Chapter 19 - Invent & Wander: The Collected Writings of Jeff Bezos
Today's Chapter is based on the book “Invent & Wander: The Collected Writings of Jeff Bezos” by Walter Isaacson.
Buy it on Amazon here:
https://www.amazon.com/Invent-Wander-Collected-Writings-Introduction-ebook/dp/B08BCCT6MW
Here's what I have learned from the book:
Decision-Making
“Warren Buffet says he’s good if he makes three good decisions a year, and I really believe that.”
— Jeff Bezos
Jeff Bezos has written some of the best letters to shareholders throughout the years as the founder of Amazon. In these letters, he has shared various thoughts on how to run a successful company while he was leading Amazon into one of the largest companies in the world. Notably, Bezos is well known to have shared his decision-making process where he separates all decisions into two piles: Type 1 decisions which needs to be made carefully as they irreversible and Type 2 decisions that can be made more quickly as they are reversible. This concept allows one to greatly speed up his decision making.
“Some decisions are consequential and irreversible or nearly irreversible—one-way doors—and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that—they are changeable, reversible—they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.”
— Jeff Bezos
As such, Bezos believes that it is important for founders and senior executives to focus on the big decisions, those that are consequential and irreversible. In fact, he explains that senior executives should be paid to make a small number of high-quality decisions. The rest of the decisions that are reversible should be decentralised and delegated. This is eerily similar to Naval Ravikant's idea that CEOs are paid highly based on the scale of their decisions.
“Imagine someone comes along who demonstrably has slightly better judgment. They’re right 85 percent of the time instead of 75 percent. You will pay them $50 million, $100 million, $200 million, whatever it takes, because 10 percent better judgment steering a $100 billion ship is very valuable. CEOs are highly paid because of their leverage. Small differences in judgment and capability really get amplified.”
— Naval Ravikant
“As a senior executive, what do you really get paid to do? You get paid to make a small number of high-quality decisions. Your job is not to make thousands of decisions every day.“
— Jeff Bezos
“You need to be thinking two or three years in advance, and if you are, then why do I need to make a hundred decisions today? If I make, like, three good decisions a day, that’s enough, and they should just be as high quality as I can make them.”
— Jeff Bezos
Bezos also shared how companies can speed up their decision-making process by following the steps below:
Never use a one-size-fits-all decision making process: As a matter of fact, as mentioned above, all decisions can be separated into Type 1 and Type 2 decisions. It would be unwise to have the same decision making process for both Type 1 and Type 2 decisions. Bezos says “And what happens in large organizations—not in start-up companies but in large organizations—is that all decisions end up using the heavyweight process that is really intended only for irreversible, highly consequential decisions. And that’s a disaster.”
Most decisions should be made with 70% of the data you wish you had: If you need to wait for more information before making a decision, you are probably being too slow. Furthermore, if these decisions are two-way doors, meaning they are reversible, you will always have the chance to course correct a bad decision. As Bezos once said, “If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”
It is okay to “disagree and commit”: In Bezos' opinion, it would save a lot of time for companies to commit to a decision even when there isn't a consensus. Bezos mentions that “Everybody cares, and if you’re not careful, the decision process can basically become a war of attrition. Whoever has the most stamina will win; eventually the other party, with the opposite opinion, will just capitulate: “Okay, I’m exhausted. We’ll do it your way.” That is the worst decision-making process in the world. It leaves everybody demoralized, and you also get a kind of random result.” Another way to fix this would be too quickly escalated these controversial decisions to even more senior leaders.
Recognize misalignment issues early: Bezos explains that, “Sometimes teams have different objectives and fundamentally different views. They are not aligned. No amount of discussion, no number of meetings will resolve that deep misalignment.” In these situations, it is essential to issue it early and to escalate it to senior leaders as soon as possible to avoid wasting time and stamina.
Finally, in a previous Chapter, we learned from Steve Jobs that life is too short to be wasting time living someone else's life and to be working in career that one is not in love with. As such, it is important to sometimes take a leap of faith when making a big decision. Similarly, Bezos had something he called a “regret minimisation framework”. He explains that he wants to minimise the amount of regrets he have and this was what pushed him to quit his well paying job in investment banking to create his own company Amazon.
“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma—which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”
— Steve Jobs
“I want to have minimized the number of regrets I have. I knew that when I was eighty, I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the internet that I thought was going to be a really big deal. I knew that if I failed, I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day.”
— Jeff Bezos
Obsess over Customers
“Our vision is to use this platform to build Earth’s most customer-centric company, a place where customers can come to find and discover anything and everything they might want to buy online.”
— Jeff Bezos
Jeff Bezos founded Amazon with the idea of making it Earth's most customer-centric company in the world. This concept came to him through the mental model of inversion. As a matter of fact, he realised that: “under all kinds of regulatory frameworks that I can imagine, customers are still going to want low prices. They’re still going to want fast delivery. They’re still going to want big selection. These are so fundamental and what we do.” As such, by working backward, he always required Amazon to acquire new competencies to fulfil these never-changing customers' needs:
“In our retail business, we have strong conviction that customers value low prices, vast selection, and fast, convenient delivery and that these needs will remain stable over time. It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery. Our belief in the durability of these pillars is what gives us the confidence required to invest in strengthening them. We know that the energy we put in now will continue to pay dividends well into the future.”
— Jeff Bezos
To do so, Bezos mentions in his 1997 Letter to Shareholders that the company must focus relentlessly and passionately on the customers in what he calls “Obsess over Customers”. As such, Amazon has been primarily built on three pillars of customer experience:
Large Selection of Products
Convenience
Low Price
As such, it is important for the company to keep a consistent high standard and to be always looking for ways to strengthen the three pillars of customer experience. And, sometimes, this can be solved by thinking backward, instead of forward. For example, rather than thinking on ways to improve convenience and experience for customers, Bezos decided to eliminate the root causes of errors which led to the same effect he wanted. This is the power of inversion! As Charlie Munger once said, “all I want to know is where I’m going to die, so I’ll never go there.”
“I’ll just point out that one of the most important things we’ve done to improve convenience and experience for customers also happens to be a huge driver of variable cost productivity: eliminating mistakes and errors at their root. Every year that’s gone by since Amazon.com’s founding, we’ve done a better and better job of eliminating errors, and this past year was our best ever. Eliminating the root causes of errors saves us money and saves customers time. Our consumer franchise is our most valuable asset, and we will nourish it with innovation and hard work.”
— Jeff Bezos
Finally, Bezos truly believes that a business model based on obsessive customer focus is one of the best ways of running a business. The main advantage of being customer focused is that instead of focusing on what competitors are doing, Amazon are purely focused on satisfying customers who are always dissatisfied. As such, they cannot rest on their laurels and need to perform consistently. As he once said, “you cannot rest on your laurels in this world. Customers won’t have it.”
“The advantage of being customer focused is that customers are always dissatisfied. They always want more, and so they pull you along. Whereas if you’re competitor obsessed, if you’re a leader, you can look around and you see everybody running behind you, maybe you slow down a little.”
— Jeff Bezos
“I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us—right up until the second that someone else offers them a better service.”
— Jeff Bezos
By consequence, it is clear that by being customer-driven focus, the company enables proactivity from within. Amazon do not need to wait for external pressures to know that they need to consistently improve their services by adding new benefits and features and to lower prices and increase value for customers at all time.
Long-Term Focus
“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.” — Jeff Bezos
We previously learned with Kirk Kerkorian that the key factor in a CEO's success is the ability of taking a long-term approach in business decisions with the main goal of increasing long-term value per shares. Similarly, Jeff Bezos understood the importance of long-term thinking as an owner. In fact, as a majority shareholder of Amazon, he understood that in the short-term, the stock price is not reflective of the value of the company, but it would be in the long-run if the company continues to increase its future cash flows.
“In that 1997 letter, we wrote, “When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.” Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.”
— Jeff Bezos
“Long term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted.”
— Jeff Bezos
“So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago? As the famed investor Benjamin Graham said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.” Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing. We’re 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.”
— Jeff Bezos
Furthermore, Jeff Bezos believes that he can correctly align the interests of the customers with the interests of the shareholders by taking a long-term approach. In fact, long-term thinking shareholders can allow the company to make constant innovations, despite having failures from time to time. As such, Bezos was not timid in making investment decisions where he had an opportunity in gaining market leadership advantages even when he knew that some of his investments would not pay off.
“We like to invent and do new things, and I know for sure that long-term orientation is essential for invention because you’re going to have a lot of failures along the way.”
— Jeff Bezos
“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
— Jeff Bezos
As a pioneer in the technology industry, it is in the company's DNA to be committed to constant improvement, experimentation and innovation. This can be done by investing into new businesses. However, Bezos mentions that it is also his responsibility to make sure that any opportunities they invest in must generate the same return on capital that investors expected when they invested in Amazon. This can only be done by taking a long-term and true ownership approach.
“Invention is in our DNA and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers. We still have a lot to learn, and I expect and hope we’ll continue to have so much fun learning it. I take great pride in being part of this team.”
— Jeff Bezos
“As we continue to grow, we’ll work to maintain a culture that embraces new businesses. We will do so in a disciplined way, with an eye on returns, potential size, and the ability to create differentiation that customers care about. We won’t always choose right, and we won’t always succeed. But we will be choosy, and we will work hard and patiently.”
— Jeff Bezos
Finally, Bezos also understood that as Amazon grows in size, everything needs to be scaled and this includes the size of their failed experiments. In fact, if the size of failures of Amazon didn't grow, then they would not be inventing at a size that would actually move the needle. Obviously, not all experiments will pan out,, but the good thing is that , in the long-run, the big winners should cover all the losses.
“Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.”
— Jeff Bezos
Hiring the Right People
“You’re not grabbing the pencil out of the twenty-five-year-old’s hand to do it better than they are. If you’re smart, you’re hiring twenty-five-year-olds who are smarter than you.”
— Steve Jobs
As we have learned from previous biographies we have read, hiring the best people is mandatory for success as employees are the spinal cord of the company. As Isadore Sharp, the founder of Four Seasons, once said, “Four Seasons is the sum of its people—many, many good people.” Jeff Bezos pushed this idea even further; it is not enough to require to hire the best people, it is also important to hire the right people. In fact, “Hire the right people” became one of Amazon's core pillars for success. And the first thing Bezos does when he sees someone, whether it's to hire him or her or to purchase a new business from him or her, is to assess if he or she is in it merely to make money or because of a true passion for serving customers.
“I’m always trying to figure out one thing first and foremost: Is that person a missionary or a mercenary?”
— Jeff Bezos
As such, before making any hiring decision, Bezos insists his managers to go through the following three criteria:
Will you admire this person?
Will this person raise the average level of effectiveness of the group he or she is entering?
Along what dimension might this person be a superstar?
Here's how Bezos explains the importance of these questions:
“During our hiring meetings, we ask people to consider three questions before making a decision: Will you admire this person? If you think about the people you’ve admired in your life, they are probably people you’ve been able to learn from or take an example from. For myself, I’ve always tried hard to work only with people I admire, and I encourage folks here to be just as demanding. Life is definitely too short to do otherwise. Will this person raise the average level of effectiveness of the group they’re entering? We want to fight entropy. The bar has to continuously go up. I ask people to visualize the company five years from now. At that point, each of us should look around and say, “The standards are so high now—boy, I’m glad I got in when I did!” Along what dimension might this person be a superstar? Many people have unique skills, interests, and perspectives that enrich the work environment for all of us. It’s often something that’s not even related to their jobs. One person here is a National Spelling Bee champion (1978, I believe). I suspect it doesn’t help her in her everyday work, but it does make working here more fun if you can occasionally snag her in the hall with a quick challenge: “onomatopoeia!””
— Jeff Bezos
More importantly, Bezos knew that Amazon's success will be largely affected by the company's ability to hire and retain a motivated employee base. To do so, Amazon implemented a compensation structured that was heavily weighted to stock options rather than cash. Bezos explains that this allows employees to think like owners as they are actually shareholders in the company. Another way of doing so, is by giving employees value in what they are accomplishing at the company:
“How do you hire great people and keep them from leaving? By giving them, first of all, a great mission—something that has real purpose, that has meaning. People want meaning in their lives. And this is a giant advantage that the US military has because its people have a real mission. They have meaning. And that is huge. And so that’s a big recruiting advantage.” — Jeff Bezos
Finally, Bezos, by using the power of inversion once again, understood that he needed to eliminate anything that could drive great people away. An example of this is by having a managerial structure that makes the speed of decision making really slow. This is the reason why speedy decision-making is such a core pillar to Amazon's success as we learned earlier.
"Why would great people stay in an organization where they can’t get things done? They look around after a while, and they’re, like, “Look, I love the mission, but I can’t get my job done because our speed of decision making is too slow.” So large companies like Amazon need to worry about that.”
— Jeff Bezos
Beyond the Book
Read "Reversible and Irreversible Decisions" by Farnam Street
Read "Inversion and The Power of Avoiding Stupidity" by Farnam Street