Amazon (AMZN, Financial) concluded 2015 posting amazing growth across the board. In his annual letter to shareholders, Jeff Bezos recognizes the role of luck in the company's success; however, he also points out some of the characteristics and circumstances that have turned Amazon into an outstanding success story.
"This year, Amazon became the fastest company ever to reach $100 billion in annual sales," he said. "Also this year, Amazon Web Services is reaching $10 billion in annual sales … doing so at a pace even faster than Amazon achieved that milestone.
"What’s going on here? Both were planted as tiny seeds, and both have grown organically without significant acquisitions into meaningful and large businesses quickly. Superficially, the two could hardly be more different. One serves consumers, and the other serves enterprises. One is famous for brown boxes and the other for APIs. Is it only a coincidence that two such dissimilar offerings grew so quickly under one roof? Luck plays an outsized role in every endeavor, and I can assure you we’ve had a bountiful supply.
"But beyond that, there is a connection between these two businesses. Under the surface, the two are not so different after all. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long term and the taking of professional pride in operational excellence. Through that lens, AWS and Amazon retail are very similar indeed."
Bezos highlights the importance of having eyes on the prize, which for Amazon has always been customer satisfaction. This focus has made the company seize opportunities, try, fail and reinvent in order to bring smiles (and more money) from customers. With a long-term vision, increasing customer satisfaction has allowed Amazon to slowly expand beyond its dominance areas, sometimes successfully, as with Amazon Web Services, or unsuccessfully, as with the Fire Phone. Bezos and his team have been relentless in delivering satisfaction to their customers and have slowly turned an unprofitable company into a real threat to big retailers and data companies.
"One area where I think we are especially distinctive is failure," Bezos said. "I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a 10% chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of 10. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments."
This paragraph pretty much sums up Amazon's philosophy. Amazon's willingness to experiment is unparalleled. Most importantly, Bezos has a clear picture of what he can obtain from these experiments: a long-tailed distribution of returns, which is what sometimes pays for the many failures you might have. This reminds me of Peter Lynch's remarks in his book "One Up On Wall Street," in which he mentions that you do not have to be right every single time; generally, being right slightly more than half of the time makes up for the losses and the failures.
What is remarkable is that Amazon has had this vision since inception, which is why it is so hard to replicate. Other retailers have started with a specific mindset and adapted as needed while Amazon has been adapting since day one. The only specific mindset it has in mind is customer satisfaction, no matter the cost. While it has proved to be unprofitable for a long time, as the ink turns black, we are watching the leaves on a tree that was planted a long time ago.
What do you think?
