4 rules Amazon uses to avoid painful decline

Share

Any company whose brand becomes a common noun (without the capital letter, called an eponym) must have made a big impact. Generations have cleaned the house with a hoover, blown their noses with a kleenex, stored hot drinks in a thermos and xeroxed a document. Most of us google rather than search.

Although not exactly the same thing, the goal of many new companies is to become ‘the Amazon of’ something. In wealth management, many new roboadvisers describe their strategy as aiming to become ‘the Amazon of financial services’.

Well, good luck with that, because not only is Amazon a unique company, it may well want to become the Amazon of financial services itself. FinancialAdvisorIQ (part of the Financial Times group) recently published an article titled ‘Betterment Yearns to be Amazon of FAs. Does Amazon?’, including:

“Amazon entering wealth management would cause a major disruption to the advice industry, pushing down prices and driving up demand for far faster delivery of financial services.”

Jeff Bezos annual letter to shareholders

Amazon has disrupted many industries, and destroyed companies like Borders, but in its 20 years, it has had negligible impact on financial services.

We all know that Warren Buffett produces his famous annual shareholder letter which is widely quoted, but it’s less well-known that Amazon’s CEO Jeff Bezos does the same. It’s a completely different style. Buffett focuses on his returns and investments, and it’s clear that making money is the main game. In his 2016 letter published a few months ago, Bezos does not mention ‘profit’ once, while ‘customer’ receives 19 hits.

The full text of Bezos’s latest letter is linked here, and it’s much shorter than Buffett’s.

There are a few highlights that every company can learn from, although the vast majority of large companies do not have the internal structures and processes to make them work. Bezos wants his company to always operate as if it’s Day 1, as Day 2 is a step to an excruciating, painful decline followed by death. For him, Day 1 vitality requires obsessive customer focus.

He identifies four rules for making high quality decisions:

  1. High velocity

Large organisation struggle to decide quickly because they fear failure. Speed matters, and where a decision is reversible, it should use a lightweight process. Most companies overestimate the cost of being wrong, whereas being slow will be expensive.

  1. Don’t wait for certainty

There is usually uncertainty around a decision, yet most companies want to check off on everything.

“Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions.”

  1. Disagree and commit

It’s often difficult to achieve consensus, as nobody can know with certainty the outcome of a new initiative. He says ‘disagree and commit’ saves a lot of time:

“If you’re the boss, you should do this too. I disagree and commit all the time … They had a completely different opinion and wanted to go ahead. I wrote back right away with “I disagree and commit and hope it becomes the most watched thing we’ve ever made.” Consider how much slower this decision cycle would have been if the team had actually had to convince me rather than simply get my commitment.”

  1. Recognise misalignment

Misalignment between teams and objectives must be identified early and addressed, or the problem will lead to exhaustion.

“Whoever has more stamina carries the decision. I’ve seen many examples of sincere misalignment at Amazon over the years. When we decided to invite third party sellers to compete directly against us on our own product detail pages – that was a big one. Many smart, well-intentioned Amazonians were simply not at all aligned with the direction. The big decision set up hundreds of smaller decisions, many of which needed to be escalated to the senior team. “You’ve worn me down” is an awful decision-making process. It’s slow and de-energizing. Go for quick escalation instead – it’s better.”

Does it work?

Many analysts have criticised Bezos over the years for reinvesting in the business rather than generating profits and paying dividends. When $10,000 invested in 1997 now has a value of about five million dollars, in a company with a market cap of nearly US$500 billion, it’s hard to criticise success and the way Amazon is challenging other businesses the world over.

 

Graham Hand is Managing Editor of Cuffelinks.

Share

, , ,

3 Responses to 4 rules Amazon uses to avoid painful decline

  1. Alex July 13, 2017 at 7:41 PM #

    We don’t have the corporate culture in our large companies that allows for quick failure in this way, and too many compliance issues and multiple layers of checks to move this quickly.

  2. Ed V July 13, 2017 at 9:46 PM #

    I noticed a discrepancy between your and Ashley Owen’s calculations on the value of Amazon stock if held continuously since 1997.

    How could it be that, according to Ashley Owen, $1,000 is worth approximately $494,000 and yet, on the same day, you stated a $10 investment is worth around $5m?

    I thought I’d check the data myself and, according to Yahoo! Finance historical share price data, Amazon has grown from a split-adjusted $1.96 on 15 May 1997 to $961.35 on the same date in 2017.

    This is a CAGR of approximately 36.3% which gives me a figure of $490,000, much closer to Ashley’s than yours.

    Either way, it’s an excellent return, but perhaps not as great as you described!

    Graham, I think your $5m figure would be correct with an investment of closer to $10,000 rather than $10. Did you miss the ‘k’??

    Regards,

    Ed

Leave a Comment:

*

Register for our free weekly newsletter

New registrations receive a free copy of our ebook, Cuffelinks Showcase 2016.