Jeff Bezos Speaking at Amazon, Source: Quartz 2014

The Jeff Bezos Framework (Part I)

“Jeff Bezos is a different species” – Charlie Munger

When legendary investor and thinker Charlie Munger speaks, we should listen.

There is much to be learned from Amazon CEO and serial entrepreneur, Jeff Bezos. When he founded Amazon, it was solely to sell books. Though he was an avid reader, selling books was never the ultimate mission for Amazon. Bezos left a high paying investment banking job in New York City with one main aim, to get involved with the Internet. At the time this was a risky bet. Over the years Amazon has become one of the world’s most influential companies. The strategic framework that Bezos has implemented at Amazon has led to market domination in many distinct industries including books, technology infrastructure, movies, and now groceries.

Aside from Amazon, Bezos has other personal business ventures. Many have criticized his decision to enter the newspaper business with his purchase of the Washington Post, but using a similar strategy to Amazon he has resurrected the newspaper and transformed it into a profitable business.  He has also developed Blue Origin, a rocket company with serious extraterrestrial ambitions.  Little is known about Blue Origin’s long-term plan, but it seems to be positioned in direct competition with the more public and Elon Musk backed SpaceX.

Blue Origin vs. SpaceX could drive the race to Mars.

This article is the first of a two part series which will explore Jeff Bezos’s framework for leading these ventures. From my experience, one of the best ways to improve a business is to study what the best have done and tailor their strategies to solve your specific challenges and problems. This article will explore Jeff Bezos’s framework and aims to help you think more strategically about your business or project.

The Long Term

“We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital…” – Jeff Bezos, 1997 Amazon Letter to Shareholders.

Perhaps the most important takeaway from Jeff Bezos is his ruthless focus on the long-term. He simply refuses to be distracted from pursuing his visions. Amazon has never paid a dividend and places little emphasis on other short-term metrics like share price and quarterly earnings. To Bezos, the fundamental metrics for success are those that reflect intrinsic value, measures  like free cash flow and revenue.  Bezos is so focused on the long-term, he believes he can predict quarterly earnings three years in advance. While lack of profits has led investors to be critical of Amazon in the past, there seems to be a growing indifference to Amazon’s bottom line because of it’s history of turning investments into sales growth and technology leadership. This trust has worked out nicely for Bezos as Amazon’s value  has made him one of the wealthiest people on earth.  This success is rooted in his focus on the long-term.

Because of his public focus on the long-term, Bezos has been asked many times about what he thinks the future will hold. He usually flips the question around and asks why focus on predicting the future? Bezos believes from a strategic perspective the best business models focus on the things that don’t change. This idea is rooted in one of Bezos’s favorite books, Nicholas Nassim Taleb’s The Black Swan.  In The Everything Store: Jeff Bezos and the Age of Amazon, author Brad Stone discusses a specific Taleb idea that had deep impact on Bezos.  It is called the “Lindy Effect.”  The “Lindy Effect” is a concept where the future life expectancy of non-perishable things like technology or ideas are proportional to age. This means that the longer something exists, the longer its life expectancy is. This seems to be the root of the Bezos’s emphasis on long-term thinking.

A Bias Towards Action

“Be stubborn on the vision, flexible on the details,” Bezos has said. This concept keeps the core idea of long-term thinking in perspective, but adds another important layer, a bias towards action.  In his book, Stone says Bezos took this concept from Walmart founder Sam Walton. Because of this action oriented philosophy he pushes employees for quick results.  In Bezos’s eyes speed is important, stating: “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.”

While moving fast is important to innovate, it can also create sloppiness. If velocity reduces quality, customers will not return.  For this reason, Bezos emphasizes the ability to identify and course correct bad decisions. In my experience as a management consultant, this is not just a key skill, it is the most important skill. Why? Things do not always go according to plan.  We are all wrong more often than we are right. The ability to reflect, learn, and improve is what separates great organizations from all of the rest. For Bezos, an effective organization makes high quality and high velocity decisions.

On Proxies

Another key point for Bezos is resistance to proxy, specifically process as a proxy. As organizations scale and become more complex, there is an undeniable benefit to some sense of standardization; however, when the process (i.e. proxy) becomes more important than the outcome you are trying to achieve it will become a roadblock. In his 2016 Letter to Shareholders Bezos wrote, “It’s always worth asking, do we own the process or does the process own us?” This is critical for leaders to keep at the front of their minds. If the process is not delivering a desired outcome, it does not matter if it is followed. Be outcome driven not process driven.

On Business Models

The Jeff Bezos business model seems to be relentlessly focused on growth. His focus on the long-term emphasizes revenue not net income or profitability. The reason? Flexibility to innovate and the power of economies of scale. Amazon has never feared high-fixed cost investments.  As Stone writes Amazon invested heavily in robust supply chain systems and technology infrastructure to more efficiently run its business. More recently this can be seen the acquisition of Whole Foods. The efficiencies gained from the initial investment results in an increased ability to scale and lower product cost for customers. This strategy seems to be working. Amazon’s net operating cash flow has grown more rapidly over recent years, and as Recode wrote, “Amazon is now the top internet retailer in the United States, now owning 33 percent of the market, according to market research company Euromonitor International. Analysts estimate that share could increase to 50 percent by 2021.” Focusing on growth, not profit, has allowed Bezos and Amazon to get to where they are today.

While a focus on growth and the risk appetite to handle what comes with it has been key to the rise of Jeff Bezos’s businesses, if you asked why his models have been successful, he would probably highlight what he calls “customer obsession” as the cornerstone. Bezos has touched on this idea with nearly all of his annual letters to Amazon shareholders and it is prominent in Amazon’s Leadership Principles. In his 2016 letter, he was  especially focused on this idea:

“There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality.

Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples.” – Jeff Bezos 2016 Letter to Shareholders

As you can see, this idea goes far beyond the old adage “the customer is always right”. It is clear here that Bezos emphasizes customer feedback and product iteration above all else. Many businesses in Silicon Valley have implemented this strategy, usually quoting Henry Ford, “If I had asked people what they wanted, they would have said faster horses.” Methodologies like “The Lean Start-Up,” “User Centered Design,” and books like “The Four Steps to the Epiphany” all lay out clear ways to implement a customer centric approach, but the key is empathy. For customer obsession to be the foundation of a good strategy, understanding of their wants and needs should be unbiased and true. Bezos has captured truth masterfully and it is maybe the most successful customer centric business in recent memory. It does not seem like Amazon’s customer-centric business model will change anytime soon. It is baked in the company’s vision:

Our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.

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