Innovation formula at Amazon: “Amazon is the best place in the world to… fail” – Part 3

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The culture and mechanism behind Amazon’s “Day 1” spirit has been discussed in part one and part two. This “Day 1” spirit is maintained by Amazon by capturing the latest technology trends, making quick decisions (which will be discussed in part 4). However, daring to fail and continuous experiment to enhance the experience of customers is a key factor in maintaining this creative spirit.

“Amazon is the best place in the world to fail”

In addition to the great success when betting on AWS, Prime or Marketplace, Amazon has also squashed billions of dollars on projects which failed obviously: Fire Phone, Amazon Auction (similar business model to ebay), Z-shop, A9 (similar to Google), Endless (similar to Zappos, Amazon later acquired this startup) or the investment deals are regarded as fail ones, which are Pet.com & Kozmo.com, along with products Amazon Destination, Amazon test drive with many other projects.

In the failures above, Amazon’s biggest failure is that Amazon Fire Phone, which is produced in an effort to get closer to consumers’ pockets “and understand their behavior. The product was not fully adopted by the market and Amazon lost $ 170 million USD. However, Jeff Bezos had a different perspective on this failure: “If you think that’s a big failure, we’re working on much bigger failures right now — and I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip.” Not only that, Jeff emphasized failure: “Amazon is the best place in the world to fail (we have experienced this a lot).” When the company reached a large scale, the size of the mistake should be increased accordingly.

Figure 1. Amazon Fire Phone – One of Amazon’s biggest failures.

Thus, according to this judgment, failure is an inevitable part and will be scaled up according to company size. This sounds ridiculous until we know that accepting such failure is part of the innovative thinking. In other words, failure and innovation are inseparable twins.

Figure 2. Venture-capital mechanism in Amazon (Image source: Nasim Taleb).

Think big but start with small steps of experiments

One of Amazon’s key leadership principles is to think big but to achieve this we need to start with small steps. It’s a series of small-scale experiments. Jeff Bezos once shared that when a company creates an idea, it is a complicated process and there is no “aha” moment. Amazon’s success is not defined in some single step but a process, a process of small experiments. Accordingly, success lies in a function of experiments performed by year, by month, by week, by day. Therefore, innovation will increase in proportion to the company experiments.

Figure 3. The number of experiments and success rates increased with each experiment.

Experimenting, building, validating product are executed fast continuously get feedbacks from customers, then learn, quickly improve products, measure and repeat the cycle above (there are several methods to implement this, such as: Lean Startup, Design Thinking, Agile … and those products are MVP, Prototype, Sprint respectively). This approach helps reduce the cost of testing new products at Amazon, especially for vague market opportunities.

Both Marketplace and AWS have a big vision but they all come from small steps. As discussed, before Marketplace (third-party sellers model), Amazon had two failures with Amazon Auction (similar model ebay) & Z-shop (According to Jeff, at the launching party, there were only a few people attending the event, including his parents).

However, Amazon takes small steps in this Marketplace approach. First, with the idea that customers want to shop through online stores with specific sellers, Amazon has built infrastructure for sellers to create online stores of each brand. But when it launched the online store, Amazon realized that customers often shop by category on the Amazon homepage. As a result, Amazon stopped investing in sellers’ online stores and focused on improving search and browsing features.

AWS is also launched with the same principle in mind. Starting from the first question: “How do we create better infrastructure, which are capable of scaling and meet the demand inside? After a while Amazon asked itself again: “Let’s try to see if software developers outside like it or not? With the same thinking in mind, Echo is also improved by first offering limited, trial version exclusively for Prime customers. Over time, these questions above are validated.

Innovation and bimodal mechanism at Amazon

Amazon is evaluated by Gartner as the company that owns the number one supply chain in the world, optimizing operating in the value chain and responding in a disciplined manner. At the same time, Amazon also innovates and scale quickly. Gartner calls this process as bimodal when a company manages two different operating modes.

Most innovations in Amazon are incremental innovation: small improvements every day to enhance the customer experience. The example could be an experimental platform like “Weblab” used to evaluate improvements on websites and products. From such a platform, features such as “Ask questions and answers” are born. On the product page, customers can ask any questions related to the product; Or maybe other A / B testing on the system.

However, to be sustainable, Amazon also pursues both innovation strategies to create new products, new features or experiences (eg delivery by drone). So at the end of the day, what made Amazon constantly risking failure to innovate? That is “Obsess by customers”. It is no coincidence that Amazon sets the principle of “customer obsession” as the first one. Obsession means not afraid to do it even if it is hard to make customers comfortable and satisfied with the product/service. Consumer obsession reflects thinking toward the future, dissatisfied with the past when always trying new things, which normally will not generate short-term profits. Also, because of this obsession, Amazon is ready to “wander” (as Jeff shared in a letter to shareholders in 2018) to bring customers new experiences, even actively create that product without being asked by customers to do so (such as AWS or Echo).

Figure 4. An example of a Q&A feature on the Amazon site (Source: Amazon).
Figure 5. Delivery by drone from Amazon’s “airborne fulfillment center”, something we often see in fictional movies.

AWS, Marketplace, Prime, Kindle or Alexa, Amazon’s Echo is Amazon’s pride thanks to the aforementioned experiment philosophy: experiment by itself naturally tends to fail, if you know the result then it is not an experiment anymore. But Amazon is aiming to learn quickly from that failure, being flexible in its decision so that it can operate quickly. In Part 4 we will discuss in detail the structure of small-group operations as well as decision-making and technology platform architecture at Amazon.

Hoang Nam Le

What is the innovation formula at Amazon? – Part 1
The innovation formula at Amazon: Going backward from the customer – Part 2

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