The Business Value of Information Systems. A Study of Amazon

Executive Summary

Business information management requires the use of information systems, which make possible the conversion of data into useful information to be used by decision makers in organisations (Chaffey, 2004) The acquisition and further deployment of such systems requires organisations to make expensive investments prior to know whether they are going to produce the desired business improvements. Therefore, delivering value for money from information systems investments has become a very serious issue for many organisations. There are several examples in both the private and public sector of expensive failures, but there are fewer published cases of success (Ward, 2006)

Therefore, the case study will illustrate how different information systems have enabled Amazon to achieve a solid competitive advantage by improving its marketing techniques and the efficiency of its distribution channels in a time in which the fast development of technologies have come to redefine the commerce model within the retail industry. Indeed, the use of Internet has changed the way in which people acquire goods and services, and nowadays there is a strong shift towards online shopping that is forcing retailers to go onto the Net if they want to remain competitive. In this regards, Amazon has been a pioneer in using information systems to anticipate changes in the retail industry environment, and in addition, it provides the perfect example of how a company can obtain value for money from information system investments.

The Business Value of Information Systems

Introduction

Business information management is essential to organisations in order to support strategic decisions. Information adds value to organisations as it allows improving products and services, reducing business costs and developing new innovations. Information systems are used in order to manage business information in such a way that allows organisations to increase profitability, to improve productivity and to gain other intangible benefits with the objective of achieving sustainable competitive advantage and company success. In addition, the use of information systems allow organisations to adapt to external changes in the business environment, otherwise they could not remain competitive.

Business Value of Information

Information management is essential to businesses in order to support operational processes, organisational performance, and strategic decisions affecting their position in the market place. According to Marchand (2000) information can create value for organisations by:

  • Adding value to products and services through a better understanding of customer characteristics and needs, as customer activities are monitored to develop competitive strategies.
  • Reducing costs and making business processes and operations more efficient, as information enables organisations to use fewer resources and to improve communication.
  • Supporting organisational strategic decisions and helping with risk management assessment
  • Enabling innovations and new product and service developments  (Chaffey, 2004; Oestreich, 2010)

Business Information Management through Information Systems

Business information management involves the use of information systems (IS) which, according to the UK Academy for IS, are “the means by which organisations and people, using information technologies resources, gather, process, store, use and disseminate information”. (www.ukais.org; Chaffey, 2004) Therefore, IS are computer based systems that collect, process and stores data, making possible its conversion into useful management information –data mining process- to be used by decision makers within organisations. (Davis & Olson, 1985; Lucas, 1990; McLeod, 1995 cited by Ramesh, 1997).

The Value of Information Systems

During the 1990s, there was a great argument about the real value delivered by expensive organisational investments on IT and IS, as studies found out that there was weak correlation between IS investments and increased business performance (Solow, 1987; Brynjolfsoon, 1993; Strassman, 1997 cited by Dans, 2003; Chaffey, 2004) However, studies by Delone and McLean (1992, 2003) and by Jacks (2009) demonstrated the importance of IS to the creation of business value and competitive advantage. (Jacks, 2011) According to Jacks (2011) IS make organisations successful by either: 

  • Increasing profitability: sales growth, profits, ROI, reduced costs, market share increase.
  • Increasing productivity: business process outcomes, operational efficiency, service performance
  • Intangible benefits: customer satisfaction and loyalty, industry performance, quality improvement.

Customer Relationship Management (CRM) Systems

CRM systems are intended to build and sustain long-term business relationships with customers of an organisation. Organisations may increase their profitability if they can retain customers and sell additional products to them. Research by Reicheld and Schefter (2000) showed that by retaining 5% more customers, online companies can increase their profits by 25% to 95%. (Chaffey, 2004)

Consequently, CRM systems focus on the activities aimed to market products and services to customers in a more efficient way. By understanding customer characteristics and needs, organisations can elaborate tailored marketing campaigns to acquire, retain, extend and select potential customers, which ultimately will translate into increased sales and organisational profitability (Steinberg, 2006; Chaffey, 2004; Lee-Kelly, 2003) 

Table 4: Marketing activities of CRM

CRM marketing activities

Objective

Information based marketing techniques

Customer acquisition

Gain new customers

Tailored marketing communication

Customer retention

Encourage repeated purchases

Personalized/tailored  communications

Customer extension

Up-sell (more expensive products)

Cross-sell (additional products)

Personalised/tailored communication

Customer selection

Identify the most responsive groups of customers

Database analysis and modelling

Enterprise Resource Planning (ERP) Systems

ERP systems integrate all departments and functions across an organisation, thus eliminating IS’ isolation in departments such as finance, HR, marketing and the warehouse, and replacing them with a single system where all important information is connected together (Wailgum, 2008; Steinberg, 2006). ERP systems add value to organisations by:

  • Integrating customer order information: ERP systems integrate order information, product shipment and invoices in one single system, enabling organisations to improve order tracking, and to coordinate inventory and shipment among different locations simultaneously. Therefore, the order process speeds faster through the organisational departments, and customers get their orders faster and with fewer mistakes.
  • Reducing inventories: ERP systems streamline the order fulfilment process and help with the delivery process, thus improving the flow of the organisation’s supply chain.  (Wailgum, 2008; Steinberg, 2006)

Supply Chain Management (SCM) Systems

SCM systems coordinate all supply activities of a company such as supply and distribution network, logistic activities and inventory management; and these add value to an organisation by (Gabe, 2010; Chaffey, 2004):

  • Increasing process efficiency: SCM systems help to reduce the cycle time of business processes and the resources needed to execute them, thus reducing costs per order.
  • Reducing supply chain’s complexity: SCM systems enable organisations to order directly from suppliers, thus reducing the costs of distribution.
  • Improving data integration within the supply chain: SCM systems enable information sharing on product demand between the organisation and its suppliers, which improves inventory management efficiency through the use of VMI (vendor-managed inventory). The benefits include reduced cost of paper processing and lower inventory holdings.
  • Reducing costs: SCM systems enables organisation to outsource certain assets, to lower costs through price competition and to offer better service quality. (Steinberg, 2006; Chaffey, 2004)

Information Systems and the Changing Business Environment

The environmental influences on any organisation change rapidly, and therefore it is important to continuously monitor the current environment and to anticipate future trends through “environmental scanning or sensing” activities, in order to respond to changes accordingly. Organisations that either do not monitor environmental factors or do not respond to changes adequately may lose competitiveness or even incur in failure. As example, IS managers need to constantly assess the relevance of new technologies and to monitor technology trends and innovations in order to remain competitive. (Chaffey, 2004).

Amazon Information Systems

Introduction

Amazon is the biggest online retailer in world, although many consider that it is more a leading software developer or “information systems’ company with a little pick, pack and ship service” (Hof, 2003). This world-class retailer, which began doing business as an online bookseller in the mid 90s, has changed with the time and currently it offers its customers a wide variety of products such as electronics, clothes, beauty products, and so on. In addition, Amazon operates as a service provider allowing other retailers to sell on its site and it also commercializes cloud storage services and its own tablet post-PC device –Kindle-. (Businessweek, 2003; Hof, 2003; Jenkinson, 2005) Therefore, Amazon has become the Net’s premier shopping destination in 2011, and data, information technology and information systems constitute its most valuable assets. (Manjoo, 2011).

Amazon’s Information Systems Value

Between 2001 and 2003, Amazon invested $300,000 into building new distribution centres and acquiring information systems software. However, experts hardly criticised the company asserting that it would never recover the investment, (Gabe, 2010) and even financial analysts such as Lehman and Brothers expressed concerns over its cash flow situation. (Foley, 2000)  Although it took Amazon long time to become profitable, additional revenues rose once the company got enough customers and sales to pay off the initial IS investments, and their bet for information systems technology enabled the company to overcome competitors such as Barnes and Nobles in the 90s and more recently Wal-Mart Stores Inc (Hof, 2003; Gabe, 2010).

Amazon uses information systems to improve profitability faster and its current financial situation, strategic position, market share, and intangible benefits give evidence of that the company’s IT and IS strategies worked as expected. According to Hottovy’s report (2011) Amazon doubled in size from 2008 to 2011 with $34 billion in net sales and its current revenue growth is close to 40%. The company has a valuation of $325 per share and generates return on invested capital exceeding the 50% – note that Amazon invests mainly in IT and IS technologies –. Moreover, it has an active customer base of 137 million users that accounts for an annual growth rate of 20%. All in all, Amazon has one of the most capital efficient-models in e-commerce and its low cost operations, network effect and focus in customer service provide the company sustainable competitive advantage (Hottovy, 2011). Amazon uses ERP, SCM and CRM information systems. Oracle (ERP) built a multi-terabyte database for the company, while SCM software was acquired to control costs and to improve shipping and logistics efficiency. In addition, Amazon’s CRM system intends to work up e-marketing efforts through the analysis of customer’s preferences and the provision of products for specific segments (Foley, 2000).

Amazon’s Customer Relations Management (CRM) system 

Amazon’s CRM system uses the following applications to gather customer information:

  • A database of customers with personal, profile and transactional data which include their purchase history and activities
  • An order processing system that includes the record of credit card information and is linked to a delivery system
  • A web-page system that takes customer information such as customer feedback, personal interests, wish list and product review records, and customises formats.
  • Automated communication systems: e-mail and message systems and order information systems that ensure personalised and relevant communication with customers (Hof, 2003; Jenkinson, 2005; Hottovy, 2011)

CRM System Business Value

Amazon’s CRM system creates business value through integrating customer sales, services and communications effectively (Jenkinson, 2005; Manjoon, 2011) In order to detect patterns of consumer behaviour, customer information is analysed by data mining experts using statistical CRM and artificial intelligence (SAS) software; while collaborative filtering technology automatically analyzes past customer purchases. The analysis provides processed information that serves to elaborate profiles of customer individual interests, which enables Amazon to send them tailored product recommendations in order to increase product sales (Foley, 2000; Hof, 2003; Jenkinson, 2005).

In addition, CRM data mining activities also compare individual profiles to other customer profiles and bring them together into similar groups. As result, the company has taken traditional campaign techniques and move into faster campaigns to target different customer segments more effectively. Thus, Amazon has the ability either to launch broad campaigns to millions of customers, or more focused campaigns to a few thousands and tailored recommendations to individuals, due to a better understanding of customer characteristics and needs (Foley, 2000; Hof, 2003).

Summarizing, Amazon’s CRM system combine advertising, service and selling to acquire customers in order to encourage repeated purchases through cross selling and up selling tailored marketing techniques. (Jenkinson, 2005) As a result, Amazon has achieved high levels of customer commitment and loyalty. Research by Millward Brown (BrandZ study) showed that 54% of US buyers are loyal to the company, as compared with a 10% of the industry average; while a 67% of its orders are from repeated customers. Moreover, Amazon customers are more likely to buy at a higher rate than loyal customers across the category, as 40% of Amazon customers are frequent users compared to an 8% of the average category (Jenkinson, 2005).

Amazon’s Enterprise Resource Management (ERP) System Value

Oracle is the ERP system used by Amazon and it consists of a multi-terabyte database that integrates all the information related to customer orders such as purchase history, product shipment and invoices, thus enabling to streamline the order fulfilment process (Wailgum, 2008) Oracle automates the steps of this process by taking customer orders and process them into invoices, so when a customer comes online to buy a product the order system communicates directly with the warehouse system to find the adequate distribution centre, while customers receive communications about their purchase status and delivery times (Bacheldor, 2004) The company recognises that without this system it would be very difficult to coordinate and control the flow of merchandise in their business operations (Bell, 2011).

Such integration of information creates business value by allowing Amazon to speed faster the order fulfilment process, as well as to improve visibility of order tracking and to reduce distribution mistakes. In fact, the company has reduced its customer service contacts per order by 50% since 1999 due to fewer distribution mistakes (Businessweek, 2003).

Amazon’s Supply Chain Management (SCM) system

Back in 2000, Amazon.com made expensive IS investments into building its high quality automated warehouses, and nowadays their supply chain is one of the most efficient and sophisticated in the world (Jenkinson, 2004; Businessweek, 2003, Gabe, 2010).  A CRM system controls all supply chain activities of Amazon, such as transportation management, shipping activities and inventory planning, with the aim of reducing operational costs and optimizing logistic operations (Gabe, 2010).

Amazon’s SCM system Value

In 2000, Amazon’s operational costs accounted for about a 15% of sales revenue because the process of picking and packing different products was not very efficient. Employees had to enter data into the system manually and chutes holding pending orders were backed up when products did not arrive on time. (Businessweek, 2003)

Nowadays, the implementation of a SCM system has enabled Amazon to reduce the cycle time and the resources needed to complete its operational processes, thus making them more efficient. The SCM system examines Amazon’s customer demand to identify items that are often purchased together in order to place them at the front of the supply lines, thus enabling to speed faster the process flow (Businessweek, 2003) The SCM system also allows to find where the items are physically located, so after receiving an order the system will send a picker where the product is shelved. In the case of multi-orders, the system generates optimised pick lists, finding the shortest possible route for picking the product. (Gilmour, 2003).

As a result, Amazon’s operation costs fell down from 15% of total sales revenue in 2000 to a 5% in 2003, and lower costs have enabled the company to offer more product discounts and free shipping in orders over $25 (Businessweek, 2003).

Moreover, Amazon’s CRM system enables information sharing on product demand between the company and its suppliers, which improves inventory management efficiency. Amazon’s CRM system is linked to its suppliers’ IS in order to share information in real time about orders and shipment. Thus, Amazon can hold lower levels of inventory stock in warehouses as it receives goods from its suppliers only when needed and accordingly to customer demand levels. (Hof, 2003; Foley, 2000) Thanks to the CRM system, Amazon reduces costs by carrying only a 15 day’s worth of inventory while traditional retailers must stock up to 160 days’ worth of inventory in their warehouses (Hof, 2003).

In addition, information systems’ integration between suppliers and Amazon enables customers to buy goods directly from suppliers. The company forwards orders to its suppliers which get the product to customers directly; therefore the complexity of the supply chain and costs of distribution get reduced. (Knowledge Wharton, 2009).

Amazon’s IS and the changing external environment

Information systems have provided Amazon with competitive advantage since it has been able to adapt its business model better than its competitors to the changes that the retail industry has experienced during the past decade such as the shift towards online shopping due to a more widespread use of Internet (Manjoo, 2011) Thus, Amazon forced traditional retailers to go onto the Net in the 90s (Hof, 2003), while nowadays, it has the best record with new products -as they are constantly monitoring environmental changes- and their web services, cloud computing services and Kindle device are true innovations that have changed the rest of the industry (Manjoo, 2011)

Conclusion

This paper demonstrates the importance of information management and information systems to the creation of organisational business value and competitive advantage. According to Jacks, information systems contribute to organisational success by increasing profitability and productivity, and providing other intangible benefits such as customer loyalty. Subsequently, Amazon’s case study illustrates the perfect example of how an organisation obtains value for money of their information systems investments. The effective use of information systems has allowed the company to improve the efficiency of its distribution channels, to provide cost effective convenient products to its customers and to achieve the highest levels of customer retention and loyalty within the e-retail industry, which ultimately has helped Amazon to increase profitability and to achieve a solid financial position. In addition, information systems have provided the company with notorious competitive advantage over their competitors since it has been able to better adapt its business model to the changes that the retail industry has experienced during the past decade, such as the shift towards online shopping due to a more widespread use of Internet.

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