Wednesday, October 31, 2007

Changing Direction
The Institutional Yes
How Amazon’s CEO leads strategic change in a culture obsessed with today’s customer.
An Interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart

There was an excellent article in HBR’s October 2007 edition that interviews Jeff Bezos, the founder and CEO of Amazon. They have been hugely successful in growing their business organically. I will excerpt the article over the next few postings, highlighting issues I feel are critical to drive organic growth from a leadership perspective.
This is the last of the trilogy. I hope you enjoyed it!
At the end, I took some liberty to do some consulting to emphasize the role of leadership in driving organic growth


(Interview questions) You’ve got two other sets of customers: the third parties who are selling goods through your site and this new set—the developers who can benefit from the tools you’ve created over the years. What are some constants for those groups?

We’re still working on identifying them for the developer community, although we have some good guesses as to what they are. Reliability of the platform would be one, which is kind of a no-brainer. But then a lot of these things are no-brainers. No-brainers are no-brainers for a reason: They actually are important. As for the sellers, the number one thing that sellers want is sales.

Is that why the auction business didn’t work out for Amazon—because eBay already had a lock on the sales those sellers wanted?

Actually, no, it’s a little different from that. It’s that our customers who are buyers are very convenience motivated. We make it really, really easy to buy things. You can see that if you look at a metric like our revenue per click or revenue per page turn. It’s very high, because we’re efficient for people. If you’re a customer who wants that kind of quick service, you do not want to wait till an auction closes. An auction is more about playing a game. There’s some fun involved. You’re not necessarily just trying to get the job done. It’s a different kind of thing and a different customer segment. (This is VERY powerful “experiment” reinforced the true strength of their base. Convenience is one of their critical Decision Criteria and they have a metric for it—you get what you measure. They want third parties because it adds to the breadth of their “selection” criteria while not impinging on "convenience". Amazon customers did not find the auction process convenient!!)
That episode is actually one of the highlights of our corporate history—one that I tell over and over internally, because it speaks to persistence and relentlessness. The basic thought was: Look, we have this website where we sell things, and we want to have vast selection. One of the ways to get vast selection is to invite other sellers, third parties, onto our website to participate alongside us, and make it into a win-win situation. So we did auctions, but we didn’t like the results. Next we created zShops, which was fixed-price selling but still parked those third parties in separate parts of the store. If a third-party seller had a used copy of Harry Potter to sell, it would have its own detail page, rather than having its availability listed right next to the new book. We still didn’t like the results we got. It was when we went to the single-detail-page model that our third-party business really took off. Now, if we’re offering a certain digital camera and you’re a seller with the same camera to sell, you can go right on our own detail page, right next to our product, and underbid us. And if you do, we will put you in the “buy” box, which is on that page.

That can’t have been an easy decision—it gets you the seller customer but loses you the buyer customer, doesn’t it?

It was a very controversial decision internally at the time. Imagine being our digital camera buyer and you’ve just bought 10,000 units of a particular digital camera. Your boss says to you, “Good news: You know all those people you’ve been thinking of as your competitors? We’re going to invite them to put their digital cameras right next to yours on your detail page.” The natural reaction is “What?” A digital camera today is like a fish in a supermarket. It’s aging fast. You don’t want to get stuck with a huge inventory of five-megapixel cameras when customers will shortly want six-megapixel cameras. You’ll have to sell them for pennies on the dollar. So our buyers were extremely concerned—and rightly. They were saying, “Let me just make sure I understand this. I might get stuck with inventory of 10,000 units of this camera that I just loaded up on, and you’re going to let just anybody come in and take Amazon traffic on what is our primary retail real estate, which is the detail page, and I’m going to lose the buy box to this other person because they have a lower price than me?” And we said, “Yeah, we are.”

We talked about that a lot before we did it. But when the intellectual conversation gets too hard because of these potential cannibalization issues, we take a simpleminded approach. There’s an old Warren Buffett story, that he has three boxes on his desk: in-box, out-box, and too hard. Whenever we’re facing one of those too-hard problems, where we get into an infinite loop and can’t decide what to do, we try to convert it into a straightforward problem by saying, “Well, what’s better for the consumer?”

The reality is that we have a highly competitive cost structure and we’re very good at competing on things like digital cameras on that page, so it actually works out very well. But some of the most important things we’ve done over the years have been short-term tactical losers. In the very earliest days (I’m taking you back to 1995), when we started posting customer reviews, a customer might trash a book and the publisher wouldn’t like it. I would get letters from publishers saying, “Why do you allow negative reviews on your website? Why don’t you just show the positive reviews?” One letter in particular said, “Maybe you don’t understand your business. You make money when you sell things.” But I thought to myself, We don’t make money when we sell things; we make money when we help customers make purchase decisions. (We often talk about the Core Mission which defines the strategic space for a company or business. There are two components: the Core Value and Core Process; the former is the ultimate value a company/business can create for their customers while the latter is their fundamantal building block of value creation. My sense is that helping the customers make purchase decisions is Amazon’s Core Value while their Core Process is their incredible system platform that enables convenience, selection, lowest cost and fast delivery. Note, the Decision Criteria must support the Core Mission.
Let’s take a shot at defining Amazon’s Leadership Framing (the first step in our Market Driven Growth process), a critical role of leadership in driving organic growth:


TO: Help our target customers make purchase decisions

IN A WAY THAT: builds the breadth and efficiency of our e - platform

SUCH THAT: we continue to increase our competitive separation to sustain our growth and margin goals for our stockholders.


Any initiative must satisfy at least one of these criteria without impinging on another. Relative project rankings will be determined by the overall enhancement of these criteria to our target customers:


I hope you can see from this example how framing the growth effort for a company or business is a critical job of leadership. Everyone within Amazon will know what leadership will resource and what they will not. This sets the conversation in the company!

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