The Business Value of Information Systems. Case Study: Amazon.Com

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 organizations. The acquisition and further deployment of such systems require organizations to make expensive investments prior to knowing 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 organizations. There are several examples in both the private and public sectors of expensive failures, but there are fewer published cases of success. The purpose of the present paper is to explain how added business value emerges from the use of information systems. The paper begins with a review of the related literature and then, it takes a practical approach through a case study analysis which intends to set out the value of information systems to a successful organization such as Amazon.

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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 has come to redefine the commerce model within the retail industry. Indeed, the use of the 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 regard, 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 organizations in order to support strategic decisions. Information adds value to organizations as it allows for 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 organizations to increase profitability, improve productivity, and gain other intangible benefits with the objective of achieving sustainable competitive advantage and company success. In addition, the use of information systems allows organizations 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, organizational performance, and strategic decisions affecting their position in the marketplace. According to Marchand information can create value for organizations 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 organizations to use fewer resources and to improve communication.
• Supporting organizational strategic decisions and helping with risk management assessment
• Enabling innovations and new product and service developments

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 organizations and people, using information technologies resources, gather, process, store, use and disseminate information”.  Therefore, IS are computer-based systems that collect, process, and store data, making possible its conversion into useful management information –a data mining process- to be used by decision-makers within organizations.

The Value of Information Systems

During the 1990s, there was a great argument about the real value delivered by expensive organizational investments in IT and IS, as studies found that there was a weak correlation between IS investments and increased business performance. However, studies by Delone and McLean and by Jacks demonstrated the importance of IS to the creation of business value and competitive advantage. According to Jack IS makes organizations 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, and quality improvement.

Customer Relationship Management (CRM) Systems

CRM systems are intended to build and sustain long-term business relationships with the customers of an organization. Organizations 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, organizations can elaborate tailored marketing campaigns to acquire, retain, extend, and select potential customers, which ultimately will translate into increased sales and organization profitability.

Enterprise Resource Planning (ERP)

Systems ERP systems integrate all departments and functions across an organization, 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.

ERP systems add value to organizations by:

• Integrating customer order information: ERP systems integrate order information, product shipment, and invoices in one single system, enabling organizations to improve order tracking and coordinate inventory and shipment among different locations simultaneously. Therefore, the order process speeds faster through the organizational departments, and customers get their orders faster and with fewer mistakes.
• Reducing inventories: ERP systems streamline the order fulfillment process and help with the delivery process, thus improving the flow of the organization’s supply chain.

Systems 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 organization by:

• 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 complexity: SCM systems enable organizations 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 organization 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 enable an organization to outsource certain assets, lower costs through price competition, and offer better service quality.

Information Systems and the Changing Business Environment

The environmental influences on any organization 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. Organizations that either do not monitor environmental factors or do not respond to changes adequately may lose competitiveness or even incur failure. As an example, IS managers need to constantly assess the relevance of new technologies and monitor technology trends and innovations in order to remain competitive.

Amazon Information Systems

Introduction

Amazon is the biggest online retailer in the world, although many consider it to be more a leading software developer or “information systems’ company with a little pick, pack, and ship service”. This world-class retailer, which began doing business as an online bookseller in the mid-90s, has changed with 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. Therefore, Amazon has become the Net’s premier shopping destination in 2011, and data, information technology, and information systems constitute its most valuable assets.

Amazon’s Information Systems Value

Between 2001 and 2003, Amazon invested $300,000 into building new distribution centers and acquiring information systems software. However, experts hardly criticized the company asserting that it would never recover the investment, and even financial analysts such as Lehman and Brothers expressed concerns over its cash flow situation.

Although it took Amazon a 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 on information systems technology enabled the company to overcome competitors such as Barnes and Noble in the 90s and more recently Wal-Mart Stores Inc. Amazon uses information systems to improve profitability faster and its current financial situation, strategic position, market share, and intangible benefits give evidence that the company’s IT and are strategies worked as expected.

According to Hottovy’s report, 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 a return on invested capital exceeding 50% - note that Amazon invests mainly in IT and IS technologies. Moreover, it has an active customer base of 137 million users which 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 on customer service provide the company with a sustainable competitive advantage. 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 improve shipping and logistics efficiency. In addition, Amazon’s CRM system intends to work up e-marketing efforts through the analysis of customers’ preferences and the provision of products for specific segments.

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 customizes formats.
• Automated communication systems: e-mail and message systems and order information systems that ensure personalized and relevant communication with customers.

CRM System Business Value

Amazon’s CRM system creates business value by integrating customer sales, services, and communications effectively. In order to detect patterns of consumer behavior, customer information is analyzed 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 customers' individual interests, which enables Amazon to send them tailored product recommendations in order to increase product sales. 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 moved 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 thousand and tailored recommendations to individuals, due to a better understanding of customer characteristics and needs. To summarize, Amazon’s CRM system combines advertising, service, and selling to acquire customers in order to encourage repeat 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 showed that 54% of US buyers are loyal to the company, as compared with 10% of the industry average; while 67% of its orders are from repeat 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 8% of the average category.

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 streamlining the order fulfillment 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 center, while customers receive communications about their purchase status and delivery times.

The company recognizes that without this system it would be very difficult to coordinate and control the flow of merchandise in their business operations. Such integration of information creates business value by allowing Amazon to speed faster the order fulfillment process, as well as to improve the visibility of order tracking and reduce distribution mistakes. In fact, the company has reduced its customer service contacts per order by 50% since 1999 due to fewer distribution mistakes.

Amazon’s Supply Chain Management (SCM) system

Back in 2000, Amazon. om made expensive IS investments into building its high-quality automated warehouses, and nowadays the supply chain is one of the most efficient and sophisticated in the world. 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.

Amazon’s SCM system Value

In 2000, Amazon’s operational costs accounted for about 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.

Nowadays, the implementation of an 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 process flow. The SCM system also allows finding 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 optimized pick lists, finding the shortest possible route for picking the product..

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

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. Thanks to the CRM system, Amazon reduces costs by carrying only 15 days’ worth of inventory while traditional retailers must stock up to 160 days’ worth of inventory in their warehouses. 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.

Amazon’s IS and the changing external environment

Information systems have provided Amazon with a 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 more widespread use of the Internet. Thus, Amazon forced traditional retailers to go onto the Net in the 90s, 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.

Conclusion

This paper demonstrates the importance of information management and information systems to the creation of organizational business value and competitive advantage.

According to Jacks, information systems contribute to organizational 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 organization obtains value for money from its 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 a notorious competitive advantage over its 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 more widespread use of the Internet.

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