Amazon is arguably one of the most successful startups to date. It’s founder, Jeff Bezos is a mastermind in innovation and someone I’ve followed to see how he moves. Investors even give Amazon an ‘Innovation Premium’ when they calculate their stock price, which is because they are positive that Amazon will do cool shit like Drone deliveries and what not.
This optimism is a result of decades of straight KILLING it. The Seattle based company began as a simple online bookstore and now processes roughly 5% of all online transactions, which means big man Bezos runs the largest e-commerce company in the world. Given their size, you would expect the company to lack the ability to innovate.
According to Steve Blank, a serial entrepreneur, co-author of The Startup Manual (highly recommended!!), and father of the “lean start-up” movement, there are three reason why established companies can’t innovate:
The focus of an established firm is to execute and maintain the current business model
Discovering a new business model is inherently risky, and is far more likely to fail than to succeed
People who are best suited to search for new business models and conduct iterative experiments usually are not the same managers who succeed at running existing business units
Over the years Amazon has launched many products including Kindle, Prime, movie production and Fresh. They are always innovating because of Bezos’ commanding leadership. In fact, Harvard Business Review named Bezos the best LIVING CEO.
What can we learn from Amazon for our own ventures?
“We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”
Bezos don’t give two shits about investors and what they think. What he does care about is having a properly proportioned portfolio approach to managing innovation, which is basically improving current operations while, at the same time, investing into new side businesses.The business model of innovation is based on long-term returns. Unfortunately, most big companies look for quarterly returns with weekly execution reports, which is wack because they are just shooting themselves in the foot.
Don’t Be Afraid to Experiment and Fail
In the same 1997 annual report, Bezos included:
“We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.”
The main function of a startup is to search for a valid business model. We all know this.
Turning an aspect of an idea into something that people are willing to pay for is crucial to the success of any venture. Bezos stated that Amazon will be continuously experimenting and for the shareholders to be patient and keep quiet. Trying to search for a new business model is risky, and is far more likely to fail than to succeed. As a startup, you have this flexibility to try new things out.
Don’t Make Unnecessary Sacrifices
In a traditional retail environment, the general thinking would lead you to pick between offering a lower price for the customer or fantastic customer service. Amazon made no such sacrifice. Their business model was not viable until they were able to perform three product tasks necessary in an information-based industry: 1) Aggregate 2) Filter 3) Connect. Once Amazon had enough traffic, they were able to accurately connect customers with recommended products based on aggregate purchasing behavior, and their dominant business model took off. In 2002, Jeff Bezos said:
“Traditional stores face a time-tested tradeoff between offering high-touch customer experience on the one hand and the lowest possible prices on the other. How can Amazon.com be trying to do both?
The answer is that we transform much of customer experience—such as unmatched selection, extensive product information, personalized recommendations, and other new software features—into largely a fixed expense. With customer experience costs largely fixed (more like a publishing model than a retailing model), our costs as a percentage of sales can shrink rapidly as we grow our business. Moreover, customer experience costs that remain variable—such as the variable portion of fulfillment costs—improve in our model as we reduce defects. Eliminating defects improves costs and leads to better customer experience.
We believe our ability to lower prices and simultaneously drive customer experience is a big deal, and this past year offers evidence that the strategy is working.
We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain percentage will result in an increase in units sold of a certain percentage. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease.
However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more.”
Basically Amazon can have it’s cake AND eat it too. They were able to solve a problem and not make any sacrifices that would have broken their business model. Think though your business model and see how you can adjust and tweak certain aspects to create something unique.
Amazon has disrupted and dominated e-commerce and accounted for more than 5% of last year’s total e-commerce sales, which passed $1 trillion for the first time. Amazon is seen as a leader with so many lessons from which to learn from. It goes without saying that they are one of the most innovative companies on the planet.