Breaking Down the 14 Business Principles of Amazon’s Success (with Steve Anderson, author of “The Bezos Letters”)
In the ascent of online shopping over the past 20 years, one business rose above the competition to achieve and maintain dominance. No other online store touches Amazon either in reach or in user experience. How did Amazon accomplish this?
IT risk consultant, speaker, and Wall Street Journal Best-Selling author of The Bezos Letters, Steve Anderson recently joined my podcast to discuss a few of the 14 business principles that drive Amazon’s remarkable success.
An expert on how technology impacts businesses, Steve mined 20 years of shareholder letters. In The Bezos Letters, he shares 14 principles Jeff Bezos has used and shared with his shareholders. The book organizes these principles into four cycles: test, build, accelerate, and scale.
We also share Amazon’s secret sauce, the flywheel, and explain how to apply it to grow your business. These ideas have enhanced my business, and I am happy to share a few of them with you. I also recommend you get the book and read it for yourself.
Return on Risk
People and businesses are often risk-averse. In a recent study by the Harvard Business Review, most executives favored marginal improvements and comfortable investments and were unwilling to take even attractive risks.
In today’s world of exponential change, there is no bigger risk than failure to keep up with the pace of technology. While a business may have taken a year or more to get up to speed with new technology in the past, today’s rate of innovation does not allow for that time.
If you look at big companies that failed, like Sears, Xerox, Blackberry, and Blockbuster, their downfall was not adapting to new technologies quickly. They were unable to speed up how they viewed and adapted to opportunity.
In contrast, Amazon embraces risk. However, they do it with a specific mindset that redefines the entire approach to risk. They examine risk in terms of return.
There is so much technology with untapped potential. The challenge in business is to step into it and grow into the possibility that is out there.
If you are not where you want to be in your business or life, it’s because you’re not taking enough risk. The question to ask is, “What is my return on this risk?”
Encourage Successful Failures
One thing that holds businesses back is an inherent conflict between the need for innovation and a culture that says you have to be right. You can’t have both. Failure is part of the process of change. A culture that doesn’t tolerate mistakes is punishing the failure required to create innovation.
Often the “fear of failure” is really the fear of the consequences of failure. Will this be embarrassing? Will it cost me a promotion?
In contrast, Bezos wrote he believes Amazon is the best place in the world for an employee to fail. He champions a culture that embraces the experimentation needed to invent. In his letters, he explains that experimentation means you don’t know if you will be successful. If you do know, it’s not an experiment.
Amazon does not tolerate incompetence. They use a strategic approach to experimentation. They think through all the issues as much as possible, but with the understanding they won’t get everything right the first time. Instead of a “chance” to get things right, it’s a cycle of experiment, learn, and repeat.
Amazon expects every employee to engage in this process of dynamic invention and innovation. Every employee is expected to look at the processes they are using and determine new, better, and different ways.
It’s called dynamic because any employee can bring up an idea. If they can support it, and the project is selected, that employee can be tapped to lead the project.
In 2006, Bezos was asked, “When are you going to open physical stores?”
He answered that Amazon did not know how to do retail stores any better than it was already being done.
Fast forward to around 2015, when Amazon began experimenting with a new concept in retail. They started with a single store in downtown Seattle and now have 26 Amazon Go convenience stores. A flagship 10,000 square foot grocery store recently opened in Seattle.
What have they done? There is no cashier!
They brought a meaningful differentiation to the shopping experience.
Shoppers scan an app to open the doors. Once inside, Amazon knows exactly what you take off the shelves. When you are done, you simply stroll outside with your purchases, and Amazon automatically charges your account for what you took.
Obsess Over the Customers
One core mindset at Amazon is to invent on behalf of the customer. Every company tries to improve the customer experience, journey, and service. Amazon takes it to a new level. They start with the customer and work backward.
Amazon Prime is an example of inventing on behalf of the customer. They realized paying for shipping was a pain point in the purchasing process. They experimented with free shipping on orders over $99, then over $25, and eventually offered it free.
At the time, Bezos did not have the support of his senior leadership team. They thought it was an unreasonable idea and that the company could not afford to pay for shipping. Bezos insisted that if it was good for the customers, it would be good for Amazon and shareholders.
Obsessing over the customers is investing in becoming friction-free, and that can fuel growth.
Applying Long-Term Thinking
In a 1997 shareholder letter, Bezos explained that he was looking long term and planned to reinvest in infrastructure because he believed that investment would pay off. He said he would not be worrying about Wall Street’s quarterly projections.
The first few years of business, Amazon paid below-market salaries and benefits, but what Bezos did was offer a generous stock option program. He saw that to think like owners, employees have to BE owners.
If you think about it, would that change the decisions you make every single day?
Employees who own part of the company are motivated to include the company’s overall success in their approach and mindset.
Understand Your Flywheel
The flywheel may be the most important of the 14 principles. Known as Amazon’s secret sauce, you’ll find the flywheel principle under number six in The Bezos Letters.
The flywheel comes out of the book Good to Great by Jim Collins. If you have that book, it’s chapter eight, “The Flywheel and the Doom Loop.”
Amazon invited Jim Collins to an annual leadership meeting. He taught chapter eight. The leadership team mapped out the company’s flywheel with “growth” at the center.
On the flywheel, they mapped out how the easier they made the website, the more people would shop there, and the more people they will tell about Amazon.com
They are still pushing on that flywheel.
Two Types of Decisions
To adapt to the speed of opportunity, you need reliable teams generating high-velocity decisions.
There are two types of decisions. Type 1 are the significant, bet-the-farm type of decisions. For these, you decide slowly and analyze as much data as possible.
Type 2 are the reversible decisions with a natural pivot. For these, you do not need much data.
What slows the average company down is moving type 2 decisions into a type 1 process.
Amazon removes layers of decision-making by hiring high-quality staff with good judgment and allowing them to make decisions and execute them. Essential to this mindset is a general acceptance. They won’t be 100% right all the time, but it’s important that they can pivot quickly and make a new decision.
Bezos shares a philosophy at the core of the success of this scalable, fast-moving structure. He says only hire people you admire.
We’ll dive deeper into this concept in an upcoming podcast with Dr. Ben Hardy covering his book, Who Not How.
At Amazon, they focus on high standards. They want people with batteries included, who have an inherent motivation, accomplishment, and grit. In hiring meetings, they ask managers to consider three questions before making a decision.
1. Will you admire this person?
2. Will this person raise the average level of effectiveness of the group they are entering — will they raise the bar?
3. Along which dimension might this person be a superstar?
Always Show up and Believe It’s Day One
To keep up with opportunity, you have to be open to possibility. At Amazon, they maintain this mindset by approaching each day as if it’s day one.
What has more potential and possibility than the first day? If you think of the first day of school, the first day your child was born, the first day of your new business. There is an excitement about what is going to come.
Amazon protects this day one vitality in four ways:
1. Customer obsession
2. A skeptical view of proxy (a procedure that overtakes a customer)
3. Eager adoption of external trends — not being afraid
4. High-velocity decision-making
Apply Amazon’s Principles of Success to Your Business
Amazon’s innovative, adaptable, and scalable structure has proven its effectiveness in a rapidly evolving technological marketplace. From Amazon Prime to Amazon Marketplace to Amazon Go, their business model demonstrates the mushrooming potential of systematic innovation and a customer-obsessed approach.