“Every time a seismic shift takes place in our economy, there are people who feel the vibrations long before the rest of us do, vibrations so strong they demand action–action that can seem rash, even stupid….Jeffrey Preston Bezos had that same experience when he first peered into the maze of connected computers called the World Wide Web and realized that the future of retailing was glowing back at him”
“Jeffrey Preston Bezos: 1999 PERSON OF THE YEAR”, Time Magazine
In our two part case study of Amazon’s leadership principles, we start with a deep dive into Jeff Bezos’ leadership principles, using the collected writings and thinking of the ex-CEO, now Chair of Amazon. In creating the world’s largest ecommerce and cloud computing platform Bezos has been uniquely successful in driving consistent company results over a 20 year plus period. How does he think as a CEO? How does he construct companies?
Bezos’ genius is in large part organisational. By organising Amazon as small, modular teams, with single threaded leaders, tied together via decision making principles such as Type 1, Type 2 decisions, he’s created an effective, fast and almost infinitely scalable company. Bezos, more than any another tech leader, knows how to fight company ‘entropy’. In this article we break down the core tenets of how he does it.
“It’s not that Bezos is doing any one thing that no one had thought to do before: it’s that he’s doing it faster, more efficiently, and at unprecedented scale.”
Jeff Bezos and the World Amazon Made – Mark O’Connell, the Guardian
The Bedrock of Amazon’s Leadership Principles
“I’ve appended our 1997 letter, our first letter to shareholders. It gets more interesting every year that goes by, in part because so little has changed.”
Jeff Bezos, 2000 Letter to Stakeholders
In 1997 Jeff Bezos set the foundation for Amazon’s business and management methodology with his letter to shareholders. Many of his guiding concepts he laid out in the letter, which continues to be referenced in every CEO letter to shareholders released by Amazon ever since.
Some of Bezos’ thinking is big repeated themes (such as customer obsession). Some of it is throwaway comments on how to run a company or think about internal processes, which is nonetheless very insightful into how Amazon is run; and the organisational and cultural practices which allow it to scale.
Overall Bezos’ writings can be condensed down into
- Business principles: Ways in which to think about how to build a successful company
- Leadership principles: How to behave as an effective leader
- Cultural and workplace principles: Working and hiring effectively
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Business principles
The overall business ethos of Amazon comprises a few major themes:
The power of the internet
- Bezos looks for industries where software can replace human labour, and where the customer experience can be digitised to deliver excellent service at scale at a low marginal cost per user. This requires upfront investment costs, a passion for invention and a long term perspective.
- A deep understanding of the landscape of the internet: it’s fast moving, constantly evolving and a young industry; and innovating at speed to stay ahead is an imperative. This requires so-called ‘Day 1’ thinking.
Pick your differentiator, drive it through the organisation, and stick to it
- Amazon’s number one principle is customer obsession. It might feel counterintuitive to have to state it, but businesses can be product focused, technology focused, business model focused, landscape or competitor focused (which can lead to tail chasing or me-too product development), and the customer can come as an afterthought.
- By picking the core focus and insisting on it above all other things for multiple decades, the clarity around the objective has enabled effective and aligned output.
Organise for success
- How can you move fast as you grow? Organise teams to be small, nimble and have only 1 goal. Be a company with lots of small companies within it, moving fast and avoiding big company stasis.
- How can you ensure they make good decisions? Create a framework where you empower them to make lots of small decisions without worrying about it too much, and then ensure they know when to escalate big decisions. Empower them to fail and fix.
- How can you help them decide what to prioritise? Create mental models where they understand how to prioritise one thing over another via Leadership principles and a north star of customer obsession.
Obsess over customers
“The number one thing, by far, that has made us successful is obsessive compulsive focus on the customer, as opposed to the competitor”
Jeff Bezos, The Bezos Day One Fund
In Bezos’ first shareholder letter in 1997, he mentioned the word customer 25 times in a letter of only 1617 words long. Clarity around the north star is critical in any company. In Amazon, that’s customers.
“We intend to build the world’s most customer-centric company. We hold as axiomatic that customers are perceptive and smart, and that brand image follows reality and not the other way around. Our customers tell us that they choose Amazon.com and tell their friends about us because of the selection, ease-of-use, low prices, and service that we deliver.
But there is no rest for the weary. I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us – right up until the second that someone else offers them a better service.”
1998 shareholder letter
Maintaining focus on a north star principle for multiple decades, and enforcing it throughout an enormous company takes significant focus. Bezos describes Amazon’s customer focus as its secret sauce, and believes it is responsible for the company’s global dominance.
“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.”
2016 shareholder letter
By maintaining a focus on customer delight, Amazon makes improvements to its products and services before it needs to – or is forced to by external market forces. This maintains customer satisfaction in fast moving environments, and avoids customer churn. Bezos has remained focused on customer metrics above all other things, including existential moments. In the 2000 shareholder letter post dot.com bubble crash he began with one word, ‘Ouch’, before noting that Amazon had lost 80% of its stock value that year, before listing multiple consumer metrics that showed him that things were going to work out just fine.
Amazon Prime is an example of customer obsessive thinking in action: the internal risks were initially scary but the long term benefits were massive:
“When the finance team modeled that idea, the results were horrifying. Shipping is expensive, but customers love free shipping…..it was very expensive at the beginning. It cost us a lot of money because what happens when you offer a free all-you-can-eat buffet? Who shows up to the buffet first? The heavy eaters. It’s scary. It’s like, oh my god, did I really say as many prawns as you can eat? And so that is what happened, but we could see the trend lines. We could see all kinds of customers were coming, and they appreciated that service, so that’s what led to the success of Prime.”
“The new Jeff Bezos book: Read his own words on how Amazon embraced failure to drive innovation and success”, Business Insider
Prime wasn’t a success on day 1, due to the adoption patterns of the service: where the heavy Amazon users piled in first since they had the biggest incentive to adopt. Prime works because some customers use the service less, and are highly profitable, therefore paying for the unprofitable customers. Even if customers use it less than some other customers, they still use Amazon more in the long term due to the loyalty it engenders for the service. Amazon is a gross margin positive business which requires fixed cost investments. In that scenario the more gross margin positive orders made through the platform the greater the fixed cost payback.
Amazon’s virtuous flywheel: Prime supports lower pricing, better customer experience and ultimately retains more traffic
Passion for invention
“If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out.”
2018 Shareholder letter
In order to succeed continuously as a company, Amazon has to continue to invent and innovate on a big scale; working towards genuine game changers or needle movers. It’s a necessity because technology is a fast moving industry, it’s necessitated by Amazon’s scale and it’s necessitated by genuine customer obsession.
Bezos compares working backwards from customer needs to an approach he calls the ‘skills forward’ approach. Skills forward means taking in-house capabilities and rolling those into new products or services: ‘we’re great at this and therefore we should do more of this’. In comparison working backwards from the user requires developing new skills or muscles – since the customer need is not fulfilled by existing in-house capabilities. So if, for example, you determine that there’s a customer need for a digital book reader and book software such as Kindle – and you have no hardware engineers – you hire some hardware engineers and meet the customer need. Capability should not be a barrier to invention.
Day 1
“this is Day 1 for the Internet and, if we execute well, for Amazon.com.”
-1998 shareholder letter
Bezos signed off every shareholder letter since 1997 with the statement: ‘it remains Day 1’. When he worked at Amazon, he worked in a building named Day 1, and when he moved, the name moved with him. He established a $2bn charitable fund focused on funding solutions to family homelessness and establishing non profit tier-one schools called the Bezos Day 1 Fund. But what, exactly, does Day 1 mean?
Day 1 means approaching everything with the energy and attitude of the first day, in a small company, small group mindset. Bezos’ belief is that by maintaining Day 1 mentality as part of the company’s DNA, Amazon can have the scope and success of a large company but with the spirit and soul of a small one.
““Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”
To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.”
2016 letter to shareholders
Elements of Amazon’s Day 1 culture – Amazon executive insights
Leadership principles
It’s all about the long term
“Long-term thinking levers our existing abilities and lets us do new things we couldn’t otherwise contemplate. It supports the failure and iteration required for invention, and it frees us to pioneer in unexplored spaces. Seek instant gratification – or the elusive promise of it – and chances are you’ll find a crowd there ahead of you. Long-term orientation interacts well with customer obsession. If we can identify a customer need and if we can further develop conviction that that need is meaningful and durable, our approach permits us to work patiently for multiple years to deliver a solution.“
2008 shareholder letter
Leaders should be thinking in years, rather than quarters. Bezos sees decision making as a long-term enterprise focusing on market leadership rather than short term profit management. Since his first shareholder letter in 1997 he has been vocal about the need to act in multi year phases in order to maintain market leadership.
“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.”
1997 shareholder letter
He enforces an operating model on himself and his senior management team built on the wisdom of Warren Buffett, who says he’s good if he makes three good decisions a year. Bezos says he really believes that, and while he acted differently when Amazon was a company of 100, these days he tries to make no more than 3 good decisions a day.
There are multiple moments in Amazon’s history where Bezos has very much eaten his own dog food – launching products, making service decisions all of which carried significant risk and which resulted in short term losses. An obvious example was his decision to lower prices to achieve more user volume, a lever he later deployed again at the Washington Post.
Not only that but by capturing so much of the ecommerce market, Amazon now has the ability to set market pricing – something most of us will have noticed positively or negatively while shopping for goods and services. The power of low pricing and convenience even on consumers who are negatively impacted as suppliers of the same products (i.e. writers), not least the rest of us is evidenced by the fact that over 30% of UK online purchases (and over 40% of US online purchases) go through Amazon.
“Increased volumes take time to materialise, and price reductions almost always hurt current results. In the long term, however, relentlessly driving the “price-cost structure loop” will leave us with a stronger, more valuable business. Since many of our costs, such as software engineering, are relatively fixed and many of our variable costs can also be better managed at larger scale, driving more volume through our cost structure reduces those costs as a percentage of sales”
2003 shareholder letter
Resist proxies
“As companies get larger and more complex, there’s a tendency to manage to proxies. This comes in many shapes and sizes, and it’s dangerous, subtle, and very Day 2.”
2016 Shareholder letter
The concept of resisting proxies comes down to one question: is the thing we’re talking about the thing we need to understand / deliver, or is it a substitute for the thing?
Most of us will have experienced proxies over impact or insight several times during our careers. Examples include
- User surveys used over interviews, qualitative data, or deep user insight: ‘Hang on, I know NPS improved by 10% but is 58% a good NPS score? Users are still churning and telling us they don’t like X?’
- Process over delivery: ‘We delivered the OKRs, we followed the process’ but by doing so did not deliver meaningful results for customers or the business.
- Metrics over instinct and intuition – data is useful but it can be manipulated to demonstrate almost any conclusion. Bezos is clear that great leaders thrive on accurate instincts.
“I’m not against beta testing or surveys. But you, the product or service owner, must understand the customer, have a vision, and love the offering. Then, beta testing and research can help you find your blind spots. A remarkable customer experience starts with heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.”
2016 shareholder letter
Embrace external trends
“The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly. If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind.
These big trends are not that hard to spot (they get talked and written about a lot), but they can be strangely hard for large organizations to embrace.”
2016 Shareholder letter
As an example of how to embed this thinking culturally, Jeff Bezos was talking about AI and machine learning as ‘an obvious trend’ in 2016. By 2020 35% of retail revenues came from Amazon’s recommendation algorithm.
Failure to move with society or the fast evolving landscape of the internet means being left behind; and leaders have to embed reactivity to societal trends throughout the organisation in order to maintain Day 1 and drive further innovation.
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Cultural and workplace principles
Culture
Bezos is personally known to demonstrate and value several values over others
- Resourcefulness – he believes life is too short to be spent with people who aren’t resourceful in their approach to tackling and resolving problems
- Truth – he is known to be relentless about the pursuit of truth, even when that creates uncomfortable situations or conclusions. More junior employees in Amazon are encouraged to challenge more senior employees in pursuit of the truth.
- Relentlessness – he is dogmatic and persistent in pursuit of difficult goals
This cascading culture from the top has created a self replicating, cultural environment which is right for some people, but not for others (as covered in this New York Times article describing a punishing and exclusive culture of long hours and expected overachievement at Amazon).
“A word about corporate cultures: for better or for worse, they are enduring, stable, hard to change. They can be a source of advantage or disadvantage … If it’s a distinctive culture, it will fit certain people like a custom-made glove. The reason cultures are so stable in time is because people self-select…. The world, thankfully, is full of many high-performing, highly distinctive corporate cultures. We never claim that our approach is the right one – just that it’s ours – and over the last two decades, we’ve collected a large group of like-minded people.”
2016 shareholder letter
Six page narratives, or how to communicate effectively
Six page narratives within Amazon are a procedural tool to enforce many of the principles outlined above. An internal memo in Amazon cannot be longer than six pages, and should be between two and six pages. Meetings at Amazon typically start with a reading and commentary session on a prepared memo, and they form the bedrock of how the company clarifies its thinking and hones its decision making.
“Well-structured, narrative text is what we’re after, rather than just text. If someone builds a list of bullet points in Word, that would be just as bad as PowerPoint.
The reason writing a good four-page memo is harder than ‘writing’ a 20-page PowerPoint is because the narrative structure of a good memo forces better thought and better understanding of what’s more important than what, and how things are related.
PowerPoint-style presentations somehow give permission to gloss over ideas, flatten out any sense of relative importance, and ignore the interconnectedness of ideas.”
Email from Bezos, quoted in The Amazon Management System
The idea is that narrative memos are harder to write well, they require more rigour, they’re less duplicitous or misleading than PowerPoints, they can be crafted and honed in draft form in a different way, and they communicate more effectively since narrative is the power of storytelling. If a compelling memo can’t be produced, the project should not be done.
Hire well
“Setting the bar high in our approach to hiring has been, and will continue to be, the single most important element of Amazon.com’s success.”
1998 shareholder letter
In his 1998 shareholder letter Jeff Bezos set out 3 questions that he expected hiring managers to be able to answer in hiring meetings. They were as follows:
- Will you admire this person? The principle behind this one is that if you look at the people you’ve learned from or were able to take an example from, they were most likely someone you admired. Bezos states that life is too short to work with people that you don’t, and advocates for admiration as a key hiring criteria.
- Will this person raise the average level of effectiveness of the group they’re entering? The principle behind this one is continuous improvement. ‘We want to fight entropy. The bar has to continuously go up.’ says Bezos. This can only be achieved by consistently raising the bar within teams for performance and membership.
- Along what dimension might this person be a superstar? This does not have to be related to the role or hard or soft skill set for which they are being hired. Evidence of superstardom can be in any realm. The idea being that people’s external capabilities and interests can enrich the workspace and provide valuable new perspectives – plus make it an interesting place to work.
These days Amazon takes this principle as far as to a) enshrine what they call ‘bar raising data points’ in interview scorecards, and b) have a specific interviewer role for cultural watchdogs, known as Bar Raisers.
Have high standards
In his 2017 shareholder letter Bezos set out some of his thinking about how to create high standards within Amazon. He separated it into multiple different components:
- Are high standards intrinsic or teachable?
- Answer: high standards are contagious and cultural
- Are they universal or domain specific?
- Answer: domain specific; each domain to has to be learned anew
- How can you achieve high standards in a specific domain area?
- First you have to recognise what good looks like in that domain
- Secondly you have to be realistic about what it will take to get to good, and how much work is entailed; you cannot achieve a high standard in 1 week if what is required is multiple months of work
- Do you have to be skilled in all areas to have and enforce high standards?
- No, but you have to staff your teams so that someone has the missing skill, and you have to be able to recognise what good looks like in that domain
This can be synthesised into a methodology of how to support and enforce high standards.In essence what Bezos is saying is: create an organisation where high standards are an embedded and expected part of the culture – and via robust hiring plans and processes for ever increasing domain high standards, keep raising them. In addition when coaching someone to a high standard in a given area, ensure that they understand the bar and the investment required to get to that standard. Finally, balance teams for high standards in given domain areas and ensure that high standards are recognisable.
Experimental vs operational failures
We’ve covered how short term revenue losses from lowering prices or short term gross margin impacts from rolling out a Prime loyalty program are more a failure of perspective or lens, driven by short term thinking rather than long term thinking. In addition Bezos applies a second failure lens, to understand if something is an experimental vs an operational failure. Amazon prides itself on operational excellence, so experimental failure is the only acceptable fail type.
““If we build a new fulfillment center and it’s a disaster, that’s just bad execution. That’s not good failure,” Bezos said. “But when we are developing a new product or service or experimenting in some way, and it doesn’t work, that’s okay. That’s great failure.””
“The new Jeff Bezos book: Read his own words on how Amazon embraced failure to drive innovation and success”, Business Insider
Operational excellence is a pillar of Amazon’s business success: selection, pricing, and logistic speed make up the three components which make Amazon such a sticky repeat purchase proposition for consumers globally. Avoidable operational failure therefore cannot be tolerated since it affects customer satisfaction (principle one), but experimental failure can be tolerated, since big bets that strive to create a new customer experience paradigm are key to raising customer satisfaction long term and keeping pace within a fast evolving landscape.
High velocity decision making
We’ve written about high velocity decision making in detail here.
Some decisions are irreversible, or Type 1 decisions, and as such they have to go through a rigorous decision making process.
“I often find myself at Amazon acting as the chief slowdown officer: “Whoa, I want to see that decision analyzed seventeen more ways because it’s highly consequential and irreversible.” The problem is that most decisions aren’t like that. Most decisions are two-way doors.”
“Jeff Bezos: Here’s how I make Amazon’s highest-stakes decisions”, Fast Company
Most decisions are reversible or Type 2, so they should be taken quickly, with authority devolved down to the team or individual level, and if necessary, reversed quickly. The goal of empowering individuals or teams to make these decisions quickly is to maintain momentum and Day 1 thinking; and avoid distracting managers from big picture thinking.
Two pizza teams
In an effort to avoid ‘you’ve worn me down’ decision making or protracted debate driven decision making Bezos is also an advocate of what he describes as ‘two pizza teams’.Two pizza teams are small autonomous teams given remit over a product category or service, with the express goal of increasing team velocity.. Two pizzas means the team cannot increase in size over ‘two pizzas’ or – if more than two pizzas are needed to feed the whole team, the team is too big.
In creating small, autonomous teams empowered to take reversible decisions fast, several things follow
- Everything Amazon does must be scaled down to a two pizza level / smallest possible denominator
- Amazon is modular and can scale almost indefinitely by adding more sticklebrick teams
- Those teams can operate fast without the constraints of internal process or management overhead; keeping hierarchies flat
- Creating what Bezos calls ‘multiple paths to yes’ in terms of innovation in products or services makes sense in a decentralised environment, thus creating an ecosystem in which the Amazon innovation process can thrive bottom up (and making sense of the memo culture)
- The small teams don’t necessarily need to work for Amazon. This created the inspiration behind the Amazon third party supplier marketplace business, which by 2018 accounted for 58% of Amazon’s retail business.
- The output of those teams can be imagined as a digital product as well as a real world one. Cf. the famous AWS generating platform memo from Bezos in 2002 which launched the AWS platform business, that stated: 1. All teams will henceforth expose their data and functionality through service interfaces. 2. Teams must communicate with each other through these interfaces…)
“This means not so much that products on Amazon are commodities (this is obvious) but that product categories on Amazon are commodities.”
Ben Evans, ‘The Amazon Machine’
Powering Innovation and Speed with Amazon’s Two Pizza Teams – Amazon.com, Executive Insights
Conclusion
In terms of operationally embedding business, leadership and cultural principles, Amazon is undoubtedly a highly effective organisation. A ruthless focus on customer ‘ecstasy’, long term thinking, internal innovation and agility, resistance to proxies and a relentless focus on high standards has yielded outsize results. Day to day operational standards (narratives, high velocity decision making, hiring principles) have been imitated across the tech industry. Jeff Bezos’ initial 1997 shareholder letter has been described as a ‘free mini-MBA’ and in terms of free business resources available to teach how to think about building a technology company his shareholder letters are hard to beat.
Hustle Badger Resources
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* [Template] Amazon Leadership Principles Interview Cheat Sheet (Google Doc)
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FAQs:
What are Jeff Bezos’ leadership principles?
Some of Jeff Bezos’ leadership principles are to obsess over customers, that it’s all about the long term, that it remains ‘Day 1 for the internet and for Amazon.com’, to resist proxies and to practise high velocity decision making. He’s also known for thoughts on how to hire well, and components of culture building, such as writing narratively over writing powerpoints, or team size, such as stating that teams should never be bigger than those which could be fed by two pizzas.
Did Jeff Bezos write leadership principles?
