Bezos On Innovation
Amazon.com's founder discusses his approach to innovation—both how to do it and how to stay focused when critics question high-risk projects

Business Week, IN Focus April 17, 2008, 5:00PM EST text size: TT
Brian Smale

Welcome to our alumni of our new Implementing Organic Growth class.

There are some very powerful leanings in these excerpts from a BW interview Amazon’s Bezos…….

Bezos has heard worse, of course. For nearly half of Amazon's 13-year history, he's been in Wall Street's doghouse, largely because he's insisted on massive spending to build the capacity that supports new services. While many Web companies were roaring back to life between 2004 and 2006, Amazon's stock fell from more than 50 to as low as 26.

But Bezos seems to be having the last laugh. Not only has Amazon emerged as the undisputed e-commerce champ, but the CEO has embarked on the most ambitious new growth initiatives in the company's history. The plan to sell access to Amazon's vaunted computing infrastructure has taken off with startups and recently with some corporations. Meanwhile, he insists the Kindle, a device unveiled last fall for reading electronic books, could be big enough to matter for the $14 billion company.

Q: The company has a reputation for frugality. Does that apply to the way you innovate?

(Great, great insight and an important lesson for folks who control the purse strings)
A: I think frugality drives innovation, just like other constraints do. One of the only ways to get out of a tight box is to invent your way out. When we were [first] trying to acquire customers, we didn't have money to spend on ad budgets. So we created the associates program, [which lets] any Web site link to us, and we give them a revenue share. We invented one-click shopping so we could make check-out faster. Those things didn't require big budgets. They required thoughtfulness and focus on the customer.

Q: You seem able to ignore criticism from Wall Street, the press, and others about your investments in innovation.

A: I believe you have to be willing to be misunderstood if you're going to innovate. That's actually a serious point. If you're going to do something that's never been done before—which is basically what innovation is—people are going to misunderstand it just because it's new

Q: Academics say Amazon excels at different kinds of innovation—from creating new ways of doing business to making small changes that improve the online store. Now comes Kindle, your first hardware product. How do you balance these approaches? (Understand your portfolio of innovations initiatives)
A: There is a ton of fine-grained innovation that happens on a daily basis. That kind is super important—things that make our operations more efficient and lower cost so we can afford to offer lower prices to our customers. But there is a spectrum, and at the other end is large-scale innovation like Kindle and Web services and Amazon Prime [a membership program that offers free shipping]. With large-scale innovation, you have to set a very high bar. You don't get to do too many of those [initiatives] per unit of time. You have to be really selective.

Q: Every company claims to be customer-focused. Why do you think so few are able to pull it off? (This is right on target – your current capabilities serve as a platform not a limiting box to meet the targeted customer needs)
A: Companies get skills-focused, instead of customer-needs focused. When [companies] think about extending their business into some new area, the first question is "why should we do that—we don't have any skills in that area." That approach puts a finite lifetime on a company, because the world changes, and what used to be cutting-edge skills have turned into something your customers may not need anymore. A much more stable strategy is to start with "what do my customers need?" Then do an inventory of the gaps in your skills. Kindle is a great example. If we set our strategy by what our skills happen to be rather than by what our customers need, we never would have done it. We had to go out and hire people who know how to build hardware devices and create a whole new competency for the company.

Q: Does that mean that dealing with the whipsaws on Wall Street have not been a management problem for you?

A: Not really. It's like trying to get people to be long-term-oriented. Also, people who want to pioneer and find new ways of doing things know there are going to be ups and downs, that there will be profound moments of success and failure. And that's O.K. It's not an experiment if you know it's going to work.

The World's Most Innovative Companies
By: Mark Borden, Bill Breen, Jeff Chu, Josh Dean, Rebecca Fannin, Amy Feldman, Charles Fishman, Paul Hochman, David Kushner, Mark Lacter, Robert Levine ,David Lidsky, Ellen McGirt, Danielle Sacks, Chuck Salter, Elizabeth Svoboda, Linda Tischler
http://www.fastcompany.com/magazine/123/the-worlds-most-innovative-companies.html?page=0%2C1


This site summarizes their work on categorizing the most innovative companies. I will share a few of them at time to show the diversity of innovation in creating growth and competitive separation

#9 AMAZON (They are really expanding their platform using very simple decisions criteria –whatever they do increases selection, reduces cost, and enhances convenience of their consumers)
Without much fanfare, Amazon has more than tripled its revenues since 2002, to $13 billion. The key: giving customers choices, not just among products, but also between buying from Amazon directly or from outside vendors on the site. Amazon's new digital offerings -- in e-books, videos, and music -- present a fresh menu of options. The company's digital music store, launched in May, already comprises 3 million songs, all compatible with any device and any music software. Similarly, Unbox allows Amazon customers to rent or buy films and TV shows, and watch them on a variety of players. In an era of fighting formats and fears of piracy, that's uncommonly ecumenical.

#5 IDEO ( A fascinating mix of projects from 3rd world to Bank of America. In each case they base their designs on a deep knowledge of the target customers)
Nobody can accuse the Palo Alto -- based design firm of taking on easy clients in 2007. The CDC asked Ideo to help tackle childhood obesity; the Acumen Fund enlisted the shop to collaborate on delivering clean water in the developing world; and the Red Cross hired it to help encourage blood donations. "As social issues increasingly become business issues," says Ideo CEO Tim Brown, "this will be a critical new direction for design." Of course, there were awards too. The company's designs for the Eclipse 500 Very Light Jet cabin and cockpit instrument panel won IDEA Gold medals, as did its LCD monitor for Samsung. But it was Ideo's "Keep the Change" campaign for Bank of America that had perhaps the most impact. Based on research showing that boomer women with kids tend to round up their financial transactions, Ideo developed a service that rounds up debit card purchases to the nearest dollar, then transfers the monetary difference from the customer's checking account to her savings. In its first year, 2.5 million customers signed up.

#17 TARGET (Great marketers and an interesting internal process)
Target's strategy of rolling out capsule collections by well-known designers has kept the store's fashion merchandise leading the trends. In 2008, that strategy will take the form of vintage-inspired sports apparel and footwear with Converse, and a line of bedding, linens, and baby goods designed by StudioDwell. Target's appetite for hip design also extends to its marketing initiatives, such as 2007's "model-less" fashion show at New York's Grand Central Terminal (think holograms strutting down virtual runways) and a 2005 "vertical fashion show" at Rockefeller Center (left). Internally, the company encourages non-big-box thinking with a quarterly Big Idea contest. Winners don't just get a star on their performance reviews; they get a cash prize and a chance to see their ideas brought to life.

#19 TESCO (This is an incredible company that bases their strategies on a deep understanding of their customers through their Club that shoppers join to get bargains and agree to share their wants and needs)
Two or three times a week since November, a Fresh & Easy grocery has opened in California, Arizona, or Nevada. It's part of a plan to open 200 stores in two years envisioned by the chain's British parent, Tesco, the world's third-largest retailer. If Tesco's past is precedent, the U.S. grocery business ought to pay attention: Tesco has already quashed challenges from Wal-Mart in the U.K., and overseas expansion is its biggest growth generator. With more selection than a 7-Eleven but less than a standard supermarket, Fresh & Easy is geared toward the typical American shopper who buys only a few hundred products. The company plans to keep costs low by centralizing distribution, selling more store-brand items, and relying solely on automated checkout. By 2011, sales are projected to reach $4 billion, according to TNS Retail Forward.

#28 LG ELECTRONICS (It is amazing how quickly they grew in the U.S.)
Early on, LG, then a tiny Korean electronics manufacturer, was known as the "lucky group." It sure looks that way now: Half a century old, LG is one of the world's biggest producers of cell-phone handsets, air-conditioners, front-loading washing machines, DVD players, and flat-panel TVs. It has gone from near anonymity here just three years ago to $11.5 billion in North American sales in 2007. LG's killer app, slated for 2009 release, is rumored to be a mobile TV, dubbed MPH, that can pick up robust digital high-def broadcasts -- even from the backseat of a car going as fast as 100 miles per hour.

#29 BOEING (Example of a great product innovation based on their extensive work with composites though their military organization. These guys bet the company on each major new plane model!)
Not long ago, Boeing seemed destined for a future of eating Airbus's jetwash. But the 787 Dreamliner put the Seattle jumbo back in contention. Fifty percent of the Dreamliner's fuselage is built from lightweight composite materials, helping shave 20% off fuel consumption. The 787 is also 60% quieter than similar planes and emits cleaner exhaust. Inside, in a bid to reduce the headaches, dry mouth, and general misery of the long-haul hangover, higher cabin pressure and humidity better imitate life on the ground, and lighting adjusts with time-zone shifts. By January, 55 customers had ordered more than 800 Dreamliners, making it the fastest-selling commercial jet ever.

The World's Most Innovative Companies
By: Mark Borden, Bill Breen, Jeff Chu, Josh Dean, Rebecca Fannin, Amy Feldman, Charles Fishman, Paul Hochman, David Kushner, Mark Lacter, Robert Levine ,David Lidsky, Ellen McGirt, Danielle Sacks, Chuck Salter, Elizabeth Svoboda, Linda Tischler
http://www.fastcompany.com/magazine/123/the-worlds-most-innovative-companies.html?page=0%2C1

This site summarizes their work on categorizing the most innovative companies. I will share a few of them at time to show the diversity of innovation in creating growth and competitive separation

#11 PROCTER & GAMBLE (leveraging the ideas from outside their company)

When Procter & Gamble's stock tanked by more than half in 2000, CEO A.G. Lafley knew he was facing the dilemma of giant companies everywhere: Despite pouring money into R&D, P&G couldn't create new products fast enough to keep growing. The only way out, Lafley realized, was to innovate innovation. So he launched the Connect + Develop program, which allows outside developers to get their concepts and designs into P&G's product pipeline. An applicator developed by Cardinal Health (now Catalent), for example, helped P&G launch Olay Regenerist Eye Derma-Pods, now its top-selling skin-care item. Today, 42% of P&G products have an externally sourced component. And this giant is growing: Revenues rose 8%, to $78 billion, last fiscal year, while profits climbed 14%, to $11 billion.

#10 NINTENDO (took a different approach to games than its largest rivals – Sony and Microsoft)
By now you know the story: After Sony and Microsoft kicked the Mario out of Nintendo's GameCube in the Video Game War of 2001, the cutest and smallest of the three platform makers needed a new plan. "Nintendo took a step back from the technology arms race and chose to focus on the fun of playing, rather than cold tech specs," says Reggie Fils-Aime, president of Nintendo of America. The resulting Wii system, with its intuitive motion-sensitive controller and interactive games, appealed not only to teen boys but also to their sisters, moms, and dads. In 2007, Wii outsold both the PlayStation 3 and Xbox 360. But get this: Unlike its competitors--which lose money on each console and earn it back on software -- Nintendo turns a profit on its consoles, makes more selling games, then takes in still more in licensing fees. "Not to sound too obvious," Fils-Aime says, "but it makes good business sense to make a profit on the products you sell." Wall Street thinks so too. The company's stock has more than doubled over the past year. Nintendo's upset is doing more than attracting new gamers and bruising Sony and Microsoft. Says Sega of America president Simon Jeffery: "It has opened doors of creativity throughout the video-game business."

#26 HERMAN MILLER (Extending their marketspace to dramatically change how business is done – a true discontinuity)

The first product to emerge from Herman Miller's secret R&D lab in Michigan just over a year ago has nothing to do with the company's signature Aeron chairs or modular office furniture. Convia Programmable Infrastructure transforms the way companies install electrical systems, letting you reconfigure an entire building -- lighting, outlets, even heat and A/C -- with only a two-button point-and-click wand. The result? Not just flexibility in managing space, but also up to 30% energy savings. Times are good at Herman Miller. Among the dozens of fresh developments in 2007 were a personal climate control unit adapted from automotive technology and a voice privacy system that scrambles cell-phone users' voices to the ears of random passersby. Coming soon: office furniture with built-in cordless charging technology.

Innovating by scaling up
http://www.managementlogs.com/2004/07/innovating-by-scaling-up.html

I thought the following snippet maybe obvious to many but it highlighted to me the breadth of what we mean by innovation. Although this discusses scaling to mass markets, it is more than appropriate to scaling in niche markets as well. My experience at DuPont suggests that companies can drive growth by scaling good ideas vs. just inventing them; many in fact felt this was the true greatness of DuPont…..

Costas Markides and Paul Geroski once more write about colonizers and consolidators in Strategy + Business (Issue 35). They now recommend large corporations to stick with what they do best in: operating at large scale. So instead of treating discovery as the only holy grail in I. (as many consultants are advising them apparently), they argue scaling up is actually as innovative as discovery. More importantly, it is also creating a tremendous amount of value. Moreover, the authors also explain the skills a company needs to excel in turning niche markets into mass markets. They are:

1. Focus on the price/performance trade-off :don't focus on creating a technically superior product but compete on a reasonable quality at an attractive price to mass (any size customer segment) consumers
2. Get a bandwagon rolling: alliance strategies, merge with a major rival or use marketing to create the illusion that a design has already become dominant
3. Reduce consumer risk in adopting the new product (universal to any market size)
4. Build a strong mass distribution channel (you want to build a strong distribution regardless of the scale)
5. Create complementary products (or support complementary products from other parties).