This book identifies six building blocks that define the Amazon management system. I must say it is a concise and well-written book for anyone wanting to understand how Amazon works. For easy consumption, I have listed down 50 things I learned from the book and Amazon as a company. I hope you like it!
Building Block 1 — Customer Obsessed Business Model
- Amazon started as an online bookstore by offering unlimited selection, unfiltered customer review and ultimate personalization. This brings out the innate advantage of the Internet at its core.
- It then moved to an everything store by expanding into different categories, supported by a strong focus in customer experiences. Bezos firmly believes that “our customer franchise is our most valuable asset”, and started Amazon Prime in 2005 — delivering free two-day shipping with a $79 membership price. A crazy move right after the dot-com burst.
- Bezos also coined the term “unstore” to reframe Amazon into a technology company, not a retailer. Amazon is a platform with an ecosystem of millions of small and medium-sized business. The platform business model opens everything up for third-party sellers, which triggers the acceleration of growth — from linear to exponential.
- Amazon has a famous flywheel strategy, with growth at its core. By having more sellers bringing in more selection, Amazon will attract more customers (e.g. browsing traffic), and increase scale (i.e. growth). The increased sales will then further reduce cost structure, and translate to even lower price for customers. With the increase in selection, decrease in price and improvement to convenience, the customer experience will be enhanced — further driving more traffic, and towards a more powerful flywheel.
- The acquisition of Whole Foods in 2017 and the opening of Amazon Go allow Amazon to increase their interactions with customers. This increased in touch points fueled more opportunities to delight the customers and maintain a strong brand awareness.
- Amazon recognizes the new laws of game in the digital age, and saw an opportunity to offer their expertise as a service to serve external partners. This mentally is different from traditional theory of competition where companies choose to safeguard core competencies as proprietary know-how.
- Customers’ trust is an earned privilege, not a long-term benefit to be taken for granted. Trust takes years to build, seconds to break and forever to repair. Bezos always emphasize — “Our pricing objective is to earn customer trust, not to optimize short-term profit dollars.”
- Amazon is relentlessly driving to invent dramatic new ways to delight customers. They focus on very big, potentially global consumer needs by visualizing the ultimate inevitability of customer needs, i.e. things that will not change in the next ten years. Looking at their inventions, this is very true!
- Amazon is all about platform and infrastructure. A scale business is characterized by high fixed costs and relatively low variable costs, this is why long term thinking is so important for Amazon.
- Scale and Speed matters. Combined with Amazon’s digital core competencies in data analytics, algorithm and AI-driven solutions, Amazon can continuously improve its operational efficiency while lowering its cost structure, and become more competitive over time.
Building Block 2 — Continuous Bar-Raising Talent Pool
- A single most important factor for success is hiring the right people. Bezos made sure that he is consistently filling the talent pipeline with individuals who have provided immeasurable value to the company.
- Bezos implemented a “Pay to Quit’ program at Amazon fulfillment centers. The goal is to encourage folks to take a moment and think about what they really want. In the long run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company.
- Bezos looks for builders who can make things happen, who can think and behave like owners — the type of people who display a sense of “true ownership”. In his 2018 shareholder letter, he said that “builders are people who are curious, explorers. They like to invent.” This is also probably why bulk of the compensation comes in form of stock option.
- When you think like an owner, you never say “that’s not my job”. You tend to set the bar high when hiring and developing the best. You also stay frugal to control expense, and spend personal time and energy deep diving into problems to stay connected to details. When tested, you should have the backbone to disagree and commit.
- Bar raisers are a unique feature of Amazon’s recruiting process. The bar raisers are carefully selected and trained to be stewards of Amazon’s leadership principles. They ensure that they bar is never lowered due to pressing business urgency, and they make the final and right hiring decision and strive to continuous raising the bar.
- The bar raisers are usually assigned to recruit outside of their own business, so they can stay independent. For every candidate, they evaluate using the Amazon’s Leadership Principles as the yardstick and judge whether the candidate have long-term potential at Amazon and whether they can continuously raise the bar. They also conduct post-interview drilling with each interviewer so that all assessments are fully explored and examined to arrive at the right decision. Lastly, they provide written feedback to help hiring managers and other interviewers ensure high consistency in the high bar.
- Amazon’s hiring process is able to weed out the non-fit from the very beginning. Those who have studied the Leadership Principles, thought through past failures and prepared writing samples will inevitably end up assessing their own personalities, preferences and competencies during the process. This forms a self-selecting process where candidates evaluate for themselves if they are right fit for Amazon.
- Builders love challenges. They have little patience and want to jump in and make things happen. For the young and ambitious who are committed to accelerating personal growth and eager for an entrepreneurial experience, Amazon is their paradise.
- Bezos insists on the highest standards and believes that people are drawn to high standards. This helps with recruiting and retention. Seems like there is a flywheel for growing human capital too!
Building Block 3 — AI-Powered Data and Metrics System
- Jeff Bezos rarely spends time on day-to-day considerations. He tries to live mostly about 2 to 3 years out. This means that he thinks and decide way ahead of time, instead of spending his energy fighting the everyday fire.
- Everyone in Amazon knows this line — “In God we trust, all others must bring data”. Every answer at Amazon starts with numbers. It is a way to understand the world and running business at Amazon.
- Execution is about knowing and delivering details. Amazon’s hunger for detailed data and metrics is magnitudes beyond most other companies. When selecting its first data center in China, Amazon has a checklist of 282 metrics. And when setting detailed goals for 2010, there were 452 of them!
- After ensuring the selection of the best people, the next most important crucial enabler is the availability of end-to-end data that is not segregated by silo nor by function. Without data support, running a business would be as difficult as maneuvering in a pitch-dark mansion. Transparency of end-to-end data is an effective mechanism to force the dismantling of silos and enabling of end-to-end accountability.
- Data is tracked and analyzed real-time. It allows for deep dive to find out the root cause and to formulate response. Even a 0.1 second delay in webpage loading can translate into a 1 percent drop in customer activity.
- Bezos once dialed the Amazon call center to verify the claim that a call will get picked up in less than one minute, but it turned out to be four-and-a-half-minute. Customer usually dial in to the call center for complains, so for someone who is obsessed with customers, it is unacceptable.
- Amazon’s pricing objective is “not discounting a small number of products for a limited period of time”, but to offer “low prices every day and apply them broadly across entire product range”. Bezos showed the results of price comparison for the 100 best-selling books, and none of the books are priced higher than real-world stores.
- To ensure its competitiveness in pricing, Amazon uses pricing bot. It is an automated crawler that spies on competitors’ pricing and then adjust Amazon’s prices accordingly. This ensures that Amazon will always match the lowest price anywhere, offline or online. Coupled this with personalized recommendations for each individual consumer, it is hard to resist the purchase.
Building Block 4 — Ground-Breaking Invention Machine
- Bezos said “There are two ways to extend a business. Take inventory of what you’re good at and extend out from your skills.” or “Determine what your customers need and work backward, even if it requires learning new skills.” Most companies seek to to preserve and maximize short term gains without investing enough in learning new skills required for the future.
- Invention and innovation come with a hefty price, even if this means killing your own business. A lot of executives talk about it but few have invested enough or made the conscious choice to accept the costs. Bezos knows too well that if you don’t dare to kill your own business, others will.
- At Amazon, failure is necessary and integral part of invention. There is no shortcut. To pursue invention, tolerance of failure is a must. Possibility of failure should be encouraged and embraced. Amazon believes in failing early and iterating until they get it right.
- Invention is anything but efficient. It is difficult, lengthy, and full of uncertainty, because no one knows how much longer it will take and when the real breakthrough is going to come. To copy, to follow conventional wisdom would be much easier, faster, certain and efficient. Bezos understands that the power of “wandering” is not efficient but definitely required for invention, especially for the “outsized discoveries”, the “non-linear” ones.
- Amazon invented “the idea tool” to tap into employees’ creativity and imagination. Anyone who has an idea can submit his or her thoughts without filters of layers of managers or concerns about feasibility from either technical or financial points.
- Bezos seeks inventions that speak to billions of customers and millions of enterprises worldwide. Beside the large addressable customer base, the idea has to be “simple”. Simple is the key to easy, fast, intuitive and low-cost.
- Inventing on behalf of the customer is key. If you are competitor-focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering. By focusing on customers and their discontents, you open up the floodgates of never-ending inspirations.
- Amazon has a well-known approach to drive project development. It is known as the two-pizza team (2PT). It refers to the autonomous groups of fewer than ten people — small enough that when working late, team members can be fed with two pizza pies. Bezos commented that if you can’t feed a team with two pizzas, the team is probably too big. Member in this team will be fully dedicated and co-located for maximum focus. The team is also fully accountable end-to-end, meaning their ownership extends all the way from concept, to design, to development, to launch and post-launch operation.
Building Block 5 — High-Velocity and High-Quality Decision-Making
- Bezos categorized all decision into Type 1 and Type 2 decisions. Type 1 decisions are consequential and have irreversible or near irreversible impact, much like a one-way door where you cannot go back to where you were before. These decisions must be made methodically, carefully, slowly and with great deliberation and consultation. Type 2 decisions are changeable, reversible, much like a two-way door where you can go through and back.
- When making decisions, speed matters. Apply heavy-weight process on Type 2 decisions will lead to slowness, risk aversion, failure to experiment sufficiently, and diminished invention. Conversely, spending too little time on Type 1 decisions and making a mistake would lead to extinction.
- As CEO, you should identify and delegate Type 2 decisions as these decisions should be made quickly by high judgement individuals or small groups. Everyone has 24 hours a day, if your business continues to grow but decision-making is still concentrated at the top, sooner or later, you will become the biggest bottleneck for fast growth.
- Former U.S. Secretary of State and retired four-star general Colin Powell advocated a 40–70 Rule — if you have less than 40% of the information, you shouldn’t make a decision. But if you wait till you have 70% of the information, you have waited too long. Once information is in the 40–70 range, go with your gut. For Bezos, he used a 70–90 rule instead. He said that most decisions should probably be made with somewhere around 70% of the information you wish you had. But if you waited for 90%, in most cases, you are probably being slow.
- You need to be good at quickly recognizing and correcting bad decisions. If you are good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.
- As a senior executive, you get paid to make a small number of high-quality decisions. Your job is not to make thousands of decisions every day. Once accountability is clarified, find the best truth all the time by thinking about how things will change going forward.
- Bezos recognizes the built-in human weakness in decision-making and subsequent biases and misjudgments so he places huge emphasis on fighting conformity, challenging group thinking, and resisting the overrated rated importance of harmony. He expects people to challenge him and demands a quality discussion where people introduce new ideas, perspectives and disruptive thinking.
- Disagree and commit is a heuristic way to save time during decision making. After considering all facts and views, if you have a conviction on a particular direction even though there is no consensus, it is helpful to say — “Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?”. At this time, no one can know the answer for sure, and will probably say yes. In the case where Bezos’s team have differing views on Amazon Studies original, Bezos chose to “disagree and commit”, staying consistent to his principle.
- Powerpoint presentations are banned in the S-team (Amazon’s core executive team), including Bezos’s direct reports and selective two-level-down executives. Instead, this is replaced by a “Six-Page Narratives”. This forces the author to conduct complete analysis, to distinguish between subtle nuances, to articulate the inner logic and set priorities for various ideas, and take full responsibility for specific proposal. When you write your ideas out in complete sentences and complete paragraphs, it forces a deeper clarity of thinking. Powerpoint style bullet points makes it easy for the presenter but difficult for the audience.
- Reading memos, instead of powerpoint slides, before a meeting ensures that everyone gets the full picture and is well-equipped for a high-quality discussion afterwards. Meeting rarely ends without clear decisions or specific actions. Those who missed meeting can easily catch up regarding what and how a decision gets made.
Building Block 6 — Forever Day-1 Culture
- Forever Day-1 Culture comes from the idea of fighting entropy where the inevitable path of any organization leads to decrease in efficiency and vitality, and increase in complexity and rigidity. Without deliberate vigilance and institutional determination to fight entropy, it will fall into mediocrity. To fight entropy, the bar has to continuously go up. Day 2 is never an option.
- To fend off Day 2, Bezos offers a starter pack consisting of the following points:
True customer obsession — People who are committed to delighting discontent customers will make sure that organizational capability will rise faster than the ever rising customer expectations
Resist proxies — As companies grow larger and more complex, there is a tendency to manage to proxies. A common example is process as proxy. Processes are means to an end, but most often they are too complex to serve the original purpose.
Embrace external trends — Day 2 companies lack the necessary vigilance to respond to key external changes. They are slow in detecting the early warning signals and slow in assessing possible impact on existing business and new opportunities, slow in making decision to adjust resource allocation to confront new realities.
High-velocity decision making — Amazon challenges the common trap of applying a one-size-fits-all heavy-weights approach to most decisions, including those changeable, reversible Type 2 decisions
- The archenemy of Amazon’s mission is complacency. Bezos fears and loathes complacency and said that “complacency replaces the spirit and desire to take risks.” and that in the face of complacency, “we would cease to insist on highest standards and gradually entangle ourselves in a giant ball of red tape”. To combat complacency, Amazon relentlessly raise the bar and has an unyielding determination to enforce it throughout the entire organization.
- Bezos hates bureaucracy, and it is a common disgust shared by A-players. For any organization entrenched in bureaucracy, the A-players will quit. The C- and D-players are lovers for bureaucracy as it protects them from transparency, accountability, or measurability. To kill bureaucracy, Amazon maintains a stringent control over indirect head counts. Bezos believes that bureaucracy-loving C- and D-players usually reside in middle management.
- Lastly, this list will not be complete without mentioning the 16 Leadership Principles: (1) Customer Obsession (2) Ownership (3) Invent and Simplify (4) Are Right, A Lot (5) Learn and Be Curious (6) Hire and Develop the Best (7) Insist on the Highest Standards (8) Think Big (9) Bias for Action (10) Frugality (11) Earn Trust (12) Dive Deep (13) Have Backbone; Disagree and Commit (14) Deliver Results (15) Strive to be Earth’s Best Employer (16) Success and Scale Bring Broad Responsibility
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