### The house of quants
A point of view is worth 80 IQ points
He was disciplined and precise, constantly recording ideas in a notebook he carried with him, as if they might float out of his mind if he didn’t jot them down.
He quickly abandoned old notions and embraced new ones when better options presented themselves.
Regret minimisation framework
When you are in the thick of things, you can get confused by small stuff.
I knew when I was eighty that I would never, for example, think about why I walked away from my 1994 Wall Street bonus right in the middle of the year at the worst possible time. That kind of thing just isn’t something you worry about when you’re eighty years old. At the same time I knew that I might sincerely regret not having participated in this thing called the Internet that I thought was going to be a revolutionising event. When I thought about it that way … it was incredibly easy to make the decision.
One of the first things (Laurel) Canan did upon being hired was give up coffee. ‘You can’t do a job like that on caffeine. You have to do it on carbs,’ he says.
The book of Bezos
The first week after the official launch, they took $12000 in orders and shipped $846 worth of books, according to Eric Dillon, one of Amazon’s original investors. The next week they took $14000 in orders and shipped $7000 worth of books. So, they were behind from the get-go and scrambling to catch up.
Paul Davis, a native Londoner, looked askance at the work-first zealotry, and he noticed that Bezos had changed a clever motivational phrase about choosing among three ways to work.
In the old Bellevue house, Bezos had said to Kaphan and Davis, ‘You can work long, hard, and smart, but at Amazon.com you can pick only two out of three.’
Now the young CEO liked to recite, ‘You can work long, you can work hard, you can work smart, but at Amazon you can’t choose two out of three.’
Unlike traditional retailers, Amazon boasted what was called a negative operating cycle. Customers paid with their credit cards when their books shipped but Amazon settled its accounts with the book distributors only every few months. With every sale, Amazon put more cash in the bank, giving it a steady stream of capital to fund its operations and expansion.
Bezos recalled speaking at an all-hands meeting called to address the assault by Barnes & Noble, ‘Look, you should wake up worried, terrified every morning,’ he told his employees. ‘But don’t be worried about our competitors because they’re never going to send us any money anyway. Let’s be worried about our customers and stay heads-down focused.’
…organise the new HBS graduates into a ‘SWAT team’ to research categories of products that had high SKUs (number of potentially stockable items), were underrepresented in physical stores, and could be easily sent through the mail.
This was a key part of Amazon’s early strategy: maximising the Internet’s ability to provide a superior selection of products as compared to those available at traditional retail stores.
‘Physically, I’m a chicken. Mentally, I’m bold.’
Bezos used that word a lot: bold.
In the company’s first letter to its public shareholders…
‘We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, other will not, and we will have learned another valuable lesson in either case.’
The letter also stated that the company would make decisions based on long-term prospects of boosting free cash flow and growing market share rather than on short term profitability.
‘What we are doing here is building a giant rocket ship, and we’re going to light the fuse. Then it’s either going to go to the moon or leave a giant crater in the ground. Either way I want to be here when it happens.’
—Gene Pope on Amazon’s frantic expansion
Could a Walmart-type story still occur in this day and age? My answer is of course it could happen again. Somewhere out there right now there’s someone—probably hundreds of thousands of someones—with good enough ideas to go all the way. It will be done again, over and over, providing that someone wants it badly enough to do what it takes to get there. It’s all a matter of attitude and the capacity to constantly study and question the management of business.
—Sam Walton in his autobiography
By relying on Amazon (to run their online operations), the retailers delayed a necessary education on an important new frontier and ceded the loyalty of their customers to an aggressive upstart.
This would be one of many problems for Borders and Circuit City, both of which went bankrupt in the depths of the financial crisis that began in 2008.
The Costco model
… it was all about customer loyalty. There are some four thousand products in the average Costco warehouse, including limited-quantity seasonal or trendy products called treasure-hunt items that are spread out around the building. Through the selection of products in individual categories is limited, there are copious quantities of everything there—and it is all dirt cheap. Costco buys in bulk and marks up everything at a standard, across-the-board 14percent, even when it could charge more. It doesn’t advertise at all, and ears most of its gross profit from the annual membership fees.
The membership fee is a onetime pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else. It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.
Costco’s low prices generated heavy sales volume, and the company then used its significant size to demand the best possible deals from suppliers and raise its per-unit gross profit dollars.
‘My approach has always been that value trumps everything,’ Jim Sinegal (Costco founder) continued. ‘The reason people are prepared to come to our strange places to shop is that e have value. We deliver on that value constantly. There are no annuities in this business.’
Lower prices led to more customer visits.
More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site.
That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website.
This greater efficiency then enabled it to lower prices further.
Feed any part of this flywheel, they reasoned, and it should accelerate the loop.
…he would rather frame the negative stories like Barron’s infamous Amazon.bomb cover. When people wrote or said positive things about Amazon, he wanted employees to remember the Barron’s article and remain scared.
It is of course unknowable whether the unusual circumstances of his birth helped to create the fecund entrepreneurial mix of intelligence, ambition, and a relentless need to prove himself. Two other tech icons, Steve Jobs and Larry Ellison, were adopted, and the experience is thought by some to have given each a powerful motivation to succeed.
(Pop Gise) instilled in Bezos the values of self-reliance and resourcefulness, as well as visceral distaste for inefficiency. ‘There was very little he couldn’t do himself,’ Jackie Bezos says of her father. ‘He thought everything was something you could tackle in a garage.’ Bezos and Pop Gise repaired windmills and castrated bulls; they attempted to grade dirt roads and built contraptions like an automatic gate opener and a crane to move the heavy parts of a broken-down D6 Caterpillar bulldozer.
‘Jeff, one day you’ll understand that it’s harder to be kind than clever.’
—Pop Gise to Jeff Bezos. (Don’t think he ever learnt that lesson)
Blue Origin’s motto
Gradatim Ferociter (Step by step, ferociously)
The phrase accurately captures Amazon’s guiding philosophy as well. Steady progress toward seemingly impossible goals will win the day. Setbacks are temporary. Naysayers are best ignored.
An interviewer once asked Bezos why he was motivated to accomplish so much, considering that he had already amassed an exceedingly large fortune. ‘I have realised about myself that I’m very motivated by people counting on me,’ he answered. ‘I like to be counted on.’
Immediately upon moving to Seattle, Wilke set about filling the ranks of Amazon’s logistics division with scientists and engineers rather than retail-distribution veterans.
Allgor and his supply-chain algorithms would become Amazon’s secret weapon, devising mathematical answers to questions such as where and when to stock particular products within Amazon’s distribution network and how to most efficiently combine various items in a customer’s order in a single box.
‘Communication is a sign of dysfunction. It means people aren’t working together in a close, organic way. We should be trying to figure out a way for teams to communicate less with each other, not more.
Bezos counterintuitive point was that coordination among employees wasted time, and that the people closest to problems were usually in the best position to solve them. … In the book The Mythical Man-Month, IBM veteran and professor Frederick Brooks argues that adding manpower to complex software projects actually delayed progress. One reason was that the time and money spent on communication increased in proportion to the number of people on a project.
Two pizza teams
Employees would be organised into autonomous groups of fewer than ten people—small enough that, when working late, the team members could be fed with two pizza pies. These teams would be independently set loose on Amazon’s biggest problems. They would compete with one another for resources and sometimes duplicate their efforts, replicating the Darwinian realities of surviving in nature. Freed from the constraints if intra-company communications, Bezos hoped, these loosely coupled teams could move faster and get featured to customers quicker.
Each group was required to propose its own ‘fitness function’: a linear equation that it could use to measure its own impact without ambiguity.
Bezos was applying a kind of chaos theory to management, acknowledging the complexity of his organisation by breaking it down to its most basic parts in the hopes that surprising results might emerge.
The idea of fitness functions in particular appeared to clash with some fundamental aspects of human nature—it’s uncomfortable to have to set the framework for your own evaluation when you might be judged harshly by the end result…. Teams ended up spending too much time worrying over their formulas and making them ever more complex and abstract.
Press release / narrative
‘Power point is a very imprecise communication mechanism. It is fantastically easy to hide between bullet points. You are never forced to express your thoughts completely.’
Every time a new feature or product was proposed, he decreed that the narrative should take the shape of a mock press release.
The goal was to get the employees to distill a pitch into its purest essence, to start from something the customer might see—the public announcement—and work backward. Bezos didn’t believe anyone could make a good decision about a feature or a product without knowing precisely how it would be communicated to the world—and what the hallowed customer would make of it.
Some Amazon employees currently advance the theory that Bezos, like Steve Jobs, Bill Gates, and Larry Ellison, lacks a certain degree of empathy and that as a result he treats workers like expendable resources without taking into account their contributions to the company. That in turn allows him to coldly allocate capital and manpower and make hyper-rational business decisions while another executive might let emotion and personal relationships intrude.
Strategy for entering a new category
If you don’t know anything about the business, launch it through Marketplace, bring retailers in, watch what they do and what they sell, understand it, then get into it.
Being an unstore meant that Amazon was not bound by the traditional rules of retail. It had limitless shelf space and personalised itself for every customer. It allowed negative reviews in addition to positive ones, and it placed used products directly next to new ones so that customers could make informed choices. In Bezos’s eyes, Amazon offered both everyday low prices and great customer service. It was Walmart and Nordstrom’s.
Being an unstore also meant that Amazon had to concern itself only with what was best for the customer.
Jeff Wilke and his group had nearly completed their job morphing Amazon’s fulfillment process from a network of haphazardly constructed facilities into something that could more accurately be considered a system of polynomial equations.
A customer might place an order for a half a dozen products, and the company’s software would quickly examine factors like the address of the customer, the location of the merchandise in the FCs, and the cutoff times for shipping at the various facilities around the country. Then it would take all those variables and calculate both the fastest and the least expensive way to ship the items.
Pricing for Prime
The group considered several prices, including $49 and $99. Bezos decided on $79 per year, saying it needed to be large enough to matter to consumers but small enough that they would be willing to try it out. It was never about the seventy-nine dollars. It was about changing people’s mentality so they wouldn’t shop anywhere else.
A technology company, not a retailer
Computing, primitives, AI and origins of AWS
…Bezos became enamored with a book called Creation, by Steve Grand the developer of a 1990s video game called Creatures that allowed players to guide and nurture a seemingly intelligent organism on their computer screens. Grand wrote that his approach to creating intelligent life was to focus on designing simple computational building blocks, called primitives, and then sit back and watch surprising behaviours emerge. Just as electronics are built from basic components like resistors and capacitors, and as living beings spring from genetic building blocks, Grand wrote that sophisticated AI can emerge from cybernetic primitives, and then it’s up to the ‘ratchet of evolution to change the design’.
EC2 was born in isolation, with Pinkham talking to his colleagues in Seattle only sporadically, at least for the first year. …
‘I spent most of my time trying to hide from Bezos. He was a fun guy to talk to but you did not want to be his pet project. He would love it to distraction.’
Atlas said that while working on the S3 project, he frequently had difficulty grasping just how big Bezos was thinking. ‘He had this vision of literally tens of thousands of cheap, two-hundred-dollar machines piling up in racks, exploding. And it had to be able to expand forever.’ Bezos told him, ‘This has to scale to infinity with no planned downtime. Infinity!’
Bezos believed that high margins justified rivals’ investment in research and development and attracted more competition, while low margins attracted customers and were more defensible.
Bezos was adamant that Kessel could not run both the physical and digital-media businesses at the same time. ‘If you are running both businesses you will never go after the digital opportunity with tenacity,’ he said.
The Innovator’s Dilemma
Christensen wrote that great companies fail not because they want to avoid disruptive change but because they are reluctant to embrace promising new markets that might undermine their traditional businesses and that do not appear to satisfy their short-term growth requirements.
Companies that solved the innovator’s dilemma succeeded when they ‘set up autonomous organisations charged with building new and independent businesses around the disruptive technology.’
A Prime member was like a shopper who walked into a Costco warehouse for a case of beer and walked out with the beer plus an armful of DVDs, a nine-pound smoked ham, and a flat-screen TV.
Prime members bought more products across more categories, which in turn convinced sellers to let Amazon stock their merchandise and ship their orders from its fulfillment centers, since that meant their products qualified for Prime two-day shipping.
‘Jeff does a couple of things better than anyone I’ve ever worked for. He embraces the truth. A lot of people talk about the truth, but they don’t engage their decision making around the best truth at the time.
The second thing is that he is not tethered by conventional thinking. What is amazing to me is that he bound only by the laws of physics. He can’t change those. Everything else he views as open to discussion.’
Build vs Buy
‘Jeff almost always prefers to build it,’ says Jeff Blackburn (Amazon chief of BD). Bezos had absorbed the lessons of business bible Good to Great, whose author, Jim Collins, counseled companies to acquire other firms only when they had fully mastered their virtuous circles, and then ‘as an accelerator of fly-wheel momentum, not a creator of it.’
The great recession was in some ways a gift to Amazon. … Desperate to protect their profit margins, many retailers reacted by firing employees, cutting down their product assortment, and lowering the overall quality of their service, and this just as Bezos was investing in new categories and more rapid distribution. The economic crisis served as a kind of cloaking device, hiding Amazon’s evolution into a dangerous diversified competitor. Retailers were scared, but the bogeyman was the reeling global economy and declining consumer spending, not Amazon.
Missionaries have righteous goals and are trying to make the world a better place. Mercenaries are out for money and power and will run over anyone who gets in the way.
From Randy Komisar’s book, The monk and the riddle
The kingdom of question mark
Despite the scars and occasional bouts of post-traumatic stress disorder, former Amazon employees often consider their time at the company the most productive of their careers. Their colleagues were smart, the work was challenging, and frequent lateral movements between departments offered constant opportunities for learning.
‘Everybody knows how hard it is and chooses to be there,’ says Faisal Masud, who spent five years in the retail business. ‘You are learning constantly and the pace of innovation is thrilling. I filed patents; I innovated. There is a fierce competitiveness in everything you do.’
The people who do well at Amazon are often those who thrive in an adversarial atmosphere with almost constant friction. Bezos abhors what he calls ‘social cohesion,’ the natural impulse to seek consensus. He’d rather his minions battled it out in arguments backed by numbers and passion, and he has codified this approach in one of Amazon’s fourteen leadership principles.
Have backbone; Disagree and commit
Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, the commit wholly.
‘We try not to spend money on things that don’t matter to customers. Frugality breeds resourcefulness, self sufficiency and invention. There are no extra points for headcount, budget size or fixed expense.
Defects that are invisible to the knowledgeable may be obvious to newcomers. The simplest solutions are the best.
Jeff is very clear and simple about his goals, and the way he articulates them makes it easy for others, because it’s consistent.
It (Amazon) was a multi-decade project. The notion that he can accomplish a huge amount with a larger time frame, if he is steady about it, is fundamentally his philosophy.
… the company announced it would start delivering packages on Sundays, in partnership with the USPS. It was added convenience for customers and a characteristically brilliant tactical move. One way to look at it: Bezos was propping up a weakened Post Office which serves as a counterweight to two of Amazon’s most powerful partners—UPS and FedEx.
Jeff’s reading list
- The remains of the day by Kazuo Ishiguro
Jeff Bezos’ favourite novel. Jeff claims he learns more from novels than non-fiction.
- Sam Walton: Made in America by Sam Walton
on principles of discount retailing, and core values of frugality and a bias for action—a willingness to try a lot of things and make many mistakes.
- Memos for the Chairman by Alan Greenberg
memos to employees of Bear Stearns, constantly restating values of modesty and frugality.
- The mythical man month by Frederick Brooks Jr
small teams of engineers are more effective than larger ones at handling complex software projects.
- Built to last by Jim Collins
about core ideology, and only employees who embrace the central mission flourish.
- Good to great by Jim Collins
companies must confront brutal facts of their business, find what they are uniquely good at, and master their flywheel.
- Creation: Life and how to make it by Steve Grand
intelligent systems can be created from bottom up if one devises a set of primitive building blocks.
- The innovator’s dilemma by Clayton Christensen
on reluctance of successful companies to embrace disruptive technologies because it might alienate customers and undermine core businesses.
- The goal: A process of ongoing improvement by Eliyahu Goldratt and Jeff Cox
on science of manufacturing, written in the guise of a novel. Identify biggest constraints in ops and structure the organisations to get the most out of those constraints
- Lean thinking by James Womack and Daniel Jones
on Toyota’s lean philosophy
- Data driven marketing: The 15 metrics everyone in marketing should know by Mark Jeffery
guide to using data to measure everything
- The black swan by NN Taleb
people see patterns in chaos while remaining blind to unpredictable events, with massive consequences. Experimentation and empiricism trumps easy and obvious narrative.