Information Systems: A
Manager’s Guide to Harnessing
Technology, version 2.0
John Gallaugher
© 2013, published by Flat World Knowledge
Published by:
Flat World Knowledge, Inc.
© 2013 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is subject to the
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© 2013, published by Flat World Knowledge
Chapter 6 An Empire Stretching
from Cardboard Box to Kindle to
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Learning Objectives
1. Appreciate the breadth of businesses that Amazon
competes in
2. Understand that Amazon’s financial performance has
not been consistent
3. Begin to recognize the reasons for this performance
inconsistency and set the stage for the examination
unfolding in subsequent sections
4. Recognize how Amazon’s warehouse technology and
systems are designed to quickly and cost-effectively
get product from suppliers to customers with a
minimum of error
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Learning Objectives
1. Understand how high inventory turns and longer
accounts payable periods help fuel a negative cash
conversion cycle at Amazon, and why this is a good
2. Gain insight into various advantages that result
from the firm’s scale and cost structure
3. Appreciate how data can drive advantages not fully
available to off-line firms, ranging from increased
personalization to innovation and service
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Learning Objectives
1. Identify the two-sides in Amazon Marketplace
network effects, and why this is important in
strengthening the firm’s brand
2. Appreciate how mobile access is influencing
opportunities through additional changes in how,
where, and when consumers shop
3. Understand the motivation behind Amazon’s Kindle
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Learning Objectives
1. Recognize the various ways that Amazon earns
money and strengthens its competitiveness via the
Kindle platform
2. Examine the changes Amazon’s digital media
offerings have brought to traditional the publishing
industry value chain
3. Understand key concepts such as channel conflict,
wholesale pricing, and agency pricing
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Learning Objectives
1. Identify several of Amazon’s personal cloud
offerings, how they are used, and the value they
provide both users and Amazon
2. Understand Amazon’s cloud-computing offerings,
the services provided, the firms that use AWS, the
size of this business, and the firm’s vision for its
future growth
3. Recognize why firms use cloud-computing
platforms, and some of the risks associated with
giving up control of certain infrastructure
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Amazon’s Profitability and Breadth
of Business
• Postponed profits and concentrated on:
Expanding warehousing capacity
Building e-commerce operations worldwide
Developing a cloud computing platform
Pioneering in eBook readers
• Kindle business
– Mobile computing as a vehicle for media consumption
– Distribution channel for sales and advertising
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Amazon’s Profitability and Breadth
of Business
– Creator of switching costs
– Gathering point for useful data
• AWS (Amazon Web Services) business
– Powerhouse cloud provider
– Generates new competitive assets
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Figure 6.X: Amazon’s
“Wheel of Growth”
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Emperor of E-Commerce
• Pillars of the business - Large selection, convenience,
and lower prices
– Work together to create additional assets for
competitive advantage
• Outstanding customer experience results in repeat
• As number of customers increase, more products can
be offered
– Caters to third-party sellers
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Fulfillment Operations
• New products are prepped for order within hours of
– Problems with incoming shipments are dealt with as
and when they occur
• Mass land - Area where fast-moving items get
dropped for fast pick-up
• Shelvers - Area where slower-moving items are
– Unique shelf code scanned for the location
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Fulfillment Operations
• Similar products are stacked at different locations to
minimize errors during pickup
– Warehouse pickers use wireless devices to pick up the
required items quickly
• Software determines the optimal size of the package
box to be used for an order
• Systems stamp names and addresses on sealed boxes
• Warehouse movements are continuously logged and
productivity is tracked and plotted
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Cash Conversion Cycle
• Period between distributing cash, and collecting
funds associated with a given operation
• Account payable: Money owed for products and
services purchased on credit
• Liquidity problems: Arise when organizations cannot
easily convert assets to cash
• Inventory turns: Number of times inventory is sold
or used during a specific period
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Figure X: Cash Conversion Cycle (in days)
Among Select Major Retailers
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Internet Economics, Scale,
and Pricing Power
• Quantity - Selling more goods gives better bargaining
power with suppliers
• Size - Provides negotiating leverage to secure lower
prices and longer payment terms
• Physical presence - Absence of brick-and-mortar
stores brings down costs for real-estate, energy,
inventory, and security
• Employee efficiency - Greater as shift workers work
at constant rates throughout the day
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Internet Economics, Scale,
and Pricing Power
• Cash coming in from all its businesses enables the
firm to compete in price competition for longer
• Dynamic pricing: Pricing that shifts over time, based
on conditions that change demand
• Private-label brands - Enables firm to cut out pricing
that would go to a branded supplier
– Provide better negotiating leverage with suppliers
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Figure X: Key Retailer Avg. Price
Difference Above
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Amazon’s Customer Obsession
• To enhance customer experience, it pioneered:
1-click ordering
Customer reviews and recommendations
Look and search inside the book
Where’s my stuff
Free supersaver shipping
• Highest rating on the University of Michigan’s
American Customer Service Index
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Leveraging the Data Asset
A/B testing
• Used to collect data and compare performance
among two options studied (A and B)
• Line of identifying text, assigned and retrieved by a
web server, and stored by your browser
Collaborative filtering
• Monitors trends among customer and uses the data
to personalize an individual customer’s experience
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Selection and Network Effects
• Sellers can warehouse and ship products themselves
or use Amazon’s warehouses
– Two-sided network effect: Products get more
valuable as two distinct categories of participants
• Affiliate program: Firm rewards partners who bring
in new business, with a percentage of any resulting
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Addition to Amazon
• Acquisition of other firms and the growth of new
internal businesses has enabled it to:
– Broaden its product offerings
– Absorb potentially threatening competitors before
they get too big
– Experiment with new product offerings and services
– Integrate value-added businesses and technologies
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Figure X: Brands and Businesses
Owned by
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Amazon’s Kindle Business
• Kindle connects customers to the firm’s product
offerings and inventory
– Firm’s top-selling product
– Arrives linked to the customer’s amazon account
• Kindle Fire was offered at half the price of its
– Kindle versions are sold at or below costs
• Digital publishing enables titles to enter the market
far faster than physical offerings
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Channel Conflict
• When a firm’s potential partners see that firm as a
– Offers competing products via alternative channels
– Works closely with threatening competitors
• Amazon’s wholesale pricing was endangered by
some publishers switching to agency pricing
– Wholesale pricing: Paying publishers for titles and
then selling the books at whatever price it wanted
– Agency pricing: Publisher sets the price and the
reseller gets a cut
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Amazon and the Cloud
• Stores purchased content off-device and can load a customer’s
virtual bookshelf on demand
Amazon Cloud Drive
• Offers file storage similar to Dropbox and Google Drive
Amazon Cloud Player
• Streams music purchases through a web browser or smartphone
• Allows firms to rent industrial-strength computing capacity on
an as-needed basis
• Goal was to monetize the firm’s expertise in scalability and
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