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A Case Study
David Beckley
Alex George
Jeff Leonard
Manjiri Kharkar
Information Management 580 – University of Washington, 2016
Amazon Prime Air – Case Study
This schematic report is an analysis of the case study “Reinventing E-
Commerce: Amazon’s Bet on Unmanned Vehicle Delivery” by Russell Walker
and Rafique Jiwani from the Kellogg School of Management at Northwestern
University, 2015.
To set the stage: “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. 1” (Walker and
Jiwani, 2015, p. 1)
Out at the outset of this report we will provide a general overview of Amazon's
business and the Prime Air service for those that are unfamiliar with them.
Amazon Prime Air can be understood both as a consumer service and as a
merchant product offering. In that regard there are highly differentiated
strategies being employed to concurrently satisfy both external (retail
consumers) and internal (Amazon Retail and FBA merchants) customers. We
attempt to address both scenarios in addition to conducting a deeper
exploration of specific aspects of the general and task business environments.
This includes regulatory, environmental, and societal considerations followed
by strategic and tactical implications arising from the product lifecycle, internal
change management practices, and human resource requirements.
QUESTIONS POSED BY THE CASE STUDY
1. “What risks would be associated with venturing into autonomous delivery
before consumers fully adopted the technology?”
2. “What risks would Amazon take on if it waited for another competitor to
enter the market first?”
3. “How would the retail landscape change and could Amazon change with it?”
OUR LEARNING OBJECTIVES
1. Strategic management principles
2. Role of IT in decision making and management
3. Change management and IT change enablement
4. Organizational politics, social responsibility, and ethics
5. The role of organizations in society
6. Evaluate and design organizational structures and culture
Introduction
In conclusion, we will provide a series of strategic recommendations at a corporate,
business, and functional level that seek to encapsulate our observations and address
the questions posed by the case study. At a high level Amazon should proceed with the
current trajectory of its Prime Air program with a focus on customer and revenue
growth realized through loyalty to the Prime program while managing risk related to
the drone technology itself, possible competitors entering the market, the optics of
social responsibility, and best-in-class information security and retention policies.
(Annabi, 2016)
The scope of our analysis has been expanded to account for the evolution of Amazon’s
drone business and the marketplace since the publication of the case study. Our
analysis seeks to address the three questions posed at the end of the case study within
the context of selected learning objectives of strategic management which we’ve
summarized in the boxes below.
Amazon.com Snapshot
From Bezos’s 1997 letter
“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. ” (Bezos, 1997)
Chronology leading to Amazon Prime Air
7
The history of Amazon's business is well known. We will not spend time repeating
it here. Rather, we will focus on specific events in its history that are relevant to the
Prime Air business. There are a series of milestones in Amazon's history that have
enabled Prime Air to come into being. This includes Formation of the Prime
program in 2005 followed by creation of the FBA business model (drop shipping
and merchant services), establishing AWS (providing supporting analytics and
machine learning capabilities), the Kindle launch (established a core competency in
consumer hardware development), formation of a network of distribution centers
(enabling speedy common-carrier delivery), their reorg to a service oriented
architecture (enabling operations to scale),the Kiva acquisition (providing
warehouse process automation), and most recently initiation Prime Air R&D in
UK/USA/Austria/Israel.
In 2014, Amazon CTO Werner Vogels said, “When making the move to a service-
oriented architecture, Amazon refactored its software into small independent
services and restructured its organization into small autonomous teams. Each team
took on full ownership of the development and operation of a single service, and
they worked directly with their customers to improve it. With this clear focus and
control, the teams were able to quickly produce new features.” (Vogels, 2014)
Amazon's vision, as established by Jeff Bezos, has been restated in every SEC financial
filing since 1997. It is illustrative of an ethos that has shaped the evolution of their
business ultimately leading to the Prime Air service. Amazon engages in rapid and
ongoing product differentiation and service diversification while being highly risk
tolerant.
Of Amazon's 12 leadership principles a subset are emblematic of the core
competencies required to make Prime Air successful, such as Customer Obsession
(speedy delivery), Invent and Simplify (service efficiency and automation), Thinking Big
(service diversification), Bias for Action (be first to market), and Earn Trust (from
customers).
• Customer Obsession
• Ownership
• Invent and Simplify
• Are Right, A Lot
• Learn and Be Curious
• Hire and Develop The
Best
• Think Big
• Bias for Action
• Frugality
• Earn Trust
• Dive Deep
• Have Backbone;
Disagree and Commit
• Deliver Results
Amazon Leadership Principles
(Amazon, 2016)
Amazon Prime Air in a Nutshell
About 85% of
Amazon’s orders are
under five pounds
Order goes to
warehouse :
Item is packaged
and placed in
Kiva Robots-
smart
warehouse.
Product
purchased :
If you are within
10 miles distance
from Amazon
warehouse,
package weighing
5 pounds or less,
you can order
through Amazon
Prime Air
1
2
Drone picks up
the order: Box
comes down on
the conveyor and
is held on by
clamps on the
drone.
3
Off it goes :
Using GPS
coordinates to
find customers,
the drone drops
the box off and
returns to the
warehouse.
4
PrimeAir 30 Minute Delivery 9
Anticipated Drone Features
• Use of small drones
• Delivery in 30 minutes or less
• Flying below 400 feet
• Drones weighing less than 55 lbs
• Use of “Sense and Avoid” technology
• Travel distance up to 10 miles
• Designed for safety (Batsford & Dinner, 2013)
Simply stated Amazon Prime is a four step process. First, products are determined
to be eligible (or ineligible) for the service based on product weight and delivery
distance. Second, the order is processed for fulfillment pick-pack-and-ship. Third, a
drone picks of the order from the warehouse. Fourth, the drone delivers the
package and places it in the designated drop zone.
Prime Air is a premium service that will only be
available to Amazon Prime members. Launched in
2005, Amazon Prime is a customer loyalty program
originally created to offer users expedited delivery
within 2 days. It builds on the overarching business
strategy to establish customer loyalty through multiple
product offerings and service delivery models. Since
then, it has allowed Amazon to market additional
services such as Amazon Video, Amazon Music,
PrimeNow and others.
Amazon Prime Air is a natural extension of the Prime program, further deepening the
commitment to speedy delivery for its customers. It's primary value, from a consumer
perspective, is to provide near-instant gratification via rapid product delivery in 30
minutes or less. Amazon estimates 85% of its current customer orders meet the
shipping weight threshold of being under five pounds.
Role of Organizations in Society – Airspace Regulation
(Amazon.com, Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems, 2015, p. 2)
26
The Amazon Prime Air program has implications for the
company’s stakeholders and the communities in which
they will operate. As a matter of societal ethics, the
company is managing the program’s implications on
fairness and individual rights by taking an active role in
the arena of airspace regulation.
Amazon envisions the development of new airspace rules
that incorporate zones for fleets of small unmanned
aircraft systems (sUAS). “Segregating the airspace will
buffer sUAS operations from current aviation operations.
It will also buffer lesser-equipped vehicles from highly-
equipped vehicles able to safely perform [beyond line of
sight] BLOS missions” (Amazon.com, 2015). As seen to the
right, their Airspace Design for Small Drone Operations
infographic is an easy way to conceptualize their vision.
However, there are potential risks the company faces by
developing and launching this technology before
communities are ready to adopt it. For example, the
National Interagency Fire Center tracks the number of
drone incursions that interrupt wildfire response
operations. From 2014 there have been Y/Y increases,
and while only 30 incidents were reported in 2016, a
single incidence is enough to raise serious public safety
concerns. A significant risk exists should Amazon and
hobbyist drones encounter each other in shared airspace
without clear rules to avoid collisions.
What does Amazon’s vision for airspace regulation look like?
Role of Organizations in Society – Consumer Privacy
26
Sense and Avoid, or SAA, is the technology Amazon is advocating for to achieve the
fully autonomous delivery system it requires to realize its vision for Amazon Prime Air.
Current technologies are primarily collaborative, meaning multiple operators must be
involved for a drone’s object avoidance capability. Amazon, and numerous
competitors, seek to develop non-collaborative software platforms that enable drones
to become fully autonomous, operating beyond line of sight (BLOS), and avoiding
objects that can’t be controlled, such as wildlife (Popper, 2015).
This technology raises concerns Amazon must consider related to its data governance
policies and customer privacy. Through this technology, large volumes of geospatial
and possibly video footage will be captured. The necessity for protection of
customers’ data will be a vital component of a successful program. Recent breaches
of data privacy have put a spotlight on this issue. Edward Snowden earned
international notoriety when he disclosed the bulk metadata collection program by
the NSA in 2013 (MacAskill, 2015). This sparked public outcry and in 2015 the US
Justice Department released a statement expiring the program. In 2013, Google paid
a $7M fine in a lawsuit brought against the company’s Google Maps program in which
it passively and secretly collected personal information on unencrypted wireless
networks, including medical and financial records, and passwords, as mapping cars
drove by (Streitfeld, 2013). To the left, we’ve outlined a number of questions we
believe Amazon may consider ahead of the technology’s implementation. These
highlight the needs for robust security and encryption standards, data collection and
retention policies, and planning for device vulnerabilities. We also believe Amazon
must consider how to ensure any data that isn’t directly relevant to the drone delivery
operation isn’t retained indefinitely, and thus not vulnerable to external actors such as
hackers, or even government subpoenas.
 How will Amazon collect and retain information with drones?
 Will data gathered from interactions with other sUAV pilots in
the < 400 ft. zone be publicly available?
 If Amazon’s SAA technology relies on computer vision robotics
(on board cameras), do customers (and others in a delivery
flight path) have a reasonable expectation to privacy?
 What will the data retention policy be for metadata collected
via drone deliveries?
Data privacy questions
Social Responsibility and Ethics
(Walker & Jiwani, 2015, p. 17 exhibit 7)
Our analysis shows that Amazon is typically accommodative of policy positions that
are generally considered to be "socially responsible." Examples include Frustration
Free Packaging that reduced the amount of materials in landfills, a long term
commitment to powering it's business and data centers with 100% renewable energy ,
and implicitly reducing the carbon foot print of its AWS customers and FBA customers
through service efficiencies. These highlight Amazon’s organizational emphasis on
honesty, trust, integrity as well as a conscious effort to instill socially responsible
normative values throughout their management team and workforce.
Nonetheless, Amazon's dedication to an agenda of social responsibility is always in
service to their strategic objectives, which often includes lobbying government officials
and agencies to promote more accommodative legislative priorities and regulatory
frameworks. In 2015 Amazon recruited former white house press secretary Jay Carney,
now Amazon’s SVP for Global Corporate Affairs. As Amazon's business has grown it's
spend on lobbying has increased rapidly. In the same year its Y/Y lobbying spend
nearly doubled to almost $10M. In 2016 Amazon spent $210k specifically lobbying for
policies accommodative to its Prime Air program.
From an environmental perspective, a new study in the Journal of the Transportation
Research Forum shows that ordering groceries for delivery online is actually much
greener than driving to the store and buying them yourself. The study found that
delivery-service trucks produced 20% to 75% less carbon dioxide than the
corresponding personal vehicles driven to and from a grocery store (University of
Washington, 2013). The same study indicated net carbon footprint impact of drones
themselves, however, is estimated at 3-5x current impact of cargo van based delivery
due to the inefficiencies of delivering individuals products one at a time via drone .
Nonetheless, we can assume that this will contribute to a evolving cultural
transformation in which the incidence of consumers driving to brick-and-mortar stores
will significantly decrease with time. We also anticipate this will catalyze the current
trend towards car-sharing programs and an overall reduction in individual car
ownership.
Obstructionist Defensive Accommodative Proactive
Social Responsibility
Low High
Lobbying Expenditures
2016 YTD Expenditures: $8,6M (Prime Air: $210k; AWS: $54k)
Core lobbing focuses:
• Sales tax
• Drone use
• Computer cloud services
• Cybersecurity
• Welfare benefits
Strategic Management
SWOT Analysis, Amazon Prime Air
Strengths
• Organizational culture
• Brand (Prime)
• Timely, efficient delivery
mechanism
• Novelty & visibility of the
service
Weaknesses
• Complex operational
environment
• Knowledge management
• Employee attrition
Opportunities
• Last mile (vertical integration)
• Customer loyalty
• Accumulation of
geospatial/environment data
Threats
• FAA Barriers / regulatory
environment (globally)
• Privacy issues
• Losing Trust
• Competition
Inventory
(Vendors)
Fulfillment
Distribution
(DHL/FedEx
etc.)
FORWARD
CUSTOMER &
MERCHANT
Traditional industry models for evaluating the economic feasibility of a product
delivery business model hinge on two variables: route density and drop size. Route
density equals the number of drop offs you can make on a delivery route and drop-
size equals the number of parcels per stop. Higher numbers of both are preferable.
Route density and drop size via Drone delivery could not be more inefficient as
contrasted with other distribution methods, e.g. FedEx, UPS. Nonetheless, Amazon
has multiple strategies for building a competitive advantage using Drones.
In the context of Prime Air, Amazon employs a focused differentiation strategy that
targets its post-sale merchant service and consumer product delivery offerings.
Through this innovation (only possible because of the company’s high tolerance for
risk), benefits can be realized in improved efficiency and responsiveness to
customers. We believe an added benefit from this strategy is to drive increased
Prime memberships and loyalty. As a long term strategy this may morph into a
related diversification strategy, extending its drop shipping and fulfillment services
to include new offerings to third party merchants (such as product return via drone
or inbound warehouse stocking via drone).
A concurrent vertical integration strategy is being employed to insource the
majority of its last mile delivery capability. This will likely yield significant cost
savings in the near term and provides additional leverage in negotiations with
competing delivery companies (e.g. UPS and FedEx) where their services are still
required. This introduces significant risks should the general business environment
change, such as evolution of the FAA regulatory framework. Moreover, Amazon’s
concept of Drone delivery is predicated on having a distribution network and a
large volume of inventory to fulfill using this mechanism. There is a potential
competing business model in which Drone delivery is sold as a service to traditional
online merchants and brick-and-mortar businesses who desire a speedy delivery
offering for their customers but do not want to sell their product on Amazon. This
would likely arise from a logical, technology competitor such as Google or Apple
who may seek to develop and license Drone technology to traditional retailers.
Amazon Prime Air Forward Vertical Integration
Role of IT in Decision Making
Embryonic Stage Growth Stage Maturity Stage Decline Stage
• Build the drones
• Build the SAA
tech
• Train human
pilots
• Build warehouse
integration
• Conduct UX and
UAT
• Advancement in
battery life /
range
• Scaling Kiva
across all
warehouses
• Growth in
distribution
center network
• Launch fully
autonomous
drones
• Predictive
delivery and
analytics
• Product
delivered via
teleporter
• Localized 3D
printing of any
product
• Personal
hyperloops
Time
Demand
Amazon Prime Air – Product Lifecycle (Projected)
Jones, Gareth and George, Jennifer. “Contemporary Management Ninth Edition.” McGraw Hill Education. 2016. P. 538 – 543.
Amazon will deploy the Drone technology within their existing IT ecosystem and
infrastructure. We anticipate this will require integration with customer ordering,
fulfillment, and triage and incident resolution systems at a minimum. Given the
structure of software development teams within Amazon, the supporting Drone IT
systems would likely be developed and supported within the Prime Air
development team as opposed to a centralized team. Care would have to be taken
across product management teams to ensure a seamless customer user experience
is achieved.
An important factor for successful deployment of any IT system is that it provides
the management team with useful information (Jones & George, 2016, pp. 538-
543) . Our analysis suggests Amazon’s development of SAA technology establishes
a new core competency that enables a competitive advantage. Development of
Drone and SAA technology supports Amazon’s corporate strategy of forward
vertical integration of order distribution while expanding the scope of and
enhancing the Amazon Prime brand.
Once the drone technology has been built and deployed, we anticipate a period of
iterative development leading to advancement of battery life and Drone range. To
enable rapid delivery, Amazon may scale its Kiva operations across all Drone
enabled warehouses, while continuing to expand its distribution center network
into new locations with significant population densities reachable by Drone. As the
technology matures, Amazon’s plan is to launch fully-autonomous Drones and the
capability to predict and stage product delivery via Drone.
In the future, introduction of technologies that undermine demand for Prime Air
services (such as 3d printing), coupled with unpredictable social and political forces
may ultimately result in the decline of this technology. Amazon will likely seek to
lead that change to remain ahead of its competitors.
Change Management
Organizational Change Management
Assess Decide Implement Evaluate
(Hypothetical)
• Conduct
experiments
• Build a business
case
• Analyze
customer
demand
• Desire to
increase Prime
memberships
• Insourcing
UPS/FedEx, the
“last mile”
• Kiva Robotics
Acquisition
• Predictive
Delivery patent
• Pursue Prime
Air Drone
Delivery
• Lobbying for
regulation
• Initiate R&D
• Drone
warehouse
integration
• Implement
service
architecture
• Staging of
predictive
deliveries
• Define the
competitive
landscape
• Measure rate of
adoption
• Mine Big Drone
Data
• Benchmark
delivery times
• Track effect on
customer
satisfaction
• Report on
carbon
footprint
• Measure
impact on
Prime
memberships
Time
Performance
Incumbent
Technology
New
Technology
1
7
How will change happen: The goal of the change is to replace delivery by shipper
to delivery by drone. Organizationally this is accomplished by encapsulating the
existing shipping service, creating a new service that utilizes drones. From the
customer point of view, the change will manifest as a new shipping option.
What are the effects of the change: First is realizing the stated goal of 30 minute
delivery. This change should drive an increase in Prime enrollment, customer
satisfaction and trust as well as being environmentally friendly. By adding a new
shipping option Amazon will attract FBA customers and acquire leverage
negotiating third party shipping contracts. Vertically integrating the fulfillment
process, leveraging Drones and Kiva robots, establishes potential automation of
fulfillment operations. This will aid predictive delivery, open new markets, and
provide a wealth of real time location data.
How will change be implemented: Amazon has deployed drone related services in
a bottom up fashion in their service architecture. Development of the technology
is largely complete. Testing is currently underway in the US, UK, Austria and Israel.
Amazon has been lobbying the FAA to reform the airspace regulations to allocate
space for autonomous drones before going live.
Evaluating the change: Drone delivery has not gone live at this point, so we have
no operational data to evaluate actual performance. The FAA recently granted a
permit for autonomous crop dusting, suggesting Amazon may be one step closer to
launch in the US. On the other hand, recent changes to the US political
environment introduce additional uncertainty to the regulatory outcomes. Amazon
will likely measure the outcome and performance of the program using key metrics
such as those we’ve outlined on the table to the right.
Disruption Curves
Jones, Gareth and George, Jennifer. “Contemporary Management Ninth Edition.” McGraw Hill Education. 2016. P337
Disruption diagram: (Adler & Kapoor, 2016)
Evaluate and Design Organizational Structures and Culture
As with any new business unit this will require significant recruitment and hiring of a
diverse population of people of varying levels of skill and specialization. In context
with Prime Air this entails a few areas of specialization including Drone manufacturing
skills, piloting, maintenance, subject matter experts and legal expertise in autonomous
vehicle operations, and recruitment of leaders from the robotics and aviation
industries. Of these, one group in particular, the Drone pilots, are unique in that they
are a significant cost level for financial viability of the program.
There are two aspects to the Drone operator role that merit discussion. First, as a
heavily regulated service, these employees will be subject to a servicing and licensing
regime that may prove to be costly to manage and maintain. The FAA has set forth
certification requirements for commercial drone operators (Kopstein, 2016), and
though a nominal fee and TSA security background check is part of the certification,
Amazon will likely need a program that either certifies its employees or they’ll have to
hire talent that is already pre-certified. Second, a third party analysis (on the left,
Keeney, 2015) suggests that of the various cost levers that may influence the cost to
deliver via drone per package, increasing the number of drones per operator offers the
greatest potential for margin improvement.
As indicated by the chart to the left, the estimated cost to Amazon per Drone delivery
is $0.88. If the number of Drones managed per pilot were doubled, this cost would be
reduced almost in half to $0.52 per delivery. Conversely, if the number of Drones per
operator is reduced, the cost to deliver a package becomes prohibitive and
undermines the business model. It is for this reason we believe Amazon is advocating
for regulation of the airspace that supports their business model. Existing
technologies for hobbyist Drone operators typically require line of sight between the
pilot and the Drone. Amazon’s proposed technology solution to the FAA presupposes
the use of SAA which eliminates the need for line of sight for drone operators and
designates airspace specifically for commercial Drone operations.
(Keeney, 2015)
What risks would be associated with venturing into autonomous
delivery before consumers fully adopted the technology?
Conclusions
Strategic Recommendations
What risks would Amazon take on if it waited for another competitor
to enter the market first?
How would the retail landscape change and could Amazon change with
it?
Corporate
• Conclude vertical integration of last mile delivery capability into overarching
corporate value chain
• Continue to pursue strategy of securing consumer loyalty via Prime program
and cross selling other services
• Anticipate future drone data monetization opportunities
• Beat competitors to market to prevent service classification as a common
carrier
Business
• Press for fully autonomous sense and avoid technology (SAA)
• Actively manage the optics of social responsibility (environment)
Functional
• Establish strict data (non) retention and access standards as well as safety
protocols to ensure consumer trust and loyalty, and public safety. Set the
standard!
• Scale Kiva across entire delivery warehouse network
Amazon has three primary risks to entering the Drone delivery market prior to
broad consumer adoption. As with any new technology, significant risks with
consumer privacy and data security exist. Associated with that risk, the company
must ensure its Drones are developed in a way that considers hardware failure and
security vulnerabilities. Commensurate public safety and legal liabilities must be
addressed related to theft, property damage, and injury.
As Amazon has already invested significantly in defining the regulatory
environment for their Drone technology, allowing a competitor to enter the market
first and assume a leadership position within that debate could have a deleterious
impact on the viability of their program. There is also some risk associated with
permanent loss of market share should a competitor achieve market saturation
first. A failed competitor’s rollout could also impede adoption of drone technology
well into the future.
There are three potential competitive scenarios we believe Amazon must manage.
First, a direct, national competitor with established warehouse network, such as
Walmart, or regional variants. Second, an existing common carrier (FedEx, UPS)
differentiates their product offering to include Drone delivery, compromising
Amazon’s competitive advantage to differentiate itself in this space. Third, a
competing technology (Google, Apple, Microsoft, DJI) company seeks to license
Drone hardware and software to merchants directly. This could erode the value
proposition of their fulfillment capabilities to third party merchants as they could
bypass Amazon altogether.
We anticipate that existing economic forces will accelerate in which it will be
increasingly challenging to operate brick-and-mortar businesses. Drone delivery
service introduces a potential tidal shift in customer expectations for speedy delivery
of all products regardless of weight. Drone delivery would likely lead to additional
price depression for products that weigh less than 5 pounds. Expedited delivery is also
likely to contribute towards a cultural trend towards less driving and outright reduction
in personal automobile ownership.
References
• Adler, R., & Kapoor, R. (2016, 11). Right Tech, Wrong TIme. Retrieved from Harvard Business Review: https://hbr.org/2016/11/right-tech-wrong-time
• Amazon.com. (2015, 07). Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems. Retrieved 12 12, 2016, from Amazon.com: https://images-na.ssl-
images-amazon.com/images/G/01/112715/download/Amazon_Revising_the_Airspace_Model_for_the_Safe_Integration_of_sUAS.pdf
• Amazon.com. (2016, 12 12). Leadership Principles. Retrieved 12 12, 2016, from Amazon Jobs: https://www.amazon.jobs/principles
• Annabi, H. (2016, 09). Final Group Case Study. Retrieved 12 12, 2016, from UW Canvas: https://canvas.uw.edu/courses/1066552/files/38609781/download?wrap=1
• Batsford, S., & Dinner, M. (2013, 12 3). The Future of Drone Delivery. Calgary Sun. Retrieved from https://www.pinterest.com/pin/503136589592033051/
• Bezos, J. (1997, 04). Amazon.com 1997 Letter to Shareholders. Retrieved 12 12, 2016, from SEC.gov:
https://www.sec.gov/Archives/edgar/data/1018724/000119312513151836/d511111dex991.htm
• Jones, G., & George, J. (2016). Contemporary Management 9th Edition. McGraw Hill Education.
• Keeney, T. (2015, 05 2015). How Can Amazon Charge $1 for Drone Delivery? Retrieved 12 12, 2016, from Ark Investment Management: https://ark-invest.com/research/drone-
delivery-amazon
• Kopstein, J. (2016, 6 21). Commercial Drone Pilots Must Undergo Background Checks Under New FAA Rules. Retrieved 12 12, 2016, from Motherboard:
http://motherboard.vice.com/read/commercial-drone-pilots-must-undergo-background-checks-under-new-faa-rules
• MacAskill, E. (2015, 11 28). The NSA's bulk metadata collection authority just expired. What now? Retrieved 12 12, 2016, from The Guardian: https://www.theguardian.com/us-
news/2015/nov/28/nsa-bulk-metadata-collection-expires-usa-freedom-act
• Popper, B. (2015, 07 28). Amazon provides new details on its plan for a drone superhighway in the sky. Retrieved 12 12, 2016, from The Verge:
http://www.theverge.com/2015/7/28/9058211/amazon-new-details-plan-delivery-drone
• Streitfeld, D. (2013, 03 12). Google Concedes That Drive-By Prying Violated Privacy. Retrieved from New York Times: http://www.nytimes.com/2013/03/13/technology/google-pays-
fine-over-street-view-privacy-breach.html?_r=0
• University of Washington. (2013, 4 29). Grocery delivery service is greener than driving to the store. Retrieved 12 12, 2016, from EurekAlert!:
https://www.eurekalert.org/pub_releases/2013-04/uow-gd042613.php
• Vogels, W. (2014, 11 12). The Story of Apollo - Amazon’s Deployment Engine. Retrieved 12 12, 2016, from All Things Distributed:
http://www.allthingsdistributed.com/2014/11/apollo-amazon-deployment-engine.html
• Walker, R., & Jiwani, R. (2015). Kellogg Case Publishing. Retrieved from Northwestern University: http://www.kellogg.northwestern.edu/kellogg-case-publishing/case-search/case-
detail.aspx?caseid=%7B4E885FA4-5D1E-459B-961E-

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Amazon Prime Air - A Case Study

  • 1. A Case Study David Beckley Alex George Jeff Leonard Manjiri Kharkar Information Management 580 – University of Washington, 2016
  • 2. Amazon Prime Air – Case Study This schematic report is an analysis of the case study “Reinventing E- Commerce: Amazon’s Bet on Unmanned Vehicle Delivery” by Russell Walker and Rafique Jiwani from the Kellogg School of Management at Northwestern University, 2015. To set the stage: “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. 1” (Walker and Jiwani, 2015, p. 1) Out at the outset of this report we will provide a general overview of Amazon's business and the Prime Air service for those that are unfamiliar with them. Amazon Prime Air can be understood both as a consumer service and as a merchant product offering. In that regard there are highly differentiated strategies being employed to concurrently satisfy both external (retail consumers) and internal (Amazon Retail and FBA merchants) customers. We attempt to address both scenarios in addition to conducting a deeper exploration of specific aspects of the general and task business environments. This includes regulatory, environmental, and societal considerations followed by strategic and tactical implications arising from the product lifecycle, internal change management practices, and human resource requirements. QUESTIONS POSED BY THE CASE STUDY 1. “What risks would be associated with venturing into autonomous delivery before consumers fully adopted the technology?” 2. “What risks would Amazon take on if it waited for another competitor to enter the market first?” 3. “How would the retail landscape change and could Amazon change with it?” OUR LEARNING OBJECTIVES 1. Strategic management principles 2. Role of IT in decision making and management 3. Change management and IT change enablement 4. Organizational politics, social responsibility, and ethics 5. The role of organizations in society 6. Evaluate and design organizational structures and culture Introduction In conclusion, we will provide a series of strategic recommendations at a corporate, business, and functional level that seek to encapsulate our observations and address the questions posed by the case study. At a high level Amazon should proceed with the current trajectory of its Prime Air program with a focus on customer and revenue growth realized through loyalty to the Prime program while managing risk related to the drone technology itself, possible competitors entering the market, the optics of social responsibility, and best-in-class information security and retention policies. (Annabi, 2016) The scope of our analysis has been expanded to account for the evolution of Amazon’s drone business and the marketplace since the publication of the case study. Our analysis seeks to address the three questions posed at the end of the case study within the context of selected learning objectives of strategic management which we’ve summarized in the boxes below.
  • 3. Amazon.com Snapshot From Bezos’s 1997 letter “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. ” (Bezos, 1997) Chronology leading to Amazon Prime Air 7 The history of Amazon's business is well known. We will not spend time repeating it here. Rather, we will focus on specific events in its history that are relevant to the Prime Air business. There are a series of milestones in Amazon's history that have enabled Prime Air to come into being. This includes Formation of the Prime program in 2005 followed by creation of the FBA business model (drop shipping and merchant services), establishing AWS (providing supporting analytics and machine learning capabilities), the Kindle launch (established a core competency in consumer hardware development), formation of a network of distribution centers (enabling speedy common-carrier delivery), their reorg to a service oriented architecture (enabling operations to scale),the Kiva acquisition (providing warehouse process automation), and most recently initiation Prime Air R&D in UK/USA/Austria/Israel. In 2014, Amazon CTO Werner Vogels said, “When making the move to a service- oriented architecture, Amazon refactored its software into small independent services and restructured its organization into small autonomous teams. Each team took on full ownership of the development and operation of a single service, and they worked directly with their customers to improve it. With this clear focus and control, the teams were able to quickly produce new features.” (Vogels, 2014) Amazon's vision, as established by Jeff Bezos, has been restated in every SEC financial filing since 1997. It is illustrative of an ethos that has shaped the evolution of their business ultimately leading to the Prime Air service. Amazon engages in rapid and ongoing product differentiation and service diversification while being highly risk tolerant. Of Amazon's 12 leadership principles a subset are emblematic of the core competencies required to make Prime Air successful, such as Customer Obsession (speedy delivery), Invent and Simplify (service efficiency and automation), Thinking Big (service diversification), Bias for Action (be first to market), and Earn Trust (from customers). • Customer Obsession • Ownership • Invent and Simplify • Are Right, A Lot • Learn and Be Curious • Hire and Develop The Best • Think Big • Bias for Action • Frugality • Earn Trust • Dive Deep • Have Backbone; Disagree and Commit • Deliver Results Amazon Leadership Principles (Amazon, 2016)
  • 4. Amazon Prime Air in a Nutshell About 85% of Amazon’s orders are under five pounds Order goes to warehouse : Item is packaged and placed in Kiva Robots- smart warehouse. Product purchased : If you are within 10 miles distance from Amazon warehouse, package weighing 5 pounds or less, you can order through Amazon Prime Air 1 2 Drone picks up the order: Box comes down on the conveyor and is held on by clamps on the drone. 3 Off it goes : Using GPS coordinates to find customers, the drone drops the box off and returns to the warehouse. 4 PrimeAir 30 Minute Delivery 9 Anticipated Drone Features • Use of small drones • Delivery in 30 minutes or less • Flying below 400 feet • Drones weighing less than 55 lbs • Use of “Sense and Avoid” technology • Travel distance up to 10 miles • Designed for safety (Batsford & Dinner, 2013) Simply stated Amazon Prime is a four step process. First, products are determined to be eligible (or ineligible) for the service based on product weight and delivery distance. Second, the order is processed for fulfillment pick-pack-and-ship. Third, a drone picks of the order from the warehouse. Fourth, the drone delivers the package and places it in the designated drop zone. Prime Air is a premium service that will only be available to Amazon Prime members. Launched in 2005, Amazon Prime is a customer loyalty program originally created to offer users expedited delivery within 2 days. It builds on the overarching business strategy to establish customer loyalty through multiple product offerings and service delivery models. Since then, it has allowed Amazon to market additional services such as Amazon Video, Amazon Music, PrimeNow and others. Amazon Prime Air is a natural extension of the Prime program, further deepening the commitment to speedy delivery for its customers. It's primary value, from a consumer perspective, is to provide near-instant gratification via rapid product delivery in 30 minutes or less. Amazon estimates 85% of its current customer orders meet the shipping weight threshold of being under five pounds.
  • 5. Role of Organizations in Society – Airspace Regulation (Amazon.com, Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems, 2015, p. 2) 26 The Amazon Prime Air program has implications for the company’s stakeholders and the communities in which they will operate. As a matter of societal ethics, the company is managing the program’s implications on fairness and individual rights by taking an active role in the arena of airspace regulation. Amazon envisions the development of new airspace rules that incorporate zones for fleets of small unmanned aircraft systems (sUAS). “Segregating the airspace will buffer sUAS operations from current aviation operations. It will also buffer lesser-equipped vehicles from highly- equipped vehicles able to safely perform [beyond line of sight] BLOS missions” (Amazon.com, 2015). As seen to the right, their Airspace Design for Small Drone Operations infographic is an easy way to conceptualize their vision. However, there are potential risks the company faces by developing and launching this technology before communities are ready to adopt it. For example, the National Interagency Fire Center tracks the number of drone incursions that interrupt wildfire response operations. From 2014 there have been Y/Y increases, and while only 30 incidents were reported in 2016, a single incidence is enough to raise serious public safety concerns. A significant risk exists should Amazon and hobbyist drones encounter each other in shared airspace without clear rules to avoid collisions. What does Amazon’s vision for airspace regulation look like?
  • 6. Role of Organizations in Society – Consumer Privacy 26 Sense and Avoid, or SAA, is the technology Amazon is advocating for to achieve the fully autonomous delivery system it requires to realize its vision for Amazon Prime Air. Current technologies are primarily collaborative, meaning multiple operators must be involved for a drone’s object avoidance capability. Amazon, and numerous competitors, seek to develop non-collaborative software platforms that enable drones to become fully autonomous, operating beyond line of sight (BLOS), and avoiding objects that can’t be controlled, such as wildlife (Popper, 2015). This technology raises concerns Amazon must consider related to its data governance policies and customer privacy. Through this technology, large volumes of geospatial and possibly video footage will be captured. The necessity for protection of customers’ data will be a vital component of a successful program. Recent breaches of data privacy have put a spotlight on this issue. Edward Snowden earned international notoriety when he disclosed the bulk metadata collection program by the NSA in 2013 (MacAskill, 2015). This sparked public outcry and in 2015 the US Justice Department released a statement expiring the program. In 2013, Google paid a $7M fine in a lawsuit brought against the company’s Google Maps program in which it passively and secretly collected personal information on unencrypted wireless networks, including medical and financial records, and passwords, as mapping cars drove by (Streitfeld, 2013). To the left, we’ve outlined a number of questions we believe Amazon may consider ahead of the technology’s implementation. These highlight the needs for robust security and encryption standards, data collection and retention policies, and planning for device vulnerabilities. We also believe Amazon must consider how to ensure any data that isn’t directly relevant to the drone delivery operation isn’t retained indefinitely, and thus not vulnerable to external actors such as hackers, or even government subpoenas.  How will Amazon collect and retain information with drones?  Will data gathered from interactions with other sUAV pilots in the < 400 ft. zone be publicly available?  If Amazon’s SAA technology relies on computer vision robotics (on board cameras), do customers (and others in a delivery flight path) have a reasonable expectation to privacy?  What will the data retention policy be for metadata collected via drone deliveries? Data privacy questions
  • 7. Social Responsibility and Ethics (Walker & Jiwani, 2015, p. 17 exhibit 7) Our analysis shows that Amazon is typically accommodative of policy positions that are generally considered to be "socially responsible." Examples include Frustration Free Packaging that reduced the amount of materials in landfills, a long term commitment to powering it's business and data centers with 100% renewable energy , and implicitly reducing the carbon foot print of its AWS customers and FBA customers through service efficiencies. These highlight Amazon’s organizational emphasis on honesty, trust, integrity as well as a conscious effort to instill socially responsible normative values throughout their management team and workforce. Nonetheless, Amazon's dedication to an agenda of social responsibility is always in service to their strategic objectives, which often includes lobbying government officials and agencies to promote more accommodative legislative priorities and regulatory frameworks. In 2015 Amazon recruited former white house press secretary Jay Carney, now Amazon’s SVP for Global Corporate Affairs. As Amazon's business has grown it's spend on lobbying has increased rapidly. In the same year its Y/Y lobbying spend nearly doubled to almost $10M. In 2016 Amazon spent $210k specifically lobbying for policies accommodative to its Prime Air program. From an environmental perspective, a new study in the Journal of the Transportation Research Forum shows that ordering groceries for delivery online is actually much greener than driving to the store and buying them yourself. The study found that delivery-service trucks produced 20% to 75% less carbon dioxide than the corresponding personal vehicles driven to and from a grocery store (University of Washington, 2013). The same study indicated net carbon footprint impact of drones themselves, however, is estimated at 3-5x current impact of cargo van based delivery due to the inefficiencies of delivering individuals products one at a time via drone . Nonetheless, we can assume that this will contribute to a evolving cultural transformation in which the incidence of consumers driving to brick-and-mortar stores will significantly decrease with time. We also anticipate this will catalyze the current trend towards car-sharing programs and an overall reduction in individual car ownership. Obstructionist Defensive Accommodative Proactive Social Responsibility Low High Lobbying Expenditures 2016 YTD Expenditures: $8,6M (Prime Air: $210k; AWS: $54k) Core lobbing focuses: • Sales tax • Drone use • Computer cloud services • Cybersecurity • Welfare benefits
  • 8. Strategic Management SWOT Analysis, Amazon Prime Air Strengths • Organizational culture • Brand (Prime) • Timely, efficient delivery mechanism • Novelty & visibility of the service Weaknesses • Complex operational environment • Knowledge management • Employee attrition Opportunities • Last mile (vertical integration) • Customer loyalty • Accumulation of geospatial/environment data Threats • FAA Barriers / regulatory environment (globally) • Privacy issues • Losing Trust • Competition Inventory (Vendors) Fulfillment Distribution (DHL/FedEx etc.) FORWARD CUSTOMER & MERCHANT Traditional industry models for evaluating the economic feasibility of a product delivery business model hinge on two variables: route density and drop size. Route density equals the number of drop offs you can make on a delivery route and drop- size equals the number of parcels per stop. Higher numbers of both are preferable. Route density and drop size via Drone delivery could not be more inefficient as contrasted with other distribution methods, e.g. FedEx, UPS. Nonetheless, Amazon has multiple strategies for building a competitive advantage using Drones. In the context of Prime Air, Amazon employs a focused differentiation strategy that targets its post-sale merchant service and consumer product delivery offerings. Through this innovation (only possible because of the company’s high tolerance for risk), benefits can be realized in improved efficiency and responsiveness to customers. We believe an added benefit from this strategy is to drive increased Prime memberships and loyalty. As a long term strategy this may morph into a related diversification strategy, extending its drop shipping and fulfillment services to include new offerings to third party merchants (such as product return via drone or inbound warehouse stocking via drone). A concurrent vertical integration strategy is being employed to insource the majority of its last mile delivery capability. This will likely yield significant cost savings in the near term and provides additional leverage in negotiations with competing delivery companies (e.g. UPS and FedEx) where their services are still required. This introduces significant risks should the general business environment change, such as evolution of the FAA regulatory framework. Moreover, Amazon’s concept of Drone delivery is predicated on having a distribution network and a large volume of inventory to fulfill using this mechanism. There is a potential competing business model in which Drone delivery is sold as a service to traditional online merchants and brick-and-mortar businesses who desire a speedy delivery offering for their customers but do not want to sell their product on Amazon. This would likely arise from a logical, technology competitor such as Google or Apple who may seek to develop and license Drone technology to traditional retailers. Amazon Prime Air Forward Vertical Integration
  • 9. Role of IT in Decision Making Embryonic Stage Growth Stage Maturity Stage Decline Stage • Build the drones • Build the SAA tech • Train human pilots • Build warehouse integration • Conduct UX and UAT • Advancement in battery life / range • Scaling Kiva across all warehouses • Growth in distribution center network • Launch fully autonomous drones • Predictive delivery and analytics • Product delivered via teleporter • Localized 3D printing of any product • Personal hyperloops Time Demand Amazon Prime Air – Product Lifecycle (Projected) Jones, Gareth and George, Jennifer. “Contemporary Management Ninth Edition.” McGraw Hill Education. 2016. P. 538 – 543. Amazon will deploy the Drone technology within their existing IT ecosystem and infrastructure. We anticipate this will require integration with customer ordering, fulfillment, and triage and incident resolution systems at a minimum. Given the structure of software development teams within Amazon, the supporting Drone IT systems would likely be developed and supported within the Prime Air development team as opposed to a centralized team. Care would have to be taken across product management teams to ensure a seamless customer user experience is achieved. An important factor for successful deployment of any IT system is that it provides the management team with useful information (Jones & George, 2016, pp. 538- 543) . Our analysis suggests Amazon’s development of SAA technology establishes a new core competency that enables a competitive advantage. Development of Drone and SAA technology supports Amazon’s corporate strategy of forward vertical integration of order distribution while expanding the scope of and enhancing the Amazon Prime brand. Once the drone technology has been built and deployed, we anticipate a period of iterative development leading to advancement of battery life and Drone range. To enable rapid delivery, Amazon may scale its Kiva operations across all Drone enabled warehouses, while continuing to expand its distribution center network into new locations with significant population densities reachable by Drone. As the technology matures, Amazon’s plan is to launch fully-autonomous Drones and the capability to predict and stage product delivery via Drone. In the future, introduction of technologies that undermine demand for Prime Air services (such as 3d printing), coupled with unpredictable social and political forces may ultimately result in the decline of this technology. Amazon will likely seek to lead that change to remain ahead of its competitors.
  • 10. Change Management Organizational Change Management Assess Decide Implement Evaluate (Hypothetical) • Conduct experiments • Build a business case • Analyze customer demand • Desire to increase Prime memberships • Insourcing UPS/FedEx, the “last mile” • Kiva Robotics Acquisition • Predictive Delivery patent • Pursue Prime Air Drone Delivery • Lobbying for regulation • Initiate R&D • Drone warehouse integration • Implement service architecture • Staging of predictive deliveries • Define the competitive landscape • Measure rate of adoption • Mine Big Drone Data • Benchmark delivery times • Track effect on customer satisfaction • Report on carbon footprint • Measure impact on Prime memberships Time Performance Incumbent Technology New Technology 1 7 How will change happen: The goal of the change is to replace delivery by shipper to delivery by drone. Organizationally this is accomplished by encapsulating the existing shipping service, creating a new service that utilizes drones. From the customer point of view, the change will manifest as a new shipping option. What are the effects of the change: First is realizing the stated goal of 30 minute delivery. This change should drive an increase in Prime enrollment, customer satisfaction and trust as well as being environmentally friendly. By adding a new shipping option Amazon will attract FBA customers and acquire leverage negotiating third party shipping contracts. Vertically integrating the fulfillment process, leveraging Drones and Kiva robots, establishes potential automation of fulfillment operations. This will aid predictive delivery, open new markets, and provide a wealth of real time location data. How will change be implemented: Amazon has deployed drone related services in a bottom up fashion in their service architecture. Development of the technology is largely complete. Testing is currently underway in the US, UK, Austria and Israel. Amazon has been lobbying the FAA to reform the airspace regulations to allocate space for autonomous drones before going live. Evaluating the change: Drone delivery has not gone live at this point, so we have no operational data to evaluate actual performance. The FAA recently granted a permit for autonomous crop dusting, suggesting Amazon may be one step closer to launch in the US. On the other hand, recent changes to the US political environment introduce additional uncertainty to the regulatory outcomes. Amazon will likely measure the outcome and performance of the program using key metrics such as those we’ve outlined on the table to the right. Disruption Curves Jones, Gareth and George, Jennifer. “Contemporary Management Ninth Edition.” McGraw Hill Education. 2016. P337 Disruption diagram: (Adler & Kapoor, 2016)
  • 11. Evaluate and Design Organizational Structures and Culture As with any new business unit this will require significant recruitment and hiring of a diverse population of people of varying levels of skill and specialization. In context with Prime Air this entails a few areas of specialization including Drone manufacturing skills, piloting, maintenance, subject matter experts and legal expertise in autonomous vehicle operations, and recruitment of leaders from the robotics and aviation industries. Of these, one group in particular, the Drone pilots, are unique in that they are a significant cost level for financial viability of the program. There are two aspects to the Drone operator role that merit discussion. First, as a heavily regulated service, these employees will be subject to a servicing and licensing regime that may prove to be costly to manage and maintain. The FAA has set forth certification requirements for commercial drone operators (Kopstein, 2016), and though a nominal fee and TSA security background check is part of the certification, Amazon will likely need a program that either certifies its employees or they’ll have to hire talent that is already pre-certified. Second, a third party analysis (on the left, Keeney, 2015) suggests that of the various cost levers that may influence the cost to deliver via drone per package, increasing the number of drones per operator offers the greatest potential for margin improvement. As indicated by the chart to the left, the estimated cost to Amazon per Drone delivery is $0.88. If the number of Drones managed per pilot were doubled, this cost would be reduced almost in half to $0.52 per delivery. Conversely, if the number of Drones per operator is reduced, the cost to deliver a package becomes prohibitive and undermines the business model. It is for this reason we believe Amazon is advocating for regulation of the airspace that supports their business model. Existing technologies for hobbyist Drone operators typically require line of sight between the pilot and the Drone. Amazon’s proposed technology solution to the FAA presupposes the use of SAA which eliminates the need for line of sight for drone operators and designates airspace specifically for commercial Drone operations. (Keeney, 2015)
  • 12. What risks would be associated with venturing into autonomous delivery before consumers fully adopted the technology? Conclusions Strategic Recommendations What risks would Amazon take on if it waited for another competitor to enter the market first? How would the retail landscape change and could Amazon change with it? Corporate • Conclude vertical integration of last mile delivery capability into overarching corporate value chain • Continue to pursue strategy of securing consumer loyalty via Prime program and cross selling other services • Anticipate future drone data monetization opportunities • Beat competitors to market to prevent service classification as a common carrier Business • Press for fully autonomous sense and avoid technology (SAA) • Actively manage the optics of social responsibility (environment) Functional • Establish strict data (non) retention and access standards as well as safety protocols to ensure consumer trust and loyalty, and public safety. Set the standard! • Scale Kiva across entire delivery warehouse network Amazon has three primary risks to entering the Drone delivery market prior to broad consumer adoption. As with any new technology, significant risks with consumer privacy and data security exist. Associated with that risk, the company must ensure its Drones are developed in a way that considers hardware failure and security vulnerabilities. Commensurate public safety and legal liabilities must be addressed related to theft, property damage, and injury. As Amazon has already invested significantly in defining the regulatory environment for their Drone technology, allowing a competitor to enter the market first and assume a leadership position within that debate could have a deleterious impact on the viability of their program. There is also some risk associated with permanent loss of market share should a competitor achieve market saturation first. A failed competitor’s rollout could also impede adoption of drone technology well into the future. There are three potential competitive scenarios we believe Amazon must manage. First, a direct, national competitor with established warehouse network, such as Walmart, or regional variants. Second, an existing common carrier (FedEx, UPS) differentiates their product offering to include Drone delivery, compromising Amazon’s competitive advantage to differentiate itself in this space. Third, a competing technology (Google, Apple, Microsoft, DJI) company seeks to license Drone hardware and software to merchants directly. This could erode the value proposition of their fulfillment capabilities to third party merchants as they could bypass Amazon altogether. We anticipate that existing economic forces will accelerate in which it will be increasingly challenging to operate brick-and-mortar businesses. Drone delivery service introduces a potential tidal shift in customer expectations for speedy delivery of all products regardless of weight. Drone delivery would likely lead to additional price depression for products that weigh less than 5 pounds. Expedited delivery is also likely to contribute towards a cultural trend towards less driving and outright reduction in personal automobile ownership.
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