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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
The scope of our analysis has been expanded to account for the evolution of Amazons
This schematic report is an analysis of the case study Reinventing E- drone business and the marketplace since the publication of the case study. Our
Commerce: Amazons Bet on Unmanned Vehicle Delivery by Russell Walker analysis seeks to address the three questions posed at the end of the case study within
and Rafique Jiwani from the Kellogg School of Management at Northwestern the context of selected learning objectives of strategic management which weve
University, 2015. summarized in the boxes below.

To set the stage: In a December 1, 2013, interview on American television QUESTIONS POSED BY THE CASE STUDY
program 60 Minutes, Amazon CEO Jeff Bezos announced that Amazon would 1. What risks would be associated with venturing into autonomous delivery
soon change the future of online shopping by enabling customers to receive before consumers fully adopted the technology?
items within thirty minutes of ordering. This delivery service, Bezos said, would 2. What risks would Amazon take on if it waited for another competitor to
be powered by unmanned autonomous drones and could be offered as soon enter the market first?
as 2015. The market reaction was instantaneous and positive. 1 (Walker and 3. How would the retail landscape change and could Amazon change with it?
Jiwani, 2015, p. 1)
Out at the outset of this report we will provide a general overview of Amazon's (Annabi, 2016)
1. Strategic management principles
business and the Prime Air service for those that are unfamiliar with them.
2. Role of IT in decision making and management
Amazon Prime Air can be understood both as a consumer service and as a
3. Change management and IT change enablement
merchant product offering. In that regard there are highly differentiated
4. Organizational politics, social responsibility, and ethics
strategies being employed to concurrently satisfy both external (retail
5. The role of organizations in society
consumers) and internal (Amazon Retail and FBA merchants) customers. We
6. Evaluate and design organizational structures and culture
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 In conclusion, we will provide a series of strategic recommendations at a corporate,
by strategic and tactical implications arising from the product lifecycle, internal business, and functional level that seek to encapsulate our observations and address
change management practices, and human resource requirements. 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.
Amazon.com Snapshot 7

Chronology leading to Amazon Prime Air 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

From Bezoss 1997 letter

Our goal is to move quickly to solidify and extend our current position
The history of Amazon's business is well known. We will not spend time repeating while we begin to pursue opportunities in other areas. We see substantial
it here. Rather, we will focus on specific events in its history that are relevant to the opportunity in the markets we are targeting. This strategy is not without
Prime Air business. There are a series of milestones in Amazon's history that have risk: it requires serious investment and crisp execution. (Bezos, 1997)
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 Of Amazon's 12 leadership principles a subset are emblematic of the core
consumer hardware development), formation of a network of distribution centers competencies required to make Prime Air successful, such as Customer Obsession
(enabling speedy common-carrier delivery), their reorg to a service oriented (speedy delivery), Invent and Simplify (service efficiency and automation), Thinking Big
architecture (enabling operations to scale),the Kiva acquisition (providing (service diversification), Bias for Action (be first to market), and Earn Trust (from
warehouse process automation), and most recently initiation Prime Air R&D in customers).

In 2014, Amazon CTO Werner Vogels said, When making the move to a service- Amazon Leadership Principles
oriented architecture, Amazon refactored its software into small independent Customer Obsession Hire and Develop The Earn Trust
services and restructured its organization into small autonomous teams. Each team Ownership Best Dive Deep
took on full ownership of the development and operation of a single service, and Invent and Simplify Think Big Have Backbone;
they worked directly with their customers to improve it. With this clear focus and Are Right, A Lot Bias for Action Disagree and Commit
control, the teams were able to quickly produce new features. (Vogels, 2014) Learn and Be Curious Frugality Deliver Results
(Amazon, 2016)
Amazon Prime Air in a Nutshell

Simply stated Amazon Prime is a four step process. First, products are determined Amazon Prime Air is a natural extension of the Prime program, further deepening the
to be eligible (or ineligible) for the service based on product weight and delivery commitment to speedy delivery for its customers. It's primary value, from a consumer
distance. Second, the order is processed for fulfillment pick-pack-and-ship. Third, a perspective, is to provide near-instant gratification via rapid product delivery in 30
drone picks of the order from the warehouse. Fourth, the drone delivers the minutes or less. Amazon estimates 85% of its current customer orders meet the
package and places it in the designated drop zone. shipping weight threshold of being under five pounds.

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 PrimeAir 30 Minute Delivery 9
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, 1 About 85% of
Product Amazons orders are
PrimeNow and others.
purchased : under five pounds Off it goes :
If you are within Using GPS
Anticipated Drone Features 10 miles distance coordinates to
from Amazon 2 3 find customers,
Use of small drones warehouse, the drone drops
Order goes to Drone picks up
Delivery in 30 minutes or less package weighing the box off and
warehouse : the order: Box
Flying below 400 feet 5 pounds or less, returns to the
Item is packaged comes down on
Drones weighing less than 55 lbs you can order warehouse.
and placed in the conveyor and
Use of Sense and Avoid technology through Amazon Kiva Robots- is held on by
Travel distance up to 10 miles Prime Air smart clamps on the
Designed for safety warehouse. drone.
(Batsford & Dinner, 2013)
Role of Organizations in Society Airspace Regulation

The Amazon Prime Air program has implications for the

companys stakeholders and the communities in which
they will operate. As a matter of societal ethics, the What does Amazons vision for airspace regulation look like?
company is managing the programs 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 (Amazon.com, Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems, 2015, p. 2)
hobbyist drones encounter each other in shared airspace
without clear rules to avoid collisions.
Role of Organizations in Society Consumer Privacy

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 drones 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 cant 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 companys Google Maps program in which
it passively and secretly collected personal information on unencrypted wireless
Data privacy questions networks, including medical and financial records, and passwords, as mapping cars
How will Amazon collect and retain information with drones? drove by (Streitfeld, 2013). To the left, weve outlined a number of questions we
Will data gathered from interactions with other sUAV pilots in believe Amazon may consider ahead of the technologys implementation. These
the < 400 ft. zone be publicly available? highlight the needs for robust security and encryption standards, data collection and
If Amazons SAA technology relies on computer vision robotics retention policies, and planning for device vulnerabilities. We also believe Amazon
(on board cameras), do customers (and others in a delivery must consider how to ensure any data that isnt directly relevant to the drone delivery
flight path) have a reasonable expectation to privacy? operation isnt retained indefinitely, and thus not vulnerable to external actors such as
What will the data retention policy be for metadata collected hackers, or even government subpoenas.
via drone deliveries?
Social Responsibility and Ethics
Social Responsibility 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
Obstructionist Defensive Accommodative Proactive
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 Amazons organizational emphasis on
honesty, trust, integrity as well as a conscious effort to instill socially responsible
Low High normative values throughout their management team and workforce.

Nonetheless, Amazon's dedication to an agenda of social responsibility is always in

Lobbying Expenditures service to their strategic objectives, which often includes lobbying government officials
and agencies to promote more accommodative legislative priorities and regulatory
2016 YTD Expenditures: $8,6M (Prime Air: $210k; AWS: $54k) frameworks. In 2015 Amazon recruited former white house press secretary Jay Carney,
now Amazons 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.

Core lobbing focuses: From an environmental perspective, a new study in the Journal of the Transportation
Sales tax Research Forum shows that ordering groceries for delivery online is actually much
Drone use greener than driving to the store and buying them yourself. The study found that
Computer cloud services delivery-service trucks produced 20% to 75% less carbon dioxide than the
Cybersecurity corresponding personal vehicles driven to and from a grocery store (University of
Welfare benefits 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
(Walker & Jiwani, 2015, p. 17 exhibit 7) 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
Strategic Management
Traditional industry models for evaluating the economic feasibility of a product
delivery business model hinge on two variables: route density and drop size. Route SWOT Analysis, Amazon Prime Air
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 Strengths Weaknesses
contrasted with other distribution methods, e.g. FedEx, UPS. Nonetheless, Amazon Organizational culture Complex operational
has multiple strategies for building a competitive advantage using Drones. Brand (Prime) environment
Timely, efficient delivery Knowledge management
In the context of Prime Air, Amazon employs a focused differentiation strategy that mechanism Employee attrition
targets its post-sale merchant service and consumer product delivery offerings. Novelty & visibility of the
Through this innovation (only possible because of the companys high tolerance for service
risk), benefits can be realized in improved efficiency and responsiveness to
customers. We believe an added benefit from this strategy is to drive increased Opportunities Threats
Prime memberships and loyalty. As a long term strategy this may morph into a Last mile (vertical integration) FAA Barriers / regulatory
related diversification strategy, extending its drop shipping and fulfillment services Customer loyalty environment (globally)
to include new offerings to third party merchants (such as product return via drone Accumulation of Privacy issues
or inbound warehouse stocking via drone). geospatial/environment data Losing Trust
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 Amazon Prime Air Forward Vertical Integration
required. This introduces significant risks should the general business environment FORWARD
change, such as evolution of the FAA regulatory framework. Moreover, Amazons
concept of Drone delivery is predicated on having a distribution network and a Distribution
Inventory CUSTOMER &
large volume of inventory to fulfill using this mechanism. There is a potential Fulfillment (DHL/FedEx
(Vendors) MERCHANT
competing business model in which Drone delivery is sold as a service to traditional etc.)
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.
Role of IT in Decision Making
Amazon will deploy the Drone technology within their existing IT ecosystem and
infrastructure. We anticipate this will require integration with customer ordering, Amazon Prime Air Product Lifecycle (Projected)
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 Embryonic Stage Growth Stage Maturity Stage Decline Stage
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 Build the drones Advancement in Launch fully Product
is achieved. Build the SAA battery life / autonomous delivered via
tech range drones teleporter
An important factor for successful deployment of any IT system is that it provides Train human Scaling Kiva Predictive Localized 3D
the management team with useful information (Jones & George, 2016, pp. 538- pilots across all delivery and printing of any
543) . Our analysis suggests Amazons development of SAA technology establishes Build warehouse warehouses analytics product
a new core competency that enables a competitive advantage. Development of Growth in Personal

Drone and SAA technology supports Amazons corporate strategy of forward Conduct UX and distribution hyperloops
vertical integration of order distribution while expanding the scope of and UAT center network
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, Amazons 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 Time
lead that change to remain ahead of its competitors.
Jones, Gareth and George, Jennifer. Contemporary Management Ninth Edition. McGraw Hill Education. 2016. P. 538 543.
Change Management
How will change happen: The goal of the change is to replace delivery by shipper Organizational Change Management
to delivery by drone. Organizationally this is accomplished by encapsulating the
existing shipping service, creating a new service that utilizes drones. From the Assess Decide Implement Evaluate
customer point of view, the change will manifest as a new shipping option. (Hypothetical)
Conduct Insourcing Initiate R&D Measure rate of
What are the effects of the change: First is realizing the stated goal of 30 minute experiments UPS/FedEx, the Drone adoption
delivery. This change should drive an increase in Prime enrollment, customer Build a business last mile warehouse Mine Big Drone
satisfaction and trust as well as being environmentally friendly. By adding a new case Kiva Robotics integration Data
shipping option Amazon will attract FBA customers and acquire leverage Analyze Acquisition Implement Benchmark
negotiating third party shipping contracts. Vertically integrating the fulfillment customer Predictive service delivery times
process, leveraging Drones and Kiva robots, establishes potential automation of demand Delivery patent architecture Track effect on
fulfillment operations. This will aid predictive delivery, open new markets, and Desire to Pursue Prime Staging of customer

provide a wealth of real time location data. increase Prime Air Drone predictive satisfaction
memberships Delivery deliveries
How will change be implemented: Amazon has deployed drone related services in Lobbying for Define the
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.
regulation competitive New
Amazon has been lobbying the FAA to reform the airspace regulations to allocate Technology
space for autonomous drones before going live.

Evaluating the change: Drone delivery has not gone live at this point, so we have Report on
no operational data to evaluate actual performance. The FAA recently granted a carbon
permit for autonomous crop dusting, suggesting Amazon may be one step closer to Incumbent footprint
launch in the US. On the other hand, recent changes to the US political Disruption Curves
environment introduce additional uncertainty to the regulatory outcomes. Amazon
Technology Measure
impact on
will likely measure the outcome and performance of the program using key metrics
1 Prime
such as those weve outlined on the table to the right. 7

Jones, Gareth and George, Jennifer. Contemporary Management Ninth Edition. McGraw Hill Education. 2016. P337
Disruption diagram: (Adler & Kapoor, 2016) Time
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 theyll 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
(Keeney, 2015) 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. Amazons 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.
What risks would be associated with venturing into autonomous How would the retail landscape change and could Amazon change with
delivery before consumers fully adopted the technology? it?
Amazon has three primary risks to entering the Drone delivery market prior to We anticipate that existing economic forces will accelerate in which it will be
broad consumer adoption. As with any new technology, significant risks with increasingly challenging to operate brick-and-mortar businesses. Drone delivery
consumer privacy and data security exist. Associated with that risk, the company service introduces a potential tidal shift in customer expectations for speedy delivery
must ensure its Drones are developed in a way that considers hardware failure and of all products regardless of weight. Drone delivery would likely lead to additional
security vulnerabilities. Commensurate public safety and legal liabilities must be price depression for products that weigh less than 5 pounds. Expedited delivery is also
addressed related to theft, property damage, and injury. likely to contribute towards a cultural trend towards less driving and outright reduction
in personal automobile ownership.
What risks would Amazon take on if it waited for another competitor
to enter the market first? Strategic Recommendations
As Amazon has already invested significantly in defining the regulatory Corporate
environment for their Drone technology, allowing a competitor to enter the market Conclude vertical integration of last mile delivery capability into overarching
first and assume a leadership position within that debate could have a deleterious corporate value chain
impact on the viability of their program. There is also some risk associated with Continue to pursue strategy of securing consumer loyalty via Prime program
permanent loss of market share should a competitor achieve market saturation and cross selling other services
first. A failed competitors rollout could also impede adoption of drone technology Anticipate future drone data monetization opportunities
well into the future. Beat competitors to market to prevent service classification as a common
There are three potential competitive scenarios we believe Amazon must manage. Business
First, a direct, national competitor with established warehouse network, such as Press for fully autonomous sense and avoid technology (SAA)
Walmart, or regional variants. Second, an existing common carrier (FedEx, UPS) Actively manage the optics of social responsibility (environment)
differentiates their product offering to include Drone delivery, compromising Functional
Amazons competitive advantage to differentiate itself in this space. Third, a Establish strict data (non) retention and access standards as well as safety
competing technology (Google, Apple, Microsoft, DJI) company seeks to license protocols to ensure consumer trust and loyalty, and public safety. Set the
Drone hardware and software to merchants directly. This could erode the value standard!
proposition of their fulfillment capabilities to third party merchants as they could Scale Kiva across entire delivery warehouse network
bypass Amazon altogether.

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