Amazon Shareholders Letter – A Lesson in Risk Taking
The Amazon Shareholders Letter has become a staple in my continuous business education. It’s a lesson in how to build a company that lasts, how to continuously innovate, and how to innovate by making big bets.
Amazon believes in “customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence.”
For me, the highlights of the Shareholder Letter are Amazon’s culture on customer obsession, failure and innovation, and decision-making abilities. Let’s dive in.
It’s hard to argue that Amazon is one of the most customer-obsessed companies on the planet. They focus on driving value for their customers rather than focusing on their competitors. The consistently strive for lowering prices for customers even when they already have the lowest price.
“Many companies describe themselves as customer-focused, but few walk the walk. We want to be a large company that’s also an invention machine. We want to combine the extraordinary customer-serving capabilities that are enabled by size with the speed of movement, nimbleness, and risk-acceptance mentality normally associated with entrepreneurial start-ups.”
In YoungMe Moon’s book Different she emphasizes the importance of challenger brands to focus on their unique strengths rather than leveling up in weaknesses to match competitors capabilities. She advices breaking away from the pack, otherwise you’ll all end of looking the same and providing the same. A lack of differentiation leads to customer indifference and disloyalty.
Failure and innovation
Amazon has a unique approach to failure. Jeff Bezos believes “[Amazon is] the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins.” Most large organizations embrace the idea of invention, but aren’t willing to “suffer the string of failed experiments necessary to get there”. Amazon believes in making big bets and given a 10% chance of a 100X payoff, they will take that bet every time. Keep in mind, that this means they are ok with being wrong 9 times out of 10. While I don’t work at Amazon to know if they indeed are following this model, the Fire Phone is a good example of a big bet that failed.
Unfortunately, for many businesses and our government, failure has a high price, and thus they tend not to go for moonshots on a mere 10% chance. Amazon on the contrary has thick skin and can brush off the Amazon phone flop, knowing that other big bets like Prime and AWS, have paid off extraordinarily well.
A common occurrence (and complaint) is that larger the company gets, the more bureaucratic it becomes and slower it makes decisions. I found Amazon’s approach to decision-making refreshing (thanks for sharing your insights on this Robi Ganguly).
“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. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.”
“As organizations get larger, there seems to be a tendency to use the heavyweight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency. And one-size-fits-all thinking will turn out to be only one of the pitfalls. We’ll work hard to avoid it… and any other large organization maladies we can identify.”
This decision-making framework lends itself to speed. Since most decisions are Type 2 decisions – decisions that can be made quickly and reversible if necessary – decisions can and should be made quickly.
Taking action quickly really resonates with me. It’s why I gravitate towards working with start-ups, and smaller, innovative teams with a lot of autonomy. As we grow, it is paramount for leaders to equip teams with the company compass (what do we believe as a company, what are our ethics and principles, etc.), and then empower people to make decisions, even if they aren’t perfect. As long as the guiding vision is protected, and the greater team knows the guiding principles from which to make decisions that will benefit the company in the future.
Wrapping it up
While Amazon is far from a perfect company, their ability to continuously innovate and grow is impressive. The culture of customer obsession, failure and innovation, and decision-making abilities, is one to be emulated.