Case Study - Amazon.Com

• Launched in 1995 as an online bookstore by Jeff Bezos.

• Diversified into a broad range of items including DVDs, CDs, computer

software, video games, electronics, apparel, furniture and groceries.

• Separate websites to serve Canada, UK, Germany, Austria, France, China

and Japan.

Gross sales have

reached almost $

50B at the end of

2011 with a net

income after tax of

$ 556M.

Amazon.Com’s Competitive Advantage

Capital Efficiency – It does not have retail stores and limits its capital

investment to its headquarters and warehouses. It receives payments from its

customers on an average of 17 days before it has to pay its suppliers.

Inventory Velocity – Averages 16.5 times per year.

Technology - Uses information technology to execute supply chain on a large

scale to realize economies of scale making its gains in capital efficiency and

inventory velocity possible.

• Run its warehouses as efficiently as possible. It is so high tech that its ERP has

complex algorithms that can analyze relationships among the items customers

purchase to find groupings that can be located in the same warehouse, thus reducing

shipping costs. Warehouse operating costs has dropped from 20% of revenue to less

than 10%.

• Optimizes delivery performance and enhances service reputation that minimizes

distribution mistakes.

• Offers its retailing and supply chain management services to more than 1.1M other

retailers both large and small.

Amazon.Com’s Competitive Advantage

• The heart of Amazon.Com’s business model is information technology. It has

been investing an average of 7% of its sales.

• Some argue that Amazon has built “a stack of software on which thousands

or millions of others can build businesses that in turn will bolster the platform

in a self-reinforcing cycle.”

• Amazon strives to be “earth’s most customer-centric company” focusing on

selection, availability and price.

Achieving Competitive Advantage Some IT investments only allow a company to achieve parity with its

competitors. In either case, to develop an information technology strategy, a

company must answer the following questions:

1. Can the company derive a competitive advantage from its investments in information

technology?

2. How much should the company invest? Should it be sustained over time or can it be

reduced as the company grows and becomes more established?

3. Where should the proposed investment in information technology be focused? How

should the investment be distributed across projects?

4. Should the company invest in purchasing standard information technology

applications or developing custom applications? In what balance should it use

standard and custom information technology?

5. How should information technology development, implementation and maintenance

be organized? How will projects be implemented? How should performance of the IT

management function be measured?

Davenport, T. H. 1998. Putting the Enterprise into the Enterprise System.

Harvard Business Review (July-August): 121-131.

Primary Reasons Why Companies Undertake ERP

Implementation

• To integrate their financial information and develop a common picture of what is going

on throughout the company.

• To integrate customer order information and smooth the flow from order through

delivery.

• To standardize and speed up manufacturing processes across dispersed business

units.

• To reduce inventory across the supply chain.

• To standardize human resources information.

Some Nasty Real Life Issues

• Hershey Foods experienced massive distribution problems following a flawed

implementation of SAP’s R/3 ERP system in 1999.

• Whirlpool blamed shipping delays on difficulties associated with its SAP R/3

implementation.

• Pharmaceutical distributor FoxMeyer Drug actually collapsed and filed a $ 500M

lawsuit against SAP and another $ 500M suit against Anderson Consulting.

• GSIS filed a controversial Php 100M lawsuit in 2009 against IBM Philippines and

Questronix over an alleged failure of its Integrated Loans, Membership, Acquired

Assets and Accounts Management System.

Develop Strategies to Avoid Implementation Pitfalls

• Training – Successful implementation depends on the skills and experience of the

workforce in using the enterprise systems correctly. Until people understand the big

picture and their roles in it, they find it hard to appreciate the value of entering their

own data properly and the adverse effects if they don’t.

The performance of enterprise systems is only as good as the weakest link in the

system. Overcoming the natural resistance in some organizations to sharing

information across organizational boundaries is an important part of training.

• Data Integrity – GIGO

• Reengineering Associated Business Processes – The company must understand

and take on the required process changes. Reengineering blurs organizational

boundaries and changes lines of responsibility, so attention to organizational design

issues is important in implementation as well.

• Complexity versus Simplicity – Well managed companies simplify their operating

systems so that the necessary software tools can be used effectively, but at the same

time understand the limitations of the system. ERP systems focus on solving the

problems that are most common across companies and rarely deal with the full

complexity or with the specific nuances of the business.

The Internet Connected Supply Chain

The Innovators Will Control the Supply Chain,

Lapide L., 2000

Opportunities for IT Based Competitive Advantage in

Operations

• IT investments, particularly when implemented as a standard ERP package, are rarely

the source of competitive advantage as a whole.

• Strategic advantage is derived from the business process redesign that accompanies

implementation, or more likely from the customization of select pieces of the ERP

system.

• IT can drive operations strategy, but usually only in conjunction with other operational

concepts such as lean manufacturing or just-in-time inventory.

• Sometimes competitive advantage is derived by applying IT to specific locations

within the value chain and other times it entails orchestrating activities that span the

value chain.

Opportunities for IT Based Competitive Advantage in

Operations

New Product Development: Use of Workgroup Technologies

It enables individuals to work together under different circumstances such as

geographical location. Examples are groupware, workflow management and document

management.

New Product Development: Use of Workgroup Technologies

Vendor Gartner: Horizontal Portals 2010 Gartner: Social Software 2010 Gartner: Enterprise Content Management 2010 Gartner: Unified Communications 2010 Forrester Wave: Collaboration Platforms 2009

Alcatel-Lucent No No No Challenger No

Alfresco No No Visionarist No No

Atlassian No Challenger No No Strong performer

Autonomy Corporation No No Visionarist No No

Avaya No No No Yes, leader No

Cisco No No No Yes, leader Contender

Covisint Visionarist No No No No

Day Software No No Visionarist No No

Drupal No Visionarist No No No

Huddle No Visionarist No No No

Hyland Software No No Challenger No No

IBM Yes, leader Yes, leader Yes, leader Challenger Yes, leader

Interactive Intelligence No No No Visionarist No

Jive Software No Yes, leader No No Strong performer

Liferay Yes, leader Niche No No No

Microsoft Yes, leader Yes, leader Yes, leader Yes, leader Yes, leader

MindTouch No No No No Strong performer

Mitel No No No Visionarist No

NEC No No No Challenger No

NewsGator No Visionarist No No No

Novell No Niche No No Strong performer

OpenText Challenger Challenger Yes, leader No Strong performer

Oracle Corporation Yes, leader No Yes, leader No No

RedHat JBoss Challenger No No No No

SAP AG Yes, leader No Niche Niche No

Siemens No No No Visionarist No

Socialtext No Visionarist No No Strong performer

SpringCM No No Visionarist No No

SuccessFactors No Visionarist No No No

Telligent No Visionarist No No No

Tibco Software Visionarist No No No No

Traction Software No Niche No No Strong performer

Vendor Gartner: Horizontal Portals 2010 Gartner: Social Software 2010 Gartner: Enterprise Content Management 2010 Gartner: Unified Communications 2010 Forrester Wave: Collaboration Platforms 2009

Opportunities for IT Based Competitive Advantage in

Operations

Forecasting

• Forecasting will always be subject to significant errors, but use of more sophisticated

approaches can reduce the variability of forecasts compared to demand.

• Internet supply chains require collaborative forecasting, planning and replenishment.

• It also requires market intelligence to develop consensus-based forecasts.

• This software integrates time series information on past demand and other external

factors such as industry data, demand for related products, the company’s and

competitor’s promotions, external data such as weather information and

macroeconomic data.

Opportunities for IT Based Competitive Advantage in

Operations

Pricing

• Pricing decisions can be optimized for specific market and operational conditions.

• Revenue management, a concept pioneered by the airline industry, optimizes

revenue given assessments of demand and capacity.

• A company can dynamically change prices to reflect product availability and

inventory, relative demand in recent periods, measured price elasticity and competitor

pricing.

Opportunities for IT Based Competitive Advantage in

Operations

Distribution

• IT enables a number of improvements in routing algorithms, load consolidation,

cross-docking methods at transit hubs, flow optimization, package tracking and

supply chain event management.

• Some are enabled with handheld devices for recording distribution actions.

Amazon.com uses dispatching software that introduces loads at different postal

locations to optimize total distribution.

• Distribution software significantly enhances the company’s rapid response to orders

and product customization.

Opportunities for IT Based Competitive Advantage in

Operations

Large-Scale Inventory Systems and Product Availability

• Inventory management improves efficiency and inventory turnover that reduces cash-

to-cash cycle times.

• Sophisticated systems use complex algorithms using quantitative analysis to set

inventory stock levels to reduce overages and shortages.

• There are systems that can handle complicated supply chains that consist of multiple

productions and inventory management stages.

• Large companies can pool national demand to achieve a significant advantage in

economies of scale.

Three Step Process for Generating an IT Strategy

Understand How the Company Wishes to Gain Competitive

Advantage

1. The business strategy dictates where the company wants to be positioned in terms

of cost, quality, availability, features / innovativeness and environmental

performance.

2. It also suggests capabilities that the firm should leverage or needs to develop.

3. The output of this step should be a general direction for the business strategy, a list

of processes that must be optimized to achieve this strategy, the set of assumptions

that constrain the process and how much it wishes to invest in IT.

4. It also includes benchmarks against competitors and knowledge of whether or not

the company wishes to distinguish itself through IT.

Three Step Process for Generating an IT Strategy

Identify the Ways in Which Information Technology Can be Used

to Support Those Goals

1. It depends upon understanding which processes are core and which are context,

which processes are stable and which are evolving and which processes are

supported by standard packages and which require custom development.

2. More investment in custom development to support core processes and less

investment in standard packages to support context, stable processes is required if

IT is a competitive differentiator for the organization.

Three Step Process for Generating an IT Strategy

Organize the IT Function to Accomplish the Goals

1. IT functions should be decentralized if there are a large number of diverse business

units with different business needs.

2. A more centralized IT function allows the company to leverage IT investments in a

homogenous environment.

3. IT skill sets must be matched to the task at hand. The greater the customization

required, the more skilled the IT organization must be.

4. Metrics to assess the IT organization’s performance should link clearly to the

company’s business strategy and ensure that individual projects yield the expected

benefits on time and on budget.