Before we move on to new books I am reading, I wanted to come back to my favorite read in 2016: The Everything Store. It is the story about Jeff Bezos and the creation of the giant that Amazon is today.
I hope my fallible memory is a great filter to sum up only great and memorable points.
Big things I learnt
I will largely frame my writing on Amazon’s values:
Customer obsession, frugality, bias for action, ownership, and high bar for talent, innovation.
On avoiding competition
Gaining edge initially: the decision to sell books
The thing that impressed me most was Bezos’ superior analytical thinking skills. As a new online store, Amazon needed an edge versus traditional brick-and-mortar stores. One of the ways he could achieve that is by having more customer choice (as brick-and-mortar have limited physical space to show and stock the product). He figured a product that has an immense variety in product offerings would maximize his edge. He went for books, hence the name Amazon, which aims to symbolize the variety of the rainforest. After Amazon became popular for books, he compiled a list of product categories with similar huge variety of choice and went for those as a second step.
There’s less competition for very long-term business plans
Most corporate agents are focused on the next quarter, year or years. A founder can afford to think longer term. There’s much less competition in plans that require patience.
Gaining and keeping edge longer term: market leadership
Gaining market leadership requires foregoing traditional financial metrics like GAAP earnings margins. Keeping market leadership requires relentless client/product focus and continuous cost consciousness. But that’s OK, Jeff knew very early on that market leadership gives you economies of scale in this new online business with huge fixed costs.
On customer obsession
Creating alignment through pricing
Amazon does not earn money on selling Kindles. Amazon earns when customers are satisfied with the Kindle ecosystem and buy Kindle books. This creates alignment.
Creating customer oriented culture through rotation
Amazon has a mandatory rotation system to make every employee talk to customers through the Amazon.com call service. Engineers passing through customer service has also brought to light IT problems that were subsequently solved.
Obsess over customers, not competitors
On innovation and frugality
AWS and getting out of the way of the customer
Jeff is not a fan of wasting time, so he especially hates the idea that many of his employees would waste time together. Amazon’s culture was shaped early on to avoid meetings (e.g. standing up during meetings, no TV screens). Another slogan was “communication is a sign of failure”. No wonder that Amazon preferred IT systems talking to each other without human friction through good API’s. However, the IT needs for Amazon.com became eventually so big that considerable time of API designers went to asking and interfering with how the internal API clients were going to use the service.
This growing internal demand led Amazon to define basic computational building blocks, or “primitives” and make them really scaleable in order to sell these services to external clients as well. This way Amazon.com would recoup these large fixed costs to improve internal operations. The initial primitives were storage, computing, payments and messaging. This became what is known as Amazon AWS and the rest is history.
This innovation was based on the idea to get out of the way of developers and provide them all required building blocks with no questions asked. It is reminiscent of electricity generation becoming centralized in the 19th century, removing capex requirements on the consumer side.
When a platform is self service, even the improbable ideas can get tried because there’s no expert gatekeeper ready to say ‘that will never work!’” – Jeff Bezos
Frugality to drive innovation
Although Jeff always loved optionality and funded many long-shot projects, it has to be stressed that he likes cheap optionality by being frugal. Another advantage of frugality on top of lower costs is reflected in the following quote.
We try not to spend money on things that don’t matter to customers. Frugality breeds resourcefulness, self-sufficiency and invention. There are no extra points for headcount, budget size or fixed expense.
Leaders are intellectually curious, but commit to execute their decisions
The following is a quote by Bezos that was also covered in Superforecasting that we summarized. It marks the decision-making process of a great leader: be always questioning, but once you decide, show commitment to the execution of your decision.
Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly. – Jeff Bezos
Always keeping the bar high
“If that’s our plan, I don’t like our plan.”
“I’m sorry, did I take my stupid pills today?”
“Do I need to go down and get the certificate that says I’m CEO of the company to get you to stop challenging me on this?”
“Are you trying to take credit for something you had nothing to do with?”
“Are you lazy or just incompetent?”
“I trust you to run world-class operations and this is another example of how you are letting me down.”
“If I hear that idea again, I’m gonna have to kill myself.”
“Does it surprise you that you don’t know the answer to that question?”
“Why are you ruining my life?”
[After someone presented a proposal.] “We need to apply some human intelligence to this problem.”
[After reviewing the annual plan from the supply-chain team.] “I guess supply chain isn’t doing anything interesting next year.”
[After reading a narrative.] “This document was clearly written by the B team. Can someone get me the A team document? I don’t want to waste my time with the B team document.”
Defining non-GAAP KPI’s and what it means for investors
The following point relates to my previous book summary “The Outsiders”. I realize that the ability to creatively define the right key performance indicators is shared among great CEO’s and founders. Last post, we covered EBITDA defined by John Malone. Jeff Bezos is definitely another example of a founder who defines success by many unconventional metrics (e.g. long term absolute free cash flow, not GAAP profit margins).
In my opinion, investors trying to identify great CEO’s by checking if they use unconventional metrics is misguided however. Fraudsters are known to be very creative in defining new metrics. Many short-seller reports are full of criticism on creative metrics. Ultimately, the hard task for the investor is to think independently and check if these metrics make sense from a business owner perspective.
The value of a business is ultimately determined by a multiple to its absolute cash flow generating ability, not a percentage of GAAP earnings.
We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.