Amazon has now been in business for 23 years, and every year Jeff Bezos has taken the time to write to shareholders. These letters are lessons from Bezos, they articulate the business philosophies, technology strategy and leadership direction.
It is a masterclass in what it has taken to build the second largest company in the world. CBInsights have analysed all twenty three letters and identified what they believe to be the most important wisdom in each letter in chronological order. In this DIGEST we have synthesised the content further down to the underlying themes over the last two decades.
“When something bad happens you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you.”
Theodor Seuss Geisel
Wandering the essential growth counterbalance to efficiency
Most large established businesses know their market, they build plans and execute as close to flawlessly as possible. Most small businesses however are very keen to experiment for growth they have less to lose and more to gain. This is the innovative growth mindset of small business.
Bezos refers to wandering as a way that employees can pursue creative ideas. Amazon welcomes this idea of considering the potential of opportunities that are quite left of field.
Wandering led to Alexa, Amazon Web Services and Amazon Go so there is no question that the process works. “The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf,” he says. “We have to tap into our own inner imagination about what’s possible.”
Build Your Company Culture
Bezos talks about how companies with high standards is a key differentiator for successfully competitive companies like Amazon.
- The first ingredient of success is to proactively communicate realistic beliefs about the scale of the challenge. He says “unrealistic beliefs on scope – often hidden and undiscussed – kill high standards.
- Secondly the capability to recognise the bad ideas and the great ones.
“To achieve high standards yourself or as part of a team, you need to form and proactively communicate realistic beliefs about how hard something is going to be”
Jeff Bezos
Move Fast and Focus on Outcomes
Bezos recognises that startups are agile, nimble and quick. To remain competitive, you just need to act faster than they do. Amazon has these four strategies:
- Stay focused on the customer
- Be skeptical of proxies
- Stay alert for and quickly adopt trends
- Make high-quality, high-velocity decisions
Bet on Ideas That Have Unlimited Upside
“A dreamy business product has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time—with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.” Jeff Bezos (2014)
Innovation by definition needs a clear risk appetite. Opportunities that match the ‘dreamy’ characteristics deliver step change growth. By taking big chances on ‘dreamy’ opportunities, the upside will more than make up for the failures.
This links to an earlier theme that Bezos shared in 2008. That year he spoke about by working backwards from what the customer needs, they know what to build next.
Innovation comes from Distributed Decision Making
Leadership at the top tend to be very effective at optimising the existing processes and driving work programs. But it takes a bottom up approach to consistently see the opportunities and generate a plethora of new ideas.
Amazon seeks to get ahead of customer demand by creating things that customers don’t even know they want yet. That culture of creativity requires lots of people thinking about innovative ideas. It also means that anyone can have a crack at a small experiment. Bezos makes the point that “the downside of a small failed experiment is low, but the upside can be very high”.
This theme was also explained in 2006 when he spoke about nurturing the companies seedlings.
“In some large companies, it might be difficult to grow new businesses from tiny seeds because of the patience and nurturing required. In my view, Amazon’s culture is unusually supportive of small businesses with big potential, and I believe that’s a source of competitive advantage.”
Surprise and Delight Customers
The concept of proactively building a trusted relationship with customers by always aiming to provide more than they expected. For much of the eCommerce industry the goal is to optimise costs, so this strategy appears flawed. However when you look at Amazon Prime customers you can see how it pays off. The proactive delight that Amazon Prime customers has an estimated lifetime value of $2500 (in 2017), significantly higher than the industry average of $150.
He talks about not getting to fixated on short term numbers. Because while some decisions can be made with the data, the most important business decisions can only be made with judgement.
Ideas that have fantastic potential upside might not make sense in the short term so think about the benefit for the customer.
Free Cash Flow Enables Innovation
If you build a business that has earnings growth but no free cash flow, it may turn out to be a poor investment. By focusing on the free cashflow you are able to experiment and innovate quickly.
Bezos talked about the importance of free cashflow in the very first letter to shareholders in 1997. He explained “Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows, more than any other single variable, seem to do the best job of explaining a company’s stock price over the long term.”
(side note) It is fascinating that in 2002 he explained the benefit that technology companies had by owning the technology IP. When technology is a fixed cost it actually reduces as a percentage of the revenue being made. Ultimately this idea led to AWS which moves all fixed infrastructure costs to variable and on demand.
Key Takeaways
- The lessons from Bezos are a masterclass in building a company and achieving continued growth.
- The focus on Customer Delight, Free Cashflow and Continued Innovation set Amazon apart from competitors.
- Amazon were and remain willing to explore new opportunities, creating products customers did not know they needed.
DIGEST from CBInsights 23 Lessons From Jeff Bezos’ Annual Letters To Shareholders Published: 27th April 2020 https://www.cbinsights.com/research/bezos-amazon-shareholder-letters/ You can read an excellent summary of each year here: 2019: In times of crisis, be aggressive and agile 2018: Wandering is an essential counterbalance to efficiency 2017: Build high standards into company culture 2016: Move fast and focus on outcomes 2015: Don’t deliberate over easily reversible decisions 2014: Bet on ideas that have unlimited upside 2013: Decentralize decision-making to generate innovation 2012: Surprise and delight your customers to build long-term trust 2011: Self-service platforms unlock innovation 2010: R&D should pervade every department 2009: Focus on inputs — the outputs will take care of themselves 2008: Work backwards from customer needs to know what to build next 2007: Missionaries build better products 2006: Nurture your seedlings to build big lines of business 2005: Don’t get fixated on short-term numbers 2004: Free cash flow enables more innovation 2003: Long-term thinking is rooted in ownership 2002: Build your business on your fixed costs 2001: Measure your company by your free cash flow 2000: In lean times, build a cash moat 1999: Build on top of infrastructure that’s improving on its own 1998: Stay terrified of your customers 1997: Bring on shareholders who align with your values Links to Jeff Bezos’ Shareholder Letters (1997-2018)