortly after an erroneous report that its founder had
died in a car crash.[142] This kind of volatility makes Bitcoin and other cryptocurrencies less useful as dollar-like currencies, limiting its appeal to speculators, who often seem like get-rich-quick
schemers, or the much smaller legitimate market that is looking for in-and-out transactions such
as cross-border payments.[143]
FIGURE 7.3 Bitcoin Price Fluctuation from January 1, 2016, through July 26, 2023
From 2016 through July 2023, the price of one Bitcoin fluctuated wildly, from a low of roughly $364 to a high of
more than $67,000.
Source: Data from “Bitcoin USD (BTC-USD),” Yahoo! Finance, https://finance.yahoo.com/quote/BTC-USD/history?p=BTCUSD.
Increased transaction volume should help stabilize the market, increase liquidity, and bring
some stability to the currency. Substantial volume means a network effect is present—the technology becomes valuable and useful because so many others are using it. But while volume will be
vital for any cryptocurrency or blockchain standard, Bitcoin has a long way to go. As of late 2023,
Bitcoin’s highest daily transaction volume was about 710,000[144] compared with the 707 million daily
transactions that Visa processes.[145] And to get to that kind of volume, Bitcoin will need more infrastructure support. Visa currently has the capability to handle 65,000 transactions a second,[146] while
the entire Bitcoin miner network could only handle seven. That’s not seven thousand, that’s one
hand plus two fingers.[147]
Perhaps most troubling, early Bitcoin technology couldn’t handle increasing transaction volume. A limitation in the structure of underlying Bitcoin software limits transaction processing,
and processing times ballooned to the point where several firms that once accepted Bitcoin have
stopped doing so. Fixes for the scalability problem (which has also hampered other cryptocurrencies like Ethereum) are possible, and several have been proposed, but issuing a fix involves a
massive upgrade of software, and certain factions of the community (including many in the large
network of small-time Bitcoin miners) are wary of the impact of any change.[148] A controversial 2017
proposal to improve scalability and reduce steadily increasing Bitcoin transaction costs resulted
in a “hard fork” of Bitcoin into an adjacent currency known as Bitcoin cash.[149] Your old Bitcoin
could work on the new network, but there were effectively two ledgers at that point. Confused?
It gets worse. Less than a year after Bitcoin cash appeared, there were no less than forty-four
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additional “forks” of Bitcoin, new software ledgers that TNW referred to as “useless.”[150] Blockchain
technology is hurt by a lack of standards, and while there may be successes if a single standard
emerges around, say, food safety or music licensing, we’re not there yet. As crypto continues to get
repeatedly “forked up,” Bitcoin balkanization and other software schisms will reinforce a perception that these technologies are not yet ready for widespread use.
What Do You Think?
What Is Web3?
The Harvard Business
Review discusses the term
Web3, a catch-all often used
to discuss decentralized
services that encompass
crypto, blockchain, DeFi, and
NFTs, among others. The
term may be going out of
favor (largely due to the
negativity associated with the
crypto winter), but looking at
the tech in this video is still
worthwhile. The
decentralization in the idea of
Web 3 would help combat
the dominance of
concentrated large tech firms
and could give end users
more control over their
identity and data. But many
of the early ideas for
large-scale decentralization
of the Web remain
speculative, with lots of work
still needing to be done.
If all this sounds sketchy to you, consider how currencies have evolved. We’ve moved from precious
materials (gold, silver, etc.) to a currency backed by precious materials (the gold standard), to one
based largely on laws and governmental trust, to one allowing physical cash to be replaced by handsigned paper receipts (checks), and then to bits—that is, credit cards and money transfers. Now,
many of us use smartphone apps to snap photos of checks and have them electronically deposited
into banks. Rip up the check when you’re done, because the transaction was completed by sending
its digital image. With this evolution as context, does cryptocurrency seem like such an unlikely
next step?
Bitcoin used its early-mover status to jump-start network effects value from a larger number
of buyers and sellers. However, there are quite a few alternatives to Bitcoin. Forbes says there are
about 23,000 cryptocurrencies in existence, most of them worthless.[151] Some of the larger, more
substantive efforts are Ethereum, Ripple, and Litecoin.[152] You might even have seen a NASCAR
sponsored by Dogecoin (the fact that this Bitcoin rival was named after an Internet meme dog
doesn’t help credibility among the financially conservative). As of this writing, Ethereum is getting
the most traction outside of Bitcoin. Its market cap had, at one point, come within 80 percent of the
total value of all Bitcoin. Larger firms, including Microsoft and JP Morgan Chase, are working
together on Ethereum-based technologies, which from the start have been designed to be a transaction-recording platform as well as a cryptocurrency.[153] To get a look at the current value of
leading cryptocurrencies, check out the CoinMarketCap website.
And remember that cryptocurrencies are just an element of what the blockchain can do. This
revolution may be less about monetary exchange and more about using technologies to redefine
processes. What’s your take? Do you see credible opportunity here? Disruptive threat? Or flash-inthe-pan hype that’ll fizzle and go nowhere?
Key Takeaways
• Bitcoin is an open source, decentralized payment system (sometimes controversially referred
to as a digital, virtual, or cryptocurrency) that operates in a peer-to-peer environment without
bank or central authority.
• Cryptocurrencies are entirely digital—there are no physical “coins.” Cryptocurrencies are
created and can be earned by miners who participate in verifying and permanently recording
transactions in a secure, distributed public ledger (the blockchain).
View in the online reader
• While Bitcoin was the first cryptocurrency to gain traction, hundreds of rivals have emerged.
Some, such as Ethereum and Ripple, have currencies that are, in total, valued in multibillions
of dollars.
• Various exchanges have been developed to make it easier for consumers to trade conventional currency for Bitcoin or other cryptocurrencies, and vice versa. An increasingly long list
of retailers and other providers have begun accepting Bitcoin as cash.
• Since blockchain technologies provide a mechanism to instantly exchange value over the
Internet without an intermediary, techniques are being developed that use the concept of a
blockchain to move beyond cash-substitute uses, facilitating the exchange and ownership
record of other types of assets (autos, real estate, diamonds and hard assets, and intellectual property), providing digital signatures, and more. If widely adopted, this technology has
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
the potential to disrupt and improve operations among not only financial institutions but also
aspects of the legal system, government regulation, health care, and other sectors.
• NFTs (non-fungible tokens) can be embedded in digital products, such as art and images,
identifying ownership, which is recorded on a blockchain. The blockchain can verify authenticity, and transferring the token transfers ownership, in theory creating more-secure markets
for digital artwork, and providing a way for digital product owners to enforce copyright and
ownership claims. While a crash in the value of NFTs has soured many on the tech as an
investment vehicle, the use of NFTs, and the blockchain verification mechanism, still may
have many practical uses in tracking ownership and in identifying counterfeit products.
• Many governments, financial institutions, and startups have launched blockchain initiatives
targeted at bond issues, capital raising, and financial settlement.
• Having lower or no transaction costs appeals to retailers and those wishing to exchange currency across borders. Crypto could lower retailer transaction costs, create an opportunity for
the digital purchase of goods with small value (micropayments), and open up markets where
credit card access is limited.
• Civil libertarians also like the fact that Bitcoin and other crypto transactions can happen
without revealing the sorts of personal data that credit card companies and other financial
institutions are gathering. Since it’s a peer-to-peer transaction, there is no central authority
that can freeze accounts or impose other policies on users.
• Limited consumer benefit, difficulty of use, reputation problems, security concerns, ambiguous regulation, volatility, transaction volume, and the scalability of current infrastructure are
all concerns that may limit Bitcoin’s mainstream appeal.
• Stablecoins are meant to peg a cryptocurrency’s value to a respected, “real world” currency,
typically the U.S. dollar. However, while some stablecoins maintain their value based on large
currency reserves of conventional currencies, algorithmic stablecoins use a second, floating
crypto maintain the stability of the stablecoin. The $45 billion failure of TerraUSD’s stablecoin
demonstrated vulnerabilities in this scheme.
• Decentralized finance (DeFi). An industry term for a bucket of blockchain-enabled financial
services that function without the need for a central authority, such as a bank or government.
Proponents believe that DeFi can be more transparent, secure, and efficient than traditional
financial systems.
• Infrastructure hacks and the high-profile, multi billion-dollar failures such as TerraUSD and
its sister Luna cryptocurency, and the FTX collapse—as well as the fraud charges against
the young founders of these firms—have lead to what many are calling the “crypto-winter,” a
time when a once high-flying set of technologies has been tarnished by blunders, poor execution, and the criminal activity of founding executives.
Questions and Exercises
1. Bitcoin’s technology is in flux. Investigate how to get dollars into Bitcoin, where you can pay
for things using Bitcoin, and how to get money out. Did you try this out? Why or why not?
2. Based on your experience in number 1, what will need to happen with Bitcoin for it to gain
mainstream consumer acceptance?
3. What’s the status of Bitcoin versus the Bitcoin cash fork? Who favored the fork, and who
opposed it? Why?
4. To whom do cryptocurrencies appeal? Why? Do some exploring online. Where are Bitcoin or
other cryptocurrencies accepted? Have any of these firms commented on results (positive or
negative) of accepting crypto? Share your findings with your class and discuss likely resulting
market trends.
5. What can retailers do to encourage more customers to use cryptocurrencies?
6. Members of the MIT Bitcoin club each received $100 to experiment with the technology. Perform some additional research. What have they done? Come to class prepared to discuss
their results and the value of this initiative.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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7. Conduct a search online and investigate the total currency value (market capitalization or
market cap) for current leading cryptocurrencies. Which firms are the most widely used and
most valuable? Why?
8. Investigate current uses of blockchain technology. Which seem successful? Have any failed?
Build a list of industries that you think have a high likelihood of disruption by blockchain.
If you were a manager in this industry, what would you do to deal with the potential for a
blockchain revolution? Report your results to the class and share what you, as a manager,
can take away from these experiments.
9. Why was there an NFT bubble? Investigate the current status of NFT use—are there practical
uses that are currently being applied and that have legitimate business cases beyond speculation?
10. Investigate the current state of CBDC and other central government efforts to use the
blockchain and digital currencies. Give the reasons why efforts that you’ve explored have
been successful or struggled. What factors influence foreign CBDCs as an alternative to the
U.S. dollar?
11. Investigate stablecoins. Has the market recovered much since the TerraUSD-Luna collapse?
If there are successful stablecoins today, how do they differ from the Terra-Luna effort? How
are stablecoins used and what value do they offer versus cash?
12. El Salvador and the Central African Republic were the first two nations to legalize Bitcoin as
legal tender within their borders, but the CAR reversed its decision within a year of launch.
Investigate the status of Bitcoin and other cryptocurrencies as legal tender. Where, if anywhere, is it used today? Where has it failed and why? What do you suppose the future holds
for crypto as currency and why?
Endnotes
1. Economist, “The Last Kodak Moment,” January 14, 2012.
2. Knowledge@Wharton, “What’s Wrong with This Picture: Kodak’s 30-Year
Slide into Bankruptcy,” February 1, 2012.
3. Calculated from data provided in Kodak 2023 Annual report.
4. J. Bower and C. Christensen, “Disruptive Technologies: Catching the
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5. O. Malik, “Skype, Now the World’s Largest Long-Distance Phone Company,” GigaOM, March 24, 2009.
6. D. Bean, “Encouraging Value Networks That Enable Disruptive Therapies,”
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7. J. Yarrow, "Here's What Steve Ballmer Thought About The iPhone Five
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8. T. Ventura, "Why Didn’t Microsoft Dominate the Smartphone Market?"
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11. Mims, C., "Intel Not Inside: How Mobile Chips Overtook the Semiconductor Giant, The Wall St. Journal, Dec. 12, 2020
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13. A. Fitch, "Arm-Based Chips Make Inroads With Apple, Amazon," The Wall
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14. S. Byford, "ARM-based Japanese supercomputer is now the fastest in the
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19. Cohen, B.,"The $1 Trillion Company That Started at Denny’s", The Wall
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20. Cohen, B.,"The $1 Trillion Company That Started at Denny’s", The Wall
Street Journal, June 1, 2023
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
21. F. Lardinois, "Nvidia calls off its efforts to acquire ARM," TechCrunch, Feb.
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22. K. Freund"NVIDIA Is Not A Chip Company. It’s A Platform Company,"
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Chapter 7
Disruptive Technologies: Understanding Giant Killers and Tactics to Avoid Extinction
45. H. Clancy, “Intuit’s Secret to Going Global Lies in Thinking Locally,” ZDNet,
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B.
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Feb.
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Bloomberg, May 21, 2022.
103. Admin, "China: Payment Trends and Popular Payment Methods," Thunes,
Jan. 11, 2022
104. [M. Orcutt, "What’s next for China’s digital currency?" MIT Technology
Review, Aug. 3, 2023
105. Chainalysis Team, "The Current State of Central Bank Digital Currencies
(CBDCs) in 2023," Chainalysis, March 27, 2023.
106. M. Carney, “For Retailers, Accepting Bitcoin Is all about the Margin,” PandoDaily, January 13, 2014.
107. E. Ombok, “Bitcoin Service Targets Kenya Remittances with Cut-Rate
Fees,” Bloomberg, November 28, 2013.
108. T. Wan and M. Hoblitzell, “Bitcoin: Fact. Fiction. Future,” Deloitte University
Press, June 26, 2014.
109. R. Salam, “The Vice Podcast—Professor Bitcoin,” Vice, January 8, 2014.
110. T. Wan and M. Hoblitzell, “Bitcoin: Fact. Fiction. Future,” Deloitte University
Press, June 26, 2014.
111. A. Irrera, “UBS CIO: Blockchain Technology Can Massively Simplify Banking,” The Wall Street Journal, Oct. 27, 2014.
112. T. Wan and M. Hoblitzell, “Bitcoin: Fact. Fiction. Future,” Deloitte University
Press, June 26, 2014.
113. T. Small, "What are non-fungible tokens?" CBC News, March 6, 2021.
114. S. Moore, "Kings of Leon have generated $2million from NFT sales of their
new album," NME, March 10, 2021.
115. E. Griffith, "Why an Animated Flying Cat With a Pop-Tart Body Sold for
Almost $600,000," The New York Times, Feb. 22, 2021.
116. E. Howcoft, and R. Carvalho, "How a 10-second video clip sold for $6.6
million," Reuters, March 1, 2021.
117. S. Rayburn, "JPG File Sells for $69 Million, as ‘NFT Mania’ Gathers Pace,"
The New York Times, March 11, 2021.
118. D. Brady, "Why NFT Investors Are Now 'Terrified'," Fortune Video, Jan. 20,
2023.
119. Unattributed, "PepsiCo targets digital recycling solutions in bid to enhance
supply chain sustainability," PackagingEurope, July 27, 2022.
120. M. Orcutt, “Leaderless Bitcoin Struggles to Make Its Most Crucial Decision,” Technology Review, May 19, 2015.
121. P. Coy and O. Kharif, “This Is Your Company on Blockchain,” Bloomberg
Businessweek, Oct. 25, 2016.
122. A. Irrera, “Bank-backed R3 launches new version of its blockchain,”
Reuters, Oct. 3, 2017.
123. R. Hacket, “IBM and Maersk Are Creating a New Blockchain Company,”
Fortune, Jan. 16, 2018.
124. S. Gordon, “Nationwide Insurance Rolls Out Proof of Insurance on the
RiskBlock Blockchain,” Nasdaq, Jan. 15, 2018.
125. B. Marr, “30+ Real Examples of Blockchain Technology in Practice,”
Forbes, May 14, 2018.
126. S. Perez, “Spotify acquires blockchain startup Mediachain to solve music’s
attribution problem,” TechCrunch, April 26, 2017.
127. S. Liao, “Kodak announces its own cryptocurrency and watches stock
price skyrocket,” The Verge, Jan. 9, 2018.
128. S. Rossman, “E. coli outbreak tied to romaine lettuce kills 1 in California,
expands to 25 states,” USA Today, May 2, 2018.
129. L. Javier, “Yes, These Chickens Are on the Blockchain,” Bloomberg, April
9, 2018.
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130. T. McDougal, “Carrefour launches Europe’s first food blockchain,” PoultryWorld, Mar. 16, 2018.
131. L. Javier, “Yes, These Chickens Are on the Blockchain,” Bloomberg, April
9, 2018.
132. H. Bottemiller, “New Estimates Lower Incidence of Food Poisoning,” Food
Safety News, Dec. 16, 2010.
133. L. Javier, “Yes, These Chickens Are on the Blockchain,” Bloomberg, April
9, 2018.
134. P. Schimidt, “Bitcoin: Understanding What It Is,” Guardian Liberty Voice,
June 15, 2014.
135. R. McMillan, “The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster,”
Wired, May 3, 2014.
136. R. McMillan, “The Fierce Battle for the Soul of Bitcoin,” Wired, March 26,
2014.
137. S. Yang and S. Lee, “China Bans Financial Companies from Bitcoin Transactions,” Bloomberg, December 5, 2013.
138. J. Kirk, “California Removes Ban on Alternative Currencies,” Computerworld, June 30, 2014.
139. E. Sherman, “New York State to Welcome Regulated Bitcoin Exchanges,”
CBS Market Watch, March 12, 2014.
140. J. Chester, “A New Way To Raise Money: The Initial Coin Offering,” Forbes,
June 12, 2017.
141. P. Rosenblum, “Bitcoin Draws Attention of Institutional Bidders and MasterCard,” Forbes, June 30, 2014.
142. E. Helmore, “Are cryptocurrencies about to go mainstream?” The
Guardian, July 1, 2017.
143. Unattributed, “Cryptocurrency Wealth Dropped $52 Billion During
Blockchain Week. Not Even a Snoop Dogg Performance Could Save It,”
Bloomberg, May 18, 2018.
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144. J. Redman, "Bitcoin Hits Second-Highest Transaction Day Amid Price
Surge, Record Influx of Ordinal Inscriptions," Bitcoin.com, Dec. 4, 2023.
145. M. Bedawala, et al. "Rethink Digital Transactions with Account Abstraction," Visa, 2023—https://usa.visa.com/solutions/crypto/rethink-digitaltransactions-with-account-abstraction.html
146. M. Bedawala, et al. "Rethink Digital Transactions with Account Abstraction," Visa, 2023—https://usa.visa.com/solutions/crypto/rethink-digitaltransactions-with-account-abstraction.html
147. P. Hyson and S. Ancrum, "Unleashing the Power of Cryptocurrency:
Exploring Transactions Per Second (TPS) and Its Impact," The Miami Herald, May 1, 2023.
148. B. Popper, “Bitcoin’s Nightmare Scenario Has Come to Pass,” The Verge,
March 2, 2016.
149. A. Cuthbertson, “The Battle Over Bitcoin: Scandal and Infighting as ‘Bitcoin Cash’ Threatens to Overthrow the Most Famous Cryptocurrency,”
The Independent, May 21, 2018.
150. N. Varshney, “Bitcoin has seen 44 forks since Bitcoin Cash and they are
all useless,” The Next Web, May 22, 2018.
151. C. Hicks and M. Adams, "Different Types of Cryptocurrencies," Forbes,
March 15, 2023.
152. E. Helmore, “Are cryptocurrencies about to go mainstream?” The
Guardian, July 1, 2017.
153. F. Chaparro, “Something called Ethereum is Suddenly All Over the
News—Here’s What the Bitcoin Rival is All About,” Business Insider, June
27, 2017.
CHAPTER 8
Amazon: An Empire Stretching
from Cardboard Box to Kindle
to Cloud
8.1 Introduction
Learning Objectives
1. Appreciate Amazon’s scale, revenues and profits, and the breadth of businesses in which
Amazon competes.
2. Know Amazon’s current CEO and where he came from.
3. Understand that Amazon’s financial performance has not been consistent.
4. Set the stage for the examination unfolding in subsequent sections. Understand how the
firm’s approach to experimentation, and its resulting timeline, differs from competitors and
how this benefits the firm.
When we see Amazon today it's hard to believe that anyone doubted that the firm would be a
success, but that's what Jeff Bezos repeatedly encountered. Bezos (pronounced Bay-zose) founded
the firm and served as its first CEO for more than a quarter century. Amazon took nine years to
turn a profit, it had racked up billions in losses,[1] and the business press was filled with pundits
openly wondering if the firm would ever make money. Shortly after Amazon went public, the
CEO of Forrester Research quipped that the company would soon be “Amazon.toast” as larger
traditional retailers arrived to compete online.[2] The Guardian and Barron’s were among the publications that called the firm “Amazon.bomb.” Bezos’s personal favorite came from a pundit who
suggested the company should be renamed “Amazon.org,” adopting the domain of a nonprofit since
it would never make any money. The company’s stock, which had previously traded above $100, was
below $3.[3] But punditry is an inaccurate business, and times have clearly changed. Over the twelve
months ending September 2023, Amazon had made over $20 billion in profits on sales of over half
a trillion dollars.[4] Amazon was number two on the Fortune 500,[5] behind only Walmart, and may
very well be number one by the time you read this. As for firm value, Amazon was just the second
firm (after Apple) to have a market cap of over $1 trillion.[6] So much for the naysayers.
The business that Bezos started began as a bookstore, then expanded to other media categories
(CDs, DVDs)—products that have widely been replaced by digital versions sent over the Internet.
Bezos would later stock products in nearly every category and acquire promising rivals, from Audible to Zappos. Bezos then defied pundits and opened the store to third-party sellers, too. Today,
Amazon is often called “The Everything Store” because there are few product categories that you
won't find on its website, and for many customers it's the first and only place they'll go to make a
purchase. Today Amazon accounts for about half of every $1 spent on retail e-commerce.[7]
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Those third parties now make up about 60 percent of Amazon’s retail sales,[8] and those firms
selling through Amazon pay the firm to list their products and handle customer purchases and
payment. Amazon will gladly sell additional services to warehouse, pack, ship, and advertise thirdparty goods on its site. While Amazon doesn't book the sale of third-party goods as revenue, about
half of a typical reseller's take goes to Amazon fees, and the margins on selling someone else's stuff
are far better than when Amazon buys and resells products itself.[9] If product sales plus the full
sale price of third parties were calculated, Amazon is a larger retailer than Walmart.[10]
The pandemic devastated many brick-and-mortar retailers, but for online Amazon it was a
growth accelerant. The biggest player in e-commerce didn't just get bigger—it was adding more
sales than anyone else in e-commerce, with a growth rate that defies the law of large numbers.
Amazon sales soared nearly 60 percent in just a year.[11] Keeping up with that demand was a
challenge—Amazon added over 427,000 employees during the first ten months of the COVID crisis—that's like hiring the entire city of Atlanta! And that number doesn't include the 500,000
delivery drivers and other contractors Amazon hires, nor the 100,000 temporary workers the firm
employs during the holiday runs, and it doesn't account for employee churn[12] (so thrown in
another city the size of Boston or Detroit to get a sense of that scale). While Amazon has often been
criticized for employee practices during the firm's relentless growth, as entire industries shut down
and low-skilled workers, in particular, suffered the brunt of layoffs, Amazon opportunities became
a lifeline that kept city-sized portions of the U.S. economy employed, saving many from personal
bankruptcy, homelessness, or increased debt. Today, Amazon is the nation's second largest private
employer, behind only Walmart.
It would also be hard for any early Amazon observer to envision what the firm has become.
Amazon is a category-creating leader in consumer electronics, including e-readers (Kindle with an
over 70 percent market share)[13] and smart speakers (Alexa/Echo with roughly two-thirds of the
market).[14] Amazon is now the third-largest seller of online advertisements, behind only Google (aka
Alphabet) and Meta,[15] but it also buys more advertising than any other firm in history.[16] Amazon
is a leading media streamer (Audible, Prime Music, Prime Video), and one of the largest producers of television and motion picture content. The firm also owns MGM Studios. Its purchase of
Whole Foods makes it one of the nation's leading grocers, and it's rolling out all sorts of pioneering
technologies to the firm, including pay-with-your-palm and “just-walk-out” cashierless checkout.
Amazon grew to have such scale that it eventually launched its own logistics business, complete
with a massive fleet of trucks, planes, and even ocean freight, and the company now ships most
of what it sells. In a stunning example of scale enabling vertical integration, Amazon has become
not only its own product shipper, but is also now larger than either FedEx and UPS—firms that it
had previously relied on.[17] With the purchase of One Medical, Amazon may be your primary care
physician (it is mine). And it’s a pharmacy, so it’ll gladly sell you the drugs those docs prescribe. In
cloud computing, it’s Amazon, not Microsoft, Google, IBM, or any other firm, that leads the industry in revenue and profits.[18] Cloud computing was so profitable that Bezos tapped Andy Jassey, the
former head of AWS, to succeed him as Amazon’s CEO. Amazon is a leader in robotics and artificial
intelligence. And the firm is pioneering a wide variety of technologies, from globe-spanning wireless Internet to driverless vehicles to drone delivery. That Internet bookstore that folks doubted has
now become so powerful that regulatory agencies worldwide are looking to check its strength and
influence.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
How Giant Is Amazon?
View in the online reader
Jeff Bezos and the Long Term
During his last presentation of firm annual financial performance as CEO, Bezos said, “When you
look at our financial results, what you’re actually seeing are the long-run cumulative results of
invention.”[19] Long-term thinking has long been one of Amazon’s core tenets of competitive strategy. Bezos had earlier stated: “Our first shareholder letter, in 1997, was called ‘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.”[20]
Just how far ahead is Bezos’s time horizon? His personal investments (conducted as Bezos
Expeditions) include Blue Origin, a commercial rocketry and aviation firm that shot “Captain Kirk”
(actor William Shatner) into space and has several contracts with NASA, including the next lunar
lander.[21] He personally invested in several tech-industry pioneers, including Twitter and Uber.
Bezos (not Amazon)[22] has even gone old school media, buying The Washington Post.[23] 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 ten millennia. How’s that for a symbol of long-term thinking?[24]
Why Study Amazon?
Amazon isn’t just the Internet’s biggest superstore, it’s also the world’s most valuable retailer and
the largest, most profitable provider of cloud computing services, by far. Examining Amazon’s various businesses provides a context for introducing several critical management concepts, such as
cash efficiency, logistics advantages, and channel conflict. We see ways in which tech-fueled operations can yield above-average profits far greater than offline 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 and its expanding forays into the tablet,
set-top box, and voice-powered personal assistant markets allow us to look into the importance of
mobile, multiscreen, and diverse-interface computing as a vehicle for media consumption, a distribution channel for increased sales and advertising, a creator of switching costs, a gathering point
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for powerful data, and a competitor 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.
Amazon has become so dominant that the doubters have been replaced by those crying
monopoly. The firm’s category-crushing performance in online commerce, the eBook industry, and
cloud computing have created a set of resources (data, scale, network effects, and more) that have a
natural end-state of winner-take-all/winner-take-most. This has given the firm enormous bargaining power with suppliers and partners, has made it the first stop for shoppers and the first choice
for selling partners, allows the firm to gather an unprecedented amount of data, and has created
a distribution footprint that’s difficult to imagine any other firm rivaling. Amazon is now under
intense scrutiny from antitrust regulators, workplace advocates, privacy groups, lawmakers, and a
public wondering if it’s justifiable that a firm earning billions in profits paid $0 in federal taxes (and
in fact, received government rebates) over several years.[25]
Key Takeaways
• Amazon is the largest online retailer and has expanded to scores of categories beyond
books, and much of this is now provided by third-party sellers who pay Amazon for a variety
of services, including listing, shipping, and advertising. 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. The firm’s AWS cloud computing business is the largest player in that category. And the company dominates in several markets
as it pursues many more.
• Amazon’s scale has allowed it to vertically integrate, becoming its own product shipper with
sea, air, and land transport. The firm is now a larger shipper than either FedEx or UPS.
• Amazon takes a relatively long view with respect to investing in initiatives and its commitment
to growing 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, after years of investing in new businesses and in building scale
advantage, Amazon is now solidly and reliably profitable. Studying Amazon will reveal important concepts and issues related to business and technology.
• Amazon has become so dominant that regulators worldwide are looking to curtail the firm’s
influence.
Questions and Exercises
1. Which firms does Amazon compete with?
2. Investigate Amazon’s performance over the last decade. How has the firm done with respect
to revenue, net income, and share price? How does this compare with competitors mentioned?
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?
4. Consider the success of Amazon. Is it a firm that should be more regulated? Why or why
not? What are the potential positive and negative consequences of this? Many cry “break
up Amazon,” but if retail and AWS were broken into separate business units, what would
likely be the result of these units’ ranking in the respective markets of e-commerce and cloud
computing? What kinds of tensions exist between encouraging entrepreneurship and free
enterprise and ensuring that markets remain fair, competitive, serve the consumer, and operate in the public interest or at least in ways that don’t create net social detriment? What
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
should managers do to address public concern, and how might a lack of addressing these
issues impact a company in the future?
5. As a longer assignment, watch the PBS Frontline documentary below: “Amazon Empire: The
Rise and Reign of Jeff Bezos.” Use this to frame your thoughts on this chapter. Is Amazon a good or bad thing for the world economy? What role does federal regulation play in
controlling concerns regarding Amazon’s growth and power? What role does the federal
government have in enabling the positive growth and innovation that came out of Amazon?
As a senior manager for the firm, how would you best navigate these concerns to benefit
your employees, customers, shareholders, and society? What responsibilities does the firm
have, and do you feel the executives understand and deal with these responsibilities when
faced with other demands of running a large, powerful, and growing company? Would you
work with Amazon? Partner with Amazon? Should the firm be further regulated or broken
up? Why or why not?
Amazon Empire: The Rise and Reign of Jeff Bezos
An extensive video on how Jeff Bezos founded Amazon and the innovations he used in order to
make it the immense success it is today.
View in the online reader
8.2 The Emperor of E-commerce
Learning Objectives
1. Recognize how Amazon’s warehouse technology and systems are designed to quickly and
cost-effectively get products from suppliers to customers with a minimum of error.
2. Understand how technology has redefined procedures used in traditional warehouse and
shipping work, and how robotics and other tech-fueled operations changes give Amazon an
advantage over rivals.
3. Explore gamification and how firms are experimenting with it for productivity gains and additional benefits, both for their workers and for their customers.
4. 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.
5. Recognize how the firm uses artificial intelligence deep learning in prediction models to further improve its cash position, avoiding the liquidity problems that plague other retailers.
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6. Gain insight into various advantages that result from the firm’s scale and cost structure.
7. Appreciate how data can drive advantages not fully available to offline firms, ranging from
increased personalization and innovation and service improvements, through tactics such as
A/B testing.
8. Understand how Amazon’s data assets and unique online position have helped it create a
multibillion-dollar online advertising business that’s ranked behind only Google and Meta.
9. Identify the two sides in Amazon Marketplace network effects, and why this is important in
strengthening the firm’s brand. Understand the financial advantages of goods sold through
Marketplace versus those that Amazon takes possession of and sells itself.
Everybody starts small, even Bezos. At first the firm focused exclusively on selling books over the
Internet. An early 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.”[26] Today, Amazon operates over 2,373 facilities worldwide dedicated to the warehousing, distribution, and delivery of products, sometimes guaranteeing
delivery within the hour.[27] The stylized smile in the Amazon logo doubles as an arrow pointing
from A to Z (as in “we carry everything from A to Z”). The firm’s downtown Seattle headquarters
takes up three full city blocks, anchored by three signature office towers, and the firm’s “second
headquarters” outside Washington, D.C., will sport a corkscrew tower with outdoor green walkway
that looks like something from a sci-fi future city (refer to the ArchDaily article, “NBBJ Designs
Amazon's Nature-Infused Second Headquarters in Virginia”).
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! The lobby of Amazon’s
headquarters sports the framed vision scribbled out by Amazon’s founder, allegedly penned on the
nearest writing surface while Bezos was noshing (refer to Figure 8.1). At the heart are three pillars
of Amazon’s business: large selection, customer experience (sometimes referred to simply as “convenience”), and lower prices. Says Bezos, “I always get the question, what’s going to change in ten
years? I almost never get asked, what’s NOT going to change in the next ten 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.”[28]
FIGURE 8.1 Amazon’s “Wheel of Growth”
Source: Based on a Jeff Bezos napkin scribble.
The three pillars of selection, customer experience, and low prices reinforce one another and
work together to create several additional assets for competitive advantage. Exceptional customer
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
experience fuels a strong brand that makes Amazon the first place most consumers shop online.
Having more customers allows the firm to provide more products, creating scale. The larger the
business, the easier it is for Amazon to justify vertically integrating to become its own shipper,
robot manufacturer, and more—keeping prices and other costs down while speeding delivery. Amazon also opens its website up to third-party sellers—a dynamic where more customers attract more
sellers, which attracts 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 the firm, now run by Andy Jassy, to further sharpen 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, make moreaccurate demand predictions, squeeze out costs, and drive cash flow. Let’s look at each of these
items and see how Amazon’s bold tech-based strategy is realizing additional advantages in the
domains of marketing, accounting, and operations.
Fulfillment Operations—Robotics and AI Drive
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. Amazon hired operations experts
from leading retailers, but raiding Walmart’s talent pool wasn’t enough. Amazon’s warehouse and
technology infrastructure are radically different than those of any conventional retailer. While
Walmart warehouses that support its superstores ship large pallets of identical items in a single
shipment (think crates of diapers or toothpaste) to thousands of its retail locations, Amazon warehouses 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, applying technology for the biggest impact.
To automate profit-pushing hyperefficiency, Amazon warehouses are powered by at least as
much code as the firm’s website,[29] as well as over three quarters of a million robots[30]—nearly all of
it homegrown. Shipments during the holiday rush number in the billions of packages, all delivered
without elves or flying reindeer.[31] The firm’s larger warehouses are upwards of a quarter-mile in
length, spanning a footprint of nearly sixty American football fields, packed with aisles of shelves.[32]
When you order products from Amazon, software examines the firm's vast database of ASINrecorded products, compares it against your location, and makes a decision on which of the firm's
hundreds of warehouses should be used to fulfill your order, or if an order should be split among
separately shipped boxes, sometimes from separate facilities. In some cases, Amazon might even
decide to ship goods from one warehouse to another so it can be boxed together. This is one reason
why a single multi-product Amazon order might arrive from several boxes at different times. Speed
and cost are the variables that determine the proper warehouse sourcing and shipped package
mix.[33] Technology choreographs thousands of workers and robots in what seems part symphony,
part sprint.
Tight coordination starts when suppliers ship products to Amazon facilities (refer to video
below). There are so many products coming in tractor trailers from such a wide variety of disparate
vendors, that arrival needs to be precisely coordinated to avoid traffic jams while ensuring the most
efficient amount of inventory stock is held. This can only be accomplished with machine-driven
scheduling constantly updated with precision analytics. Systems also need to integrate with supplier systems to ensure timing is perfect. Inside those distribution facilities, Amazon had previously
relied exclusively on human beings rushing around maze-like warehouse shelves to stock products
and pick orders.[34] The worker runabout was good for personal cardio, but it required wide lanes
between shelving, and technology to coordinate path-crossing, occasionally crash-prone, cart-push-
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A Tour of an Amazon
Fulfillment Center
Amazon shows you how
robotics and the firm’s AWS
services, including AI and
machine learning, come
together to get products from
suppliers to you.
View in the online reader
ing humans. Today, a robot army supplemented by AI smarts and a swarm of sensors turbocharges
fulfillment, sparing the worker sprint.
Robots powering redesigned fulfillment centers came from Kiva Systems, a Massachusettsbased firm that Amazon bought for over three-quarters of a billion dollars, and which is now the
centerpiece of the firm’s unit named Amazon Robotics.[35] These robots, which have gone through
several generations of innovation, don’t look like C-3PO. they’re often squat, brightly colored,
rounded rectangles on wheels, about the size of a living room ottoman, and they often sport mythical names: Hercules, Pegasus, Proteus. Some can haul shelving that weighs as much as 3,000 lbs. In
Amazon’s robotic warehouses, the shelves come to the workers.
Goods Coming In: When items arrive in an Amazon warehouse, robots line up to accept new
inventory while carrying four-sided shelf towers with open bins (known as pods, internally).
Shelves may have nine or more levels of goods on each side, with multiple pods per level, but robots
know to spin shelves and face workers with sides that will accept incoming goods. Shelf-carrying
bots travel around in an area caged off from humans. They travel about three to four miles per hour
and never collide, using motion sensors and floor markers to find their way. The wireless, electric
robots will run a couple of hours on a charge, and they’ll return for a recharge when needed. Workers who shelve incoming products scan each item’s barcode, and an ASIN or Amazon Standard
Inventory Number is assigned. Cameras overhead link a feed to AI software using image recognition to provide an additional verification that an item matches the scan. Next, overhead colored
lights will color code the bin that should accept the item. Software knows if a bin is full and knows
the weight distribution of what's currently stored, so it can walk workers through shelving new
products in a way that keeps these robot-carried towers of goods in balance. Amazon software also
enforces an additional rule when stocking shelves, known internally as “random stow,” where no
two similar products sit next to each other. While this makes Amazon’s shelves look like an unorganized hodgepodge, when a product is the only one of its type on a given shelf, this actually
reduces the chances that a picker will confuse a size or color or otherwise grab the wrong thing.
Reducing mistakes keeps customers happy in brand-building ways, and it reduces errors that can
crush profits. Once stocked, robots carry shelves in a bots-only caged-off area and park each shelf
in a tightly packed space optimized not for humans to run down, but so that bots to quickly locate
a shelf containing an item that’s needed.
Goods Heading Out: When a worker, called a picker, is packing an order, that order appears on
the picker’s screen. Robots are dispatched to find shelves containing an ordered product and carry
it to the picker. Robots rotate shelves so the side containing the desired item faces the worker. This
picker checks a screen showing an image of the item to be picked, and overhead lights highlight
the specific shelf slot containing the item so that it can be easily found. Cameras once again relay
images to AI that verify the picked item is the one that was ordered. A plastic tote bin to hold the
customer's order sits along side the picker on a conveyor belt, and that item is loaded up with all of
the individual items that make up a customer’s order. For speed, multiple pickers might assemble
multiple totes that contain goods for a single multi-product order, but the firm's conveyor system
will combine items from separate totes so that they're ready to be boxed together.[36]
Artificial intelligence also selects the right box for an order, puffs the proper number of packing
pillows, and even dispenses the correct length of tape. Boxes are weighed, and the software does
an additional check to see if the weight is what’s expected. If an order is too light, that’s a sign that
a box is missing an item, too heavy and the wrong item may be in the order. In the final stage, a
conveyor belt shuttles boxes to SLAM machines (Scan, Label, Apply, Manifest) that blow customer
address shipping labels onto the firm’s smile-logoed cardboard boxes with a puff of air. Privacy is
maintained since a human is never in position to see the items go into a box matched with a customer's name and address.[37] And once a product is boxed and sent out, the quantity ordered of
each item is deducted from the product’s ASIN database entry. This means Amazon should have
a near-perfect understanding of its inventory—eliminating costly and time-consuming inventorytaking steps performed by other retailers.
Conveyor belts then take the package to the outbound shipping area determined by algorithms evaluating the speed versus cost. A product might be shipped by Amazon, the U.S. Postal
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
Service, or a third-party shipper, and will then be sent to the proper sorting facility so it can be
packed with the day's other outbound packages in an efficient delivery run.[38] Some warehouses
ship products so quickly that outbound trucks are dispatched with a less-than-three-minute window between them.[39] The entire order process involves only about a minute, total, of human
contact.[40]
Introducing the Full Amazon Robot Lineup
See various types of robots used by Amazon and hear from workers developing these technologies.
View in the online reader
Keeping customers happy stems in part from setting expectations, so Amazon’s systems
receive weather reports as well. Order a product during a pre-Christmas snowstorm, and expect to
see a message on the website indicating that “adverse weather conditions are impacting deliveries.”
It’s a nice touch on the few times when a snag might cause problems. Those are quite rare: Amazon
boasts on-time package delivery rates of up to 99.9 percent or more.[41]
In a pilot effort that will be rolled out widely if successful, the robot-carried tall shelves
containing different products would be replaced by robots toting waist-high bins.[42] In the new
bin-instead-of-shelf system, workers would no longer need to reach up or down in a multi-tiered
shelf—a key goal, given that Amazon has been criticized for workplace ergonomic hazards.[43] Fewer
injured workers mean less time off and lower insurance premiums.
While a previous generation of robots navigated factories in caged-off areas with low lighting,
and where humans rarely tread, Amazon’s Proteus robot is entirely autonomous and can work
alongside humans, backtracking or moving around workers, as needed. Robots like this are
designed to offer cues to their human co-workers to make robot intentions clearer and perhaps
even pleasant to work with. For example, rather than stop abruptly in a way that might startle a
person, robots recognize humans from a distance and stop gradually when they can. Other Amazon robots have screens that mimic eyes and that turn into shapes to indicate what’s happening,
like hearts when a task has been properly completed.
Amazon has also made great strides in creating robot pickers that can identify and grab
items from inventory bins. Replicating the sensitivity and dexterity of the human hand is one of
the most difficult things in robotics. The holy grail is building a robot that can simply pick up
stuff that’s of different sizes, shapes, weights, and textures. A new robotic arm named Sparrow can
pickup about 65 percent of the more than 100 million items in Amazon’s inventory[44] and can even
identify an individual item from a tray that has different goods. It does this using what’s called
multi-modal identification, with an array of sensors on the arm or positioned nearby that quickly
scan bar codes, read packaging text using optical character recognition, and identify products using
image recognition AI. Sparrow lifts items using an array of deployable suction cups at the end of
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
245
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Information Systems
Up Close with
Amazon's Sparrow
Robot
Amazon’s Sparrow robot can
pickup roughly 65 percent of
the million-plus items sold by
Amazon, further automating
the fulfillment process.
View in the online reader
extenders, and AI analysis recognizes the item’s size, calculates its center of gravity, and extends the
appropriate number of sucker-equipped extenders in the exact location needed to pick a package
up. Once that item is lifted, sensors surrounding the arm scan the item and use more AI to check
for damage, boosting customer satisfaction and eliminating a category of return costs.[45] Sparrow
isn’t the only bird-named Amazon robotic arm. Others with names like Robin and Cardinal can pick
and sort packed packages, or grab and stack heavy trays.
As for benefits, robots have helped Amazon store as much as 50 percent more product in robotequipped warehouses (greater selection at lower cost); have reduced unload time for inbound
inventory from “hours” to as little as thirty minutes;[46] have cut average order fulfillment time from
about an hour and a half to as little as fifteen minutes;[47] and have dropped fulfillment costs by as
much as 40 percent.[48] While robot workers are cheaper than people, Amazon Robotics insists the
firm’s innovations aren’t a job-killer; and backs this up by pointing to the firm’s continual hiring.
Robots also can’t repair themselves, so a human repair staff is on site in the event of failure. Says
the firm’s vice president of worldwide operations, “[The robots are] doing the part that’s not that
complicated. It’s just moving inventory around. The person is doing the complicated work, which is
reaching in, identifying the right product, making sure it’s the right quality, and making sure it’s
good enough to be a holiday gift for somebody.”[49] During the medium term, more robots may
enable more humans to be hired, but it’s not difficult to imagine a day when robots can replace
most of Amazon’s workforce. Given that Amazon is the nation’s second largest private employer
and there are many other workers performing similar jobs in other factories, if, or more likely when,
this happens, the economic shock would be significant if those workers can’t be redeployed to other
industries or careers.
Can You Improve Worker Performance with Gamification?
Some Amazon warehouse workers might begin to feel as if they're playing Tetris with real
boxes.[50] The firm has been experimenting with games tied to their work, pitting employees
against each other in friendly competition in an attempt to make work less tedious and, hopefully,
even more productive. Games have names like PicksInSpace, Mission Racer, Tamazilla, and
CastleCrafter, with graphics showing players advancing as they show more productivity than
peers. Game play is optional, and players can reveal their identity or play anonymously, or compete just against their own performance record, and employees who choose game play say the
games help cut down on the tedium of repetitive tasks. Some games offer prizes, like Amazon
SWAG (stuff we all get) or consumer electronics.[51] The process of applying game mechanics to
enhance non-game activities is known as gamification.[52] Amazon is by no means alone in gamifying the workplace. Target has used games to boost checkout staff productivity. Uber and Lyft
use gamification to motivate drivers and encourage productivity.[53] Delta Air Lines has gamified
otherwise rote tasks in reservation agents’ training. My university distributed free Fitbits to faculty
and staff and encouraged us to compete against one another in team challenges that promoted
fitness—outcomes that could lower health care costs and reduce sick days. Employees may
receive bonuses, gift certificates, or corporate swag based on performance. And you may have
encountered gamification tactics in your own life, such as fitness apps that encourage you to
“close your rings,” education tools such as Duolingo for language learning or Minecraft for Education, or the Starbucks app that encourages you to order at a given time to earn extra “stars”
that apply to free bonuses. Dr. Jane McGonigal, a video game designer and expert on gamification, warns would-be gamifiers, “Competition is only enjoyable for a short time. . . . As soon as
workers start underperforming against their colleagues, it becomes less fun and can actually be
counterproductive.”[54] Firms seeking to use gamification might need to vary games over time and
seek intrinsically rewarding games. For a better understanding of gamification and tips on effective gamification design, refer to the video below.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Understanding Gamification
A quick primer on gamification by Dr. Zac Fitz-Walter.
View in the online reader
Amazon’s Cash Conversion Cycle—Realizing
Financial Benefits from Tech-Enabled Speed
Quickly moving products out of warehouses is good for customers, but Amazon’s speed also offers
another critical advantage over most brick-and-mortar retailers: The firm is astonishingly efficient
at managing cash. Here’s how.
When incoming inventory shows up at most retailers—and this is certainly true for Amazon,
Barnes & Noble, and Best Buy—those firms don’t pay their suppliers right away. Instead, they log
payment due for these goods as an accounts payable, a bill that says when payment is due some
time in the future. Accounts payable periods vary, but it’s not uncommon for a big retailer to be able
to hold products for a month or longer without having to pay for them. However, when customers
buy from a retailer, they pay right away. Cash is collected immediately, and funds from credit cards
and checks clear in no more than a few days. The firm’s period between shelling out cash and collecting funds associated with a given operation is referred to as the cash conversion cycle (CCC).
There are other factors that influence the CCC, but right now we’ll concentrate on the hugely
important time difference between paying for inventory and selling those goods. A retailer wants
this number to be as small as possible; otherwise, unsold inventory is sitting on shelves and doesn’t
generate any cash until it’s sold. Especially cash-crunched firms may even require short-term loans
to pay suppliers, and those firms that can’t generate cash quickly enough are referred to as having
liquidity problems.
While a firm’s CCC varies from quarter to quarter, Barnes & Noble has reported that its inventory has sat on shelves sixty-eight days on average before being purchased.[55] Best Buy has held
inventory for as many as seventy days before a sale.[56] Costco and Walmart sell goods more quickly,
but they also pay for inventory before it is sold.[57] When compared with these peers, however, Amazon alone consistently reports a negative CCC—it actually sells goods and collects money from
customers weeks before it has to pay its suppliers. This gives the firm a special advantage since it
has an additional pool of cash that it can put to work on things like expanding operations, making
interest-bearing investments, and more.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
accounts payable
Money owed for products
and services purchased on
credit.
cash conversion
cycle
Period between
distributing cash and
collecting funds associated
with a given operation
(e.g., sales).
liquidity problems
Problems that arise when
organizations cannot easily
convert assets to cash.
Cash is considered the
most liquid asset—that is,
the most widely accepted
with a value understood by
all.
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Information Systems
inventory turns
The number of times
inventory is sold or used
during a specific period
(such as a year or quarter).
A higher figure means a
firm is selling products
quickly.
The efficiency of a firm’s cash cycle will vary over time. And numbers reported are an average
for all products—some products are slow movers while others are sold very quickly. But the negative cash conversion cycle is another powerful benefit that Amazon’s fast-fulfillment model offers
over rivals. The goal for Amazon? Keep inventory turns high (i.e., sell quickly) and pay suppliers
later.
FIGURE 8.2 Cash Conversion Cycle (in Days) among Select Major Retailers
Source: Data from firm-published financial reports.
deep learning
A type of machine learning
that uses multiple layers of
interconnections among
data to identify patterns
and improve predicted
results. Deep learning
most often uses a set of
techniques known as
neural networks and is
popularly applied in tasks
like speech recognition,
image recognition, and
computer vision.
Comparing against rivals in pandemic years is a less-fair comparison, so the chart above hasn’t
been updated, but note that as Amazon’s machine learning models get even better at choosing the
right time to reorder product to minimize time in inventory without leading to stockouts, Amazon’s
CCC improves. When Amazon shifted to so-called deep learning machine learning models—morecomplex models that are often described as having more “hidden layers” that can be uncovered
with more powerful computing—the company saw a fifteen-fold improvement in the accuracy of
its forecasts.[58] The firm’s CCC for Q4 2020 was almost negative twenty-five days—meaning most
customers paid Amazon for products nearly a month before the firm had to pay suppliers. And that
was during a quarter where many retailers experience a cash crunch due to the need to hire more
holiday-quarter staff, or spend more to stock up for holiday-season inventory. For contrast, Macy’s
CCC was a positive seventy-one days—meaning on average that firm paid for goods that sat on
shelves about two and a half months before it collected cash from customer purchase.[59]
Internet Economics, Scale, and Pricing Power
Selling more goods often gives Amazon bargaining power with suppliers. And the size (scale) of
Amazon’s business provides the firm with negotiating leverage to secure lower prices and longer
payment terms. Consider this: Walmart’s sales do exceed Amazon’s. Walmart’s 2023 revenues were
over $611 billion. Amazon’s revenue during the same period was about $538 billion, but a direct comparison would need a bit more math. The dollar-value of products moved through Amazon is quite
a bit larger, but the firm only books the smaller percentage of money it keeps when selling thirdparty products, not overall sales figures per product. Also, a retail comparison of Amazon’s numbers
would subtract other revenue, like AWS and advertising. But Walmart has over 11,500 stores worldwide,[60] and U.S.-focused Target (with only $109 billion over the same period) has 1,958 stores.[61]
Amazon has over 2,300 fulfillment facilities worldwide.[62] Putting aside the Whole Foods acquisition
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(which Amazon runs as a separate business with its own CEO), and its decreasing number of other
experimental retail outlets, Amazon still has a massive economic advantage over traditional retail.
While Amazon does spend significantly on software, automation, and expansion of its warehouses,
a 40 percent-fulfillment cost savings from robotics and automated processes was noted above,[63]
and its overall costs in non-grocery consumer sales for things like real estate, energy, inventory, and
security are far lower than costs experienced by brick-and-mortar rivals. And employee efficiency
should be greater as well, since Amazon shift workers are working at fairly constant rates throughout the day while retailer activity fluctuates with the ebb and flow of customer visitation hours.
The Advantage of Being Big: Realizing Scale
Advantages as the Retail E-commerce Leader
Retail can be a cutthroat business. Competition often boils down to whoever has the lowest price.
Amazon’s sales volume scale enables it to operate with thin margins and low prices. As former
Amazon employee Eugene Wei puts it, this allows Amazon “to thin the oxygen” of competitors.[64]
Amazon’s breadth of operations brings in cash from other businesses, giving the firm the stamina
to endure the challenge of an unprofitable price war. After vanquishing a category rival following a
price war, Wei put it this way: “Our leading opponent had challenged us to a game of who can hold
your breath longer,” and Amazon had “bigger lungs.”[65] The lesson is clear: A smaller firm looking to
pick a price fight with Amazon might not survive.
Even more impressive, Amazon seems to be monitoring the availability of products at competitor websites and using stockouts as an opportunity to earn more. The Wall Street Journal reports
that “where rivals sold out of items, Amazon responded by raising its prices an average of 10 percent.”[66] Amazon has also been accused of using data analytics applied to constantly monitoring
competitor price data to adjust prices up or down. When Amazon needs to lower prices to match a
firm like Target or Walmart, it will do so, but it will also raise some prices in tandem with others
when it’s able to maximize revenue. Amazon still monitors others and adjusts prices so it’s seen as
the lowest offering in most circumstances, but the technique of altering prices on the fly based on
economic factors—known as dynamic pricing—can help a firm maximize profits and goose
sales.[67] Firms should be careful—consumers have been known to react angrily to dynamic pricing
if they feel they are being taken advantage of.[68] But the insight does show how data can drive a
nimble response to shifts in the competitive landscape.
Amazon generates a lot of cash, and for years had been plowing nearly every penny back
into the firm, mostly via investments in fulfillment center infrastructure and (as we’ll see later in
this chapter) capacity for the firm’s dominant, higher-margin cloud computing business (visible in
accounting statements by analyzing the sizable gap between the firm’s operating cash flow, which
eliminates capital expenditures, and free cash flow, which includes them).[69] Now the firm is harvesting profits from that infrastructure investment. Larger warehouses, more warehouses closer
to big cities, and more efficient warehouses all build a moat around the firm’s existing businesses,
making it less likely that any firm will be able to attack Amazon’s three-pronged value trident of
selection, service, and price.[70]
Scale delivers bargaining power with suppliers, and Amazon has used its massive influence to
demand price-saving concessions from partners and to insist that partners not charge less than
their Amazon price anywhere else (a practice challenged in court as anti-competitive).[71] Amazon
has set standards that require vendors to send it products using less bulky, easier-to-open, and
more environmentally friendly packaging, or in some cases ship with no additional packaging at all.
Glossy boxes and see-through packaging aren’t needed for Amazon customers, who have already
made a purchase decision and have paid for goods by the time they first touch a package. Products that pack as rectangles are also easier to stock and ship than those with odd shapes. Good for
consumers, better for the environment, and a clear benefit for Amazon, but suppliers have had to
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
dynamic pricing
Pricing that shifts over
time, usually based on
conditions that change
demand (e.g., charging
more for scarce items).
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Information Systems
spend to retrofit packaging lines and in many cases now package otherwise identical products in a
completely different way to meet Amazon standards. Amazon has also stopped offering products
in quantities that are less profitable to ship, and provides deeper discounts via “subscribe and save,”
where the firm is guaranteed volume and can ship at less costly options than Prime-ordered oneoffs.[72]
Amazon has also experimented heavily with its own brand offerings. At one point the firm had
over 243,000 products in forty-five largely unforgettable brand names. Private-label branding isn’t a
new retail trick. Sears has done it since the horse and buggy days, Costco’s Kirkland store brand (on
everything from food to clothing) makes up a quarter of the firm’s sales,[73] and private labels make
up 46 percent of sales at Kohl’s, one-third of sales at Target, and 15 percent of Walmart sales.[74] But
recently, Amazon has cut dozens of brands and tens of thousands of products, focusing on a few
better-distinguished brands like “Amazon Basics” and “Amazon Essentials.”[75] Firms put their own
brand on high-volume products to cut out some of the costs that would otherwise go to a branded
supplier, lowering prices and improving margins over conventional brands. Private-label brands
can also give a retailer even more negotiating leverage with suppliers. But Amazon's third-party
sellers have done a fine job of competing away excess brand-related price, and since third-party
sales have better margins than when Amazon buys and warehouses its own inventory, many of the
earlier private-label products no longer make economic sense. Eliminating private-label brands also
appeases government regulators who had accused the firm of unfairly using sales data to identify
lucrative markets and squeeze out competitors with its own offerings.[76]
Customer Obsession
FIGURE 8.3 Amazon Breaking Records
Letter posted to Amazon’s home page following
the firm’s second record-breaking ACSI score.
For a firm that does so much, Amazon’s moves are largely motivated by one thing:
relentless customer focus. Sure, every firm says they care about their customers.
But consider this: In meetings, Amazon leadership is known to insist that one
seat be left open at the conference table as a symbol representing “the most
important person in the room,” the Amazon customer.[77] To keep even the most
senior executives empathetic to the customer experience, every two years every
employee, from the CEO on down, must spend two days on the service desk
answering customer calls.[78]
It’s an eye on improving the customer experience that has motivated so
many of Amazon’s pioneering efforts, including one-click ordering (which the
firm patented), customer reviews, recommendations, bundles, look and search
inside the book, where’s my stuff, and free shipping. While pioneered by Amazon,
many of these efforts are now accepted as must-have features across e-commerce
categories.[79]
Amazon is also using the Amazon Prime subscription service to make customers happy, and along the way to create habit-changing behaviors that fuel
sales growth. Subscribers to Amazon Prime now get next-day delivery on roughly
10 million products,[80] so users don’t have to bundle products in a shopping cart
before they can qualify for free shipping. It also loads up Prime members with
additional perks like a selection of thousands of videos and hundreds of thousands of songs that subscribers can stream for free. Show your loyalty with an
Source: Amazon Press Room; http://media.corporateAmazon Prime Visa card? You’ll get 5 percent cash back, not only from Amazon,
ir.net/media_files/irol/17/176060/images/letters/letter_
but also at Whole Foods. Prime members will get another 10 percent off Whole
acsi.jpg.
Foods sales items—a welcome discount for customers that used to refer to the
high-priced grocery chain as “Whole Paycheck.” Global Prime subscribers now top 200 million.[81] Many estimates have Prime customers spending twice as much as non-Prime. While
Amazon offers more value via Prime, it has also increased the price (it’s now $139 a year in the
United States), and the firm’s addicted customer base doesn’t seem to be fazed by the changes.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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As mentioned earlier, strong brands are built largely through customer experience. As evidence
of the strength of customer experience, Amazon has repeatedly scored the highest rating on the
University of Michigan’s American Customer Service Index (ACSI). Not only has it bested all other
Internet retailers, but it has also scored the highest of any firm in any service industry.
Leveraging the Data Asset—A/B Testing,
Personalization, and Even an Ad Business
Moving early and having scale allow Amazon to amass that profoundly valuable tech-derived
competitive resource—data. The more customers a firm has, the more accurately the firm can
understand various patterns related to recommendations, preferences, customer segments, price
tolerance, and the more data the firm has to feed machine learning and other AI models, and more.
At Amazon, data wins arguments, and the corporate culture gives employees the freedom to
challenge even the most senior managers, all the way up to the CEO. When Amazon coder Greg
Linden proposed that Amazon present “impulse buy” recommendations that match patterns associated with the consumer’s shopping carts (e.g., customers who bought that also bought this), he
was originally shot down by a senior vice president. Linden was undeterred; he ran an A/B
test—capturing customer response for those who saw option “A” (recommendations) versus option
“B” (no recommendations). The result overwhelmingly demonstrated that recommendations would
drive revenue.[82]
Two-Pizza Teams: Keeping an Entrepreneurial Culture in a Big Firm
One challenge growing firms often face is that they become slow and less innovative as they
expand.[83] To keep Amazon nimble and innovative, its founder mandated a rule known as “twopizza teams,” stating that any individual project team should be small enough that it can be fed
by no more than two pizzas.[84] This helps ideas flourish, discourages the kind of “groupthink” that
diminishes the consideration of alternative approaches, and even provides a mechanism where
several efforts can compete to identify the best solution.
While the “abandoned shopping cart” problem plagues many Web retailers, Amazon is considered one of the best “converting” e-commerce sites, moving customers from product evaluation
through completing checkout.[85] A/B tests drive this; the firm has relentlessly experimented with
tests that modify and compare all sorts of variables, including the wording associated with images
and buttons, screen placement, size, color, and more. Constantly measuring customer activity also
helps the firm direct its investment in infrastructure. One test, for example, revealed that a tenth
of a second’s delay in page loading equaled a 1 percent drop in customer activity, pointing to a clear
ROI (return on investment) for keeping server capacity scalable.[86]
While you’re shopping on Amazon, you’re likely part of some sort of experiment—perhaps several. The firm runs some 12,000 tests a year.[87] A/B testing is yet another advantage e-commerce
firms have over conventional retailers. Constant experimentation, refinement, and retesting are far
easier in the digital world when every user’s click, delay, and backtrack can be measured and compared.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A/B test
A randomized group of
experiments used to
collect data and compare
performance among two
options studied (A and B).
A/B testing is often used in
refining the design of
technology products, and
A/B tests are particularly
easy to run over the
Internet on a firm’s
website. Amazon, Google,
and Facebook are among
the firms that aggressively
leverage hundreds of A/B
tests a year in order to
improve their product
offerings.
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Information Systems
cookie
A line of identifying text,
assigned and retrieved by
a given Web server and
stored by your browser.
collaborative filtering
A classification of software
that monitors trends
among customers and
uses this data to
personalize an individual
customer’s experience.
retargeting
Presenting a customer
with promotions on
third-party websites based
on their in-store browsing
activities.
Amazon’s data trove on you individually, and users collectively, fuels the firm’s personalization
effort (efficiently referred to internally as p13n, since there are thirteen letters between the p and
the n in the word personalization). When visiting the Amazon home page, it’s more accurate to say
that you’re visiting your Amazon home page at a given point in time. Your page may vary not only
based on any ongoing A/B tests but also based on Amazon’s best guess of what you’ll want to see as
well as any myriad of other sales and promotion goals. Behind the scenes, your Web browser
receives a unique tracking string called a cookie, and Amazon tracks your surfing behavior as well
as your buying history. Rate products? Even better! Amazon knows what you liked and what you
didn’t. The firm’s proprietary collaborative filtering software compares a user’s data with others’
data, mapping a best guess of what you’ll like to see each time you visit. A parent who has searched
for and bought items for young children will likely see recommendations for other age-appropriate
kid products—maybe even guessing at your kid’s gender and likes. Athletes, gamers, and romance
novel fans should also expect interest revealed by surfing and purchasing to create a custom experience. Amazon has claimed that as much as 35 percent of product sales have come from the firm’s
recommendations.[88] Scale means the firm has more users doing more things, allowing the firm to
collect more observations that fuel greater accuracy in tailoring the user experience. And this fuels
that oh-so-important, brand-building positive customer experience.
All of this customer insight data positions Amazon to grow a massive, Google-competing ad
business. Amazon initially sold ads as a way to generate more sales through its website, but Amazon now offers advertisers the ability to advertise on Kindles, on other Amazon-owned sites like
Twitch and IMDb, within mobile apps, and via Amazon-targeted ads on third-party websites. Even
the firm’s cardboard boxes and packing tape provide ad real estate. Amazon blew past earlier analyst estimates of ad business growth, bringing in about $38 billion and becoming the firm’s fastestgrowing business and one with profit margins far ahead of the far slimmer money it makes per
retail product sold.[89] Only Google and Meta have bigger ad businesses. Amazon ad offerings are
feature-rich, including things like the ability to play a movie trailer in an ad or embedding a discount coupon in a click-to-purchase offering. Amazon reportedly charges up to $1 million for ads
placed on the welcome screen of a new Kindle Fire.[90] Don’t like ads? You can pay $20 more for a
Kindle without the “special offers.” Alexa is also an outlet for promotions.[91] Have you also ever
looked at a product on Amazon, didn’t buy it, but then started seeing the product pop up in ads as
you surfed the Web? That’s called retargeting, and Amazon is building this business as well. Retargeting is especially attractive to suppliers since a click through brings you right to Amazon’s cash
register, a place where you’ve likely already got all of your account information online and where
buying is just “1-Click” away.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
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FIGURE 8.4 How Retargeting Works
In this retargeting example, a user visiting the Amazon page for a moisturizer (background) was tracked using a
cookie, and the user’s interest in this product was recorded. Advertisements for this product were shown when
this same user visited other websites (foreground).
Sources: Amazon, https://www.amazon.com/bareMinerals-Bare-Haven-Essential-Moisturizing/dp/B01A3HO1W2/ref=sr_1_
2?keywords=bare+minerals+cream&qid=1568321319&sr=8-2; Politico, https://www.politico.com/story/2018/03/29/facebook-dataprivacy-448737.
Selection and Network Effects
Amazon’s radical focus on customer experience also caused it to take what many would consider a
contrarian move—offering products provided by others alongside its own listings. Today, the over
2.1 million active third-party sellers on Amazon[92] make up over 60 percent of goods sold by the
firm.[93] Third-party products are referred to as being part of the Amazon Marketplace. Amazon
doesn’t own inventory of marketplace items. Sellers can warehouse and ship products themselves,
or they can opt to use Amazon’s warehouses as part of the Fulfilled by Amazon program. The latter
lets Amazon handle logistics, storage, packaging, shipping, and customer service, while customers
get Amazon shipping prices—including supersaver discounts and free shipping for customers
enrolled in the Amazon Prime program. Amazon also sells advertising services, so third-party sellers can buy a better position in search results. Although revenue booked through third-party sellers
is only a fraction of overall product sales, margins on these services is far higher.[94] Because Amazon increasingly sells so many “must-have” services to Marketplace vendors, it’s estimated that
roughly one of every two dollars in third-party Marketplace sales goes to Amazon, not suppliers.[95]
More than half of shoppers start their product search on Amazon—making the firm the leader in
product-oriented search (only 23 percent of product search happens on search engines—sorry,
Google). This reinforces the two-sided network effect (i.e., more buyers attract more sellers, and
more sellers attract more buyers). Third-party sellers that don’t offer goods through Amazon are
simply not in the first-choice consideration for more than half of online product searches. And the
more third-party products that are attracted to the site, the more likely buyers will continue to turn
to Amazon first when hunting for goods.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
two-sided network
effect
Products or services that
get more valuable as two
distinct categories of
participants expand (e.g.,
buyers and sellers).
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Information Systems
FIGURE 8.5 Percentage of Online Product Searches
Source: P. Danzinger, “Amazon’s Third-Party Marketplace Is Its Cash Cow, Not AWS,” Forbes, Feb. 5, 2021.
long tail
In this context, it refers to
an extremely large
selection of content or
products. The long tail is a
phenomenon whereby
firms can make money by
offering a near-limitless
selection.
Marketplace allows Amazon to build a long tail (refer to below) of product offerings without
the costly risk of having to take ownership of unproven or slow-moving inventory, while the firm
gets fat and happy in the middle of a two-sided network effect. Some Marketplace products compete directly with Amazon’s own offerings, but the firm doesn’t shy away from allowing competitive
listings, new or used, even if they’re cheaper. Competition among sellers reinforces low price and
lowers the chance that customers will look first to sites like Shopify, Temu, Google Shopping, or
eBay. And when Amazon sells third-party goods through its site, it continues to “own” much of the
customer relationship for that sale, gathering data that would have otherwise been lost if customers went elsewhere. Amazon also won’t hesitate to kick out sellers with bad ratings to ensure
quality and protect the Amazon brand.
Scale from Selection: The Long Tail
Much of Amazon’s appeal as a first-choice shopping destination comes from the firm’s selection.
Internet businesses are free of what former Wired editor Chris Anderson calls the limitations of
shelf space and geography, which trouble traditional retailers.[96] Traditional retailers stock their
limited shelves with the most popular items, and consumers are limited to the selection available
in the stores that they are willing to travel to. Amazon’s warehouses and third-party seller selection offer the equivalent of virtually limitless shelf stock, something you’d never find in a store. This
selection is delivered by U.S. mail or package shippers, so geography is no longer a concern.
This allows the firm to leverage what is often called the long tail (as introduced in Chapter 5,
the tail refers to the large number of products unavailable through conventional retail stores, refer
to Figure 8.6). The cost to house and ship a popular book, or a more obscure one, should be the
same. While popular items make up traditional retailer inventory (the area on the left-hand side of
the curve in Figure 8.6), it turns out there’s actually more money to be made selling obscure stuff
(the stretched-out but larger area on the right-hand side of the curve) if you can reach a greater
customer base over the Internet. As evidence, consider that at Amazon, roughly 60 percent of
books sold are titles that aren’t available in even the biggest Barnes & Noble Superstores.[97]
Amazon is also moving from distribution of the “atoms” of books and video to digital distribution
of media products via the Kindle. This eliminates the cost to warehouse and ship the atoms of
physical goods.
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Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
255
FIGURE 8.6 The Long Tail
Source: John Gallaugher.
Not only does Amazon allow others to sell products through its site, but it also allows others to
market for the firm. The Amazon Associates program is the world’s largest affiliate marketing
program, offering a sort of “finder’s fee” for generating sales. Website operators can recommend
Amazon products on their site, and Amazon gives the affiliate a percentage of sales generated from
these promotions. You can set up a blog to take advantage of this right now. This has also led to the
rise of “must buy” product recommendation compilations on sites like BuzzFeed, or review comparisons on Gizmodo or The New York Times–owned Wirecutter. All of these sites earn affiliate revenue
if you click through links and buy products from Amazon or other linked vendors.[98] For Amazon,
fees paid are pay for performance—associates get a commission only if their promotions generate
sales.
Are Maturing Firms Degrading Customer Experience to Pursue Growth?
One of Amazon's most lucrative advertising lines is selling a higher ranking to vendors who want
to appear higher in search results, but is the push to sell more lucrative ads actually making
Amazon a worse firm to deal with? Product search ads are labeled as “sponsored”, but they're
taking up an increasingly larger portion of screen real estate. In a study of seventy search terms,
Amazon showed nine sponsored ads on the first results page, more than twice the average Walmart showed.[99] Amazon has also launched its own ad-sponsored streaming channel, and it will
begin running ads in Prime Video, adding an “ad-free” subscription tier for an extra $2.99 per
month.[100] Most customers get Prime Video free with their Prime subscription, so it remains to be
seen if this will prompt users to leave or pay, but it’s certainly not likely to make customers happy.
Many suppliers feel compelled to pay Amazon for placement. According to the FTC, advertised
products are forty-six times more likely to get clicks.[101] While this could be good for the bottom
line, it risks degrading both the customer and supplier experiences. Customers have looked to
Amazon to rank results based on product quality, price, or shipping time. The vast amount of
non-name brands, coupled with the pollution of organic search results by those who pay for
placement, all make Amazon's filter-oriented search seem more like a haphazard walk through a
bazaar that puts more onus on the user to figure out which products are a value and not low-quality junk. Amazon does spend significant resources on evaluating suppliers and will cull bad actors
from its service, but charging for ads has made brand names almost meaningless. Many suppliers seem like sketchy fly-by-night operators that were named by a cat that accidentally walked
across the keyboard. Actual examples include MARSHEEPY (sneaker deodorizers), AZMKIMI
(replacement TV remotes), or a collection of glove brands: Nertpow, SHSTFD, Joyoldelf.[102] Brand
erosion is a major reason why firms such as LVMH, Ralph Lauren, and Patagonia resist selling on
Amazon.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
affiliate marketing
program
Marketing practice where
a firm rewards partners
(affiliates) who bring in new
business, often with a
percentage of any resulting
sales.
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Information Systems
Tech critic and author Cory Doctorow has noticed a pattern of successful firms entering a maturing cycle for their business, then altering services in ways that boost profits but degrade the
customer experience. The pattern has been observed in many maturing tech firms, including
offerings by Google, Meta, and TikTok. Doctorow refers to this process of worsening service as
businesses mature as (rude word alert) “ensh*ttification.”[103] It’s included here because Doctorow
is regularly quoted by the business press, and you're presumably all adults and should be able
to handle a little rough language. Hopefully Amazon's A/B testing and relentless customer focus
will pull back on alienating practices, but we need to watch this space. The rise of Amazon alternatives, like Shein, Temu, and Shopify, also put pressure on Amazon. Will customers begin to
explore alternatives as they find Amazon a less enjoyable place to shop? And might suppliers
squeezed by the increasing cost of doing business at Amazon (payments for many include listings, advertising, warehousing, and shipping) abandon the firm for marketplaces that treat them
better? This three-way tension between customer experience, growth opportunities, and pressure from rivals is a centerpiece of management challenge, and one that those of you working for
mature firms are likely to encounter.
Acquisitions and Category Expansion: Fewer
Rivals, More Markets, and More Customer
Choice
flash sales
Offering deep discounts of
a limited quantity of
inventory. Flash sales often
run for a fixed period or
until inventory is
completely depleted.
Players include Gilt Groupe
and Amazon’s Zulily in
fashion, and One Kings
Lane in home décor.
Acquisitions of other firms and the growth of new internal businesses have allowed Amazon to
accomplish several things, including broadening the firm’s product offerings to underscore Amazon
as the “first choice” shopping destination; absorbing potentially threatening competitors before
they get too big; experimenting with new product offerings and services; and integrating valueadded businesses and technologies into the Amazon empire. Bloomberg Businessweek once ran a
cover story titled “What Amazon Fears Most,” featuring a diaper-clad toddler. The implication was
that New Jersey–based Quidsi, operator of Diapers.com, could grow brand and scale in staple products, drawing customers away from Amazon. Amazon bought the firm for over half a billion dollars,
and even though Quidsi never turned a profit and Diapers.com, Wag.com, and other Quidsi brands
were eventually shuttered,[104] Amazon took out what was once regarded as one of the biggest
threats to grabbing high-growth markets that Amazon didn’t dominate, and prevented Walmart (a
rival bidder for Quidsi) from gaining that expertise (Quidsi’s founders went on to start Jet.com, selling that firm to Walmart for $3 billion a short time later).[105] Amazon’s $1 billion purchase of Zappos
(which continues to operate as a separate firm) also took out a fast-growing Amazon rival before it
became a threat.[106] Other acquired firms include the string of robotics firms from Kiva to Roomba
parent iRobot, as well as Alexa, a Web analytics and tools provider; Audible, the leading provider of
digital audiobooks; Goodreads, a social networking site for book readers; Woot, a flash sales site;
Lovefilm, often described as the “Netflix of Europe”; Souq, known as the “Amazon of the Middle
East”; and OneMedical (a medical provider with doctors’ offices).[107] Some experiments fail, such as
the now shuttered flash-sale site MyHabit, but Amazon’s deep pockets and relentless experimentation make it one of the most threatening competitors in retail and services. One thing to note,
though. Amazon’s big acquisitions may be coming to a close. With regulators worldwide investigating Amazon for monopolistic practices, it’s unlikely the firm will be allowed to acquire firms as
aggressively as it has in the past.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
Key Takeaways
• Amazon’s sophisticated fulfillment operations speed products into and out of inventory, reinforcing brand strength through speed, selection, and low prices.
• An Amazon warehouse ships multiple goods to individual customers and differs significantly
from the kinds of warehouses that firms like Walmart and Target run to ship pallets of the
same goods out to their stores. These differences made it difficult for traditional firms to
retool operations and match Amazon’s direct-to-customer model.
• AI and robotics drive significant advances in Amazon’s warehouse operations. The firm’s
scale has allowed it to purchase and manufacture its own proprietary robots, creating a
degree of efficiency leadership difficult for other firms to match.
• Rapid inventory turnover and long payment terms enable Amazon to consistently post a negative cash conversion cycle. The firm sells products and collects money from customers in
most cases before it has paid suppliers for these products.
• The cost structure for online retailers can be far less than that of offline counterparts that
service similarly sized markets. Savings can come from employee costs, inventory, energy
usage, land, and other facilities-related expenses.
• Amazon’s scale is a significant asset. Scale gives Amazon additional bargaining leverage with
suppliers, and it allows the firm to offer cheaper prices in many categories than nearly every
other firm, online or off. Scale through multiple warehouses allows Amazon to offer more
products, a greater product selection, and same-day delivery for urban areas near warehouses.
• Over 60 percent of products sold on Amazon are offerings sold through Amazon Marketplace by third parties. Amazon charges for listings and takes a cut of each sale, and offers
a host of for-fee services including warehousing, shipping, and advertising, so much so
that Amazon takes about half of money generated by third-party sellers. In addition to this
high-margin revenue, Amazon maintains its control of the customer interface and retains the
opportunity to collect customer data that would be lost if users went elsewhere for a purchase. While Amazon only books the fee on sales, not the entire revenue of the sale, fees
have far better margins than traditional sales.
• Amazon takes advantage of the long tail, a concept where firms can profitably offer a selection of less popular products. Amazon’s enormous product selection—with offerings from
the firm and from third parties—reinforces its position as the first-choice shopping destination.
• Selection attracts more customers, and more customers attract more sellers, bringing in
more selection. This creates an extremely strong two-sided network effect that has led to
Amazon’s being the first choice for more than half of all online product searches, and to the
continued growth and appeal of the firm as an outlet for third-party sellers. Firms that don’t
sell through Amazon are opting out of more than half of product searches conducted online.
• Amazon’s ability to acquire and leverage data further allows the firm to enhance customer
experience and drive sales. Internet retailers have a greater ability to gather personal data
on consumers than do offline counterparts. Data is used in personalization and in innovation
fueled by the result of A/B experiments.
• Amazon data and the diversity of the firm’s properties have also lead to a growing, high-margin ad business—third behind ad giants Google and Meta.
• Some wonder if Amazon has overreached with some advertising, clogging its website and
leading to a rise in firms with unrecognizable brands.
• Amazon has growth through aggressive acquisition, including purchasing potential rivals
such as Zappos and Quidsi. With Amazon increasingly scrutinized by international regulators,
it is unlikely that the firm will be able to make such acquisitions in the future.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
257
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Information Systems
Questions and Exercises
1. When you walk into a conventional retailer, similar items are stacked next to each other. But
Amazon tries not to do this in its warehouses. Why?
2. How do Amazon warehouse staff know where to find items? How does technology help
make the process most efficient?
3. How have artificial intelligence and robots changed the way Amazon warehouses operate?
What are the benefits these robots bring to Amazon? Which firm supplies Amazon’s shelving
robots and why might this be important for Amazon?
4. Does Amazon buy most of its warehouse automation software from others, or is most of the
software written in-house? Why do you suppose this is the case?
5. In what other ways do Amazon’s information systems reduce errors? Why is error reduction
so critical to firm performance?
6. Although Amazon is investing in robotics, human beings still do most of the product picking.
How does Amazon ensure that customer privacy is protected despite heavy human involvement? Do you think it needs to go to such great lengths? Why or why not?
7. What is the cash conversion cycle (CCC)? What factors enable Amazon to have a CCC that
is negative? Why are offline rivals unable to match these efficiencies? What advantage does
this give Amazon over rivals?
8. What gives Amazon such advantages? What other pricing advantages does Amazon have
that a conventional retailer might not be able to take advantage of?
9. What is dynamic pricing, and why might this be risky?
10. Log into Amazon (or pull up a page if you “remain” logged in). Compare it to a classmate’s
page. What similarities do you notice? What differences? Why do you think Amazon made
the choice to show you the things that it did? Do you think it guessed accurately regarding
your interests? Why or why not?
11. Amazon’s unique customer data has allowed the firm to enter the advertising business.
Which firms does this bring Amazon into competition with? Research Amazon’s role in
matching advertisers to consumers. How big a player is Amazon? How do you feel about
a firm using your personal data on purchases, product browsing, and recommendations for
advertising? Under what circumstances (if any) are you comfortable with such targeting, and
under what circumstances are you concerned?
12. How does Amazon keep management focused on customer issues and “putting the customer first”?
13. Describe how Amazon Marketplace offers two-sided network effects. What are the two
“sides,” and why is this a source of sustainable advantage for Amazon?
14. Besides network effects, what additional benefits does Amazon gain by allowing other retailers to sell potentially competing products on Amazon?
15. What is the long tail? How does the long tail change retail economics? How does it influence
shoppers’ choice of where to look for products? What firms, other than Amazon, are taking
advantage of the long tail in their industries?
16. How does Amazon earn money from third-party sellers? How are revenues from third-party
sales booked? How do profit margins of third-party sales compare to when Amazon sells
products from inventory that the firm owns?
17. Cory Doctorow and other pundits suggest Amazon and other tech firms are actually degrading experiences as they mature. Why is this the case? In what ways does it seem Amazon’s
pursuit of profit creates a negative experience for customers and suppliers? What does Amazon risk if experiences degrade too much?
18. Amazon has the third largest digital advertising business, behind only Google and Meta.
What types of ad products does Amazon sell? How is Amazon able to use ad data in selling
these products?
19. How is scale important to Amazon? What advantages does scale offer Amazon over its
smaller rivals?
20. Amazon’s operations are a marvel of automation and procedural efficiency, but the firm has
also been subject to criticism regarding its warehouse work environment. Investigate these
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Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
259
criticisms on your own. Do you feel they are valid? Are any of the critics also worthy of criticism? If so, how? Do you feel Amazon has responded appropriately to this criticism? How
would you have responded if you were CEO of the firm? What takeaways from your own
investigation will inform your own actions as a manager?
21. You can visit an Amazon fulfillment center! Investigate if a class trip is possible—perhaps
there are funds available in the student government for a business or tech club to hire a bus
to bring class to visit an Amazon facility, or maybe you can organize a carpool with classmates who drive and have cars on campus. You can arrange a tour on the Amazon Tours
website. How does what you’ve seen compare with what you’ve learned in this chapter?
Did you learn additional things that you think are important for managers to know? Share via
social media using the hashtag #BizTechBook.
8.3 The Lord of Logistics
Learning Objectives
1. Understand how and why Amazon is increasingly taking over aspects of its own logistics
business.
2. Understand Amazon’s various delivery options and why it would choose one versus the
other.
3. Explore how scale is enabling the firm to vertically integrate several aspects of delivery, from
air freight and ocean freight to long- and mid-haul trucking, to last-mile delivery; as well as
the various business models involved in these efforts.
4. Understand how Amazon uses technology to forecast, model, and create online marketplaces that have transformed the firm’s logistics compared with rivals, and have fueled its
march into new revenue channels.
5. Learn how Amazon is using technology to provide more delivery convenience to consumers,
and potentially set itself up as a better alternative for consumer delivery than UPS, FedEx, or
the USPS.
Building a Delivery and Logistics Business
inside the Business
Amazon has also been rapidly building out its own shipping and delivery infrastructure, which now
includes a fleet of Prime Air cargo jets, long-haul trailers, local delivery vans, transoceanic shipping
operations, and continued trials of automated delivery by drone. The rise of Amazon’s own shipping business is astonishing. As late as 2015, FedEx, UPS, and the U.S. Postal Service delivered more
than 97 percent of Amazon’s packages in the United States, but today Amazon delivers the vast
majority of its own packages and is a larger shipper than FedEx and UPS.[108] Even more impressive,
roughly one-third of all U.S. package delivery is handled by Amazon’s own delivery network.[109] Cost
and control drive Amazon’s interest in logistics.
Amazon spent $83.5 billion on shipping costs in 2022. That’s more than twice the amount it
spent just three years earlier.[110] Add in fulfillment costs, and the total to get product to you
accounts for about 30 percent of the firm’s revenue—and that doesn’t subtract out the lucrative
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
logistics
The process of managing
how resources are
acquired, stored, and
transported to their final
destination.
fulfillment costs
Include receiving and
packaging costs, in
addition to shipping costs.
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Information Systems
AWS and ad businesses.[111] By taking control of its own shipping needs, Amazon saves about a third
in costs that would normally go to third parties.[112]
FIGURE 8.7 Choosing the Right Shipping Partner
Crunching data and creating infrastructure lets Amazon choose the right shipping partner (including itself) to optimize on factors such as speed and
cost. Prime Now customers ordering in areas served by a Prime Now hub (sometimes called Same Day Sites) can get goods fulfilled within an hour
or two (and packages may arrive via van, bike, or on foot). Products outside of Prime Now are sourced at fulfillment centers and may be handed off
to UPS or Amazon shipping, or moved to a sortation center where sorted products are passed to the U.S. Postal Service, or go out for delivery in
Amazon trucks or by private citizen drivers contracting with Amazon.
Sources: John Gallaugher; © Shutterstock, Inc.
Disintermediating shippers by creating its own delivery network also gives Amazon more control over the customer experience. Interest in taking control of logistics increased after December
2013, when UPS couldn’t handle the massive volume of Amazon’s holiday package delivery, costing Amazon millions in refunds and damaging the firm’s reputation for delivery reliability among
those who were left with empty spaces under the tree.[113] Fast-forward to 2020, where the one-two
punch of increased pandemic holiday shopping and winter weather caused FedEx and UPS to fail
to deliver a million packages by Christmas, but Amazon, now in control of most of its own shipping,
was still offering overnight deliveries with Christmas Day guarantees.[114] The threat moves beyond
just delivery. FedEx and UPS have lucrative logistics businesses where they handle warehousing
and inventory management for partners. Amazon already provides these services for its own sellers
via FBA and has begun to offer this to third-party clients in the United Kingdom.[115] Some ana-
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261
lysts believe Amazon could grow a third-party logistics business into its next “AWS”.[116] The benefits
aren’t just about savings—they also fuel customer-pleasing speedier delivery. In the first half of
2023, Amazon delivered 1.8 billion units to U.S. Prime members the same or next day, four times
more than what it delivered in 2019.[117] Amazon has tweaked its fulfillment operations, moving from
hub and spoke to eight smaller regional facilities and an increasingly larger network of “same day
sites.” This has allowed the firm to close some less efficient facilities while opening several new
ones, all while reducing the number of touch points between Amazon’s warehouse and the customer’s home. Larger fulfillment warehouses have a wide selection of goods, while “same day sites”
have a rotating selection of what’s most commonly ordered in that region. And with more than half
of U.S. Prime orders arriving same day or next day, customers are increasingly buying supplies from
Amazon that they’d previously bought from pharmacies, grocers, or big box stores.[118] Cost savings,
happier customers, plus a new revenue stream are all sweet incentives for Amazon to keep building its efficient shipping empire, and the firm has been aggressively poaching executives and other
experienced workers from Uber, FedEx, and UPS to bring in the brains needed for a best-in-class
operation.[119]
Amazon already uses data to cherry-pick the optimal way to get packages to consumers,
crunching data that considers cost, fuel prices, routing, delivery time commitment, weather, traffic,
fleet availability, and other factors, to dispatch packages to either UPS or the U.S. Postal Service
(USPS), or to Amazon itself. By diving into partner shipping-route data and comparing this to urban
density and delivery frequency, Amazon has targeted high-throughput areas where it can gain the
most efficiency, leaving costlier rural delivery to partners like the U.S. Postal Service.[120] Efficiency
through vertical integration has prompted Amazon to cut in half its reliance on the U.S. Postal Service in just two years,[121] and to dramatically cut the “miles driven” per delivery for its own fleet.
Long- and Mid-Haul Trucking: Amazon owns thousands of its own branded truck trailers that
get loaded with customer packages at fulfillment centers.[122] While Amazon owns the trailers, they
can be driven by any firm or independent contractor. Amazon is now a licensed freight broker and
has rolled out a service that is a sort of Uber for truckers, matching trucks with shippers, which
could include Amazon or any other firms that need a load hauled. This not only gives Amazon an
opportunity to cut out the 15 percent commission taken by traditional freight brokerage firms, but
it also puts Amazon in direct competition with big freight haulers, including Uber Freight, C.H.
Robinson, and XPO Logistics, for the over $72 billion freight brokerage market. An app as part of the
system offers driving directions, truck stop recommendations, warehouse check-in procedures, and
suggested pickup and drop-off routes to maximize capacity, shorten delivery time, and cut costs.[123]
Prime Air: For items that need to travel farther and faster than trucks, Amazon has realized
that in many cases it can now fly cargo jets more cheaply and efficiently than shipping partners. A
recent purchase of Boeing 767 passenger jets that will be converted to haul cargo will bring Amazon’s Prime Air fleet to eighty-five planes.[124] These planes often fly in and out of low-traffic airports,
like Pennsylvania’s Lehigh Valley, which is near Amazon facilities and is only ninety minutes from
downtown Manhattan. Reports suggest that Amazon cargo jets are flying full, but with lighter
loads (cutting fuel costs). By running the numbers, Amazon software can decide when it makes
sense to move products onto its own planes for delivery, and when products (likely fuel-burning
heavier goods) are better sent through third-party shippers. Flying its own route-optimized planes
point-to-point also offers speed advantages. While FedEx was a partner, that firm’s planes leaving
from the West Coast departed no later than 9:00 p.m. to ensure they arrived at the firm’s massive
Memphis, Tennessee, sorting hub. However, if Amazon software says it can fill a plane with cargo
that can skip a third-party hub and go straight to its destination, Amazon planes can leave as late
as 2:00 a.m.—allowing the firm to take more orders even later, but still guaranteeing fast delivery.[125] And if a stop is necessary to channel orders to disparate locations, Amazon has built its own
$1.5 billion 900-acre hub in northern Kentucky so it can handle these options without an air freight
partner.[126] In the recent supply chain crisis, Amazon was able to run the numbers and decided that
it made sense to, for the first time, lease long-haul aircraft to fly from China to the United States.[127]
The Last Mile: In the three-year period after UPS botched holiday deliveries, Amazon has built
out its network of sorting facilities, delivery stations, and “same-day sites” that support same-day
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
How Amazon Beat
Supply Chain Chaos
with Ships, Containers
and Planes
Coverage of how Amazon
altered operation during the
recent supply chain crisis
also shows how the firm’s
worldwide shipping network
works.
View in the online reader
262
Information Systems
delivery of products with the sales volume to support such efforts. The network is so extensive
that 75 percent of the United States can now be serviced with next-day or same-day delivery,[128] and
another one thousand facilities are being rolled out in cities and suburbs throughout the United
States—in many cases repurposing abandoned mall and retail space.[129] These facilities are designed
to take customer orders boxed up at the fulfillment centers and get them to customers as quickly as
possible. Packages sorted by zip code might be dropped off at U.S. Postal Service facilities, or Amazon could forward packages to its own facilities, where it controls the final delivery leg.
Amazon is aggressively expanding its own last-mile delivery fleet with an order for 100,000
electric delivery vans from Detroit electric vehicle (EV) supplier Rivian,[130] but challenges with lastmile delivery have also prompted the firm to create ways for gig workers to round out the firm’s
delivery options. With just three months from FedEx’s dropping Amazon to the start of the holiday season, constructing its own, reliable delivery network became an even more urgent priority.
Amazon offered $10,000 and up to three months’ salary to existing Amazon employees for them to
quit and become “delivery entrepreneurs.” Anyone joining the program also got access to Amazon
delivery technology, hands-on training, and discounts on products, including insurance and vehicle
leasing. The firm’s Amazon Flex service offers Uber-style gig work as a delivery driver at $18–$25 an
hour to anyone twenty-one or older with a driver’s license and at least a four-door sedan.[131] Now
more than 400,000 drivers deliver goods for Amazon, all of them either self-employed or working
for other companies.[132] Four million drivers have downloaded the Flex app worldwide. Technology
constantly evaluates driver performance and can make decisions to suspend or fire a driver who
fails to meet the firm’s expectations.[133]
Inside Amazon’s
Meticulous Same-Day
Delivery Strategy, WSJ
Shipping Wars
View in the online reader
Amazon is also using technology in ways that could eventually make it an even more attractive
choice than FedEx, UPS, or the U.S. Postal Service. The Amazon Key delivery option uses smart
home technology to allow delivery people to drop off packages inside the home. This effort was
boosted even further with Amazon’s $1 billion purchase of one-time Shark Tank reject, Ring, a
maker of smart home security technologies.[134] Amazon also has an early lead in allowing you to
accept delivery to the trunk of your car—partnering with GM and Volvo in a thirty-seven city rollout linking an Amazon App to OnStar car systems.[135] As mentioned in Chapter 6, having fast/cheap
computing embedded in all sorts of devices is opening up new opportunities.
By Sea and Global Reach: Amazon is on land, air, and also at sea. Amazon’s China subsidiary
has become an ocean freight shipping operator moving goods from Chinese manufacturers to the
United States that already ranks in the top five transportation firms in the trans-Pacific.[136] Ocean
shipping isn’t for rapid delivery, but for forecast demand, say to bulk up fulfillment centers with
goods Amazon knows it will need. Managing ocean freight is another way for Amazon to control
another leg of its value chain, cleave costs, and potentially even enter the $350 billion ocean freight
market.[137] During the post-pandemic supply chain crisis, Amazon even began manufacturing its
own shipping containers when the worldwide supply became scarce.[138]
Amazon’s global logistics march continues beyond China and the United States. In Europe, the
firm has taken a stake in two European logistics companies, giving it partial control of 6,700 delivery trucks handling 170 million shipments in the United Kingdom and France,[139] and it has built
out its last-mile delivery network in the highly competitive German logistics market (home to DHL
and well-serviced by FedEx).[140]
On Deck—Delivery by Drone and Robot: Amazon is also actively piloting copter-style drones
to deliver small packages to consumers in thirty minutes or less. While some initially thought this
was a publicity stunt, Amazon has since gained F.A.A. approval to “safely and efficiently deliver
packages to customers . . . beyond the visual line of sight of the operator”[141] (UPS and Wing, owned
by Google parent Alphabet, and Walmart partner Zipline have similar approval). The effort is limited to mostly rural areas, has been slow to roll out, and has experienced some crashes, but the firm
claims to have made “hundreds” of deliveries in California, Oregon, and Texas.[142]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
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Key Takeaways
• Shipping represents a large portion of Amazon’s expense for each order, and the firm leverages several approaches to bring down this cost.
• In the United States, Amazon can choose to deliver products to consumer homes via the
U.S. Postal Service, UPS, or itself. Algorithms decide which path is most effective from both
cost and customer service perspectives. Data gathered through years of operations help the
firm improve analytics around optimal shipping choice.
• Technology has allowed the company to enter in several ways, including Amazon’s Uberstyle recruitment of contract drivers. Apps allow drivers to schedule three- and six-hour
delivery times, and supply predetermined routes and driving instructions.
• Amazon owns its own trucking fleet to handle long- and medium-haul product transit, when
appropriate. It has also used technology to become a freight scheduler for its own and
for third-party trucking, entering a new market valued at billions. Drivers can find available
jobs through an Amazon website that delivers a host of information on completing the job,
including delivery-time scheduling (key for large warehouses), delivery check-in and security
instructions, and even suggestions for truck stops.
• The firm has also leased eighty-five cargo planes, allowing it to funnel the most cost-effective
shipping to its own fleet and giving it more time to accept orders for next-day shipment.
Planes utilize underserved airports that are still near metro centers or other Amazon facilities. The company has also built its own air hub in the center of the United States to further
improve cost and speed efficiency.
• Amazon also operates its own ocean freight for products from overseas (primarily East Asia)
that it knows it will need in its warehouses but that lack the immediate need of plane delivery.
• While Amazon is a customer of large shipping firms, it has also begun offering its own shipping option to third parties, making it both client and competitor to package delivery firms.
Amazon’s experience in shipping provides an opportunity to create a shipping and logistics
business in the way that its expertise in computing allowed it to create a cloud computing
business.
• Amazon has leveraged technology in ways that may make it a more attractive shipping partner and that better serve consumers. Amazon Key is the firm’s service for providing the
option of in-home delivery, even when customers are not present. The acquisition of Ring
smart home products gives Amazon a supplier of this tech, vertically integrating components
of the solution offering. The firm has also partnered with GM and Volvo to offer app- and
OnStar-powered delivery to customer automobiles.
• Amazon has secured FAA approval for drone package delivery in the United States, no
longer requiring a human to have “line of sight” view of the vehicle as it is flying. Machine
learning models help the firm with hard-to-identify obstacles, such as “fluffy dogs” and thin
clothes lines.
Questions and Exercises
1. In what ways is Amazon increasingly taking over its own shipping and logistics needs? When
can a firm attempt such a move? Why does this move make economic sense for Amazon?
2. What advantages does Amazon enjoy by being able to consider various shipping options at
the time a package is to be shipped?
3. Why is Amazon leasing planes that are painted with the “Prime Air” logo? Why is it involved in
ocean freight shipping? What advantages does this give the firm? Should Amazon fear other
e-commerce rivals might do the same? Why or why not?
4. What sort of customer would use Amazon Key or Amazon Key In-Car (auto-delivery)
options? Would you? Do you think this will be successful? Why or why not?
5. Describe the ways that Amazon has expanded its “last-mile” delivery network. Act as an
investor or stock analyst and research online to get a sense of the size of the delivery market,
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the savings Amazon may gain, and the potential for additional revenue that Amazon might
earn by expanding these efforts. Would this prompt you to invest in the firm? To advise the
firm to continue or slow these efforts? Come to class prepared to defend your answer.
6. How does technology help in improving the firm’s fulfillment network? What is the role of
data in these efforts? How do apps and websites help the firm roll out a UPS-rivaling fulfillment network in roughly five years time?
7. What role will technologies such as machine learning and other AI play fur the future of Amazon package delivery? How has Amazon acquired this data, and why does ownership of
data present a challenge to new entrants who try to replicate Amazon’s success? Could
advances in these areas also lead the firm to enter more businesses? If so, give examples.
8.4 Reworking Brick-and-Mortar
Retail: Failed Experiments but New
AI-Fueled Tech
Learning Objectives
1. Understand how Amazon has experimented with and closed physical retail concepts, and
which concepts it continues to experiment with.
2. Examine various models for the grocery business, understand why this is an attractive
option, and explore how Amazon can apply technology and logistics to improve real-world
shopping.
3. Recognize the role of AI and machine learning in these services, and understand how Amazon’s time lead in this area has led to a stronger set of AI/ML assets.
4. Explore how Amazon is turning AI/ML and its fast checkout products into new businesses.
Amazon’s “Brick-Based” Misadventures
Amazon spent several years rolling out a wide variety of physical locations, including a chain of
“Amazon Books” real-world bookstores, Amazon 4-star locations that carried a hodgepodge of select
goods rated 4-stars or above, and a network of dozens of mall kiosks. Amazon even briefly opened
Amazon Style clothing stores, packed with all sorts of fancy tech to improve the in-person fashion
experience, but it has closed these, too.[143] Many of these facilities were also showcases for Amazon's new consumer electronics brands, like Echo and Fire. But as we've studied, the economics of
physical retail can't really match online efficiencies, and the firm has decided to throw in the towel,
shuttering over fifty brick-and-mortar stores and all its mall kiosk and pop-up stores.[144]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
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Hello Machine Learning, Goodbye Checkout
Line
Also surprising to many, Amazon has closed nine of its Amazon Go “just-walk-out” stores; however,
by fall 2023,[145] the firm still operated twenty-three Amazon Go stores in the United States and
twenty more in the United Kingdom.[146]
Amazon Go stores show how the tech giant is radically changing the face of physical retail.
These stores have no cashiers or cash registers. Instead, customers scan an app (tied to a credit card,
of course) when entering. Image recognition, motion detection, weight sensors, and other advanced
artificial intelligence can tell what a customer picks up and charges them when they leave the store.
Items that are difficult to distinguish by image, like pre-made salads, contain large codes easily recognized by models trained through machine learning. The commercial viability of this technology
underscores points on the impact of machine learning fueled by cloud-based server farms (and
increasingly powered by special graphics processors, ASICs, and FPGAs), which were introduced in
Chapter 6. The growing and powerful Amazon cloud, described later in this chapter as well as in
Chapter 16, may be an important force redefining your real-world shopping experience, too! One
important key to all of this: A store without registers can have a smaller footprint, or can carry more
items, and could operate with fewer but more highly skilled workers.[147] While Amazon is a pioneer
in the concept, other retailers aren’t far behind. In Dallas, Walmart has introduced its first Sam’s
Club Now concept with cashierless checkout, while U.K. and French retail giants Tesco and Carrefour also have no-cashier systems.[148]
While rivals gear up, Amazon is already looking to grab-and-go technology as yet another new
business it can provide to other firms. The first company to license this technology is Hudson News.
The news and convenience store, ubiquitous in airports, seems a natural for such technology that
makes it easier for customers to grab and go before they catch their next flight.[149] And remember—since models to recognize products and consumer behavior are based on machine learning,
more stores mean more data, which should also mean better and more accurate AI, leading to an
improved customer experience.
Amazon Wants You to Just Walk Out of Whole Foods Now
This tour of the first Whole Foods with “Just Walk Out” technology shows how cameras and sensors can track everything from salad bar purchases to deli items. One thing to note: The tech is
cool, but will customers resist using this because it “feels like stealing?”
View in the online reader
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More “Green” from High-Tech Grocery
Shopping?
goodwill
An accounting term for an
intangible asset above and
beyond the operations
value of the firm. Goodwill
can include the perceived
value of the company’s
brand name, customer
base, loyalty, positive
employee relations, as well
as proprietary technology
and patents.
How Amazon Changed
Whole Foods, Five
Years Later
See Amazon’s “Pay with
Your Palm” Technology being
rolled out in Whole Foods, as
well as several other changes
Amazon has brought to the
chain. Some Whole Foods
stores have also been
converted to “Just Walk Out”
tech.
View in the online reader
While Amazon has about 44 percent of the online retail market,[150] over 90 percent of purchases
happen in physical stores, and the U.S. grocery business alone is worth three-quarters of a trillion
dollars.[151] The firm’s largest move in the grocery space was decidedly old school, purchasing Whole
Foods markets and its then 450 stores for $13.7 billion (the firm has since opened about 100 more
stores). Prior to the purchase, Whole Foods had been struggling and had been in search of a buyer.
In fact, about 70 percent of the cost was categorized in Amazon financials as “goodwill” meaning
most of the price wasn’t for operations, but rather less tangible value. And although Amazon had
operated the grocer with its own CEO under the Whole Foods name, Amazon’s influence can now
be seen throughout its stores. Whole Foods stores have Amazon order pick-up lockers, and customers can return Amazon products in Whole Foods without shipping boxes. The chain is rolling
out Amazon One, the firm’s “pay with your palm” technology, and has refitted select Whole Foods
sites on both coasts with Amazon Go “just walk out” tech. Alexa and other products occupy kiosk
or end-cap space, and app scans offer deep discounts for Prime members and those buying with an
Amazon Prime Visa card.
Pay with the Hand
The Amazon One palm payment technology has gone nationwide and is now available at many
Whole Foods sites across the country. Amazon has also licensed the tech, so you can use it, for
example, to pay for grub at Coors Field if you catch a Colorado Rockies baseball game. You can
even register your age with the technology so you can buy an actual Coors with nothing but your
hand. The scanning hardware quickly maps the uniqueness of an individual's hand, including
lines, ridges, and vein patterns, to make the identification in seconds—no need to worry about a
phone with tickets or mobile pay running out of juice, fumble for a wallet, or slow down the line
as you put away your credit card or phone.[152]
Despite Amazon's palm-scanning tech’s being available at the grocery store and ballpark, some
privacy groups and even some rockers have called “foul.” The outcry was so strong that the Colorado concert venue Red Rocks dropped plans to deploy Amazon One palm scanning for
ticketless entry.[153] Amazon contends the concerns aren't justified, and that scans are encrypted
and stored in a secure area in the AWS cloud that it built specifically for Amazon One, and that it
strictly controls and restricts employee access to this data and its underlying code. Amazon also
says the firm doesn't use or sell Amazon One customer information for advertising, marketing, or
any other reasons. If privacy concerns prove not to be an issue, and consumers embrace the
convenience, we may be on the cusp of using your hand for payments, tickets, and other services.
Even more aggressive is the firm’s rollout of full-service grocery stores under the Amazon
Fresh brand. While you’ll find Whole Foods and Amazon-branded products inside Amazon Fresh,
most impressive is the cutting-edge shopping tech used in-store. While customers can shop and
check out using traditional methods, shoppers using an Amazon Dash Cart use what is essentially
a networked computer on wheels to find items, track purchases, and skip traditional checkout.
Check in with an app, then sensors in the store and in the cart, plus cameras leveraging computer
vision machine learning techniques track the items that customers pick off shelves and place into
bags. A display above the cart's push handle shows the order total as you shop. An on-board scale
will weigh and calculate produce costs. Remove an item and the cart automatically deducts the
tally from your running total. When it's time to leave, just walk through the Dash Cart lane to
complete payment, completely avoiding the checkout line (unless you buy booze—which flags the
order as requiring an ID check—although palm payment does provide age verification for alcohol
purchases).[154] Carts were specifically designed so customers wouldn’t have to learn many new shop-
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267
ping behaviors[155]—for the most part it's grab and go without the checkout hassle. And if you've
used Alexa to make your shopping list, the firm's app or Dash Cart can also help you quickly navigate aisles, find items on the list, and check them off as you shop.
Dash Carts are clearly v.1.0. The carts are fairly small when compared to the grocery haul for a
large family. Dash Carts also don’t have the space for parents used to pushing little ones near the
top of the basket. The first version of the Kindle was also klunky and expensive, but a few iterations
in, Amazon built a hit. Some combination of Dash and Go carts would be a home run if it speeds
customer shopping and allows checkout space to be repurposed for selling product.
Some Amazon Fresh stores offer drive-through “click and collect” pickup, while others have
counters to grab-and-go pre-orders (adjacently stocked with meal kits and booze, to fuel additional
impulse purchases). Set a pickup time for as little as fifteen minutes after placing your order. Stop
by after you’ve picked up kids from the soccer game, or shortly after you leave work, and shopping remains low cost and is even more convenient—no minimum order, no delivery fee.[156] Grocery
and delivery may also allow Amazon to enter even more businesses. The firm could make a business catering push, or explore serving institutional customers like schools and hospitals (a business
you may have seen in your community, served by Sysco trucks, not to be confused with Cisco with
a “Ci,” which is networking equipment). If successful, Whole Foods may see some of the technical innovations from Fresh, or could potentially even be rebranded, if that better suits the needs
of a market. Amazon has also combined online ordering so Amazon’s website, Fresh, and Whole
Foods orders can share a single shopping cart for home delivery. This has an advantage in that
Whole Foods shoppers who also jones for junk food can order Doritos or Pepsi—items not available
in the organic grocer. As Go and Whole Foods expand, Amazon will be able to share warehousing
space between the two brands. Amazon has even launched a so-called dark store Whole Foods in
Brooklyn. Customers don’t enter the store to shop—it’s exclusively dedicated to deliveries. Expect
more in markets where delivery use is especially high and where customers may become frustrated
if they compete with sharp-elbowed professional shoppers from Door Dash or Instacart (Whole
Foods dropped its Instacart partnership years ago, partly for this reason).
Key Takeaways
• Amazon has experimented with and closed several retail concepts, including Amazon Books,
Amazon 4-star, Amazon Style pop-up stores, and mall kiosks.
• The grocery market is massive and could fuel significant Amazon growth. The firm’s techfueled logistics model and other advantages in leveraging tech for customer service and
enhanced shopping convenience are increasingly a part of the firm’s Whole Foods grocery
subsidiary.
• The Amazon Go store, now available coast to coast in the United States and in the United
Kingdom, shows how machine learning influences computer vision, AI, and other techniques
to eliminate cash registers. A shopping experience without lines is potentially far more attractive for consumers and would offer any retailer benefits, such as more shelf space, stores in
a smaller real estate footprint, and perhaps even a smaller staff size. The firm has begun to
license this technology to other firms, and more tech in more places should mean more data
and even better models refined through machine learning.
• Amazon Fresh grocery stores blend traditional full-service grocery shopping with the option
to use an Amazon Dash Cart that’s loaded with technology and recognizes purchases similar
to the Amazon Go shopping experience. Alexa shopping lists and Alexa end-aisle kiosks
provide additional shopper support.
• Amazon has begun rolling out its Amazon One palm payment technology in Whole Foods,
and some Whole Foods sites also have the “just check out” cashierless tech, as well. Amazon has created a separate business where it sells this technology to other retailers, as well.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Amazon Fresh and the
Dash Cart
Travel with Rick on Tech to
tour an Amazon Fresh
grocery store that takes full
advantage of the firm’s
machine learning–trained
image recognition, in-cart
and in-store sensors, and
Alexa technology.
View in the online reader
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Information Systems
Questions and Exercises
1. Why do you suppose Amazon closed brick-and-mortar experiments?
2. Why are grocery stores attractive for Amazon? In what ways is Amazon entering the grocery
business, and how do these models differ?
3. How is Amazon using Whole Foods? How is the firm creating synergies between the grocery
chain and its existing businesses? What benefits, other than more sales through groceries,
does Amazon get through Whole Foods?
4. What does the accounting term goodwill mean? What was included in the goodwill category
when Amazon acquired Whole Foods?
5. Have you shopped in a checkout-free grocery store like Amazon Go or Amazon Fresh? Have
you used Amazon One palm checkout? If so, share your experience with your class. What
did you like about it, and did you find anything frustrating?
6. Why do you think some organizations have stepped back from implementing Amazon One
palm scanning? What can Amazon do to try to make consumers feel more comfortable and
increase the use of this tech?
7. List the ways in which Amazon Go’s in-store technology could improve the customer experience. How might it improve the cost economics of retail? What kinds of additional costs do
you think are associated with the rollout of this tech?
8. Why is Amazon licensing its Amazon Go technology? How will this help the firm other than
by bringing in additional revenues? Who was the first licensee of this technology, and why
was it appealing to this customer?
9. How does Amazon Fresh use technology to improve the shopping experience? What kind
of technology is involved? What is the potential payoff of this tech both to Amazon and for
customers?
10. This SNL skit shows how users may have differing ideas about technology and whether it
is appealing for use. How do you feel about self-checkout? Can you relate to the "Amazon
Go—SNL" sketch? Why or why not? Have you encountered other tech that you resisted
using or that made you feel weird or hesitant? Why? What, if anything, can firms do to
improve your likelihood of adopting new efforts that you might initially resist?
Amazon Go—SNL
View in the online reader
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Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
8.5 Amazon’s Consumer Electronics
(Kindle, Fire, Alexa) and Amazon as
Publisher (Twitch, Print, Games, and
Video)
Learning Objectives
1. Understand the motivation behind Amazon’s consumer Kindle, Fire, TV, and Alexa/Echo
businesses.
2. Explore emerging businesses, like Alexa and cloud gaming, with an eye on potential benefits
and challenges these efforts face.
3. Learn about the business of Twitch and why this was an attractive acquisition for Amazon.
4. Recognize these efforts are platforms, not just products, and understand the various ways
that Amazon earns money and strengthens its competitiveness via these various platforms.
5. Examine the changes Amazon’s digital media offerings have brought to the traditional publishing industry value chain.
6. Understand key concepts such as channel conflict, wholesale pricing, and agency pricing.
Amazon’s Current Device Lineup
For a current look at the state of Amazon’s own device business and third-party products that
support Amazon standards, visit the Amazon website.
Amazon began its push into consumer electronics when it launched the Kindle in 2007. Since
then, Amazon-branded device businesses have moved well beyond eBook readers and
have expanded to the Fire product lines, include tablet plus streaming and game-playing television
devices; the category-leading Alexa/Echo voice interface products; Ring doorbell and security products; and eero home networking, among others. Amazon's umbrella of connected-home tech is
now baked into thermostats, cars, doorbells, clocks, eyewear, earbuds, air conditioners, and ovens,
as just a few examples. As of this writing, the firm is seeking regulatory approval to buy Roomba
maker iRobot. Many of these devices have key benefits beyond revenue from device sales, including
catalyzing additional sales (e.g., books for Kindle, add-on smart home products for Alexa), media
consumption, subscriptions, and advertising. Amazon consumer electronics devices are also datagathering conduits, arming the firm with the kind of data that fuels better machine learning
models for voice and image recognition, customer profiling, and additional AI that can be baked
throughout an Amazon-enabled world from the Dash Cart you push in the Amazon Fresh grocery
store to the smart neighborhoods mesh networks that power the firm’s “Sidewalk” initiative.[157]
Amazon’s success in consumer devices is mixed along a broad performance swath from category monopolizing (Kindle), dominant but not money making (Echo/Alexa), to utter flop (Fire
Phone). The company’s devices business lost some $10 billion in 2022 alone[158] and has taken swings
at a variety of markets, including established (the failed Halo fitness trackers) and completely new
(flying in-home drone-style security cameras, for more refer to this video about Ring; a personal
home robot with screen that’s a sort of Alexa on wheels, for more refer to this video about Amazon’s
robot). The firm has also launched lots of experimental products, some targeted at higher-end
technical education, such as autonomous mini-racer robots (for more, refer to this video about
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DeepRacer) and AI electronic music keyboards (for more, refer to this video about AWS
DeepComposer).
Amazon’s consumer electronics plays also come with a host of additional challenges that
include privacy, security, and antitrust.[159] These issues aren’t lost on firm executives, who recognize
that while the firm dominates e-commerce and digital books, a host of other firms, including rich
rivals Alphabet and Apple, are ready to offer alternatives should customers feel exploited, violated,
or insecure when using Amazon devices. But even if executives are well intentioned, unanticipated outcomes and vulnerabilities have already plagued the firm’s connected products—from
customers unaware that humans may transcribe some Alexa interactions, to security issues with
Ring devices.[160] Let’s look a some of Amazon’s consumer electronics plays, the technologies used,
and how these relate to firm strategy.
Amazon Devices Event: Everything Revealed in Eleven Minutes
Each year, usually in September, Amazon has a Devices Event where it introduces new consumer
electronics products. You can find the latest such event by searching on YouTube.
View in the online reader
The Kindle Line: Igniting Possibilities on
eBook and Tablet
While many refer to the Kindle as an e-reader, the Kindle isn’t as much about reading digital books
as it is about putting an always-on store in the hands of Amazon customers, not only allowing them
to lap up goods from an increasingly massive digital trough that further locks customers into Amazon’s own standard, but also instantly linking those customers to a new platform for advertising
and promotion of additional products: digital print, audiobooks, media subscriptions, Prime benefits, and more.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
FIGURE 8.8 eReader and eBook Market Share
Amazon’s dominance in eReaders leads to even greater dominance in eBooks.
Source: eBook Market Share: Amazon, Apple and Kobo, Jan. 12, 2023.
While Amazon had built solid advantages by selling a broad array of third-party products,
its first major foray into consumer electronics, the Kindle, was prompted by a realization that at
the time, media (books, music, and video) made up well over 20 percent of the firm’s revenue.[161]
That'd be a huge chunk of business to lose, especially for a publicly traded firm with razor-thin
margins. Bezos, who championed the Kindle effort, realized all of that media business was going
digital—shifting from atoms to bits—and that whoever controlled the platform would dominate
the market, since everyone would want all of their books on a single device in a single library. It
was the epitome of digital tech’s winner-take-all/winner-take-most market redefinition, realized
through the shift from atoms to bits.
The first Kindle was optimized for book reading and featured a black-and-white display that
used e-ink. That display can’t refresh fast enough for animation or video, but it is legible in sunlight
and only draws power when flipping a dot from black to white or vice versa, offering exceptionally
long battery life. Thanks to Moore’s Law, Kindles, originally offered at $399, grew in power while
plummeting in price, with a low-end model selling for just $69 five years after introduction. The
success of the Kindle is staggering. By the holiday season of the product’s second year, the Kindle
was Amazon’s top-selling product in both dollar volume and unit sales.[162] That means that at that
time, Amazon was selling more Kindles than any single book, CD, movie title, toy—or any other
product among the millions that it offered. Today, Amazon owns roughly 83 percent of the eBook
market,[163] and that market has been surging. With bookstores closed during the pandemic, millions
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more turned to eBooks. While overall hardcover and paperback sales in 2020 were down, eBooks
and audiobooks were both up double digits.[164]
Up next was the high-resolution, color, and touch-screen Kindle Fire tablet (now known just
as the Fire). In its introduction, the Fire came to market for half the price of the competing iPad
and quickly became the second-best-selling tablet on the market. The Kindle and Fires are also
cloud machines. The first Fire came with half the RAM of the iPad, the thought being that your
media would be snugly stored on Amazon’s servers and downloaded when you need it, creating a
big sticky switching cost in the process.
Even more noteworthy for competitors in the eBook and tablet space, Amazon doesn’t look to
make money directly from Kindle and Fire hardware sales; various entry-level versions of these
products are regularly sold at or below costs.[165] But any Kindle device ordered from Amazon arrives
linked to your Amazon account. That means the device comes, out of the box, as a preconfigured
cash register with a vacuum attached firmly to the credit card in your wallet. Over 12 million titles
are offered in the Kindle “always-open” bookstore, with “search inside the book” features and the
first chapter downloadable for free.[166] Voracious readers can gorge at the buffet of Kindle Unlimited, a subscription service providing unlimited access to over 1.5 million titles. Estimates of the
firm’s Kindle-generated revenue bump vary, but all point to positive Kindle-fueled sales gains. RBC
Capital estimates that despite being sold at a loss, each Fire generates over $136 in operating income,
with operating margins above 20 percent over the lifetime of the device.[167] Kindle owners buy three
to four times more books than they did prior to owning the device.[168] And Amazon today sells more
electronic books overall than their print counterparts.[169] In terms of fueling overall sales, SmartMoney reported that Amazon customers who don’t own a Kindle spend an average of $87 each
month while those with a Kindle spend $136 and Kindle Fire owners spend over $150.[170] The Kindle accounts for two-thirds of all e-readers sold, but it also fuels over 80 percent of the electronic
book market.[171] In Kindle, Amazon has clearly created a platform with winner-take-most competitive dynamics. Also keep an eye on the future. While eInk technology today has a slowly refreshing
monotone screen, one day we’re likely to have eReaders that are higher resolution, color, and highly
responsive, bringing tablet-like capabilities to eBooks and making it easier to integrate more shopping and advertising opportunities into the Kindle.
Alexa: A Wild Success That’s Losing a Ton of
Money
Apple had its Siri voice assistant three years before Alexa, and Google’s voice assistant had a twoyear lead, but Amazon’s master stroke was embedding its voice-responding AI into a simple smart
speaker.[172] Google took two years to catch up and Apple was even further behind with the expensive and lackluster selling HomePod. Today Alexa has 70 percent of the smart speaker market,[173]
and even more impressively has used this to build Alexa beyond just a product—Alexa is now a
true platform. Today over 100,000 devices from over 9,600 brands offer some type of Alexa connectivity,[174] and an appliance that looks to integrate with the voice-enabled “smart home” has to
consider accepting commands from Amazon’s software, or else it’ll miss out on the biggest share of
the market. Amazon has announced that roughly 1 billion Alexa-powered devices have been sold
by Amazon and by partners that embed Alexa into their own offerings, from automobiles to thermostats to power outlets.[175]
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
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FIGURE 8.9 Percentage of U.S. Consumers Who Own Smart Speaker (by Brand)
Percentage of U.S. households that own a smart speaker brand. The totals are greater than 100 percent because
some homes own multiple products. Note that many Google Nest devices act as smart speakers, so that
percentage is broken out here, as well.
Source: Statista—“Amazon Dominates the U.S. Smart Speaker Market”, Jan. 23, 2023.
Amazon’s product branding here is a little clunky—Echo is the brand name for many of the
firm’s voice-powered devices, while Alexa is the name of Amazon’s voice assistant software platform. The original Echo was a high-quality speaker equipped with seven far-field-listening microphones that tap into Amazon’s cloud. Call it by the name “Amazon” or “Alexa” and you can ask it
questions (“How many teaspoons in a tablespoon?”); set a timer; inquire about the weather, traffic,
or sports; summon an Uber; have it read the step-by-step instructions as you prepare your Whole
Foods–purchased Amazon meal kit; deliver a news briefing; play songs, audiobooks, and podcasts
from Audible, Amazon Prime Music, or other services; act as an intercom when used with other
linked devices; ask it to tell you jokes, play Jeopardy, or a Name That Tune–style song quiz; control
smart home devices like lighting and lawn sprinklers; read back your Google calendar appointments; create reminders; and of course, create shopping lists and place shopping orders. Voice
recognition can be tricky (early versions would mistakenly think they were summoned with the
name “Amazon” when you asked the kids to get their “pajamas on”), but with most of its brains in
the cloud, and a steady flow of voice-training data flowing in from the world’s largest smart speaker
platform, Alexa only gets smarter over time—no software updating on the device required.[176] The
machine learning from Alexa improves other Amazon offerings, too, like AI and natural language
models used for voice recognition and smart responses that the firm now embeds in its Ring doorbell (“please leave the package inside the front door”).[177] Alexa also wants you to burn less food,
with Alexa embedded in the AmazonBasics Microwave and higher-end Amazon Smart Oven—a
combination microwave, convection oven, and air fryer. You can either scan a package or talk to
the Alexa-enabled device to tell it what you’ve put inside, and the product will be cooked according to specifications on the packaging. Running low on microwave popcorn? Your oven will happily
order more if you just tell it to.[178] Strategists—think how these devices build competitive advantage
through technology. Each device is a touchpoint that gathers information on consumer behavior that can then be used to refine machine learning models, improve personalization and customer
experience, and help in new product design or product recommendations.[179] But also consider use
cases and cost. How likely are customers to want to talk to their microwave? Does that conflict with
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
273
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Information Systems
other products that are also “within listening distance” (for example, have you ever called Siri only
to have a response battle ensue between your watch, phone, HomePod, and laptop)? What has to
happen to standards to make this useful? And how much costlier is it to embed these kinds of electronics into existing products? Strategists will want to fuel network effects by getting capabilities
into the hands of consumers, but the likelihood of use and the cost of devices may thwart some
strategies.
Amazon has continued to expand the Alexa ecosystem and has over a hundred thousand “skills” (the firm’s term for apps), positioning the firm with a category-defining lead ahead of
Google and Apple. Alexa-enabled products from Amazon include the low-end Echo Dot and Echo
Dot Kids Edition; the camera-equipped, fashion-advice-dispensing Echo Look closet companion;
the voice-call-capable Echo Dot, and the Echo Show with a touch-screen and “follow you as you
move about the kitchen” video conferencing capabilities. Alexa has wheels, too, with Alexa skills
extending to Toyota, Mercedes, BMW, Ford, Hyundai, and many others (“Alexa, start my car and turn
on the air conditioner”). Amazon has even experimented with a Kickstarter-like program where it
proposes new devices, allowing customers to pre-order these products. If a product hits a minimum threshold, the firm will build and ship the devices. First offerings included an Alexa-powered
cuckoo clock, a printer that can print PostIt-style sticky notes from Alexa commands, and an Alexa
smart kitchen scale for measuring and reporting nutritional content of your food.[180]
technology stack
All of the technology
products and services
used to build and run one
single information
technology solution.
white label
A fully supported product
or service that's made by
one company but sold by
another. The term was
popular by branded
appliances, like Sears
Kenmore, which were
often designed and
manufactured by
established firms such as
Maytag and General
Electric. The term is now
used in all sorts of
products and services,
including white label apps
offered by GrubHub/
LevelUp, which power
branded apps at the salad
firm Sweetgreen, or
Amazon's Alexa Custom
Assistant, used to produce
custom voice assistants
for Fiat Chrysler.
And “Alexa for Business” extends the Alexa platform for enterprise use, including running private, custom skills; acting as a corporate help desk; handling room scheduling; offering support for
multiple users and device administration; and powering otherwise challenging tasks such as “set
up a conference call.” Amazon also has specialty vertical segments for adding Alexa to business,
such as Alexa for Hospitality. Hoteliers Wynn Resorts and Marriott International now offer Alexa
rooms in some properties where devices are muted at first, but when turned on, can power heating
and air conditioning, control blinds, act as a television remote, and integrate with back-office systems like housekeeping and the concierge and front desk so Alexa can be used to request amenities,
discover hotel services, and check out. The offerings even come with a set of tools to allow on-site
IT managers to deploy and manage hundreds of devices. Want this power in your firm’s own products? Anyone can pay for an array of AI-enabled voice recognition, response, and text processing
tools available as separate products through AWS. Amazon now rents the entire underlying
technology stack (from voice recognition through back-end processing), allowing companies to
create their own white label Alexa products that contain their own wake words and skills. Fiat
Chrysler, which already has an Alexa voice assistant option in some vehicles, was the first publicly
announced licensee that will build its own branded voice using these tools, but Amazon says we
can expect non-Alexa voice assistants that are nonetheless powered by Alexa smarts to appear in
all sorts of products, ranging from video games to appliances.[181]
By many of the metrics mentioned above, Alexa seems like a wild success. But the ugly truth
for Amazon is that Alexa is a money loser for the firm. Amazon’s various electronics initiatives lose
about $10 billion a year, the vast majority associated with Alexa.[182] Despite the product’s ubiquity
and cool use cases outlined above, very few customers are actually shopping using their Alexa, and
there isn’t really any substantive evidence that Alexa boosts sales. Alexa’s skills, the firm’s name for
its apps, have also been a dud. The voice interface doesn’t really lend itself for exploring and discovering new services—you wouldn’t ask a device to list off hundreds of skills, so how do you tell what
it can do? A voice assistant with a screen might provide more discovery options, but we’re still
learning how to best use audio-only interfaces. Amazon has begun rolling out more conversational
AI capabilities for Alexa, but these capabilities, while more engaging, are also fraught with all the
concerns that come with chatbot AI, including hallucinations, offensive recommendations, and bad
advice. Amazon has had as many as 10,000 staff working on Alexa, although the division was hit
hard with recent job cuts. Perhaps more advanced AI can turn the product into more than a ubiquitous money pit. Keep watch to see if Alexa’s new chatbot skills make it a better conversation
partner and collaborator, and a conduit to a set of services that finally generate the cash to justify
the massive investment.
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
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275
“Alexa, Let's Chat”: Experience New Alexa Capabilities
Amazon’s promotional videos are notoriously dorky, but this does show you a bit of how Alexa’s
chat experiences can be used.
View in the online reader
fork
The Failure of Fire Phone: Lessons for Late Movers
Amazon followed Fire TV with Fire Phone, a high-end smartphone that came with several innovative features: one-handed operation, 3D perspectives that shifted when the phone was tilted,
and, most notably, a signature feature called Firefly. Firefly software used the phone’s camera to
recognize all sorts of objects: bar codes, QR codes, books, artwork, and grocery items. It could
also recognize songs and movies, Shazam-style, and dial scanned phone numbers. A dedicated
Firefly button on the phone brought up the feature even if you were outside the lock screen, trigger-ready for the quickest of draws to make an impulse buy or visual search. Why create a
shopping list? Out of a household item? Just scan, hit 1-Click order, and you’re done.[183]
Neat features, but no one bought it. The initial price of $199 with contract for the base phone
placed it in line with Apple and Samsung’s smartphone pricing, not the value-pricing Amazon
customers have enjoyed on profitless Kindle hardware. The phone came bundled with a year of
Prime, which equates to another $100 in value, but many of the customers Amazon hoped to
appeal to were already wedded to iOS or Android, and getting them to break up means overcoming switching costs. In less than one year the price was cut to $99. A little over a year after
launch, the Fire Phone was canceled,[184] with Amazon declaring a $170 million write-off.[185] Like
Fire TV, the Fire Phone’s OS was an Android fork that didn’t run the vast majority of Android
apps—that means Fire Phone was fighting against switching costs with a malnourished network
effect—its snazzy new features alone weren’t enough to gain any sort of market traction. A New
York Times piece reminds us that “phones are a graveyard of tech dreams.” Google struggled
with the Nexus and sold off Motorola. Microsoft has been at it for years and has never gotten
phones right. BlackBerry withered. Apple and Samsung are the only players making money in
hardware.[186]
Amazon for Your TV
The eBook and tablet forays were followed by Fire TV. The firm offers a range of devices, from the
often-discounted USB-sized sub-$20 Fire TV Stick that plugs directly into your TV’s HDMI port
and comes with an Alexa-enabled remote, a slightly more expensive version that supports 4k Ultra
HD video, and other models that offer integrated high-end audio, as well. Fire TV also runs apps
for a host of other services, including Apple TV+, Disney+, HBO, Hulu, and Netflix—search them
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
In software development
(sometimes also called
project fork). When
developers start with a
copy of a project’s
program source code, but
modify it, creating a
distinct and separate
product from the original
base.
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Information Systems
all through the mic-enabled remote (yes, ownership of the TV is vital to gather data on customer
viewing habits and profiling, which can be translated into targeted advertising). Several television
manufacturers have also baked Fire technology into their TV sets. An optional game controller
opens up another world of entertainment. While Fire OS is based on Android, it’s what is referred
to as a modified Android “fork,” with differences significant enough that Fire runs only a subset
of Android apps. During its launch, Fire TV only had 180 apps in total, while the competing Roku
device, which had been on the market for years, was offering over 1,200 apps.[187] The savvy manager
should consider what forking means when trying to create network effects from complementary
apps.
The market for television streaming media players is crowded, with Apple TV, Chromecast and
Google TV, and Roku offering impressive efforts with similar feature lists. Comcast and other cable
providers have also opened up their set-top boxes to streaming services after realizing that locking
out streaming also locked out their access to valuable data on what their customers were watching.
At some point, customers may gravitate to a single platform that can search all other services to
show available content, but so far it’s unclear who will win this race. For Amazon it might not even
be about dominating the TV, but instead ensuring that Prime Video is available everywhere. While
Amazon has sunk tens of billions into Prime Video and offered it as a free service to Prime customers, it has now begun monetizing its video library (which includes MGM and films from James
Bond to Rocky franchises) via advertising. Delivering personalized advertising on-demand may be
another accelerant to Amazon’s already massive ad business.
latency
A term often used in
computing that refers to
delay, especially when
discussing networking and
data transfer speeds.
Low-latency systems are
faster systems.
IRL
In Real Life—online
acronym for interactions
outside of pre-produced
videos, podcasts, etc.
DMCA
Digital Millennium
Copyright Act—U.S. law
protecting copyrighted
works from unauthorized
digital distribution.
Amazon: Game Powerhouse—from Cloud Gaming to Twitch
Today, many gamers still prefer the speedy response of high-end consoles. But one day you may
be able to get as good as, or even better experience over the Internet without any expensive
set-top hardware directly connected to your TV. Internet latency and bandwidth caps hinder
widespread adoption of “cloud gaming,”[188] but major console firms recognize this is the future,
and all want in, suggesting it's only a matter of time before cloud-delivered gaming experiences
elbow out consoles the way streaming beat the CD in audio and DVD in video, and eBooks swallowed a vast portion of the book biz[189] (this expectation has led to a plummeting of GameStop
revenues and stock value, and to the freak show that was the coordinated short seller squeeze
in early 2021).[190]
Major players all have tried some sort of cloud-gaming rollout. Microsoft has xCloud—and its
experience as a console gaming leader and a cloud platform second only to AWS. Google
launched but then shuttered Stadia. Sony offers PlayStation Now; graphics and cloud hardware
giant Nvidia has GeForce Now; Apple has rolled its Arcade gaming service into its Apple One
services bundle, and by one estimate Apple already owns half the mobile gaming world.[191] And
while Amazon has offered gaming over Fire TV since it first rolled out, Amazon's Luna service has
upped its entry into the no-console cloud-based gaming field.[192]
Luna requires purchase of a controller that contains some additional hardware to accelerate local
gaming, and games can run on a PC, in a browser, or on Fire TV. Luna offers subscription channels, including a $6 a month buffet of Amazon-backed games, and an Ubisoft channel that serves
up some of the world's most popular games for those who have a Ubisoft+ subscription.[193] Prime members also have free access to some Luna games. Amazon’s industry-leading
cloud has over 175 specialty services tailored toward video game developers.[194] And Amazon
has another asset that's second to none—Twitch, the billion-dollar acquisition that taught the
non-gaming world that watching other people play video games could attract massive audiences
akin to the most popular TV and sporting events.[195]
Twitch allows gamers to stream their game play live, and offer real-time commentary to viewers.
Is watching other people play video games really a big business? You bet! Twitch revenue in 2022
was $2.8 billion. Twitch averages over 30 million daily visitors, and at any given time, roughly 2.6
million people are tuned in. This is truly the long tail of content, with some 7.6 million streamers broadcasting on Twitch at least once a month.[196] And Twitch is truly global, with about half
of Twitch streams featuring a broadcaster speaking a language other than English.[197] In terms
of Internet traffic, the year it was acquired only Netflix, Google, and Apple were bigger bandwidth hogs than Twitch.[198] The service has more viewers than the established cable networks
© 2025 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chapter 8
Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud
MTV, Comedy Central, and MSNBC. Twitch shares ad revenue with broadcasting gamers, and
while few are big earners, some Twitch stars have been known to pull in seven figures a year.[199]
Current Twitch audience numbers are ahead of some of the biggest network hits, including stalwarts like The Bachelor.[200] While Google and Facebook have tried to copy Twitch success,
these efforts flopped, and today Twitch is another Amazon-owned near monopoly with a market share above 90 percent. And today Twitch locks in some of its most popular streamers with
exclusive contracts. With an audience this big, Twitch, which is banned in China, has begun to
expand beyond gaming, offering streams that enable all sorts of live-broadcast including music
performances and “IRL
IRL” chats, and audience-interacting content from cooking shows to beauty
tipsters to programming tutorials.[201] Rolling Stone has launched a Twitch channel featuring music
performances and variety programming,[202] although in an example of how copyright laws like the
U.S. DMCA conflict with streamer ambitions, Twitch hilariously scrambled to overlay a Metallica
performance with copyright-free elevator music during a broadcast of the BlizzCon gaming convention.[203] Even politicians have gotten into the act. Left darling/right nemesis Congresswoman
Alexandria Ocasio-Cortez racked up one of the largest broadcasts ever, playing the popular game
Among Us while encouraging viewers to vote.[204]
Amazon—Now a Major Content Publisher
As device and storefront, Amazon has vertically integrated, capturing several segments in the traditional book value chain. Today, Amazon accounts for nearly three-quarters of all adult book
sales online, and nearly 50 percent of new book sales by unit.[205] The traditional printed book, or
“dead-tree,” publication value chain involves a publisher, bookstore, agent, and author. Publishers
typically get half of a physical book’s retail price, the bookstore takes about 30 percent, and the
author keeps about 15 percent as a royalty[206] but shares 15 to 20 percent of this with his or her
agent. At the time of the Kindle’s rise, six (then consolidated to five) large publishers controlled
about 60 percent of the U.S. book business commonly referred to as “trade publishing” (that means
most of the books you’d find in a typical bookstore but not books such as educational, scientific,
and medical texts).[207] While most Kindle titles are from publishers that sell both print and digital
versions, Amazon has gotten into the book publishing business as well, creating its own “imprints”
(publishing divisions that specialize in a genre, like foreign translations, romance, or sci-fi). For
authors wanting to bring books to market through Amazon instead of through traditional publishers, Amazon offers royalty options ranging from 35 to 70 percent.[208] There’s even a “Kindle
Singles” program that allows authors to sell work too short for a stand-alone book (fiction, essays,
magazine articles). And since digitally published work doesn’t require printing, shipping, and shelfstocking, these titles can often come to market far faster than physical offerings. Using Amazon
as a publisher doesn’t mean your titles will only be available through Kindle.[209] The firm will also
produce print books and even offer them to bookstores willing to carry the titles. But Amazon has
incentivized many authors to sell exclusively through the world’s biggest e-commerce outlet and
largest eBook platform. And authors don’t need to work with a publisher. Many authors choose
to self-publish, and given the ease of doing this with eBooks over Kindle, Amazon controls over
90 percent of this market, as well.[210] To get a sense of Amazon’s influence as a publisher, consider
that recently, six of the ten bestselling eBooks were published by Amazon itself,[211] and sixteen of
the top twenty romance novels were either titles where an Amazon imprint was the publisher or
were self-published on Amazon’s platform.[212] Over 2,000 authors surpassed over $100,000 royalties
in 2022 through Kindle Direct Publishing.[213] Many indie authors also choo