Before diving into them, let’s clarify a few key points.
Table of Contents
Companies get nonlinearly complex
When a company scales up at the size of Amazon, culture becomes extremely important as it works as a glue to keep aligned a large number of people. According to Amazon financials, the company had 647,500 full-time and part-time employees as of December 31, 2018.
To give you a bit of context, this is the size of cities like Boston, Las Vegas or Detroit. And this is just counting the full-time or part-time employees of the company. If we count the induced employment created by Amazon (suppliers, businesses, and services built on top of it), we might well go over the few million people.
At this size, it gets exponentially more complex to keep people operating for a common purpose or a set of shared goals that fit the company’s objectives.
To be sure, a company with a hundred thousand employees is not a thousand times more complex than a company with a thousand employees. Instead, when we talk about people and their relationships, things get nonlinearly more complex.
Thus a company of a hundred thousand employees is many many times over a thousand times more complex than a company with a thousand employees.
For that matter, culture might become critical for a few reasons.
Culture as a survival mechanism
It’s hard to prove any causal relationship between culture and success of an organization. And we tend to point to organizations which turned out to be successful. I bet that if we were to select companies that went bankrupt during the dot-com bubble, many of them seemed to follow the same principles.
In short, where it’s hard to pinpoint why culture matters, culture does carry some hidden benefits for the companies that survived thanks to certain principles. But the survival might be due to hidden aspects which are hard to understand consciously.
Culture with a via negativa approach
Rather than look at culture as something that you do that makes you successful. We can look at it via negativa. In short, what some successful companies are doing to avoid screw-ups as they scale.
As Amazon scaled to the tech giant, we know today, it went through quite some bad historical times. From the dot-com bubble, when the company lost more than 90% of its value from its peak, yet it survived.
For that matter, before going to the principles, Amazon has today, I want to jump to the hardest time for Amazon historically. The reason is Amazon hasn’t always been a lean company, following a sustainable business playbook.
Yet it learned the hard way a new model that would enable it to make it through the hardest time and to become the tech giant we know today.
Amazon during the dot-com bubble
As you can notice above, Amazon managed to survive the dot-com bubble. While its revenues grew from 1997 to 2001 as a result of the aggressive expansion, the company’s losses mounted.
During that time, Amazon’s employee base grew from 158 to 614. That was a time when management, leadership, and culture started to play a critical role in Amazon’s success.
Indeed, if we were to break down or have a theory around what makes a company able to scale, there is the core which is represented by a must-have product or a service which obsesses over customer experience.
To gain further traction, the company needs a strong business model. And as it scales, culture might become extremely important. Thus, it might look something like that:
That is why, as Amazon scaled up and as it started to expand its products aggressively it has also to find business model-market fit.
By 2001, Amazon had that!
The company, had not only expanded its selection away from books and into many other categories.
But it had also opened up its platform to third-party sellers which helped further grow Amazon customer base, by following the Amazon flywheel model:
At the time, Amazon also strategically opened to third-party sellers to enhance its brand. In other words, where today Amazon might host third-party sellers which might be primarily small businesses.
Understanding Amazon business model-market fit
Back in the 2000s, Amazon opened up to brands like Toysrus.com, Inc., Target Corporation, Circuit City Stores, Inc., the Borders Group, Waterstones, Expedia, Inc., Hotwire, National Leisure Group, Inc., Virgin Wines, and others which further amplified Amazon‘s brand.
If you could buy something from Target on Amazon, you would trust its brand more easily.
The third-party seller strategy started to work. And it showed how Amazon was leveraging on a platform business model to enhance its brand and business.
The third-party seller services strategy revolved around three core ones:
Merchant@amazon.com Program: here third party seller could offer their products on Amazon, either in its online stores or in a co-branded store on the Amazon site, or both. And they could also fulfill those thorough products Amazon by paying the company a fixed fee. Companies like Target and Toysrus were part of it.
Merchant Program: with which the third-party seller had its own URL and Amazon provide the option of providing fulfillment-related services on behalf of the third-party.
Syndicated Stores Program: which represented third-party seller’s e-commerce websites were offering products available on Amazon, which product were fulfilled by Amazon and the company paid commission to syndicated store.
In that period, as Amazon started to scale its employees base, it significantly strengthened the management team.
In the annual letter of 2001, Jeff Bezos highlighted:
When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.
And he continued:
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.
Therefore, even though Amazon did survive the dot-com bubble, the business model which would enable the company to make it through the first phase of scale-up was drafted around the beginning of the year 2000, right at the bottom of the dot-com bubble.
In short, even though Amazon emphasized so much on cash flows, during the dot-com, the company was burning a substantial amount of cash. And Amazon itself still saw the web as a distribution platform, rather than a business model enabler.
Therefore, Amazon‘s survival through that period was nonetheless due to a bit of lack. However, Jeff Bezos led Amazon through that period with vision and extreme passion, and he kept pushing the company to a new business model.
Amazon.bomb evolving into a platform
To have an idea of how gloomy was the scenario. As the Guardian highlighted in June 2000, in an article entitled “Amazon.bomb:“
Analyst Ravi Suria highlighted Amazon‘s “weak balance sheet, poor working capital management, and massive negative operating cashflow – the financial characteristics that have driven innumerable retailers to disaster through history.” It was a day during which Amazon‘s shares lost 20% of their value, and 51m of them changed hands. A company worth about $40bn (£25bn) just before Christmas had ended the day worth $12bn (£7.5bn), and things did not improve during trading yesterday.
At those comments, Jeff Bezos replied at the time:
Three years ago our stock was $1.50 a share, today it’s $30-something. There have been many, many days when our stock has gone up 20% in a day” – that laugh again – “and if stocks can go up 20% in a day, they can go down 20% in a day. All internet stocks are volatile, including Amazon.com… we are nowhere near running out of cash, and we are not at all worried about it.
And he was right. Even though the company had burned a few hundred million in cash in 2001.
It had managed to get a long-term loan of over six hundred million back in 2000, right before the explosion of the dot-com bubble. Thus, guaranteeing enough cash to go through that bad period.
Indeed, as of 2001, Amazon still had over five hundred millions of cash sitting in its bank account.
To understand how bad Amazon reputation might have been at the time (of course not all agreed with that), an article dated April 26, 2001, by Doug Casey, author of “Crisis Investing,” highlighted:
I’ve said several times that Amazon is a cinch for bankruptcy, certainly Chapter 11 (a reorganization) and maybe even Chapter 7 (a liquidation), although I consider the latter a bit of a long shot.
The lessons Amazon learned during the dot-com bubble to find business model-market fit
What can we learn from this story?
Quite a bit of luck when hard times hit is critical.
Amazon managed to secure enough cash to survive long enough to its business model to be fully viable and scalable.
The company kept pushing on growth, and it changed its business model as it went through the crisis. In short, Amazon in 2000 finally expanded its e-commerce and made it more as a platform business, which would be the basis for Amazon success in the decades to come.
Jeff Bezos kept a strong focus on the operations even through a period which was highly distracting.
When new technologies are becoming mass adopted, companies need to think about it as a new playground where the rules of the business game can be rewritten.
Throughout the dot-com era, Amazon changed the playbook. It went from a cash-burning machine, and it transitioned into a lean organization. Although we give the lean startup principles as given today, they were not so back then.
Not by chance, I mentioned luck as the first factor, but learning fast, changing playbook accordingly, are also crucial to Amazon survival.
Let’s look now at the amazon guiding principles.
Where is Amazon today?
Amazon’s expanded in many industries.
Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure
While still most people think of Amazon as an e-commerce company, in reality, Amazon’s reach spans across several industries, and it’s not a mere presence, but rather market domination.
Amazon’s is a leader in the e-commerce space, which has been its core space, to expand in many other areas. From Cloud, where the company is a key player competing with Google and Microsoft.
To entertainment with its Amazon Prime, which competes with global players, like Netflix.
Or perhaps, the advertising side of the business that makes of Amazon a legitimate and fastest-growing player in the digital advertising space, competing with the advertising machines of Google and Facebook.
And its voice technology side, Alexa, that makes of Amazon the best positioned to take advantage of the next wave of voice assistant.
In short, in whatever direction you look, Amazon is there with its tentacles, entering markets abruptly, to dominate them in a short span of time.
Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.
Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.
This mindset shift is critical. It’s essential to understand the playground and who’s playing. But the focus and obsession should never move away from customers. And customer obsession is not just about doing what customers want.
It’s about finding out new ways to serve them, which they don’t even know yet exist. This is important as many companies out there praise them as “following customers needs” as they build products and services that do affect the bottom line.
But following the bottom line alone is short sited. As a company leading in industry, for how small it can be, you need to have a vision of how you want things to be. Thus, drive your customers through and toward that vision!
Ownership
Leaders are owners. They think long term and don’t sacrifice long-term value for short-term results. They act on behalf of the entire company, beyond just their own team. They never say “that’s not my job.”
Long-term thinking has been ingrained in Amazon thinking for a long time. However, as we saw, the playbook which brought Amazon to become a tech giant was implemented in 2000, when Amazon was struggling in the short term.
As the company still had a few million dollars at the bank, it also knew it had to slow down the rate of burning that cash. That is why operational efficiency became an essential element of Amazon‘s growth.
Short-term cash coming from the operation efficiency would help Amazon finance its short-term growth, that was at the core of Amazon cash machine. In short, Amazon learned that long-term vision, together with short-term cash flows, made a massive difference.
Invent and Simplify
Leaders expect and require innovation and invention from their teams and always find ways to simplify. They are externally aware, look for new ideas from everywhere, and are not limited by “not invented here.” As we do new things, we accept that we may be misunderstood for long periods of time.
Invention and experimentation have also been at the core of the company’s culture. Throughout the years, Amazon did make many (at hindsight) foolish investments, that although looked brilliant at the time (take the case of Pets.com).
Yet in the process, it also produced a few huge winners.
Are Right, A Lot
Leaders are right a lot. They have strong judgment and good instincts. They seek diverse perspectives and work to disconfirm their beliefs.
Beliefs can help us go through complex scenarios. But in certain instances, they might limit hour ability to grow. Thus, it becomes critical to be able to revise those beliefs when they turn out to be off.
Learn and Be Curious
Leaders are never done learning and always seek to improve themselves. They are curious about new possibilities and act to explore them.
Experimentation and exploration are critical to any company’s success. Once again, it doesn’t matter if you’re a small startup or a tech giant, you need to make bets.
Hire and Develop the Best
Leaders raise the performance bar with every hire and promotion. They recognize exceptional talent, and willingly move them throughout the organization. Leaders develop leaders and take seriously their role in coaching others. We work on behalf of our people to invent mechanisms for development like Career Choice.
For Amazon leadership highlights coaching and development of other people within the organization.
Insist on the Highest Standards
Leaders have relentlessly high standards — many people may think these standards are unreasonably high. Leaders are continually raising the bar and drive their teams to deliver high quality products, services, and processes. Leaders ensure that defects do not get sent down the line and that problems are fixed so they stay fixed.
Improving the bar and setting higher and higher standards it’s not an easy game. Yet essential to stay on top.
Think Big
Thinking small is a self-fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers.
Communicating vision is key not only internally, to align employees and key stakeholders. But also to show to your customers where you’re going.
Imagine the case I’m building an e-learning platform and as one of my first customers, you can see my vision of having it become the best platform on earth you will stick around to help me shape my vision.
Bias for Action
Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk taking.
This is an extremely important point: speed and reversibility.
As we stress more and more on making a data-driven decision, we end up in an analysis paralysis scenario. On the opposite spectrum, as we prioritize on speed, we end up killing our company for an excess of it.
Thus, a sweet spot is speed, and reversibility can help. For that you can use the speed-reversibility matrix:
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.
As we’ve seen Amazon fully transitioned to this playbook in the 2000s when it lived hard times thor the dot-com bubble.
Earn Trust
Leaders listen attentively, speak candidly, and treat others respectfully. They are vocally self-critical, even when doing so is awkward or embarrassing. Leaders do not believe their or their team’s body odor smells of perfume. They benchmark themselves and their teams against the best.
Dive Deep
Leaders operate at all levels, stay connected to the details, audit frequently, and are skeptical when metrics and anecdote differ. No task is beneath them.
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.
Deliver Results
Leaders focus on the key inputs for their business and deliver them with the right quality and in a timely fashion. Despite setbacks, they rise to the occasion and never settle.
Key takeaways
Blitzscaling is a business concept and a book written by Reid Hoffman (LinkedIn Co-founder) and Chris Yeh. At its core, the concept of Blitzscaling is about growing at a rate that is so much faster than your competitors, that make you feel uncomfortable. In short, Blitzscaling is prioritizing speed over efficiency in the face of uncertainty.
I defined Amazon “the continuous blitzscaler” Indeed, Amazon in the beginnings pushed on growth at the risk of breaking things up. While it survived the dot-com bubble (a good chunk of luck also helped).
The company has mastered over the years a playbook that didn’t look for conventional short-term financials. Where many analysts over the years could not make sense of Amazon with its tight and sometime almost negative net profit margins.
The company was instead using most cash it generated to invest back on growth and quickly expand in adjacent areas. While this sort of aggressive playbook didn’t make sense for many. This is the Amazon playbook.
Like the other companies that would become tech giants, each of them had to master a business playbook.
Apple mastered the ability of pushing expensive and yet beautiful (none thought tech products had to be beautiful) Tech products to mass audiences through its powerful direct/indirect distribution approach.
Google learned how to make its advertising machine well suited to an audience that grew to the billions and yet keep working smoothly (with of course massive resources invested back to it).
Amazon learned how to keep growing at fast speed, in several segments, and yet quickly dominate them.
Key Highlights
Amazon’s Journey Through Challenges:
Amazon survived the dot-com bubble in the early 2000s, a period of financial turmoil for many tech companies.
Amazon has a diversified business model. In 2022 Amazon posted over $514 billion in revenues, while it posted a net loss of over $2.7 billion. Online stores contributed almost 43% of Amazon revenues. The remaining was generated by Third-party Seller Services, and Physical Stores. While Amazon AWS, Subscription Services, and Advertising revenues play a significant role within Amazon as fast-growing segments.
Amazon’s mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.”
In the Amazon Shareholders’ Letter for 2018, Jeff Bezos analyzed the Amazon business model, and it also focused on a few key lessons that Amazon as a company has learned over the years. These lessons are fundamental for any entrepreneur, of small or large organization to understand the pitfalls to avoid to run a successful company!
Amazon has a business model with many moving parts. The e-commerce platform generated $220 billion in 2022, followed by third-party stores services which generated over $117 billion; Amazon AWS, which generated over $80 billion; Amazon advertising which generated almost $38 billion and Amazon Prime, which generated over $35 billion, and physical stores which generated almost $19 billion.
The Amazon Working Backwards Method is a product development methodology that advocates building a product based on customer needs. The Amazon Working Backwards Method gained traction after notable Amazon employee Ian McAllister shared the company’s product development approach on Quora. McAllister noted that the method seeks “to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it.”
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.
In the letter to shareholders in 2016, Jeff Bezos addressed a topic he had been thinking quite profoundly in the last decades as he led Amazon: Day 1. As Jeff Bezos put it “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”
The Amazon fundamental principles that drove and drive the company are:
– Customer Obsession – Ownership – Invent and Simplify – Are Right, A Lot – Learn and Be Curious – Hire and Develop the Best – Insist on the Highest Standards – Think Big – Bias for Action – Frugality – Earn Trust – Dive Deep – Have Backbone; Disagree and Commit – Deliver Results
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
