I'm taking my love of reading and turning them into highlights to share what I learned. First up is Amazon's story. Book: The Everything Store by Brad Stone.
Few things you will learn:
→How did Jeff Bezos make sure not to repeat Steve Jobs' mistake?
→ Why can Communication be a sign of dysfunction?
→How did ideas for Amazon Prime and AWS come about?
How did Amazon decide to let third-party sellers sell their products right next to Amazon's products in the early days?
In the early days of Amazon's growth, the company faced a dilemma of whether to show products from third-party sellers that competed with their products. Conventional wisdom would guide to not show competitor products along with your products. But Jeff decided to show the competitor products along with Amazon's. His thinking was that if the customer chooses the third party product over Amazon's then Amazon lost a sale but collected a small commission. Jeff emphasized that "If somebody else can sell it cheaper than us, we should let them sell it and figure out how they are able to do it". This thinking has led Amazon to expand and create their own product lines.
How did the airline industry help Amazon with the idea of its prime program that has over 100 million members today?
The idea of prime membership came from one of Amazon's engineer who got the inspiration from the airline industry. Airlines divide their customers into recreational (willing to stay an extra day to get better prices) and business (fixed time to fly). Thus, Amazon divided its customers into two sections - time-sensitive and everyone else (users who could wait longer for their packages). The thinking was, why not provide faster shipping for customers whose needs are time-sensitive and are less price-conscious while charging them a monthly rate?
To reduce free shipping expenses, the workers in fulfillment centers would prioritize packaging for time-sensitive customers, aka prime members. Thus Amazon prime was born, and today, it has a lot more than just free shipping - movies, TV shows, music, and much more. Amazon understood its customers' needs and segmented them to create a business around it while delivering exceptional customer service.
Takeaway: Does your company or startup have a segment of customers willing to pay more for a better/faster service? If so, there might be a business opportunity worth exploring with that segment of users.
Why is "Communication a sign of dysfunction" and how Jeff accelerated decision making within a big corporate like Amazon?
"Communication is a sign of dysfunction. It means people aren't working together in a close, organic way. We should be trying out a way for our teams to communicate less with each other, not more" - Jeff Bezos
- Bezos vowed to run Amazon with an emphasis on decentralization and independent decisions making. From his perspective, "A hierarchy isn't responsive enough to change".
- Bezos's point was that coordination among the employees wasted time and that the people closest to problems were usually in the best position to solve them. They are thus pushing decision making down the chain.
This is one of the main reasons Amazon can work like a startup while being a big corporate as they move decision making to teams closest to the problem and thus increasing the speed of decision making. One might argue that speed in decision making doesn't matter, but the quality of decision matters. You will learn about how Amazon makes quality decisions later in this section.
How did the idea of AWS (Amazon Web Services) come about?
There were two main contributors to the idea of AWS: necessity and creativity.
- Necessity:Amazon's consumer team wanted to quickly try out new features and products, but they couldn't as each team had to plead to a separate team that controlled access to amazon servers. There were way more features that needed to be tested than there was the capacity for. Naturally, if consumer teams couldn't test their ideas - it would slow them down. Therefore, computer resources became a bottleneck—this frustrated Jeff Bezos.
- Creativity:Around the same time, Jeff came across a book called Creation by Steven Grand, who was also the creator of a video game called creatures. This game allowed players to guide and nurture an intelligent organism on their computer screens. Grand wrote that his approach to creating intelligent life was to focus on designing simple computational building blocks called primitives, and then sit back and watch surprising behaviors emerge. This sparked debate in Amazon exec team over the problems of the company's infrastructure. If Amazon wanted to stimulate creativity among its developers, it shouldn't guess what type of services they might want. Instead, it should be creating primitives - the building blocks of computing like storage, bandwidth, database, messaging, payments, and then get out of their way. Thus, AWS was born with the mission: "to enable developers and communities to use web services to build sophisticated and scalable applications".
Today, AWS is leading its industry by a significant margin. Part of AWS's immediate attraction to startups was its business model. Bezos viewed Web services as similar to an electric utility that allowed customers to pay for only what they used and increase or decrease their consumption anytime, just like an electrical grid.
Takeaway: If your company faces internal technical challenges, it's worth asking if other companies within the industry or outside face similar challenges. If you can solve your company's internal technical problems and other companies have similar issues, there might be a business opportunity worth exploring.
Why did Amazon make the decision to price AWS services at a drastically low price? And this was probably one of the greatest Go To Market strategies ever.
- Pricing:During a leadership meeting when someone proposed AWS's pricing at 15 cents an hour, Jeff pushed for 10 cents an hour even though it meant Amazon would lose money for a long time. Amazon had a natural advantage in its cost structure and ability to survive in low margin businesses. This was a strategic advantage that Amazon had that no other company had; thus, it could pursue this.
- Don't repeat Steve Jobs's mistake:A great example of this was the iPhone. Jeff said he doesn't want to repeat Steve Job's mistake of pricing the iPhone in a way that was so profitable that the smartphone market became a hub for competition. Jeff was spot on.
- Go To Market + Competitive Strategy:Jeff was aware companies like IBM, Microsoft, and Google make decisions to invest in a new industry if there are decent margins. Suppose there are high margins in the business, then rivals would rush in, just like the iPhone, which meant more competition. On the other hand, low margins attracted more customers and created more defensibility in the long term. Jeff attributed this to abusiness miracle, but small margin decisions played a critical role in the big companies not pursuing cloud opportunity for some time. Google chairman Eric Schmidt said it was at least two years before he noticed that founder of every startup he visited told him they were building their systems on top of Amazon servers. He said, "Let's give them credit. The book guys got computer science, they figured out the analytics, and they built something significant".
Takeaway: If your company is pursuing a new business opportunity, it's worth thinking about how your competitors will react to this opportunity. How can you discourage your competitors from entering the market or delaying their entry into the market? Low margins are one of the ways worth exploring.
How can Amazon run like a startup even though it's a giant corporate while other big corporates can't?
Jeff Bezos recognizes the decisions that a team has to make regularly. Execs like Jeff can't be there to make every decision, but he has laid out a strategic and tactical guide on operating well.
Strategy:14 leadership principles, and here are just three of them.
- Customer Obsession: Leaders start with the customer and work backward. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.
- Frugality: Accomplish more with less. Constraints breed resourcefulness, self-sufficiency, and invention. There are no extra points for growing headcount, budget size, or fixed expense.
- Have Backbone: Disagree and Commit: 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.
Tactic: (6-page narrative) How 6-page narratives led to better decision making about a feature or product and GTM strategy?
The goal is to get employees to distill a pitch into its purest essence, start from something the customer might see - the public announcement - and work backward. Bezos didn't believe anyone could make a good decision about a feature or a product without knowing precisely how it would be communicated to the world - and what the hallowed customer would make of it. Another benefit of the 6-page papers also pushed employees to think through problems and clarify their thinking, thus leading to better decisions.
I would highly encourage you to read the book as there are tons of valuable and counterintuitive lessons. I hope you find this helpful. I would love to hear your feedback in the comments below!
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