Amazon 2016 Letter to Shareholders, adnotated.

From the last great tech leader in Americai :

“Jeff, what does Day 2 look like?”ii

That’s a question I just gotiii at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades.iv I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me.v I spend time thinking about this topic.

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”vi

To be sure, this kind of decline would happen in extreme slow motion.vii An established company might harvest Day 2 for decades, but the final result would still come.

I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization?

Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it.viii Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.

True Customer Obsession
There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality.ix

Why? There are many advantages to a customer-centric approach, but here’s the big one: 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.x No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples.xi

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. This comes in many shapes and sizes, and it’s dangerous, subtle, and very Day 2.

A common example is process as proxy. Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing. This can happen very easily in large organizations. The process becomes the proxy for the result you want.xii You stop looking at outcomes and just make sure you’re doing the process right. Gulp. It’s not that rare to hear a junior leader defend a bad outcome with something like, “Well, we followed the process.” A more experienced leader will use it as an opportunity to investigate and improve the process. The process is not the thing.xiii It’s always worth asking, do we own the process or does the process own us?xiv In a Day 2 company, you might find it’s the second.

Another example: market research and customer surveys can become proxies for customers – something that’s especially dangerous when you’re inventing and designing products. “Fifty-five percent of beta testers report being satisfied with this feature. That is up from 47% in the first survey.” That’s hard to interpret and could unintentionally mislead.xv

Good inventors and designers deeply understand their customer.xvi They spend tremendous energy developing that intuition. They study and understand many anecdotes rather than only the averages you’ll find on surveys.xvii They live with the design. I’m not against beta testing or surveys. But you, the product or service owner, must understand the customer, have a vision, and love the offering. Then, beta testing and research can help you find your blind spots.xviii A remarkable customer experience starts with heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.

Embrace External Trendsxix 
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 have a tailwind.xx

These big trends are not that hard to spot (they get talked and written about a lot), but they can be strangely hard for large organizations to embrace. We’re in the middle of an obvious one right now: machine learning and artificial intelligence.xxi

Over the past decades computers have broadly automated tasks that programmers could describe with clear rules and algorithms. Modern machine learning techniques now allow us to do the same for tasks where describing the precise rules is much harder. At Amazon, we’ve been engaged in the practical application of machine learning for many years now. Some of this work is highly visible: our autonomous Prime Air delivery drones;xxii the Amazon Go convenience store that uses machine vision to eliminate checkout lines;xxiii and Alexa,xxiv our cloud-based AI assistant.xxv (We still struggle to keep Echo in stock, despite our best efforts. A high-quality problem, but a problem. We’re working on it.)xxvi

But much of what we do with machine learning happens beneath the surface. Machine learning drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more. Though less visible, much of the impact of machine learning will be of this type – quietly but meaningfully improving core operations.xxvii

Inside AWS, we’re excited to lower the costs and barriers to machine learning and AI so organizations of all sizes can take advantage of these advanced techniques.xxviii

Using our pre-packaged versions of popular deep learning frameworks running on P2 compute instances (optimized for this workload), customers are already developing powerful systems ranging everywhere from early disease detection to increasing crop yields.xxix And we’ve also made Amazon’s higher level services available in a convenient form. Amazon Lex (what’s inside Alexa), Amazon Polly, and Amazon Rekognitionxxx remove the heavy lifting from natural language understanding, speech generation, and image analysis. They can be accessed with simple API calls – no machine learning expertise required. Watch this space. Much more to come.

High-Velocity Decision Making
Day 2 companies make high-quality decisions,xxxi but they make high-quality decisions slowly.xxxii To keep the energy and dynamism of Day 1, you have to somehow make high-quality, high-velocity decisions. Easy for start-ups and very challenging for large organizations.xxxiii The senior team at Amazon is determined to keep our decision-making velocity high.xxxiv Speed matters in business – plus a high-velocity decision making environment is more fun too. We don’t know all the answers, but here are some thoughts.

First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you’re wrong? I wrote about this in more detail in last year’s letter.

Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow.xxxv Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. 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.xxxvi

Third, use the phrase “disagree and commit.”xxxvii This phrase will save a lot of time. If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble 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.

This isn’t one way. If you’re the boss, you should do this too. I disagree and commit all the time. We recently green lit a particular Amazon Studios original. I told the team my view: debatable whether it would be interesting enough, complicated to produce, the business terms aren’t that good, and we have lots of other opportunities. They had a completely different opinion and wanted to go ahead. I wrote back right away with “I disagree and commit and hope it becomes the most watched thing we’ve ever made.”xxxviii Consider how much slower this decision cycle would have been if the team had actually had to convince me rather than simply get my commitment.

Note what this example is not: it’s not me thinking to myself “well, these guys are wrong and missing the point, but this isn’t worth me chasing.” It’s a genuine disagreement of opinion, a candid expression of my view, a chance for the team to weigh my view, and a quick, sincere commitment to go their way. And given that this team has already brought home 11 Emmys, 6 Golden Globes, and 3 Oscars, I’m just glad they let me in the room at all!xxxix

Fourth, recognize true misalignment issues early and escalate them immediately. 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. Without escalation, the default dispute resolution mechanism for this scenario is exhaustion. Whoever has more stamina carries the decision.xl

I’ve seen many examples of sincere misalignment at Amazon over the years. When we decided to invite third party sellers to compete directly against us on our own product detail pages – that was a big one. Many smart, well-intentioned Amazonians were simply not at all aligned with the direction. The big decision set up hundreds of smaller decisions, many of which needed to be escalated to the senior team.

“You’ve worn me down” is an awful decision-making process. It’s slow and de-energizing. Go for quick escalation instead – it’s better.xli

So, have you settled only for decision quality, or are you mindful of decision velocity too? Are the world’s trends tailwinds for you? Are you falling prey to proxies, or do they serve you? And most important of all, are you delighting customers? We can have the scope and capabilities of a large company and the spirit and heart of a small one. But we have to choose it.

A huge thank you to each and every customer for allowing us to serve you, to our shareowners for your support,and to Amazonians everywhere for your hard work, your ingenuity, and your passion.

As always, I attach a copy of our original 1997 letter. It remains Day 1.

Sincerely,
Jeff

Jeffrey P. Bezos
Founder and Chief Executive Officer
Amazon.com, Inc

That’d be all.

___ ___ ___

  1. Sorry, Presidents don’t count. And Jobs has left but a loathsome fraud in his wake. []
  2. In order to understand what Day 2 is, a quote from the opening lines of Jeff’s 1997 Letter to Shareholders is in order :

    Amazon.com passed many milestones in 1997: by year-end, we had served more than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and extended our market leadership despite aggressive competitive entry.

    But this is Day 1 for the Internet and, if we execute well, for Amazon.com. Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery.

    []

  3. Is it just me or is it high time that “get” in all its uses and for all its maddening ambiguity and implicit laziness is stricken from all but the most pantomime tongue-in-cheekeries (eg. “I gets mines Larrys, I brings da ruckus to da ladies.”) ? []
  4. Repetition is, after all, the father of learning (and son I know your barrel burnin’). []
  5. This is pretty exceptional. Companies will take their corporate branding with them everywhere they go and plaster it atop the tallest buildings they can afford, but to take the building’s given name along with you after a move is pretty bizarre. Imagine if you always called your new girlfriend by your first girlfriend’s name. []
  6. This spirit of innovation is very much the engine of growth and equally the reason why government (Day 2 per definitio) can never spur, foster, or otherwise kickstart innovation through its usual means of adding complexity, weight, and paperwork in saecula saeculorum. Despite its many, several, and “well intentioned” efforts to be on the bleeding edge, the best a government can do is provide a simple-to-understand low-tax regulatory environment with strong, stable utility infrastructure. []
  7. As it has in, say, Bombardier or General Motors, both of whom are better at lobbying for government grants and “nonrepayable loans” than at selling competitive products to the marketplace. []
  8. Humble guy, eh. []
  9. Jeff’s stayed at the forefront of e-commerce for longer than anyone, so in that domain at least, his word is gold. Whether the “customer first” ideology transfers into other industries will be left for the reader and his respective domain, but suffice to say that Bitcoin takes a very anti-customer stance by its essential nature. No hotline number can unerase your hard drive. Can you handle that ? []
  10. While you might argue that great inventors invent not for their customers but for themselves out of their own obsessions and for their own fanciful passions, examples ranging from Archimedes to Fulton counter such a broad stroke of the brush. This doesn’t make invention a profession, but it does make invention focusable. []
  11. The only thing Prime can’t do is make Jeremy, James, and Richard young again. []
  12. Look no further than your local state government or TBTF auto/aerospace/insurance providers for evidence of exactly this shamanistic-rain-dancing-the-gods-must-be-crazy-process-proxy-disease. []
  13. This is quite right. When the process is the thing, we see requirements for forms in triplicate from Agency A that must be stamped by Agency B on the other side of town before being hand-delivered to Agency C in the capital a thousand miles away. It’s also how we ended up with Gehry’s Guggenheim and Mies’ Neue Nationalgalerie.  []
  14. In a company or a country where equality of outcome trumps equality of opportunity, process will always win ; and the more “random” and rationalised, the better. []
  15. No argument here! Statistics are the road to hell whether your industry is epidemiology or economics or e-commerce. []
  16. Meaning they also understand themselves first and foremost. []
  17. Reading Freud and Aristotle far better serves the inventor than does reading Psychology Today. []
  18. And we all have our blind spots. []
  19. So how long before Amazon is accepting bitcoin for services rendered ? Hm ?   []
  20. Embracing Bitcoin is closer to having a hurricane at your back than a measly tailwind, but it’s also not hard to see that a terra firma based firm like Amazon is immiscible with the ephemeral and distributed nature of digital currency. []
  21. Algorithms are great but their promise of everlasting life and All Good Things Except Cheaper and Faster ™ is very much akin to the hype and hoopla of the Atomic Age. And we all know that that one played out (ie. it’s remembered mostly for its furniture). []
  22. Which don’t exist. []
  23. Which also don’t exist. []
  24. Original footnote : For something amusing, try asking, “Alexa, what is sixty factorial?” []
  25. Which also also doesn’t exist. Noticing a trend yet ? The whole AI “future” is full of “apocalypse is almost here“-isms. The chicken little routine is as sure a sign as any that you’re being scammed hard. []
  26. Insinuating that low Echo stock is the result of high demand doesn’t make it not the result of manufacturing or other supply constraints, but nice try all the same, Jeff. []
  27. The apocalypse is always slower and quieter than predictors want it to be. []
  28. Just as creating the App Store will let a thousand flowers bloom, right ? No way everyone just wants to play candy crush!! []
  29. Moah “food” prease! []
  30. The c == k soviet swap is totally making a comeback. Comrades for the world, unite! []
  31. Oh ? []
  32. Because good fast food takes time! []
  33. Early start-ups have the advantage of being composed of a concentrated collection of (hopefully) intelligent people. Size dilutes this strength in the name of “adoption.” []
  34. A strict management hierarchy goes a long ways towards preserving the power of the few intelligent people in the room. Amazon’s senior team is therefore always two pizzas big. []
  35. Learning languages works the same way. You never know as much as you wish you did but you’ll also never say a word, make a mistake, or progress if you don’t try and fail to make yourself understood. []
  36. Not that flailing around pretending to be fast for the sake of being fast is the cure, but Jeff knows this. []
  37. This is a new one for me. Have any of you tried this at work ? Feedback is welcome! []
  38. This is exceptionally unusual management style and practice. But by God does he pull it off.  []
  39. More humility. Seems sincere too. Not what you’d expect after reading third-hand accounts of “OMG BEZOS IS A MEGALOMANIAC” in the lamestream media, is it ? Checking your sources and forming your own opinion is always best, but that means it’s also largely reserved for… the best. []
  40. This isn’t to undermine stamina. Stamina is an admirable, even essential quality for success, but it can’t replace vision. You need both. []
  41. This certainly requires a work environment free of trigger warnings and safe spaces. Good. []

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