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IAN MANN REVIEWS: The top 3 principles that built Amazon

Dec 25 2019 16:31
Ian Mann

In July 1994, 30-year old Jeff Bezos left his job on Wall Street to start a little online bookstore called Amazon.com.

This decision was triggered by the fact that Web usage was growing at 2 300% per year! Additionally, an online bookstore with millions of titles was something that simply couldn’t exist in the physical world. Bezos’ plan, from the beginning, was to diversify the offering beyond books.

These are the bones of what has proven to be an extraordinarily brilliant strategy. Amazon is the fastest company ever to reach $100bn in sales and now employs over 647,000 people!

I have long held the view that how a company is run is far more significant than its 'strategic plan'. In fact, I titled my approach to strategy 'Functional Strategy' for this reason– because how you function is the key determinant of success. Full stop. (See my book, Strategy That Works.)

What makes this book so important for everyone who leads a business (the subtitle must be taken lightly) is that it is an analysis of Bezos’ Shareholder Letters. These letters reveal his thinking from the start, and the principles on which this business is run. These are not leadership principles: leadership principles focus on people. These are growth principles that focus on the business as a whole.

The author has never met Bezos, and the 14 principles articulated in this book are borne out by his analysis of 21 Shareholder Letters (1997- 2018), when read as a single document.

I will focus on only three: Encourage successful failure; obsess over customers; and apply long-term thinking.

Successful failure

Bezos identified early in Amazon’s history that unless the company takes risks, invests in risks, and intentionally creates opportunities for ‘failure’, it would never grow big enough. The idea of a ‘successful failure’ is an essential part of his thinking and he intentionally built failure into his business model. He looks for ways not only to make it work, but also to make it worth it.

These ‘failures’ aren’t the result of incompetence or laziness. Amazon has an “intolerance for incompetence.” Rather, these failures are the inevitable result of not knowing what you cannot know in advance.

Applying this principle, Amazon lost major money in failures, some of which ultimately became successful. The team that created the Fire Phone, an attempt to create a phone and a convenient way to shop on Amazon, took the teachings of that failure and eventually put it into the Echo hardware and Alexa, a voice-activated virtual assistant, and that has generated billions of dollars of revenue.

zShops was a creative attempt to monetize Amazon’s large and growing platform by allowing third-party sellers to use it to sell their goods. Customers didn’t like the additional steps required, and zShops was closed as a failure.

However, the idea of allowing third parties to sell on Amazon would survive—and thrive into billions of dollars—as ‘Amazon Marketplace’. Launched in November 2000, it has experienced a meteoric rise. Now a third-party sellers’ item appears on the same page as an Amazon item to customers looking to buy something. On average, sellers pay Amazon about 15 percent of every item sold. The Amazon Marketplace has led to billions in sales.

Where people are unafraid of failure being career-limiting, creativity is accelerated.

Customer focus

Amazon’s customer obsession starts with the customer and works backward to obsess about how to earn and keep the customer’s trust. They chose as their focus “low prices, best selection and fast, convenient delivery". The rationale for Bezos was that is difficult to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery.

Bezos realized that one of the biggest obstacles keeping people from shopping online was the cost of delivery. So early on, Amazon offered free delivery on orders over $25. It was so successful Amazon bet heavily on and launched Amazon Prime – free delivery for subscribers. In 2018 it had more than 100 million members, and these members spent an average of $1 400 per year versus $600 per year for non-Prime customers.

Long-term thinking

In a 1997 Letter, Bezos wrote: “We believe that a fundamental measure of our success will be the shareholder value we create over the long term.”

Bezos owns the property in Texas where the first full-scale version of a '10 000 Year Clock' is being housed. Unlike most clocks that tick at one-second intervals, this clock ticks only once a year. It has a century hand that advances once every 100 years, with a cuckoo that comes out once in 1 000 years.

For Bezos the clock is not just the ultimate prestige timepiece. Rather, it is a symbol of the power of long-term thinking. Wall Street doesn’t like long-term thinking, their timeframe is the next quarter’s results. As a consequence, a lot of pressure is exerted on quarterly earnings and monthly sales targets.

The famed investor Benjamin Graham said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.” Bezos talks of Amazon having “our heads down working to build a heavier and heavier company.”

Long-term thinking allows Amazon to focus on metrics that matter, and these metrics are customers and revenue growth.

None of the 14 principles are Bezos ‘originals’, but that is not where the value lies. The real learning from this book is how seriously these 14 principles are applied in practice. Like the author, I am convinced that the 14 Growth Principles could help any business in any industry, provided they are applied with equal vigour.

Readability         Light --+--- Serious

Insights              High -+--- Low

Practical              High +---- Low

Ian Mann of Gateways consults internationally on strategy and implementation, is the author of ‘Strategy that Works’ and a keynote speaker. Views expressed are his own.

amazon  |  jeff bezos  |  ian mann  |  book review  |  business  |  strategy
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