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.

eBay: The other golden child.

In my previous post, I wrote about Amazon and how innovative and daring it is in its strategic moves. However, there’s another company that has been equally impressive: eBay. The other golden child of the dotcom era is also a case study on doing things well (and some not so well).

First, eBay was a marvellous idea to begin with. Auctions are a great price discovery mechanism, because in theory the seller gets the highest price anyone is willing to pay for their product and the buyer gets the product for a price that is either at or below what they want to pay for it. I say, in theory, because auctions need to have a critical mass of buyers to really work. In the physical world, the problem was always getting all the potential buyers in one place at the same time. So, they were limited to art and collectibles, livestock, impounded cars, and so on.

eBay’s founder realized that he could use the web as a virtual meeting place for auctions. So, as long as someone could go online, they could be “present” at an auction. He also recognized that people sell their own things all the time. One person’s trash is another person’s treasure. Putting the two together, eBay created the largest auction based garage sale in the world.

This was an amazing business model. eBay carries no inventory. All it does is match buyers and sellers through an online auction and charge small fees and commission for sales made. Theoretically, it was profitable from day one.

So, the first lesson from eBay is recognizing the potential of IT to create new business models. Sometimes, those business models are extensions of models that have existed for a long time (as in the case of auctions). It’s all about leveraging the technology to enable new or improved business models which may simply provide marginally additional business value, but additional nevertheless.

The second lesson is in what eBay has done since their hugely successful online auction business took off. As this recent article in Business Week describes:

Since shelling out $1.5 billion in 2002 to acquire online payment processor PayPal, eBay (EBAY) has aggressively expanded into areas well beyond its core business of charging people fees to auction off goods via the Internet. Over the last five years, a spate of acquisitions—some of which are just now generating significant profits—has made the company into something of an enigma. EBay is a Web auctioneer. It’s an online payment processor and bank of sorts (PayPal). It’s a ticket seller (StubHub). It’s a global Internet telephone service (Skype). It’s a classified ad service (Kijiji).

Now eBay is said to be moving into the social search business. Tech industry blogs such as GigaOm and TechCrunch are buzzing that eBay is in talks to acquire StumbleUpon, a popular site that lets users find other Web sites based on their interests and the recommendations of others. Both eBay and StumbleUpon declined comment.

As far as I’m concerned, that’s not an enigma. It’s a basic concept that every MBA student learns on day 1 in B-school. It’s called: diversification.

In this case, it’s what I would call integrated diversification. The different acquisition and areas in which eBay has expanded are not only related, they are very complimentary to their basic core activity: online auctions. eBay customers can pay with PayPal and communicate with each other using Skype to talk about products bought and sold. The uses for StubHub, Kijiji, and StumbleUpon are less obvious. They are all market makers, just like eBay. They create markets for tickets, all types of services through classified ads, and information/websites respectively.

Not that much of an enigma after all, is it?