Amazon's (NASDAQ:AMZN) rise over the past two decades has seen it upend not only the retail market but also the enterprise IT industry with its Amazon Web Services division. The shareholder returns have been nothing less than incredible.
So, how did Amazon do it?
Each year, founder and CEO Jeff Bezos gives glimpses into his business philosophy in his (usually very brief) annual letter. Last year's letter focused on being a "Day One" company, but this year's letter, revealed something much broader, giving a clue as to how Amazon can execute a dizzying number of innovations every year with remarkable consistency.
Here's a look at the company's secret sauce.
Bezos outlines the importance of instilling a culture of high standards in business.
According to Bezos, the benefits of high standards are many. For one, your business will provide better products and services. But the side effects are just as important: Having high standards also helps to attract like-minded people, which continually raises the bar, and it enables the "invisible work" that gets done behind the scenes of any company to be of high quality -- even when no one is watching.
The last point is especially important to mitigating risk. At the end of last year, Amazon employed 560,000 people. Obviously, there is no way a single CEO or manager can keep tabs on all of them, but a company that devotes itself to setting high standards across the board will have a much better chance of avoiding problems that may be lurking in the shadows.
Imagine how different things might have been at scandal-plagued companies like General Electric, Equifax, or Wells Fargo had employees operating "in the shadows" held themselves to higher standards. Perhaps the calamities that befell these companies might have been avoided if rigorous standards had permeated throughout the organization.
But establishing such a culture is not as easy as it looks, so Bezos gives us tips on how to achieve them.
Raising the bar
There are a few aspects of high standards that Bezos outlines:
- High standards are teachable, not inborn.
- They are usually domain-specific, not universal.
- They don't come easy but must be worked on for a sufficient amount of time, with correct "scope".
On the first point, Bezos believes that they are "contagious" within an organization and can be taught to new employees. You can see how this culture can snowball -- as it's followed by more and more employees, the organization improves, raising the bar even higher for new hires.
By the second point, Bezos means that if you have high standards in, say, stock-picking, that doesn't automatically make you an arbiter of standards in radiology. Bezos uses himself as an example here: At the start of Amazon, he had high standards for inventing, customer care, and hiring. However, he had blind spots in aspects like operations, which he had to learn from others. It's important because it can act as a check on hubris. If you're really good at one thing, it could lead to overconfidence in your abilities elsewhere. As Bezos put it, "You may not even know that your standards are low or nonexistent, and certainly not world class. It's critical to be open to that likelihood."
To illustrate his last point, Bezos gives the example of Amazon's six-page memo policy -- the company famously doesn't do PowerPoint presentations but rather starts meetings with the reading of a six-page memo on the topic at hand. Bezos says that subpar memo writers think they can knock out a memo in a few hours, but they don't understand how much work goes into a successful one.
"Great memos are written and rewritten, shared with colleagues who are asked to improve the work, set aside for a couple of days, and then edited again with a fresh mind," Bezos says. "They simply can't be done in a day or two."
Lessons from Seattle
Listening to lessons from successful business leaders can be very helpful not only for investing but also in your daily life, and I'm going to refocus my attention on Bezos' message. By working on high standards each day -- whether at work or with family -- good things should eventually happen.