“There is still a lot of stuff to invent. There are still many things that need to happen. Somehow it's still day one." Jeff Bezos
Letters from Seattle
As we said in a recent post, Jeff Bezos' letter to shareholders, which accompanies Amazon's annual report, is a very important document for understanding the evolution of the e-commerce giant's strategies since its listing on the stock exchange in 1997 to today. These letters, in their essentiality and terseness, are a small masterpiece of institutional communication and deserve to become a teaching subject in business schools around the world.
What is most striking in these documents from a few folders is the consistency of Amazon's vision over the course of 20 years. As Bezos likes to say, at the end of each of his letters, to which he always attaches the letter sent back in 2007, Amazon is always the same as the first day of its existence. It is simply implementing the program outlined by its founder on his founding day, Day 1, as Bezos calls it. Let's see them.
The long term
In the 1997 letter, already at the beginning, Bezos clearly outlined Amazon's first founding principle: "It's All About the Long Term". On this specific point, the founder of Amazon returned massively in his 2004 letter, entirely dedicated to explaining to shareholders the reason why Amazon has no other alternative than to operate within a long-term strategy. In the new economy landscape, the only strategy that can create lasting shareholder value is the ability to become a market leader. Only by being the market leader can the "network effect" develop, a powerful, unstoppable and spontaneous phenomenon that leads to the formation of new types of monopolies. This objective can only be achieved by operating with a long-term vision.
Here is what Bezos wrote already in 1997:
“We believe the primary measure of our success is the long-term shareholder value we create. This value will be a direct result of our ability to extend and consolidate our current position as market leader. The stronger our market position becomes, the more the power of our economic model grows. Being a market leader means producing higher revenues, higher profitability, greater capital velocity and, as a final consequence, better returns on invested capital. Focusing on the long term is therefore a fundamental necessity for an initiative that intends to innovate or that wants to grow through innovation. This is the only approach that allows you to experience and bear, in the short term, the effects of probable failures inherent in an innovative-experimental approach to completely new markets. “Failure is an integral part of innovation, it's not an option”. Innovating within a long-term operating framework also reduces the impact of equity fluctuations on business decision-making processes. In the short term the stock market is a deafening megaphone, in the long term it is a piped symphony. Finally, the long-term tends to align the interests of customers with those of shareholders, a difficult operation to achieve as the two clusters tend to be contrasting”.
Innovate without fear of consequences
Bezos writes again in the letter of 1997:
“We will be making bold, rather than prudent, investment decisions where we see opportunities to gain market position. Some of these investments will work, some won't, in any case we would have learned a valuable lesson from both situations ".
The three services that make up Amazon's revenue engine—The Marketplace, the Prime program, and AWS (Amazon Web Service)—were born of daring experimentation. The Marketplace was Amazon's first sensational failure and only later did the e-commerce giant find the right step to make this service work. Prime was a huge gamble, initially opposed by shareholders, due to its high costs and depressing short-term margin consequences. Finally, AZW was the most daring experiment: making your technology and big data infrastructure available to third parties requires a real mental reversal of all business parameters.
To criticism leveled at Amazon for its insensitive approach to the expectations of shareholders who put their money into the company, Bezos replies:
“Proactively making customers happy earns us trust, which in turn increases purchases by those customers, even in new business areas. By innovating and taking a long-term view, the interests of customers and shareholders will align."
And here we come to the second founding principle of Amazon, the customer first: "Customer first". A cri de guerre coined many years before it became the vector of Donald Trump's success on the American political scene.
Customer obsession
There are many ways to build a company's business: it can be based on the competition, on the product, on the technology, on the business model or on the customer. From the beginning, Amazon's goal has been to build the most customer-centric company in the world. The second chapter of the 1997 letter is titled "Customer Obsessed." Bezos writes:
“Word of mouth remains the most powerful tool for acquiring new customers and increasing our market share. We are grateful to customers who have responded with confidence in us. Repeat purchases and word of mouth have helped make Amazon the market leader in online book sales.”
In the diagram above that counts the occurrences of the keywords in the 2016 letter, as can be seen from a computational examination of it, after 20 years, you continue to be central to Amazon's operational scheme. The word "customer" is mentioned 16 times, the words "shareholder", "profit" and "return" are never mentioned. Precisely because the customer determines the market position, Amazon has modeled its commercial proposition on maximizing the shopping experience. Returning customers bring more.
Under this approach, Amazon's growth occurred in two ways. One, let's say, spiral: Amazon has extended the methodologies and practices acquired with the book trade to ever new product categories. At the same time, it built the tangible and intangible infrastructure necessary to support this expansion. Its activity has thus extended to logistics, sorting centers, data centers, cloud computing. He has carried out this strategy incrementally with intelligence, patience, diligence and sheer determination.
The second growth model could be defined as large leaps. To pursue customers, Amazon has ventured into initiatives very far from e-commerce, but very close to the questions and needs of consumers conveyed by their shopping experience. Jeff Bezos himself explains Amazon's growth model based solely on the customer.
Companies can expand in two different ways — says the founder of Amazon. One is to outward develop your internal skills and ask yourself, “What else can we do with these?” It is an approach that sees a purely quantitative extension. Another way is to start with the customers' needs and look back inward. You observe your customers' behavior and ask yourself "What are their needs and how can I satisfy them even if this means developing skills that I don't have?".
The Kindle is an example of the latter approach. We have a large customer base who love to read. What can we do to make reading even easier, even if it requires developing new ideas? To do this, you need to get out of your own field and go and look for people who have skills in the field of industrial design, hardware and software production and so on. If you start with the clientele, and then work internally to meet their needs, then you need to think and work long-term, forget about short-term results.
Develop the machine of the invention
To maintain and develop the invention machine, it must always be "day one" at Amazon. “Day two” is stagnation, irrelevance, decline and finally death. Bezos claims to have thought about this issue for a long time: how is it possible to avoid the advent of "day two"? With which techniques and tactics can the vitality of the first day be maintained even within a large organization?
The first ingredient of the recipe for staying as young as the first day is to avoid delegation and the risk of remaining trapped in procedures. Each necessary process is not an end in itself, it is not the final result, but must serve a purpose, that is to improve customer service. If this no longer happens, there is no point in making the process work perfectly. We must therefore ask ourselves: Are we in charge of the process or is the process in charge of us? In second day societies it is the second thing that happens. Great inventors and great designers deeply understand their customer and never lose touch with the market.
The second ingredient is an understanding of the world around the company. You cannot fight the trends that are asserting themselves in society and in the economy, even if these involve decisions that are difficult for a large organization to make and implement. If Amazon ignored cognitive machines and artificial intelligence, it would lose its appointment with history. So even if far from your typical business, market inputs absolutely cannot be ignored.
Finally, the third but no less important ingredient is the speed of the decision-making processes which are the fuel for invention and innovation. Bezos dwells particularly on this issue in his 2015 letter. The speed of decisions is important in the business of innovation. “If you are good at correcting, know that making a mistake costs less than you think, while slowness is undoubtedly more expensive”.
Slow decisions, in fact, subtract energy and nullify any competitive advantage. Bezos has developed a set of guidelines for making quick, timely and possibly qualitative decisions. There are two types of decisions: “Type 1” decisions which need to be made after thorough reflection, discussion and sharing. These are decisions from which there is no going back. However, there are many other decisions, which Bezos defines as "type 2" from which one can go back, for which there is an emergency exit if they don't work.
These decisions can also be made quickly by individuals and small groups in their day-to-day business. As an organization grows, the drive to make only “type 1” decisions becomes established, even when one could easily make “type 2” decisions. The outcome of this trend is slow operations, the spread of a risk-averse mindset and ultimately a fall in innovation. Amazon must fight this trend. Along with the timeliness of decision-making processes, a specific mindset is needed to execute and manage decisions. First there must be a propensity for action. Most decisions need to be made with 70% of the necessary information available. Waiting to have more than 90% would unnecessarily slow down the process. You may not agree with these decisions, but you have to work hard to get a positive result anyway.
Trying to change the mind of the whole team is an approach that slows down and damages its effective execution. We also need to be able to recognize when an agreement is unattainable in group work. It happens that different teams have different goals and visions and no amount of discussion will change their point of view. In these cases, quick resolution is far preferable to ongoing confrontation, which would be exhausting and crippling.
Bezos writes: I have seen many examples of misalignment at Amazon. One of them was when we decided to invite third parties to sell directly competing products on our platform. Many brilliant and well-meaning people on our staff were not at all aligned with this major decision which led to hundreds of other minor decisions that were invoked by senior managers precisely because of this misalignment.
Build a Kaizen culture of innovation
Today, the main drivers of Amazon's growth are: AWS, Prime and Marketplace. Each of these businesses has come to produce high returns of capital and operate in a broad market. But that wasn't always the case. In the beginning these activities were very problematic and required huge investments in capital and human resources. Many large companies are unable to launch new activities from scratch, because they are absorbed by the most profitable ones to which they sacrifice all other initiatives, even innovative ones or those with greater prospects. Furthermore, these organizations are not built around patience and determination and do not have the mindset to fuel them.
Yet these new activities can bring huge competitive advantages if done correctly. Amazon has instead instilled a culture that supports small businesses with high development potential that must be carried out with intelligence, perseverance, method and discipline. AWS, Prime and Marketplace are three great ideas masterfully executed by Amazon. The company is looking to activate its fourth pillar, which could be Alexa. It is clear that there is a growing trend towards voice search and interaction with digital assistants. Some analysts predict that Echo and Alexa will generate more than $11 billion in revenues by 2020.
Only a couple of years ago this market didn't even exist. Bezos knows full well that if Amazon doesn't innovate and respond to market inputs, someone else will and then Amazon will have to chase. In an article addressed to young entrepreneurs entitled “My Advice To Anyone Starting A Business Is To Remember That Someday I Will Crush You” the founder of Amazon writes:
“As you can imagine, many young entrepreneurs ask me for advice on starting a business. What they seem to be looking for is some prestige, some magic tool that will allow them to launch a successful startup out of thin air. Well, prestige has nothing to do with it, but the key to success is very simple: value customers, get the right people, find a market that hasn't been served yet and assume that there will come a day when I will completely destroy your business ”.
What follows stands out explosively…because it's really going to happen.
