The Amazon Management System . Ram Charan
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Block 1:
Customer-Obsessed Business Model
Before starting Amazon, Jeff Bezos worked at D. E. Shaw and Co., a Wall Street firm famous for its quantitative trading methods. In 1994, founder David Shaw appointed Bezos to lead the effort to study potential business opportunities that could be created by the Internet. The two would spend a few hours brainstorming each week, and Bezos would conduct further study to explore the feasibility of their ideas.
Among those seemingly crazy ideas generated twenty-five years ago, some indeed came true, such as the “concept of a free, advertising-supported email service for consumers – the idea behind Gmail and Yahoo Mail,” “a new kind of financial service that allowed Internet users to trade stocks and bonds online” – the idea behind E-Trade, and last but not the least, “the everything store.”1
When Bezos studied the Internet, a magic number caught his attention: 2300%. Web activity had increased by a factor of roughly 2300% in the past year. Bezos noted, “It’s highly unusual, and that started me thinking, what kind of business plan might make sense in the context of that growth?”2 With this notion in mind, he decided to quit his lucrative, highly promising career on Wall Street and start his own business.
Twenty-five years ago, the Internet was still in its infancy. So where should Bezos start? How to conceptualize a dynamic business model with unlimited growth that had both the high potential to ride this wave of unprecedented growth and the solid feasibility to convert his ambition into reality?
What’s Amazon’s business model?
Although extremely excited by the unprecedented growth, Bezos sensibly realized that it was highly impractical to launch the “everything store” right from the beginning.
So where to start? Bezos listed twenty product categories that had potential to sell online, such as computer software, office supplies, apparel, and music. After careful contemplation, he decided that the best starting point should be books.
1.0: Online bookstore
Why books?
You can probably come up with several obvious reasons yourself. Books are highly standardized, the market is big, and the logistics of shipping books is relatively less challenging than shipping other things.
The less obvious reason is that at that time the book market was heavily dominated by only two distributors. For a start-up, it was much easier to deal with two, rather than thousands, if not hundreds of thousands, suppliers at the same time.
But the most important reason was that the Internet could provide enormous competitive edges in the book game.
Why? Back then, a typical bookstore would carry 100,000 books in stock, only a fraction of the roughly 3 million titles in print. All physical bookstores were constrained by a practical ceiling of how many books they could carry, while an online bookstore could offer an “unlimited selection”.
This was exactly the crucial differentiator that Bezos had been looking for to feed his game-changing ambition. He understood that the Internet would change customers’ shopping experience in a fundamental way. So what other magic tricks could the budding Internet do?
There were two more worth noting. One is customer reviews. Unlike the flattering reviews by famous figures included on physical books as part of marketing efforts, reviews on the Internet would come from ordinary readers, direct, authentic and unfiltered. The unlimited space on the web meant that all reviews, positive or negative, could be shown in their entirety, as posted.
The other is personalization. Bezos envisioned that one day they could achieve the ultimate in personalization: a different version of the website for each customer based on the patterns and preferences derived from his or her previous shopping records. This would be a whole new experience for customers, made possible only on the emerging Internet.
With “unlimited selection,” “unfiltered customer reviews,” and “ultimate personalization,” the three unmatchable and innate advantages of the Internet, Bezos was confident that no physical bookstores, no matter how big they were then, could be serious competitors in the long run.
That’s perhaps why the word “Amazon” instantly enchanted Bezos when he tried to find a good name for his start-up. He had experimented with names such as Awake.com, Browse.com, Bookmall.com, Relentless.com, Makeitso.com, as well as Cadabra. Still searching, Bezos referred to the dictionary. Luckily the name hunt didn’t last long. Amazon jumped out at him. It was love at first sight. Amazon “is not only the largest river in the world. It’s many times larger than the next biggest river. It blows all other rivers away,” Bezos said.
Yes, Amazon, it was.
The name spoke to Bezos’s dramatic ambition at the time. His goal was to build an online bookstore that would not only be the largest in the whole world, but could also blow all other bookstores away.
Clearly Bezos achieved his goal. Amazon has become the indisputable leader in the book market. In 2018 in the US, it commanded a dominating share of 42% in physical books and a staggering share of 89% in E-books (as shown below).
2.0: Online everything store
Despite Amazon’s burgeoning book business, Bezos never forgot his dream of “the everything store.” In 1998, Amazon started its first wave of expansions into new categories such as music, video, and gifts; and into new geographies, such as the UK and Germany. After that, the company accelerated its further expansions into toys, consumer electronics, home improvement, software, video games, and many more. This was the kernel of Bezos’s vision.
While enjoying dramatic organic growth in these earlier categories, Amazon also made numerous investments and acquisitions, such as Drugstore.com, Pets Smart, Accept.com, HomeGrocer.com, Gear.com, Back to Basics Toys, Greenlight.com (online car retailer), Wine Shopper.com, Audible.de, Zappos, and many others.3 Despite the variety, you can discern a common underlying theme.
At a dazzling speed, Amazon had woven together a magnificent tapestry of the everything store.
During this time of rapid growth of categories, geographies, and acquisitions, Bezos kept his laser-sharp focus on the customer. In 2001 he articulated Amazon’s “pillars of customer experiences” for the first time and reinforced the durability of these pillars in his 2008 Shareholder Letter:
1 Selection: already 45,000 items and millions of book titles on sale in 2001.
2 Convenience: a combination of 1-click ordering, recommendations, wish lists, instant order update, “Look Inside the Book” and fast delivery.
3 Low price: not simply by the scale of economy, but more so by the Moore’s Law and its variants (price performance of bandwidth, disk space and processing power are doubling about every 9, 12, and 18 months, respectively).
Why this constant focus on the customers? Because Bezos firmly believes that “our consumer franchise is our most valuable asset.”
Amazon launched Prime in 2005, a $79 annual membership fee for free two-day shipping. As of December 31, 2018, Amazon had more than 100M prime members around the world, the second-highest number of paid subscribers only next to Netflix. 4
Interestingly, the principle of focusing on the customer will result in the best creation of shareholder value.
3.0: Unstore — online platform
What’s a platform and