Balancing the books

Amazon.com was born of strategy. The story has often been told of how founder Jeff Bezos, working in a quantitative analysis group at an investment firm, spotted an opportunity to sell books on the Internet. No native of the book-selling industry, he arrived at his business model logically: Given the attributes of the product and the structure of the supply chain, a no-bricks retailer could clearly make it – and make it big.
     
Who is setting strategic direction for Amazon? At the very beginning it was just you, sitting in a car on the way from New York to Seattle, making all the plans. Are you still making them all?
Oh, heavens, no. We have a group called the S Team – S meaning ‘senior’ – that stays abreast of what the company is working on and delves into strategy issues. It meets for about four hours every Tuesday.

Once or twice a year the S Team also gets together in a two-day meeting where different ideas are explored. Homework is assigned ahead of time. A lot of the things discussed in those meetings are not that urgent – we’re a few years out and can really think and talk about them at length. Eventually we have to choose just a couple of things, if they’re big, and make bets.

The key is to ensure that this happens fractally, too, not just at the top. The guy who leads Fulfillment by Amazon, which is the Web service we provide to let people use our fulfillment center network as a big computer peripheral, is making sure the strategic thinking happens for that business in a similar way. At different scale levels it’s happening everywhere in the company.

And the most important thing is that all of it is informed by a cultural point of view. There’s a great Alan Kay quote: “Perspective is worth 80 IQ points.” Some of our strategic capability comes from that.
         

How would you describe that cultural point of view?
First, we are willing to plant seeds and wait a long time for them to turn into trees. I’m very proud of this piece of our culture, because I think it is somewhat rare. We’re not always asking ourselves what’s going to happen in the next quarter, and focusing on optics, and doing those other things that make it very difficult for some publicly traded companies to have the right strategy.

Do you know when you’re planting one of those seeds that it’s, say, an acorn and it’s going to turn into an oak? Do you have a strong vision of how things will materialise? Or does the shape emerge along the way?
We may not know that it's going to turn into an oak, but at least we know that it can turn out to be that big. I think you need to make sure with the things you choose that you are able to say, "If we can get this to work, it will be big." An important question to ask is, "Is it big enough to be meaningful to the company as a whole if we're very successful?"

Every new business we've ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally. They'll say, "Why are you expanding outside of media products? Why are you going international? Why are you entering the marketplace business with third-party sellers?" We're getting it now with our new infrastructure Web services: "Why take on this new set of developer customers?"

These are fair questions. There's nothing wrong with asking them. But they all have at their heart one of the reasons that it's so difficult for incumbent companies to pursue new initiatives. It's because even if they are wild successes, they have no meaningful impact on the company's economics for years. What I have found ... is that when we plant a seed, it tends to take five to seven years before it has a meaningful impact on the economics of the company.
  
That,does require people, inside and outside, to keep the faith. How do you have the confidence that the investment will ultimately pay off?
It helps to base your strategy on things that won't change. When I'm talking with people outside the company, there's a question that comes up very commonly: "What's going to change in the next five to 10 years?" But I very rarely get asked, "What's not going to change in the next five to 10 years?"

At Amazon we're always trying to figure that out, because you can really spin up flywheels around those things. All the energy you invest in them today will still be paying you dividends 10 years from now. Whereas if you base your strategy first and foremost on more transitory things ... those things are going to change so rapidly that you're going to have to change your strategy very rapidly, too.

What are some of the things you're counting on not to change? 
For our business, most of them turn out to be customer insights. Look at what's important to the customers in our consumer-facing business. They want selection, low prices and fast delivery. This can be different from business to business: There are companies serving other customers who wouldn't put price, for example, in that set.

But having found out what those things are for our customers, I can't imagine that 10 years from now they are going to say, "I love Amazon, but if only they could deliver my products a little more slowly." And they're not going to, 10 years from now, say, "I really love Amazon, but I wish their prices were a little higher."

So we know that when we put energy into defect reduction, which reduces our cost structure and thereby allows lower prices, that will be paying us dividends 10 years from now. If we keep putting energy into that flywheel, 10 years from now it'll be spinning faster and faster.

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