Case study: Amazon.com
Like many entrepreneurs, Jeffrey Bezos, founder of Amazon.com had an idea, did his homework, and developed a new service. Amazon.com opened its virtual doors in July 1995. Since then, the retailer has served millions of customers worldwide and, in the fourth quarter of 2011, generated more than $17 billion in net sales, which represents an increase of 35 percent more than that of the equivalent quarter the previous year. 11 Many people regard Amazon.com as the “golden child” of the Internet. Unlike many entrepreneurs, however, Bezos was not content with just gaining market share for his initial concept. Nearly 25 years after opening its doors, Amazon.com still is developing new services. The young CEO started Amazon with the intention of establishing a strong brand name that he could leverage into other products. He marketed books first, because he believed they were ideal cyberspace products. Customers do not need much physical interaction with the product or with a salesperson to purchase books. Books, therefore, are well suited to marketing over the web. A key success factor for Amazon.com is that it captures market share and fosters brand loyalty by focusing on customer needs. Bezos believes that paying too much attention to short term gains means forgetting about long-term customer satisfactions. This long-term customer focus comes at a price, however. Despite impressive sales growth, Amazon did not turn a profit quickly, but that didn’t stop it from becoming a dominant force in online retailing. In addition to books, the Amazon website now includes products and services such as electronics, music, software, toys, clothing, and B2B services for other businesses. Some items are available from Amazon’s inventory, and other products and services are supplied by third-party sellers. These sellers, in turn, pay a portion of their revenues to Amazon. Amazon also manufactures and sells several versions of its Kindle e-book reader, which has made Amazon the leader in e-book sales.
AMAZON’S GUIDING FORCE-THE CUSTOMER
Amazon’s guiding philosophy is to provide superior service to its customers. Bezos and his management team spent one year creating the website and database programs that drove Amazon.com in the beginning. They sought to create a friendly site that would not demand a high level of computer literacy. Bezos recognized that Internet commerce would shift the balance of power toward consumers. Consequently, Amazon.com built customer relationships by customizing its service, involving its website visitors in the service, and creating a communal spirit. Focus on the consumer is the cornerstone for developing customer loyalty.
CUSTOMER AS COPRODUCER AND SERVICE CUSTOMIZATION
Amazon.com integrates customers into the service delivery process in several ways. Customers can participate in a Customer Discussion service. This service presents an opportunity to read comments from readers about books or products of interest to the customer. The customer also can chat with other Discussion participants. The “wish list” is another service that Amazon .com offers. For example, a customer can enter titles of books he or she would like to have into a personal wish list. A friend who wants to give that customer a book as a gift then can make a selection from the wish list. Amazon also makes personalized recommendations to individual customers. Some of these recommendations are based on the customer’s past purchases, and other recommendations are based on the behaviour of past customers who have made purchases similar to those of the customer. If a consumer purchases a book on Amish quilts, for example, Amazon .corn’s software will search for all of the people who purchased this same book. Using a mathematical process developed by Amazon.com called item-based collaborative filtering, the software determines what other books are popular with people who read the Amish quilt book. The customer then receives a list of proposed titles based on this information. Amazon.com uses this technique to provide the same friendly and personalized reading advice that a local bricks-and-mortar bookstore operation can, but it achieves greater accuracy and convenience at a fraction of the cost. One flaw of this early collaborative filtering was its inability to distinguish gift purchases. Someone buying his or her mother a book on quilting, for example, would receive recommendations on this topic despite a lack of personal interest. Amazon.com solved this problem by including a check box on the order page so the customer can indicate if the item is a gift. Another problem can arise because the power of collaborative filtering is based on the customer’s history. If a person changes e-mail addresses frequently and uses a new Amazon .com identification, all of the data are lost. · In addition to collaborative filtering, the company uses other strategies to achieve its mission. When repeat customers log on to the website, a personalized web page greets the customer by name and allows him or her to view the new recommendations made by the collaborative filtering tool. Bezos compares this personalized front page with “walking into your favourite store and finding only items that you want on the shelves near the door.” Amazon also allows customers to store information on the company’s secure server. Customers can authorize Amazon.com to keep a record of their credit cards and mailing addresses, for example. This technology, called 1-Click, streamlines the service so that customers don’t have to re-enter the information every time they make purchases. Amazon.com doesn’t wait for customers to come to its site to provide its service. Customers receive periodic e-mails encouraging them to visit Amazon.com and giving a list of recommendations for items to check out on the next visit.
OTHER UNIQUE USES OF TECHNOLOGY FOR THE CUSTOMER
Amazon.com not only has used technology to personalize the customer experience, but also has designed its site with customers in mind. The pages are easy to understand and use. The website avoids large graphics, which can take a long time to load. A powerful search engine is another unique feature of Amazon.com. The company employs a “do what I mean” (DWIM) search function. The site recognizes the misspellings that customers make frequently and changes the search function to account for these mistakes. If a customer misspells the author’s name Fitzsimmons as Fitzsimons, for example, Amazon.com still displays the book Service Management.
MORE THAN JUST FRIENDLY TECHNOLOGY
Amazon’s technology has helped to create loyal customers who not only visit the site, but, as we have noted, also interact with it. Amazon .com is an active virtual community that involves the customer. Another feature of its Customer Discussion service is the Author’s Corner, which sometimes allows readers to engage in question-and-answer sessions with their favourite writers. The company also encourages visitors and customers to post reviews of any book or product on the site. This review process involves the customers in developing the content on the website and creates an information tool for other website visitors. Amazon also allows users to form reading groups where customers can post comments to each other about specific books. The library of reviews is an important barrier to entry in a digital environment where entrepreneurs easily can copy this business model in a week. Amazon.com employees go to great lengths for the customers and consider them as part of a community. One customer reported with joy that a copy of his father’s book, 20 years out of print, had been located for him by Amazon. The Associates Program expands this “community” beyond the websites under Amazon’s direct control. Amazon.com allows registered websites, such as Yahoo.com, Drugstore .com, and Zappos.com, to recommend specific books, CDs, videos, and other Amazon products to their visitors using a hyperlink. If customers follow the hyperlink and purchase the product on Amazon.com, these associates receive up to a 10 percent commission. Amazon claims “tens of thousands” of associates are participating in its programs, which expands Amazon’s presence and publicity on the web, but it also means that Amazon could lose some control of its brand and image. Amazon has encountered some other problems. A reporter once revealed that Amazon was selling space to publishers on a list of favourite books. Amazon also was accused of selling authors extra e-mail support on the website for various titles. 12 The company was flooded with outraged e-mails and stopped all paid promotions in response to the outcry. This incident raises the question, Will the loyal customer base of Amazon.com or any other electronic service tolerate being used for financial gain? The ability to provide the broad spectrum of services for millions of customers seamlessly and consistently depends on very sophisticated technology, much of which was pioneered by Amazon engineers and architects. The highly personalized page that greets a returning customer contains between 200 and 300 bits of software logic, and is a testament to their work. Referring to software and technology capabilities, Bezos says in a 201 0 letter to shareholders issued in early 2011, “Many of the problems we face have no textbook solutions, and so we happily-invent new approaches.” 13
NOT JUST A BOOKSELLER ANYMORE
As noted earlier, Amazon.com continues to develop new services. Amazon Web Services (AWS) is a pivotal addition to the company’s offerings. This program supplies other businesses with a web-based platform for all of their operations. In addition to basic infrastructure technology, Amazon offers Cloud Watch, which provides monitoring for the AWS cloud resources and applications. Amazon states that “developers and systems administrators can use Cloud Watch to collect and track metrics, gain insight, and react immediately to keep their applications and businesses running smoothly.” 14 The company’s cloud computing services are available in 2012 in eight geographic regions and a new service, Amazon Dynamo DB, has been launched. Dynamo DB is a powerful new database that has high speed and predictable performance with seamless scalability so the user can adjust the program to meet individual resource requirements and performance metrics. A new alliance with Viacom, a company that provides online access to many entertainment venues, was announced in early 2012. 15 This alliance allows Amazon Prime members to stream movies and television programs instantly and commercial-free. 16 In accordance with his firm belief that successful entrepreneurs must take a long-term view of their businesses and the world, Bezos founded Blue Origin, a company dedicated (and determined) to provide affordable suborbital and orbital space travel. 17 In its short life thus far, Blue Origin has enjoyed the taste of success and failure, and researchers look forward-and upward-to matching Amazon. Corn’s achievements.
AS AMAZON LOOKS TO THE FUTURE-WILL IT BECOME THE WALMART OF THE INTERNET? Amazon.com has been very successful turning a profit since 2004. Amazon’s personalized customer service and online community strategy work well. The company claims its sales of electronic books have surpassed the sales of its printed books, and it is the largest seller of videos and music on the Web. 18 Early skeptics suggested that price-sensitive buyers would constantly search the net for the lowest prices and leave companies without any pricing power or brand loyalty. Amazon has not suffered this predicted pattern in part because it has taken a long-range view of the business and invested heavily in creating a loyal customer base. Fast expansion into a variety of retailing areas reinforces Amazon’s goal to be a one-stop shopping site on the Internet. Some sources suggest that Amazon might venture into the brick-and-mortar arena by establishing Apple type-stores to sell its Kindle e-readers, and, also, might introduce a smart phone. 19 This Walmart strategy has its dangers, however. Amazon runs the risk of expanding too rapidly, which could damage or dilute its brand image. Thus far, however, this long-term growth strategy is proving successful. The most recent publicly released financial statement indicates that net sales of $34,204 million for the year of 2010 were up by almost $1 0,000 million over sales during 2009.
Question:
- What generic approach(s) to service design does Amazon .com illustrate, and what competitive advantages does this design offer?
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