Invent and Wander: Part 1
Relentless focus on improving customer experience; that’s the jest of it.
In this post1, I have tried summarising everything that I think is important to create a better customer focused business. This post is a reminder for me to look back, compare & contrast the businesses around me. I work in Finance so, my motive is to understand how consumer focused businesses work, How do they evolve? and how do they prosper by staying true to their core. So, let’s dive in!
Relentless.com, it pretty much defines the whole mindset of Jeff Bezos. When you look at a company like Amazon, the focus should be on “What didn’t change?” and if you read the shareholder letters one thing that hasn’t budged since its founding is its singular focus on customer’s convenience.
Amazon has stayed true to its core, most of my orders on Amazon are books. As Bezos says, It’s Still Day 1.
The quote below is from 2002, the basic context of how Amazon operates and does its business hasn’t changed much. So, while reading everything else in this post, keep in mind the below paragraph.
In many ways, Amazon.com is not a normal store. We have deep selection that is unconstrained by book shelf. We turn our inventory nineteen times in a year. We personalise the store for each and every customer. We trade real estate for technology (which gets cheaper and cheaper every year). We display customer reviews critical of our products. You can make a purchase with a few seconds and one click. We put used products next to new ones so you can choose. We share our prime real estate—our product detail pages with third parties, and, if they can offer a better value, we let them.
—2002 Letter to Shareholders
1997: It’s All About the Long Term
It is always about the long term. We humans have increasingly become fixated on the “short-term”—Later on, when Amazon launched “Kindle” Bezos talked about “information snacking” and how this has led to “shorter attention span”. (See 2007)
Everything compounds given enough time—Knowledge, Money, Friendship. But, the only condition is—You have to let it.
“Focus relentlessly on *your* customers”: In an overarching theme you would think that are thousands of things that you can do to improve your bottomline but, in reality, there is only one factor that has the potential to dictate your success or failure—Customers.
If you want to create something exceptional—You can’t choose between working long, hard or smart—You need all three.
If you’re building something important, something that matters, something that you tell your grandkids about—These things aren’t meant to be easy. (Most important line for me from 1997 letter.)
“Big part of the challenge for us will lie not in finding new ways to expand our business, but in prioritising our investment”—capital allocation or, opportunity costs—If you think about life in the terms of opportunity cost—Your decisions will be more thought-out, more investigated—and you’ll have less regrets. (I would suggest reading Charlie Munger & Buffett on this subject—I don’t think there is anyone better.)
1998: Obsessions
More often than not, opportunities and risks are ahead of us than those behind us—Be excited about it.
Customer Focus—Sales grew from $148 million in 1997 to $610 million—a 313 percent increase.
Keep your cost down: “Our centralised distribution model has allowed us to build our business to a billion-dollar sales rate with just $30 million in inventory and $30 million in net plant and equipment.”
Customer Focus—“We intend to build the world’s most customer-centric company”— “We consider them to be loyal to us—right up until the second that someone else offers them a better service.”
Words like—“constant innovation, relentless focus on customer experience.”
“Working on creating a little bit of history isn’t supposed to be easy, and well, we’re finding that things are as they’re supposed to be!”
People: Set the bar high when hiring. Three questions:
Will you admire this person?
Will this person raise the average level of effectiveness of the group they’re entering? And,
Along what dimensions might this person be a superstar?
Every decision that Bezos has taken is in line with what his customers would have demanded; Every Decision.
It’s all about the long term: “We don’t claim it’s the right philosophy, we just claim it’s ours!”
Remember, this was before the peak of the dot-com bubble—The number of shareholders went up from 13,000 to 200,000 So, Bezos was reiterating what he said in the last year’s letter.
1999: Building for the Long Term
Again, focusing on the importance of “Long Term”
Keeping your cost down: A business with over $2 billion in annualised sales but requiring just $220 million in inventory and $318 million in fixed asset.
Customer Focus: “We simply won’t build a partnership with any company that does not share our passion for serving customers”.
“Each successive product and service we launch this year should build on our platform, so out investment course can be less steep and the time to profitability for each business should, in general continue to shorten.
2000: Taking the Long View
Context: Post dot-com bubble burst.
Bezos writes, “Our shares are down more than 80 percent from when I wrote you last year. Nevertheless, by almost any measure, Amazon.com the company is in stronger position now than at any time in its past.”
“We are a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company”—Keep your head down, and keep at it—Noise will eventually die down.
Again focusing on “relentless improvements in customer experience of online shopping”.
Another aspect of Amazon that Bezos talked about in 2001 for the first time is, working on increasing the efficiency of its operations and passing the benefits to the customers and if you look at the history of retailing—Almost everyone has done it, if they aren’t doing it any more, they won’t survive in the business.
In 2001 letter, Bezos says, “Amazon.com had been primarily built on two pillars of customer experience: selection and convenience, …we added a third customer experience pillar: relentlessly lowering prices.”
This tells you so much about how he sees the importance of efficiency. and more importantly passing those benefits to the customers.—This is the whole economics of discount retailers—Think Dmart, Costco. They all buy in bulk, save money and they sell in bulk—Increasing their turnover.
2003: Long-Term Thinking
“Long-term thinking is both a requirement and an outcome of true ownership.”
“Though negative reviews costs us some sales in the short term, helping customers make better purchase decisions ultimately pays off for the company.”
Instant Order Update feature: reminds customers if they have bought the item in the past—“The feature slightly reduced sales. Good for customers? Definitely. Good for shareowners? Yes, in the long run.”
“Our pricing strategy does not attempt to maximise margin percentages, but instead seeks to drive maximum value for customers and thereby create a much larger bottom line—in the long term.”
2004: Thinking about Finance
Free-cash flow per share: “earnings don’t directly translate into cash-flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings.”
“A company can actually impair shareholder value in certain circumstances by growing earnings. This happens when the capital investments required for growth exceeds the present value of the cash flow derived from those investment.” or, Return on Invested Capital (ROIC)
Amazon was also focused on eliminating future dilution by repaying more than $600 million of convertible debt that was due in 2009 and 2010.
2005: Making Decisions
There are certain aspects of business that requires you to make decisions based on Math but, more often there are decisions were there is “little or no historical data to guide us and proactive experimentation is impossible, impractical, or tantamount to a decision to proceed. Through data, analysis, and math play a role, the prime ingredient in these decisions is judgement.”
With consumer-focused innovations—there was no way to prove in advance that it would work—here, risk is inherent—Just one thing—It shouldn’t be so substantial that it kills you.
This opinion is quite similar to how Buffett, Munger and Taleb think about risk. But, most people in “Finance” equate risk with volatility but, for the three people mentioned its chances of inadequate return and chances of permanent loss of capital.
Making bold rather than timid investment decisions… “We’ll start with the customer and work backward—Best way to create shareholder value.
This highlights the mental model of inversion as discussed by Charlie Munger.
2006: Growing New Business
“Before we invest our shareholders’ money in a new business, we must convince ourselves that the new opportunities can generate the returns on capital that our investors expected when they invested in Amazon.”—The concept of opportunity cost while also factoring in the returns on the basis of future cashflow.
Two things: (1) Must believe that the opportunity is currently underserved, (2) We must have the capabilities needed to bring strong customer-facing differentiation to the market place.—If not, it’s not worth investing.
Amazon started working on AWS: Bezos says, “We’re targeting broad needs universally faced by developers, such as storage and compute capacity—areas in which developers have asked for help”—“Opportunity is currently underserved.”
“We’re positioned to do it, it’s highly differentiated, and it can be a significant, financially attractive business over time.”— “Strong customer-facing differentiation.”
Importance of culture in scaling “tiny seeds” into big trees: “Many people at Amazon have watched $10 million seeds turn into billion-dollar businesses.”
“The culture demands that these new businesses be high potential and that they be innovative and differentiated, but it does not demand that they be large on the day that they were born.”
“We won’t always choose right, and we won’t always succeed. But we will be choosy, and we will work hard and patiently.”
2007: A Team of Missionaries
Reason for the launch of Kindle: Smaller devices have shifted us towards “information snacking” and “towards shorter attention spans”. He writes, “If our tools make information snacking easier, we’ll shift more toward information snacking and away from long-form reading. Kindle is purpose-built for long-form reading.”
The hope for Kindle is to “move us over years into a world with longer spans of attention, providing a counterbalance to the recent proliferation of info-snacking tools.”
Kindle was launched to be true to its name and “start a fire” and “improve the world of reading”.
—Are you seeing the vision? This was just after the launch of iPhone and in 2025, the internet is full of articles emphasising these factors causing lots of mental and psychological issues.
2008: Working Backward
Context: Global economy in tatters; prospect of an economic recession.
What does he write?
He writes, “Stay heads down, focused on the long-term and obsessed over customers. Long term thinking levers our existing abilities and lets us do new things we couldn’t otherwise contemplate. it supports the failure and iteration required for invention, and it frees us to pioneer in unexplored spaces. Seek instant gratification—or the elusive promise of it—and chances are you’ll find a crowd there ahead of you.”
All this is in the 1st paragraph of the letter. It tells you—Keep you head down, think long-term, take risks, fail, iterate—Eventually, you’ll invent. It also tells you what not to do—Don’t focus on the short term—It’s fickle. And do it all while thinking about—You guessed it—CUSTOMERS!
“Customers value low prices, vast selection and fast, convenient delivery”—These things won’t change, ever. Amazon’s whole existence is structured on this aspect. He writes, “Our pricing objective is to earn customer trust, not to optimise short-term profit dollars.”
Thus, choosing “customer-experience path” by having an “efficient cost structure”.
“Around the world, amazing, inventive, and hard-working Amazonians are putting customers first”.
A Thought: Now, I think I know why Pulak Prasad doesn’t invest in conglomerates—Their attention is fragmented—They are focusing on one-too-many things at once, which not necessarily but often leads to underutilisation of what a brand could be.
2009: Setting Goals
The year had 452 goals in total out to which, 360 goals ought to have direct impact on customer experience. AND, in writings, the word revenue is used eight times and free cash flow is used only four times. In the 452 goals, the terms net income, gross profit or margin and operating profit is not used once.
The focus the energy on controllable inputs to the business in the most effective way to maximise financial outputs over time. —Start with customers and work backwards.
2011: The Power of Invention
“Invention comes in many forms and at many scales. The most radical and transformative of inventions are often those that empower others to unleash their creativity—to pursue their dreams.”—This reminds me of the arguments in ‘Why greatness cannot be planned’—there the author writes how many inventions are stepping stones that facilitate greater invention—For example-vacuum tubes, when vacuum tubes came into existence, no one had thought that it would be used in something called as “computer” but, eventually this is what happened.
—Even well-meaning gatekeepers slow innovations.
2012: Internally Driven
“Our energy at Amazon comes from the desire to impress customers rather than the zeal to best competitors.”
This reminds of a Mungarism: “Invert, Always Invert.” (Originally by Carl Jacobi)
“One Advantage of customer driven focus is that it aids a certain type of proactivity.—Earns more trust with customers and drives rapid improvements.”
AWS Trusted Advisors: monitors customer configurations, compares them to known best practices, and then notifies customers where opportunities exist to improve performance, enhance security, or save money.—Yes, we are actively telling customers they’re paying us more than they need to.
2013: Wow
The importance of hiring the best people: “This broad array of initiatives is only possible because a large team of talented people ar every level are exercising their good judgement every day and always asking how do we make this better?”
This paragraph and all the points highlights one thing: Hire awesome people to work for you.—You can’t expect to build generational organisations if you hire people who aren’t the best.
“What we’re doing is challenging and fun—we get to work in the future. Failure comes part and parcel with invention. It’s not optional. We understand that and believe in failing early and iterating until we get it right. When this process works, it means our failures are relatively small in size (most experiments can start small), and when we hit on something that is really working for customers, we double-down on it with hopes it turns it into an even bigger success. However, it’s not always as clear as that. Inventing is messy, and over time, it’s certain that we’ll fail at some big bets too.”
2014: Three Big Ideas
Amazon Prime: When Amazon launched it in 2004, they didn’t know whether it will work. In the first year, they give up “many millions of dollars in shipping revenue” and there was no math that showed if it’ll work or not.
But, as Bezos and the team was thinking from the customer point of view—they had “an intuition that customers would quickly grasp that they were being offered the best deal in the history of shopping.” (Blows your mind if you think about it long enough.)
And as Bezos says, “We’re the first company to have figured out how to make winning a Golden Globe pay off in increased sales of power tools and baby wipes.” AMAZING!
Amazon Web Services: Enterprises are dependent on IT—It’s mission critical. So, “I can save you significant amount on your annual IT bill and my service is almost as good as what you have now,” won’t get you many customers. “What customers really want in this arena is “better and faster” and if “better and faster” can come with a side dish of cost savings, terrific. But the cost savings is the gravy, not the steak.”
2015: Big Winners Pay for Many Experiments
“This year, Amazon became the fastest company ever to reach $100 billion in annual sales. Also this year, Amazon Web Services is reaching $10 billion in annual sales—Doing so at a pace even faster than Amazon achieved its milestone.”
“Both were planted as tiny seeds and both have grown organically.” Yet, both can’t be more dissimilar—“One is famous for brown boxes and the other for APIs.”
There is however a connection between these two distinctive organisation—A culture that cares deeply about and acts with conviction on a small number of principles.
Customer obsession rather than competitor obsession.
Eagerness to invent and pioneer.
Willingness to fail.
Patience to think long-term.
Taking professional pride in operational excellence.
One area where Bezos thinks Amazon is different from everyone is at failing, he writes:
“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 experiment.” And “outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of one hundred times payoff, you should take the bet every time. But, you’re still going to be wrong nine times out of ten.”
This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.—This is true about everything in life, very few exceptions-almost none.
Invention Machine: A large company that’s also an invention machine. Combine the extraordinary customer-serving capabilities that are enabled by size with the speed of movement, nimbleness, and risk-acceptance mentality normally associated with entrepreneurial start-ups.
There are subtle traps that even high-performing large organisations (like Amazon) can fall into—one common pitfall for large organisations—one that hurts speed and inventiveness—is “one-size-fits-all” decision making.
Some decisions are consequential and irreversible or nearly irreversible—one-way doors—these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. —TYPE 1 decisions.
But, most decisions aren’t like that—they are changeable, reversible—they are two-way doors—A suboptimal TYPE 2 decisions.—You don’t live with the consequences for that long. you can re-open the door and go back through.
Type 2 decisions can and should be made quickly by high judgement individuals or small groups.
As organisations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision making process on most decisions, including many Type 2 decisions.
The end result: slowness, unthoughtful risk aversion, failure to experiment sufficiently and consequently diminished invention2.
2016: Fending off Day 2
Bezos, often used to end the letter with, “It’s still Day 1” so, people asked him, “Jeff, what does day 2 look like?” This is his answer:
“Day 2 is stasis. Followed by irrelevance. Followed by excruciating painful decline. Followed by death. And that is why it is always Day 1.”
—This applies so much to life as well. As they say, “Corporate life-cycle”.—If interested more about this, read Aswath Damodaran’s new book on the same. It’s really good.
Starter Pack for Day 1 defence:
True customer obsession: There are many ways to centre a business; you can be competitor focused, product focused, technology focused, business model focused. But, for Amazon—Obsessive customer focus is by far the most protective of Day 1 vitality. Bezos says and I concur, “Customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.”
Staying in day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen.
Resist Proxies: As companies get larger and more complex, there’s a tendency to manage to proxies.
Good process serves you so you can serve customers. The digression happens very easily in large organisations. The process becomes the proxy for the result you want. You stop looking at outcomes, just make sure you’re doing the process right.
Whenever you het a snag after following a “process” the better thing to do is, ask, “do we own the process or does the process own us?”
Example: Market research and customer surveys can become proxies for customers. But, surveys don’t have,“heart, intuition, curiosity, play, guts, taste”.
As the product or service owner, you must understand the customer, have vision and love the offering.
“Good inventors and designers deeply understand their customers. They spend tremendous energy developing that intuition. Study and understand many anecdotes rather than only the averages you’ll find on the surveys.—They live with the design.”
Embrace External Trends: The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly. If you fight them, you’re probably fighting the future. Embrace them and you’ve a tailwind3.
Big trends are not that hard to spot, but they can be “strangely hard” for large organisations to embrace.— Obvious one: Artificial Intelligence and Machine Learning.
High-Velocity Decision Making: Day 2 companies make high-quality decisions, but they make high-quality decisions slowly.—You have to somehow make high-quality, high velocity decisions.
Never use a one-size-fits all decision making process. (Discussed in 2015 letter—See above.)
Most decisions should probably be made with somewhere around 70 percent of the information you wish you had. If you wait for 90 percent, in most cases, you’re probably being slow.+need to be good at quickly recognising and correcting bad decisions.
Use the phrase “disagree and commit”, saves a lot of time. “Look, I know we disagree on this, but will you game with me on it? Disagree and commit?”—By the time you’re at this point, no one can know the answer for sure, and you’ll probably get a quick yes.
Recognise true misalignment issues early and escalate them immediately. “You’ve worn me down” is an awful decision-making process. It’s slow and de-energizing. Go for a quick escalation instead—It’s better.
“So, we have settled only for decision quality, or are you mindful of decision velocity too? Are the world’s trends tailwinds for you? Are you failing prey to proxies, or do they serve you? And most important of all, are you delighting customers?”
“Have the capabilities of a large company and the spirit and heart of a small one.”
2017: Building a Culture for High Standards
Customers are “divinely discontent” (Remember this phrase!). Their expectations are never static—They always go up. If you focus on this, you think you’ll never go wrong but, Amazon has had its fair share of failure. But, having high standards does help in culture building in an organisation.
Intrinsic or Teachable?
Bezos believes,“high standards are teachable”, people are quite good at “learning high standards simply through exposure” but, the opposite is also true, if low standards prevail, these too will quickly spread.
Universal or Domain Specific?
Bezos believes,“high standards are domain specific, and that you have to learn high standards separately in every arena of interest”.
Bezos had to learn to develop high standards in many of the areas that were crucial for better functioning of Amazon and in that, his colleagues were his tutors.
Understanding this point helps in two ways:
Even though you can consider yourself a person of high standards in general and still have debilitating blind spots.—Keeps you humble.
There can be whole arenas of endeavour where you may not even know that your standards are low or nonexistent, and certainly not world class.
Recognition and Scope
What do you need to achieve high standards in a particular domain area?
1st—You have to be able to recognise what good looks like in that domain.
2nd—You must have a realistic expectation for how hard it should be (how much work it will take) to achieve that result—The scope.
Unrealistic beliefs on scope—often hidden and undiscussed—kill high standards. Proactively communicate how hard something is going to be. You can’t learn to do head stand in two weeks, you need to slowly practice it for 6 months. Reminds me of an awesome Buffett quote: “No matter how great the talent or effort, some things just take time: you can't produce a baby in one month by getting nine women pregnant.”
Writing the Memo example: Some people think they can write a 6-page memo in two days, its’ not the right way. “The great memos are written and re-written, shared with colleagues who are asked to improve the work, set aside for a couple of days, and then edited again with fresh minds. They simply can’t be done in a day or two.”—Someone should have told me this when I was writing the dissertation or you can say, ‘I was too dumb to figure it out by myself.’
“You can improve results through the simple act of teaching scope—that a great memo probably should take a week or more.”—So, don’t try to write a memo in two days.
Benefits of High Standards
Building a culture of High standards is well worth the effort and there are many benefits:
You are going to build better products and services for customers—this should the reason enough!
People are drawn to high standards—helps in recruiting and retention.
A culture of high standards is protective of all the “invisible” but crucial work that goes in every company.—The work that gets done when no-one is watching. Reminds of a Feynman quote: “The prize is the pleasure of finding the thing out, the kick in the discovery, the observation that other people use it. Those are the real things. The honors are unreal to me.”
High standards are fun!—Once you’ve tasted high standards, there’s no going back.
Four elements of High Standards: They are teachable, they are domain specific, you must recognise them, and you must explicitly coach realistic scope.”
2018: Intuition, Curiosity, and the Power of Wandering
“From very early on in Amazon’s life, we knew we wanted to create a culture of builders—people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind.”
“A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: Invent, Launch, Reinvent, Relaunch, Start Over, Rinse, Repeat, again and again. They know the path to success is anything but straight.”
Sometimes in business—you know where you’re going, and when you do, you can be efficient. But, wandering in business is not efficient—but it’s also not random. It’s guided—by hunch, gut, intuition, curiosity, and powered by a deep conviction that the prize for customers is big enough that it’s worth being a little messy and tangential to find our way there. Wandering is an essential counterbalance to efficiency. You need to employ both. The outsized discoveries—the “nonlinear” ones—are highly likely to require wandering.
The above paragraph reminds me so much of ‘Why greatness cannot be planned’ and the thinking of inventions as things in a large room full of all known and yet-to-be-known inventions.
Failure Needs to Scale Too
“As company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you are not going to be inventing at a size that can actually move the needle.”
Example: Fire phone and Echo (One worked and the other didn’t.)
Conclusion:
Before I conclude the article; I want to ask, what do you see is the arching theme of every shareholder letter?
For me, the one world answer would be—Customers! Relentless focus on making lives of your customers better, even accepting “losses” in the short-term so that the customers stick for the long run.
Take risks that are calculative, don’t stagnate. Create wonderful thing; you might feel like you’re left behind but, if you stick to it, it’ll work—It has to work, there’s no other way.
Keep your head down and be at it and whenever you feel like it’s not working, Remember Bezos, generational things aren’t supposed to be easy, if they were, they won’t be anti-fragile.
Thanks for reading; Love ya!
All the mistakes, if any, is mine. I apologise for that. I have tried to writing everything that I thought is important but, putting in a lot of data didn’t seem very productive. Enjoy reading.
The opposite situation is less interesting and there is undoubtedly some survivorship bias. Any companies that habitually use the light-weight Type decision-making process to make Type 1 decisions go extinct before they get large.
Tailwind: a wind blowing in the direction of travel of a vehicle or aircraft; a wind blowing from behind. In a business context, "tailwind" refers to a positive trend or circumstance that benefits a company, leading to growth, increased profits, or improved performance. It's the opposite of a "headwind," which represents obstacles or challenges.