Commerce / Sep 2017

Thought: Lessons Learned from the World’s Most Innovative Company

Innovate or Die.  This is the unwritten ethos of the world’s most innovative company, Amazon .  “Our job,” says Amazon Founder and CEO Jeff Bezos, “is to invent new options that nobody’s ever thought of before and see if customers like them.”

This April, Amazon topped Fast Company’s 2017 Most Innovative Companies list for its undeniable track record (a stock price that has increased more than 300% in the past five years, and becoming the fastest company ever to reach $100 billion in annual sales in 2015), but also for an unequivocal culture of innovation.

A king amongst fellow top ten giants Google, Uber, Apple and Facebook, Amazon remains the undisputed leader, a start-up at heart refusing to stay in its lane, and repeatedly remaking itself. In his 2017 Shareholders Letter, Bezos revealed that being an environment for continual experiment (and even failure), making quick decisions, massively diversifying, and obsessing on customer outcomes are key to avoiding stasis within companies.

Using a theme which he first coined when he started Amazon.com in 1994, and which he has reiterated in every annual Shareholders Letter since, Bezos describes Amazon as maintaining a “Day 1” start-up mindset, as compared to a “Day 2” company which, for Bezos, represents “…stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death”. Revealing the secret to Amazon’s success, he continues… “Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen”.

All companies, whether burgeoning start-ups or established behemoths, can learn from the example of the most innovative company in the world.

 

ACCEPT ENCOURAGE FAILURE

All innovative companies want employees (or at least some employees) to take risks because that is where the magic happens. But failures are frequently seen as career-limiting and something to hide. At Amazon, employees comfortably refer to initiatives as “experiments” because they know that failure is a possibility; and failures are shared openly and used as an asset.  It’s seen as a sign that they are pushing hard enough to try new things.

At Amazon, employees do try to mitigate risk by using data. But when you are breaking new ground, some amount of risk is unavoidable. Ultimately, failures will occur. And Bezos actively encourages this mindset: “Given a ten percent chance of a 100 times payoff, you should take that bet every time.” That means you should still expect to fail 90% of the time. And then turn that failure into a tool for other people to learn from.

One example that illustrates the value of learning from previous failures is Amazon’s Marketplace business, where third party sellers can offer goods for sale on our platform (versus Amazon owning the inventory itself). Marketplace (which accounts for 50% of units sold on Amazon) began as Amazon Auctions. Never heard of “Amazon Auctions”? That’s because it wasn’t successful. Learnings from that failure were integrated into something called zShops, which eventually became Marketplace.  Some more examples? Amazon’s Echo smart speaker rose on the lot where its Fire Phone flamed out. The latest version of Amazon’s streaming music service, Amazon Music Unlimited, was constructed on top of its initial music store, Amazon MP3, which opened nine years ago. Amazon Studios’ Emmy Award–winning original TV shows are built upon a crowdsourcing platform that the company first introduced in 2010 for aspiring scriptwriters.

 

MOVE AT LIGHT SPEED

That means making what Bezos calls “high-velocity decisions.” That doesn’t mean making low-quality decisions, but it does mean “most decisions should probably be made with somewhere around 70 percent of the information you wish you had”, says Bezos.  And with the backing of Amazon’s first tenant to not fear failure, teams are equipped to make a decision, and then make a better one, and so on.  “You need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think,” Bezos said.

Part of this emphasis on making decisions wards off “Day 2” stasis.  If you are continually making decisions, you are not stagnating or maintaining status quo.  Amazon Prime is a, well, prime example of how innovation should continue, long after the invention. Initially conceived to offer customers faster shipping options (at a lower overall price), Prime members now have access to free books and some of the best TV programming and movies available.  And the features for members keep coming.

So, at Amazon, innovation equals impetus.  The company has embraced, and even pioneered, outside trends like cloud computing and artificial intelligence. While trends like those can be easy to spot, “Day 2” organizations resist them, Bezos writes.  “The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly. If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind”.

 

ENTERTAIN WILD DIVERSITY

Bezos’s strategy of continuous evolution has allowed the company to experiment in adjacent and even completely unrelated areas: devices, retail, services, cloud computing, robotics, fashion, natural language processing, television and movies. Unlike Apple, Google, and Microsoft, Amazon is not fixated on a tightly designed ecosystem of interlocking apps and services.  Over its 23 years, Amazon has moved into one sector after another and completely disrupted the business model. The website that once sold only books now lets anyone set up a storefront and sell just about anything, including fashion (Amazon is now the second-largest seller of apparel in the U.S., according to Morgan Stanley) and now perishables. The warehouse and logistics capabilities that Amazon built to sort, pack, and ship those books are available, for a price, to any seller. Amazon Web Services, which grew out of the company’s own e-commerce infrastructure needs, has become a $13 billion business that powers over one million active customers every month in 190 countries.

For employees, moving between organizations is encouraged and Leadership Principles are consistent across the sectors. People can build a career moving from org to org, sector to sector and completely change job roles. This keeps employees interested and engaged, but it also moves innovation and approaches to problem solving across organizational boundaries. This cross-pollination brings new, great ideas to the table so that the people in a room making decisions about an initiative likely come from varied professional backgrounds.

Despite this diversity, everything ultimately drives revenue back to the company.  Nearly all of Amazon’s most recent innovations share a connection to Prime, which by some estimates accounts for 60% of the total dollar value of all merchandise sold on the site. Between 40 million and 50 million people in the United States use Prime, and, according to Morgan Stanley, those customers spend around $2,500 on Amazon annually, more than four times what non-members spend.

 

BE CUSTOMER-OBSESSED

Ultimately, Bezos credits Amazon’s precise focus on customer outcomes for the company’s success. Amazon is always looking to address what Bezos refers to as the “divine discontent of the customer.” Everything the company does, collectively and individually, is viewed through the lens of customer benefit. “Everybody wants fast delivery. Low prices… Our job is to provide a great customer experience, and that is something that is universally desired all over the world.”

Bezos tirelessly demands innovations that serve Amazon customers in the best and fastest possible way. “Our customers are loyal to us right up until the second somebody offers them a better service,” he says. “And I love that. It’s super-motivating for us.” Instead of being competitor focused, product focused, technology focused, or even business model focused, Amazon promotes a customer-centric approach because “customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.”

With Amazon’s annual retail earnings at $70billion, and then next highest competitor Apple at $20billion, Bezos sees complacency as the eventual death knell of a company.  He concedes that, whilst the decline would happen in extreme slow motion, and a company might harvest “Day 2” for decades, the final demise would still come.  So, rather than being motivated by profit, it is the continual risk of customer dissatisfaction that spurs the world’s most innovative company forward. “Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen.”

 

CONCLUSION

Amazon has constantly innovated both horizontally (across product areas and business policies) and vertically (over supply chain and distribution).  The combination of no fear of failure, rapid decision making, extreme diversity, and an entirely customer-focused imperative plus the power of enormous financial, idea and human resources creates the ideal environment for continuous innovation and evolution

That Amazon has continued to be nimble even as it has achieved enormous scale is testament to the power of an innovation mind-set to keep a company moving forward, and an encouragement to business operators, at every stage, to maintain the eternal optimism of a “Day 1” company.