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    ©2015 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Russell Walker and

    Rafique Jiwani ’14. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce

    materials, call 847.491.5400 or e-mail [email protected] No part of this publication may be reproduced, stored in a

    retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording,

    or otherwise—without the permission of Kellogg Case Publishing.

    RUSSELL WALKER AND RAFIQUE JIWANI ’14 5-315-501

    Reinventing E-Commerce: Amazon’s Bet on Unmanned Vehicle Delivery

     I would define Amazon by our big ideas, which are customer centricity, putting the

    customer at the center of everything we do, [and] invention. We like to pioneer; we like to

    explore; we like to go down dark alleys and see what’s on the other side . . . I know

    [drone technology] look[s] like science fiction—it’s not. It will work and it will happen.

     It’s going to be a lot of fun. 1

       —Jeff Bezos, CEO and founder, Amazon.com

    In a December 1, 2013, interview on American television program 60 Minutes, Amazon CEO Jeff Bezos announced that Amazon would soon change the future of online shopping by enabling customers to receive items within thirty minutes of ordering. This delivery service, Bezos said, would be powered by unmanned autonomous drones and could be offered as soon as 2015. The market reaction was instantaneous and positive.

    Still, Amazon needed some answers before it could launch autonomous delivery services: Were customers ready to embrace and pay for this type of delivery service? Would regulators allow it? Should Amazon make or buy its drones? Would it be too risky for Amazon to wait to launch this service? If it decided to go ahead, how should it launch, and to whom?

    The U.S. E-Commerce Industry

    The Early Days

    An English inventor named Michael Aldrich began developing the precursor to online shopping in 1979. Aldrich, frustrated with how long it took to shop for groceries (driving to the store, looking for items, waiting in line, and driving back home), tested a device that used videotex* to connect a television set to a transaction-processing computer with a telephone line. He decided to commercialize his concept in 1980, just when VCRs were beginning to gain mass- market traction in the United States. Aldrich envisioned that his product, coined the Teleputer, would enable a new form of information exchange between businesses and consumers;

    * Videotex, developed in the mid- to late 1970s, was a technology that incorporated a television with a computer interface, allowing

    users to send messages and content to each other.

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    additionally, he felt that firms could gain competitive advantages by externalizing labor costs and serving customers more efficiently.2 

    While finding short-lived success with B2B-focused customers (e.g., General Motors tested the system to sell spare truck parts), Aldrich was unable to make headway in the minds of

    consumers. They had just woken up to the idea of the VCR in their homes and the costs were extremely high, and there was no real online marketplace in use or laws regulating how firms could conduct business online.* Further, consumers were wary that these systems had no way of transacting orders securely. Aldrich later commented on his release of the Teleputer:

     It is also clear that moving a company [or consumer], for strategic reasons, from a low

    technology profile to a higher technology profile is not an overnight activity. Before

    using information technology strategically the goals, capabilities, positioning, and

    constraints on the enterprise must be established . . . If the first step in our guide was the

    management of change, the second step must be the business implications of change.3 

    Aldrich’s insight, though ahead of its time, gave way to evolving technologies such as the

    ATM, electronic payment through credit cards, and telephone banking during the 1980s.However, it was nearly fifteen years before his work would be remodeled for a consumer willing to accept the risk of shopping online. 

    1994 Resurgence

    As the 1980s continued, little notable advancement occurred in the online shopping industry, though there were signs of potential. The first mass-market online services, Prodigy and AOL,  began advertising flowers on their welcome pages in the late 1980s, but the attempt was more of an advertisement than a platform to complete a transaction. Security was still seen as the major impediment to consumer adoption. It wasn’t until 1994, four years after the invention of the World Wide Web, that security protocols (SSL) and high-speed connections (DSL) were

    established, allowing users to confidently purchase goods online securely and quickly. The withdrawal of entry barriers enabled the emergence of hundreds of online retailers by 1995, including Amazon, eBay, and Dell. Offering goods at prices 10 to 20 percent below those at  brick-and-mortar retail locations allowed online retailers to grow substantially through the latter  part of the decade. By 1999, the U.S. online retail market reached over $15 billion in annual sales.4 

    Along with the exponential rise of Internet retail companies came a substantial amount of venture capital (VC) funding. VCs believed that the success of an online retailer would come after realizing net losses in order to gain market share, and were willing to back startup dot-coms  based simply on an idea. Within a year, the NASDAQ fell 78 percent from its high in March 2000, and 52 percent of dot-com companies established between 1995 and 2000 disappeared. This left only a few pure-play online retailers, including Amazon, eBay, and Priceline.

    * By 1984, California was the only U.S. state that had passed an electronics commerce act that defined corporate and consumer rights online.

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    5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY 

    K ELLOGG SCHOOL OF MANAGEMENT  3

    2001–2013 Boom

    Continuous revitalization of goals, identification of “white space,”* and diversification of risk  became a major theme for dot-com companies that survived the bubble and the subsequent decade. Amazon explored interests in B2B, reseller, and hardware operations; Priceline shifted its  product focus from air travel to hotel and rental car travel; and eBay drastically expanded its  product lines. By 2013, Amazon was the clear and dominant leader in online retail. With over $74  billion in revenue, it outpaced eBay, Priceline, and all other online retailers many times over.5 

    Amazon.com

    History

    The story of Amazon is widely known. Founded in Jeff Bezos’s garage in 1995 as a reseller

    of books, the company took advantage of the rapidly growing e-commerce space that followedthe increased security measures enacted by Netscape founders. Attempting to carry “every  product from A to Z,” Bezos enacted an unusual business plan (though not uncommon to Internet startups at the time) that focused on customer and revenue growth rather than profit. He also emphasized the need for Amazon to pursue areas within and outside online shopping from the  beginning of its existence as a public company. In a 1997 letter to shareholders, Bezos contended:

    Our goal is to move quickly to solidify and extend our current position while we begin to

     pursue opportunities in other areas. We see substantial opportunity in the markets we are

    targeting. This strategy is not without risk: it requires serious investment and crisp

    execution.6 

    By 1997, the company—now public—had greatly expanded its reach. Employee headcount

    grew from 185 to 614; distribution center capacity grew from 50,000 to 285,000 square feet; and  book inventories surpassed 200,000 titles. Amazon soon found itself competing less on price with incumbent retailers and more on convenience and time to delivery.7 Throughout the next fifteen years, Amazon’s focus on winning with time and price in every aspect of its business was crucial. Retail competitors had a difficult time transitioning from brick-and-mortar operations to e- commerce platforms. Even the ones who experienced some online success still had trouble competing with Amazon because of its sheer range of product offerings and logistical capabilities. By the end of 2013, Amazon had $74 billion in sales and had turned a profit for five consecutive years. (See Exhibits 1A, 1B, and 1C for Amazon financials.) It occupied nearly 50 million square feet of distribution centers around the country and employed more workers than Google and Microsoft (Exhibit 2).

    * White space is a management term coined in 1991 by Geary Rummier and Alan Brache to identify areas of an organization where no one is in charge. Mark Johnson redefined the term in 2010 as an area in which businesses can create new business models.

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    Growth Strategies and Amazon Prime

    Tho