I recently bought and read Invent & Wander, which is the collective writings of Jeff Bezos (AKA all of Amazon’s annual letters to shareholders). It also includes the transcripts of a handful of speeches that he’s given. Reading the annual letters chronologically made it clear that Jeff focuses his attention on just 9 key themes. These themes are reiterated in nearly every single letter.
1.) Obsession with customers
This is the biggest recurring theme by far. In his very first annual letter, Bezos states that he wants to create the world’s most customer-centric company. Instead of focusing on competitors, Amazon relentlessly focuses on its customers. He argues that, over the long term, what is good for customers will ultimately be good for shareholders.
The other big benefit of being customer-centric is that it allows Amazon to innovate proactively, instead of reactively. Companies that focus on their competitors will constantly be reactive. They wait for competitors to launch a new product or feature and then respond to it. Amazon, on the other hand, proactively innovates and creates new products. By this point, there are probably tens of thousands of examples of Amazon innovating and improving upon its own products.
One early example of customer-obsessed innovation was Amazon’s decision to allow negative reviews on products. After all, Amazon makes money when it sells products. Allowing customers to leave negative reviews on products will inevitably discourage customers from making a purchase.
However, Bezos knew that this honesty and transparency would ultimately build customer trust. While it might hurt sales in the short term, it would create a better customer experience and encourage customers to return in the long term. Speaking of the long term…
2.) Focus on the long term
Especially in Amazon’s earliest days, Bezos was always focused on the long term. In many cases, he would ignore short-term shareholder expectations in order to maximize the customer experience. He felt that this would ultimately provide the most value for all parties involved.
Additionally, ambitious innovation requires a long-term mindset so that engineers have enough time to work through setbacks.
3.) Bezos’ three rules for entering a new market
Bezos refused to enter a new market unless it fit these three criteria:
- Amazon had the ability to offer an improved differentiated customer experience.
- The market was large enough to scale in.
- The market offered the potential to earn impressive capital returns.
Most importantly, Amazon needs to be able to offer an improved experience. This was Jeff’s philosophy when he first started Amazon. He felt that he could offer a differentiated bookstore experience by offering a wider selection of books, fast shipping, and cheaper products. If Amazon cannot differentiate itself then it won’t be able to scale.
This brings us to the next main takeaway.
4.) Take bold, calculated risks
This is Jeff Bezos’ theory on innovation. He fostered a culture at Amazon of taking a long-term focus on innovative ways to provide more value to customers. To create this culture, Jeff focused on taking bold, calculated risks. He knew that many of his ideas would fail spectacularly. This didn’t bother him because these failures would then become valuable lessons. Additionally, he could double down on the few ideas that worked to make up for the failures.
5.) Ask these 3 questions before hiring someone
Early on in Amazon’s journey, Bezos highlighted the importance of hiring the right people. To do so, he always asked the same three questions before hiring someone:
- Will I admire this person? Could this person ultimately grow to be a person that I’d admire?
- Will this person raise the average effectiveness of the group they’re entering? Bezos wanted each hire to be more impressive than the previous one. So much so, that he wanted older employees to look around at the new hires and feel lucky that they got in when they did.
- Along what dimension might this person be a superstar? Bezos was more inclined to hire superstars, even if their skills didn’t directly relate to their job. For instance, one of his earliest employees was a spelling bee champion.
6.) Wake up every morning terrified
Don’t be scared of what your competitors are doing. Instead, wake up terrified that today is the day that your customers stop finding your product/service valuable. Bezos would literally wake up terrified of losing his customer-centric focus.
7.) Build businesses that can scale
“Real estate does not obey Moore’s Law.”
This is what Jeff stated when investors pushed him to get into the physical retail business. Moore’s Law states that the number of transistors on a microchip doubles about every two years. At the same time, the cost of computing halves. In other words, computing power gets exponentially more powerful, while also getting cheaper. Real estate, on the other hand, does not.
Jeff knew that technology was a field that was growing exponentially while real estate was staying stagnant. This is why he never had an interest in opening a physical store. That is, he didn’t until Amazon created its “just walk out” technology.
“Just walk out” is the tech that lets customers simply walk out of a store with their products. Staying true to his standards, it wasn’t until Jeff could offer a differentiated customer experience that he explored opening a physical Amazon store.
8.) Bezos’ favorite accounting metric
Interestingly, Bezos hardly discusses Amazon’s financial metrics in his annual letters. Instead, he prefers to describe how Amazon is providing more value to customers along its many different business lines (hopefully you’re noticing the trend). If you want a detailed breakdown of Amazon’s balance sheet then you’ll have to look elsewhere. There is one financial metric, however, that Bezos focuses on…free cash flow.
Bezos loves free cash flow because it is the most closely related to stock price. A share of stock is usually portrayed as a share of the company’s future cash flows. Other metrics, like EBITDA or revenue, don’t directly translate to cash flows.
In Bezos’ mind, improving free cash flow is the best way to eventually improve a company’s stock price.
9.) Work-backward innovation
Innovation can be a daunting task. Where do you even start while trying to create groundbreaking technology? At Amazon, they start with their customer and work backward. Jeff appropriately calls this method “work-backward” innovation.
Essentially Amazon dives into its customer data, polls, surveys, and complaints to see what customers want or are complaining about. Then, it invents products to satisfy these complaints. It essentially invents products on behalf of its customers. This is another way that Amazon can stay proactive in its quest to offer the best customer experience possible.
If it wasn’t clear what customers wanted, Amazon engineers would simply brainstorm ways that they could improve the customer experience.
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