Amazon Insights For Boards
• Bezos preaches a “Day 1” mentality of a new startup to stay relevant and innovative.
• Amazon AMZN ’s customer obsession drives them to release products and services before the consumer knows they want it.
• Amazon keeps meetings small and differentiates their decisions into Type 1 and Type 2 to ensure high-velocity decision-making
A perspective I recommend bringing to your board rooms is the best insights and learnings from truly world class thinkers and companies. The company and leader I believe we can learn from is Jeff Bezos and Amazon.
What separates Amazon is Bezos’ directing strategies that has allowed Amazon to keep innovating for the last 25 years. In a 2016 study by McKinsey & Company, they found that the average life-span for companies in the S&P 500 is less than 18 years and this age is only decreasing. Bezos himself has even told his employees in 2018 that “Amazon is not too big to fail.”
“In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years,” he added as reported by the New York Post.
The key for Bezos is prolonging this inevitable fate as long as possible. He does this through his “Day 1” business outlook.
“Day 1” signifies treating every day, no matter the success of the company, as if it is is the first day of a new startup. This mentality allows Amazon to stay relevant, innovative and customer-focused.
The idea has been integrated into Amazon since the beginning. “Day 1” goes all the way back to his original 1997 letter to the Amazon shareholders, a letter he refers back to at the end of each proceeding shareholder letter to emphasize the mantra. The building Bezos works in is even called “Day 1.”
When asked what Day 2 looks like, Bezos addressed this answer in his 2016 letter to shareholders by writing, “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.” When asked how to fend of Day 2, he provided “a starter pack of essentials for Day 1 defense:”
1. True Customer Obsession
2. Resist Proxies
3. Embrace External Trends
4. High-Velocity Decision Making
True Customer Obsession
Bezos preaches a customer centric focus to their business model. Often in engineering cultures companies will fall in love with an idea and move backwards from that idea only to find out the customer does not like the product or service when all is said and done. Amazon, rather, starts with the customer and moves backwards.
Brittain Ladd, a former Amazon executive, describes in 2018 Forbes article, “Amazon is focused like a laser on customers. Instead of starting with an idea for a product and trying to convince executives that customers will ‘love the idea,’ Amazon works from the perspective of the customer to come up with ideas that will legitimately generate value.”
From their perspective, this obsession requires coming up with products and services before the consumer knows that they even want it. Bezos adds, “Your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it.”
To be truly relevant and a Day 1 company, you have to research, analyze and obsess over the consumer to provide them with products before they know they want it.
This ideology was emphasized in Bezos’ 2012 shareholder letter. He expressed that an advantage of the customer-driven focus is “proactivity.” “We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to.”
All together, investing time and resources into understanding the consumer to proactively bring them value will drive your success and customer.
It is common to see large companies hide behind proxies in defense of certain decisions. Bezos uses the example of process as proxy. In his words, “Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing.”
Companies struggle with innovation because they avoid risk by following their traditional process. This then takes the responsibility off of the individuals/company and onto the process. Bezos shared that, “It’s not that rare to hear a junior leader defend a bad outcome with something like, ‘Well, we followed the process.’ A more experienced leader will use it as an opportunity to investigate and improve the process.”
It is important NOT to merely follow the process or allow the process to control you. It is easy to lose sight of the goal, blinded by processes. Processes need to be be living not stagnant, actively refined, adapted and updated.
Embrace External Trends
“If you fight [external trends], you’re probably fighting the future. Embrace them and you have a tailwind,” urges Bezos. Despite clear business trends talked and written about to a great degree in the media, is not uncommon to see successful companies turn the other way to these macro trend shifts rather than adopt and embrace them.
Amazon has eagerly embraced the shift to machine learning and AI in recent years to aid in their operations.
Bezos described that “Machine learning drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more.”
By embracing AI and machine learning, Amazon has increased their revenue embedding AI into all phases of the customer journey and experience.
High-Velocity Decision Making
This is where, from my perspective, Amazon truly separates from the field. It’s amazing how a company as large as Amazon can maneuver on such a fast timeline.
Bezos stated, “Day 2 companies make high-quality decisions, but they make high-quality decisions slowly. To keep the energy and dynamism of Day 1, you have to somehow make high-quality, high-velocity decisions. Easy for start-ups and very challenging for large organizations.”
Amazon does this efficiently through differentiating their decisions making. In his 2015 letter reported by CB Insight, Bezos stressed not to waste time and energy deliberating on reversible decisions. “Some decisions are consequential and irreversible or nearly irreversible – one-way doors — and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation … But most decisions aren’t like that — they are changeable, reversible — they’re two-way doors … [These] decisions can and should be made quickly by high judgment individuals or small groups.”
He refers to these decisions in his 2016 letter as Type 1 decisions (one-way door) and Type 2 (two-way door).
Amazon has exhibited a strong willingness to take on these risky Type 2 decisions. Some of these investments have turned into huge successes for the company such as Amazon Prime and Amazon Web Services. In other cases, they are not shy to stop an investment that isn’t performing well such as Fire Phone. The failed investment allows for capital to be invested somewhere else.
Bezos proposed in his 2016 letter 3 thoughts for how to make high-velocity decisions as a company.
1. Never one-size-fits-all. Many decisions are type 2 decisions that are reversible. Others are type 1 that require more care and thought.
2. Decisions need 70% of information. Companies can be hesitant to make a decision until they have 90% of the information for the decision, but this is too slow. Being good at correcting bad decisions makes these mistakes much less costly.
3. “Disagree and commit.” This is crucial to save time. If you or another team are committed to a project but there is no consensus, disagree and committing will save time from trying to convince the others of this idea. Bezos shares his own experience of when he was on the fence about an Amazon Studio original but said to the confident team, “I disagree and commit and hope it becomes the most watched thing we’ve ever made.” He then adds, “It’s not me thinking to myself ‘well, these guys are wrong and missing the point, but this isn’t worth me chasing.’ It’s a genuine disagreement of opinion, a candid expression of my view, a chance for the team to weigh my view, and a quick, sincere commitment to go their way.”
4. Recognize and fix misalignment issues. If certain teams are not working well due to different views or objectives, the result will be exhaustion and wasted time trying to convince the others.
A pivotal aspect for Amazon achieving this efficiency with decision-making is through Bezos’ “Two Pizza Rule.” The rule is that every meeting should be small enough so that two pizzas could feed the group.
The more members of a group, the more likely there will be links between the group. As a result, the productivity and efficiency of meetings is more likely to be obstructed by political and social biases and disputes. J. Richard Hackman, Professor of Social and Organization Psychology at Harvard University, recalls, “A colleague and I once did some research showing that as a team gets bigger, the number of links that need to be managed among members goes up at an accelerating, almost exponential rate. It’s managing the links between members that gets teams into trouble … Big teams usually wind up just wasting everybody’s time.”
Evaluate your own teams. Determine what is the minimal amount of people needed for the meeting to run effectively. The Muse reported that middle managers spend 35% of their time in meetings. Upper management spends 50% of their time. Do not let meetings eat up valuable time. Keep meetings small, efficient, and driven by customer needs.
As we contemplated guiding our companies and boards to be nimble, innovative, customer centric and timely, I find many ideas in these lessons for Amazon worthy of reminding our CEO and colleagues as we seek to add value in our board oversight. I believe these themes are still important and relevant!