Jeff Bezos is undoubtedly one of the greatest entrepreneurs of our time. He started Amazon.com in 1994, and it took him 60 meetings to raise $1 million for the online bookstore. From the very beginning Bezos envisioned an Everything Store - and it’s safe to say that the vision is now reality. Known for always putting the customer first, often at the expense of Amazon’s business partners (or local business), Bezos has transformed the online shopping experience. He is a disruptor. Because of him, mail carriers work on Sunday - but not for too long - Amazon isn’t quite ready to commercialize their drones.
Continuing our series of “Notes from the video you should have watched”, we’ve summarized this fireside chat between Jeff Bezos and Werner Vogels (Amazon’s CTO) that took place at the 2012 AWS Conference.
- The customer always comes first (even at the expense of business partners)
- Innovate the things that never change (lower prices, fast delivery, etc.)
- Innovative companies must have a willingness to fail and be misunderstood
- Lean & Low Margins (Amazon doesn't know how to operate any other way)
- The 10,000 year clock & Blue Origin (Bezos has interesting hobbies)
Why Kindles are Priced at Nearly Break-Even
The tablet industry is competitive. The high end is Apple’s iPad - it dominates usage and is priced at a premium. There is fragmentation at the low end among the Android based manufacturers - that price to sell but not necessarily to use (Tim Cook likes to point that out when addressing Apple’s declining tablet market share). Then there’s the Kindle, which Amazon sells at nearly break-even. Bezos believes that Amazon should only win when the customer wins, which means that Amazon should only make money when people use the device and not when they buy the device. That mindset is very aligning with customers, leaving little incentive to get people on the “upgrade treadmill” (Apple) or buy a cheap tablet and never use it (Samsung).
"If I buy a device and put it in my desk drawer and never use it, Amazon doesn't deserve to make any money."
Flywheels - Innovating the Things that Never Change
People always ask Bezos to predict what’s going to change in the next 10 years - which is important - but it is more important to focus on what’s not going to change in the next 10 years. Amazon invests a lot of time and money in “flywheels;” innovating the things that don't seem too obvious, but are actually really obvious. Flywheels are those things that never change for the customer like price, convenience, delivery time, size of catalog. It’s impossible to imagine a future 10 years from now where customers wish the prices were a little higher, or delivery was a bit slower...
"You can build a business strategy around the things that are stable in time. In the retail business, we know that the customers want low prices, and I know that's going to be true 10 years from now. They want fast delivery, they want a vast selection."
"We know that the energy we put into those things today will still pay dividends for our customers 10 years from now. When you have something that you know is true - even over the long term - you can afford to put a lot of energy into it."
Innovation in Larger Companies
If you want to be an innovative company you must:
1) Hire people that are explorers (people that embrace change and like to innovate)
2) Have a willingness to fail
3) Have a willingness to be misunderstood for a long time
Hiring the Right People
Innovation is a mindset - you have to hire people that want to innovate and explore! That said, being a pioneering company is not for everybody. Some people have the conqueror mentality. They get their energy from putting their competitors out of business. The conqueror mentality is inherently competitor focused - which can succeed - but when you attract people who have the DNA of pioneers, you build a company of like minded people that want to invent. Amazon hires explorers, people that get up in the morning because they want to build a great product or service for their customers.
"If you're the right kind of person and you like to invent and you like change, everything you see as you move around the world you think how it can be improved. That's just fun. Over the last 18+ years Amazon has attracted a bunch of people like that and we have a ton of fun doing it."
Willingness to Fail and Be Misunderstood
If you do something in a new way people are initially going to misunderstand it relative to the traditional way. Usually, Amazon is misunderstood: Jeff, why are you starting an online bookstore? Why would anyone want to read an eBook? Why is Amazon getting into the tablet market? Why is Amazon starting a cloud storage business? Why does Amazon’s revenue keep going up, yet they never make a profit?
There are two types of critics:
1) Well-Meaning Critics: people who genuinely want the best outcome, but are worried about the new way
2) Self-Interested Critics: people that have a vested interest in the traditional way (usually tied to a profit stream)
In the process of becoming the largest retailer in the world Amazon is responsible for putting lots of companies out of business. While Bezos’ focus on long-term growth - at the expense of making a profit - it doesn’t always sit well with investors around earning season. In other words; over the years Bezos has been criticized a lot - and he has quite the pragmatic approach for dealing with it. He says, "If you never want to be criticized, never do anything new." If you have a willingness to fail and be misunderstood for a long time you can ramp up your rate of experimentation, which is essential for companies to do if they want to successfully keep innovating. In fact, you need to make experimentation into a process.
“How do you go about organizing your systems, your people, your own daily life and how you spend time, how do you organize those things to increase your rate of experimentation?"
"Successful invention is inventions that customers care about. It's actually relatively easy to invent new things that customers don't care about."
Lean: From Answering Customer Service Calls to Sweeping the Floors - Bezos Does it All...
Bezos is known for operating a very lean organization, much of it influenced by the Toyota Production System. One of the key things about being lean is defect reduction, which starts by not letting defects travel downstream in a new process. Toyota had what they called an "Andon Cord" that any factory worker can pull to stop the whole automobile manufacturing line if they saw a defect - no matter how small. American auto manufacturers optimized for the exact opposite - keeping the line running at all costs. Initially, this is very expensive if your line is full of defects because you get a lot of Andon Cord pulls. But over time, this approach eliminates defects closer and closer to the source. The further a defect travels downstream the more expensive it becomes to fix, so you want to stop the defects from happening and being repeated over and over. Today, Amazon’s fulfillment centers have systems in place that are directly influenced by Toyota’s Production System.
Example: Bezos Answering Customer Service Calls (18:30)
Amazon requires all senior executives to go through two days of customer service training every other year. A few years ago Bezos was in one of those training sessions taking calls from customers, with an experienced customer service agent next to him (for quality assurance). On one of the calls, as soon as the customer’s order was pulled up the agent predicted that they’ll want to return their item - a table - because it was scratched. The agent was correct, the customer did just that, and Bezos was surprised.
It turned out that the table was returned several times already for the exact same reason. There was a lack of communication between the people who were talking to customers and the fulfillment centers where the actual shipping and packaging is taking place. Inspired by the Andon Cord, Amazon implemented a system where any customer service agent can pull a product off the Amazon website if they think that there is a problem, which ensures that the same defective item won't be shipped to the same customer over and over again.
Example: "Kaizen" Japanese Consultant (21:00)
Amazon brought in a Japanese consultant from the Toyota School of Kaizen - known for their concept of continuous improvement. The consultant did not call himself a consultant, he called himself, an in-sultant; and he was very tall with a fiery attitude and didn’t speak any English. One afternoon he saw Bezos sweeping up dust in the fulfillment center. He walked up to him and said:
"Mr. Bezos, I am all in favor of a clean fulfillment center, but tell me, why do you sweep? Why don't you eliminate the source of dirt?"
One of the main aspects of running a lean organization is the concept of “Muda” meaning; eliminating waste. To eliminate waste you must have information, and the data center has usually been an information free zone as far as application developers are concerned. Engineers would write code but have no idea how resourced were actually being consumed. But now, with Amazon Web Services (AWS), there is the added benefit of application developers getting a real sense of which inner loop is driving all the cost. It’s one of the ways cloud infrastructure reduces costs.
Retailers are a high-volume low-margin business. Amazon - the Everything Store - takes that to the extreme. But how do you build a business when you’re operating with razor-thin margins like Amazon?
"Operating a low-margin business is hard. I sometimes have waking dreams that I might one day operate a high-margin business!"
"High margins will cover a lot of sins. It's impossible to be efficient with high margins because you don't need to be. Necessity is the mother of invention. It takes a certain point of view to figure out how to operate in a low-margin business, but we wouldn't know any other way. We've been doing it for 18 years and it's deep in our culture."
"I like operating in a low-margin business because I think it's more aligning with customers. You get more usage, and it keeps you honest by having to operate leanly and efficiently."
Entrepreneurship & Risk
Bezos has been surprised by the speed of technological innovation in the internet arena today - it’s one of the things that’s changed from the time he first started. Although at its core, he believes that entrepreneurship hasn’t changed all that much. The basic principles of entrepreneurship are very stable over time.
"The heart of entrepreneurship is about risk-tasking. But I think that many people misperceive what good entrepreneurs do. Good entrepreneurs don't like risk, they seek to reduce risk."
"Starting a company is already risky, and you systematically reduce risk in those early days. You need a lot of luck in all endeavors in life, and Amazon has had planetary alignment of the highest order."
"You need a way to systematically identify risk, and as the company gets bigger and more robust you can start taking risks again. But in those early days a lot of it is about finding ways to remove risks from your good idea."
Amazon Web Services (AWS)
AWS is one of Amazon’s most important innovations. It validated the Seattle based online retailer as a true tech giant - one that could be mentioned in the same breath as Apple, Google and long-time neighbors; Microsoft. Amazon’s cloud infrastructure is used by everyone: from small startups, to large enterprises, in universities, in governments, and even Netflix - a direct competitor for Amazon Instant Video. Analysts estimate that the AWS business unit alone may be worth $50 billion dollars by 2015; and that may be too low...
Amazon has built a cloud platform that continues to have a profound impact all over the world, by being an enabler of innovation. It is much cheaper to start a technology company today because everything is done in the cloud - the CAPEX consists of a laptop. Which means that companies don’t need to raise much capital to get their idea off the ground. This leads to more companies getting started and more new ideas are being implemented. AWS, is accelorates the pace of innovation.
"AWS is one of those enablers that helps companies experiment faster. If you double the number of experiments you do per year you're going to double your inventiveness."
"Whenever you empower people with new tools, you get unexpected and beautiful results. We're still in the early innings of seeing the changes that AWS can bring to a whole group of entrepreneurs - including entrepreneurs inside of companies."
The 10,000 Year Clock
Bezos and inventor Danny Hillis are building a very large clock that is designed to last 10,000 years. The clock (and Bezos) is a symbol for long-term thinking.
1) Long-term thinking will enable us to accomplish things that we couldn’t accomplish otherwise.
2) Humans are getting awfully sophisticated in technological ways and have a lot of potential to be very dangerous to ourselves. As a species, we are going to have to start thinking longer term.
"If I told you I want you to solve world hunger in 5 years you would rightly decline the challenge. But if I said I want you to solve world hunger in 100 years, that’s more interesting. First, you must create the conditions under which such change can occur. All we've done there was change the time horizon, we didn't change the challenge, so time horizons matter a lot."
Blue Origin is Jeff Bezos’s rocket company. Under development, they have a vertical takeoff and vertical landing space vehicle that’s designed to be reusable. Although still a few years away from the first operational suborbital flight, the long-term goal of Blue Origin is to get to orbit and democratize space travel so that anybody who wants to go to space can afford to do so.
In the context of entrepreneurs fulfilling a fascination with space by starting a rocket company; Blue Origin is closer to Richard Branson’s Virgin Galactic, which is giving ordinary people the opportunity to get to space and see the curvature of the Earth (a joyride). As opposed to Elon Musk’s SpaceX, the first private enterprise to get to Orbit, with a mission is to develop the technology that’s needed for building a self-sustaining civilization on Mars. From their collective efforts one thing is clear; in order for there to be meaningful progress in the space industry, the space vehicle must be rapidly and readily reusable.
"You need reusability. If you go look at any approach that doesn't have reusability it's never going to be low-cost. There are only two problems with space travel today. It's too expensive and it's too dangerous. Other than that it's fine. So we hope to solve those two problems. If you want to solve those problems and have a space faring species you need to practice - and you can't practice with expendable vehicles."
Advice to people who want to start their own company
Never chase the hot thing. That's like trying to catch the wave, and you'll never catch it. You need to position yourself and wait for the wave, and you can do that by picking something that you are passionate about. Startups are hard, so you have to focus on a problem that you really care about solving.
Bezos will choose a missionary over a mercenary any day because it's the missionaries who build better products. When mercenaries are focused on flipping the company and trying to get rich; missionaries want to build a great product or service. It's of those great paradoxes; missionaries are usually the ones who end up making more money anyway.
What a fascinating fireside chat - great insights from Amazon's long-time founder and CEO. If you want to learn more about Bezos and the story of Amazon, we highly recommend picking up a copy of Brad Stone's The Everything Store. Never has a hyperlink felt so redundant - for a book about Amazon - we all know where to get it!