It takes a village to make a laptop.

The New York Times today report that Amazon will expand its program called Fulfillment by Amazon which allows independent sellers to use its network of distribution centers to fill their orders. Up to now, it was available only for sellers who listed their products on Amazon but they are expanding it to independent sellers everywhere, even eBay.

Amazon’s distribution system, with more than 20 giant warehouses and a well kept secret inventory management system, is something that the company is very proud of. But they also recognize that in today’s world, it’s just another service that can be made leveraged to create revenue outside of Amazon’s own core operations. Sure, they may be making it easier for some sellers who list their products on competitor sites (like eBay) to sell their stuff and in that way increasing their competitors’ business and profits. But they also know that these are sellers who would have sold their products on the competitors’ sites anyway. Instead of trying to hijack sellers by making it mandatory to list items on Amazon in order to use Fulfillment by Amazon, they are letting them sell anywhere they want and they are making money by providing them with a service they already know how to do very well.

In today’s highly networked business environment, this is only a sign of things to come. It will become less and less possible for companies to maintain their competitive advantage by producing and bundling all their services within themselves. Instead, market mechanisms will prevail and more and more services that were traditionally kept within a company will be bought and sold in a networked market environment. So, what will be left of the traditional company, you ask? Well, things like the end physical product (the toaster, the TV, the car) with its brand will be what the company is all about. Same thing with the end service product (the marketing campaign, the tax preparation). But how that final product or service is put together and delivered, where the parts come from, who coordinates the activities, and so on will all increasingly be coming from outside the companies.

The reason is simple: lower transaction costs. These are the costs of search and coordination which in a highly integrated and networked environment decrease dramatically. It has become easier to go out into the market and outsource a service that up to now had to be done inhouse. The result can be lower cost and higher quality, especially since this service can now be provided by another company that specializes in it (hence the higher quality) and can take advantage of economies of scale (hence the lower price). That’s exactly what Amazon is providing with the service of order fulfillment.

 This isn’t speculative fiction by the way. This is happening right now. By the time your customize Dell laptop arrives at your doorstep, dozens of companies have contributed with parts, knowledge, labor, and delivery services to get it there. It didn’t all get produced in a giant Dell factory from beginning to end.

Can Amazon do no wrong?

Amazon released its earnings report yesterday and things are going well for Bezos and co. Amazon’s quarterly profit increased 38 percent, to $145 million, compared with $106 million in the period last year.

Amazon is such an interesting case study on running a business, online or offline. They’ve done so many things right (and quite a few things wrong), I could usually spend a whole class session, if not more, just talking about them.

First, they started with the right product: books. They are a commodity of uniform value, an information-intensive product that benefits from the research-friendly web, easy to ship, and universally in demand. Not to mention, that in the early days of e-commerce, before everyone went online, those who would buy anything online were more likely to be big readers: geeks and heavy computer users.

So, using the right product, Amazon quickly built a very strong brand. In fact, Amazon’s brand is so strong, that when I say the word Amazon out of context in any conversation, I would bet that close to 100% of those who hear me will think of Amazon.com and not the Amazon river or rainforest.

But Jeff Bezos didn’t stop there. Against all odds and against all rational advice, he went on to expand Amazon in breadth and create a giant department store that now sells virtually everything under the sun, from books and cds to computing infrastructure to other companies, something called Amazon Web Services (hey, if you’ve spent millions building an amazing infrastructure, why not make money by farming it out?).

Things weren’t always good. Amazon came close to collapsing many times and it seemed that the dotcom’s golden child would follow all the other failed e-businesses when Bezos had another great idea. He figured that people were reluctant to buy things online from Amazon because shipping and handling fees made them too expensive. So, why not ship products for free for all purchases above $25? Keep in mind that the “handling” part of those fees is a large source of revenue for all companies that ship products.

The results were dramatic. Sales shot up and Amazon became profitable again. Why? Well, I can tell you from my own personal shopping experience that very often I go to Amazon to buy something and I fall short of the $25. What do I do? I buy one or two more things to get me above $25 and save the s&h costs. This translates into a lot more in profit for Amazon than if they had charged me for s&h. Don’t forget that a company like Amazon that ships millions of products gets very big discounts from the delivery services it uses.

Last year Bezos went a step further. With Amazon Prime, he offered second-day delivery for most products for $79 a year. Again, there were doubts all around (including from me). But it seems that Bezos can do no wrong. These new earnings show that the program has most likely been a big success.

Amazon’s innovations go beyond pricing their products and services. It was one of the first to provide XML feeds of their product pages and allow third parties to use those feeds in applications that can be used by anyone to gather and compare product information. This created an entire ecosystem of service businesses around Amazon’s market. It is also one of the major “incubators” of small businesses (eBay is the other one), with its Amazon Marketplace, where thousands of small businesses can sell goods that directly compete with Amazon’s own, while, of course, paying fees and commissions to Amazon.

I could go on and on but I’ll stop here. For all students of business, Amazon is an example of vision, innovation, effective strategic use of IT, and calculated risk.