The Advent of Electronic Commerce Left Its Fair Share of Casualties Along the Information

Date: September 24, 2009
To: Professor Truex
From: Douglas Tarkington, IB8680[D1]
Subject: Comparison of Amazon.com Cast Study, Being Digital, and The World is Flat

1. Introduction

The advent of electronic commerce left its fair share of casualties along the information superhighway. Among these were the infamous sock-puppet branded Pets.com, online fashion retailer Boo.com, eToys.com[D2] and the list goes on. For many entrepreneurs and venture capitalists, the realization that change was in the air and that new opportunities were emerging was not always matched by the foresight of how those changes would ultimately manifest themselves.

Amazon.com, however, figured it out. Amazon.com focused on leveraging the internet across the traditional four P’s of the Marketing mix in order to develop a competitive advantage. These themes of Place, Price, Product and Promotion are all present, if not explicitly stated in as many words, within Negroponte’s Being Digital and Friedman’s The World is Flat[D3]. The important point to understand with each author is that they recognized the shift that globalization, instantaneous communications and the internet would cause to businesses and society.[D4]

2. Place

Amazon.com used the concept of place strategically in two ways. In the physical sense, it was able to gain competitive advantage by reducing the need for brick-and-mortar retail locations and by locating its warehousing facilities in close proximity to its supply chain in Seattle. In the virtual sense of place, Amazon.com optimized product placement on the webpage, improved search to help customers find what they were looking for and streamlined checkout processes via 1-click to provide a better customer experience with limited computer-screen real estate.

In The World is Flat, Friedman mentions Amazon.com and Barnes and Noble specifically, and alludes to the notion that Amazon is able to create a more convenient place to shop with greater selection through its use of technology, but he also still likes to browse in a physical store such as Barnes and Noble. Both the Amazon.com case and The World is Flat highlight the idea that the internet created a new, competing “place” that had both advantages and disadvantages compared to traditional concepts of physical space. Negroponte, however, takes a similar but somewhat more extreme view stating that the limitations of geography will be all but removed. Although Negroponte carries the argument too far in suggesting that place may no longer matter, it does not diminish the value in his idea that the new global, digital network carries significant repercussions for business that fail to adapt to the changing environment[D5].

3. Price

Of the many value propositions that Amazon.com offers to its customers, low prices rank high on the list. Amazon.com makes money, while delivering low prices, based on the advantages it gains from lower fixed-costs in real estate, a streamlined supply-chain, low distribution warehousing costs and sales tax advantages[D6]. These advantages in pricing are largely enabled by the use of global communications technology. Amazon.com’s strategy of limiting operations to an online store means that there is no need for physical retail stores. This allows Amazon.com to locate its distribution and transportation centers nearby to publishers and suppliers without having to worry about centralizing to accomodate retail chain locations. This is the same direct-to-customer approach that Dell Computer is widely known for.

Friedman uses the example of Wal-mart to illustrate how technology can be used to create low prices by optimizing the supply-chain and creating value by capturing data at the point-of-sale system. Whereas Amazon.com uses technology to compete against physical retailers in more recent times, Wal-mart used similar tactics to gain an advantage over other physical competitors back in the 1980’s.

Negroponte similarly points out how technology can drive down price [D7]in a compelling way with his proposition that “bits are bits”. This concept ties in to the idea that the marginal cost of producing another copy of a digital good is negligible compared with the cost of producing another physical good. For this reason, iTunes is growing while traditional music retailers are suffering. The price of a single song, distributed direct-to-customer in an electronic format will always be cheaper than having to produce and store physical bundles of songs in a shrink-wrapped CD format[D8].

4. Product

There were 20 products that Jeff Bezos, CEO of Amazon.com, identified as compatible with online sales when he first conceived the company in the 1990s. The decision of what to sell, which in Amazon’s case began with books, was as important as the decision of what not to sell. This is to say that not all products sell equally well over the internet. Digital goods are obviously strong candidates to sell online, but in the 1990s, the digitization of music, movies and books had not acheived lift-off yet. Jeff Bezos chose books because the product fit with the business model he was setting up. While traditional businesses develop a product or service first, many online businesses took the opposite approach, which asks which product will sell well given the dynamics of a new channel (the internet).

In a flattened world, Friedman may sympathize with this reverse model. His argument follows that in in a globalized world where things can be produced anywhere and transported quickly, other factors matter more, such as innovation, creativity and brand. Businesses who have produced a product or service in the old world must refine or redefine their product in a flattened world. When new producers suddenly appear from China, or a new channel suddenly appears in the form of the Internet, businesses must react in a convincing manner to stay ahead.

Negroponte focuses on the rift created by the digitization of many products. He argues, successfully, that music, movies and anything that can be digitized must be sold and marketed as an entirely new kind of product. The difficulty that these industries have had is a testament to Negropontes argument: the CD is no longer the product, but rather the MP3 is. For movies, the DVD is no longer the product, it’s the stream of bits that constitute the on-demand Netflix viewing. For newspapers, it’s the nytimes.com online article, rather than the folded newsprint. Indeed, the product itself has sometimes changed entirely, above and beyond its method of sale and distribution.[D9]

5. Promotion

Amazon.com focuses relentlessly on the customer. By doing so, the company has created something bigger than just a store, it has created a community that provides value back to the company. [D10]Amazon.com puts significant resources into improving the user experience, allowing for customer reviews, ratings and personalization. The community that develops when Amazon.com customers write reviews of products reinforces the value provided by the site. Customers that have dedicated time and energy into writing reviews for a site often develop an attachment to it, having invested effort in making it better. This leads to positive word-of-mouth promotion which is one of the best and cheapest forms of advertising. Amazon.com essentially leverages technology and the internet to build a community which becomes a core competitive advantage that traditional retailers cannot copy.

Friedman writes that communities and the power of uploading is one of the 10 flatteners. By using technology to facilitate the creation of communities and leveraging personalization, companies can be large in size but operate with all the personal attention as if they were much smaller. Sites like Amazon.com greet customers by name, serve up recommendations in the appropriate language and provide features such as lists and “people who bought this also liked…” features that tie customers to like-minded individuals. The community drives promotion and sales in a way that traditional advertising can’t match on a cost basis.

Negroponte refers to digital butlers and personal filters that will custom tailor experiences to promote products and services. He sums up the value proposition of the flattened world and global network well: “the true value of a network is less about information and more about community.”

6. Conclusion

What drove Amazon.com to success whereas others failed was their ability to understand how the changes in technology and communications applied to the traditional drivers of business and marketing.[D11] What other companies failed to grasp was that the business environment was changing with globalization and new technology, but that business itself, and the fundamental concept of buyers and sellers coming together to exchange goods and services, remained the same. Offering value is still paramount.

Amazon.com took advantage of the traditional 4 P’s by understanding the changes within the guidelines of that framework. Friedman and Negroponte hit upon these same issues, although to different extremes and sometimes in more roundabout ways, given that the focus of their books are all slightly different. The takeaway from the Amazon.com case is that a relentless focus on providing value to the customer is the clear path to success. The key is to understand how to best deliver on that proposition within the context of globalization and emerging technologies.

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A Comparison Table of Collura and Applegate, Negroponte and Friedman[D12]

• Online stores can touch anyone with a connection and are far-reaching

• However, people still do like to go outside (p.27)

• Innovative search and page layouts create a store that’s extremely easy to find products with and to shop in

• “the post-information age will remove the limitations of geography” (p.165)

• The new platform is global and operates without regard to “geography, distance, time and, in the near future, language” (p.204)

• “I used to have to go to Barnes & Noble to buy and browse for books, but once the internet came alive, I wanted to browse for books on Amazon.com as well” (p.71)

• Online retailers have lower fixed costs, lower customer acquisition costs, higher sales per employee and often don’t charge sales tax

• These factors give online stores a pricing advantage over traditional retail

• Physical retailers can’t compete on price (p.27)

• New technology means traditional mediums for delivering goods and services (bits) will change, impacting price

• Wal-mart, the biggest retail company in the world, does not make a single product. “All it ‘makes’ is a hyper-efficient supply chain” (p.152)

• In 1983, Walmart introduced point-of-sale terminals allowing it to track inventory better

• Amazon now innovates in a similar way to how Wal-mart innovated in the past, using technology to lower prices

• Amazon.com researched and selected products and services that would be successful online

• Products that can be digitized will be sold differently

• Bits are bits and are infinitely scalable

• Many products and services can be replicated quickly and cheaply in remote parts of the flattened world

• Services that can be delivered over the internet mean increased competition for traditional firms

• Every customer gets their own unique and personalized store

• Leverage brand strength and word-of-mouth to reduce advertising costs (p. 11)

• Use the community to build value through reviews, recommendations, referral programs

• “Everything is made to order, and information is extremely personalized” (p.164)

• Digital butlers and Personal filters (p.150)

• “the true value of a network is less about information and more about community” (p.183)

• Uploading and harnessing the power of communities is one of the flatteners (p.93)

• “Rule #4: And the big shall act small....”

• The birth of the self-directed consumer (p.455)

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[D1]A good table with inventive criteria.

All said and done (see below) Dough this is a very fine, excellent in fact, analysis and essay.

Grade: „A“ high A at ... 94 points.

BTW—any idea why the quotes are showing as they are. I just spent 40 minutes in MS word help and cannot undo or fix this. ???

[D2]webVan....

[D3]cool. I await examples

[D4]good. Nice intro. Make it a GREAT intro by giving a ‚look ahead‘ tohow you plan to do the analysis. – That is, your use of the Ps as a focus and how you defined the nature of the criteria.

[D5]Ok all good. And your take on this is...?

[D6]excellent

[D7]good too. Clearly Porter weighs in on this as well.

[D8]Your take on how these three views intersect and what they mean for IT and management thereof?

[D9]Yep as predicted non?

[D10]The 3 Ps is also amended by the 5 Cs of ecommenrce. Community is one of those.

[D11]bravo

[D12]Neat the way you specified and anchored it to the marking „Ps“.

[D13]Nice. I await the extended definition of ‚location‘