How did they do that?
How a leader builds sustainable, long-term results
We are used to hearing about quarterly losses of public companies. Thus, when we hear stories of leaders and companies who, defying the trends and the finicky Dow Jones and S&P, have eked out an increase in earnings per share, our heads turn.
Topping HBR’s list of the 100 best CEO’s in the world is a head-turning man and a head-turning story. In his 19 years at the helm of Amazon, Jeff Bezos has delivered a whopping 15,189% of total shareholder returns, despite being ranked nearly last in terms of compensation among his CEO peers. Amazon’s amazing story of Wall Street defiance isn’t a new one, but a closer look at why they consistently perform well despite intermittent quarterly losses (a big one in the summer of 2014) reveals some fundamental leadership and organizational lessons that those with the courage to do so should heed.
In Jeff’s 1997 letter to his shareholders, he outlined very clear principles by which he intended to run and grow Amazon, and he has stuck to them since. Of the many practices we might glean from Amazon’s impressive results, here are five we believe are worth paying attention to. They prove that fundamental principles of good management we’ve been reading about for decades may actually work. While they appear nearly clichéd in a list-form, as though we’ve heard them a thousand times – because we have – seeing them actually in practice is refreshing and instructive.
Amazon’s Prime Secret
Maniacal focus Jeff’s vision of “being the most customer-centric company in the world” permeates the organization’s ethos. He said this at the outset, and it remains true today: “Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.”
Relentless adaptation Recognizing that the relevance in its business model is predicated on scale, Amazon continues to invest, and reinvest, in new businesses. Beginning in a garage focused almost exclusively on books, today it is a leading player in cloud computing services and storage, big data analytics, online video and music, e-readers and other devices. Bezos founded Blue Origin, a company that is exploring space travel, and he acquired the Washington Post in hopes of finding a profitable business model for journalism. Amazon is not afraid to experiment to remain relevant and build scale, even if that means showing losses.
Prudent Risk In 2004, Jeff summoned key leaders to his home on a Sunday afternoon in response to a customer suggestion he’d received online. The suggestion was charging an annual fee in exchange for free shipping all year long. Against intense criticism from his financial leaders that margins would dramatically erode, Amazon Prime was born. “There were people who thought it was an extremely bad idea—the spreadsheets uniformly painted pictures of losses,” Vijay Ravindran says. Bezos ignored the objections, convinced that the offer would spur more orders. That intuition proved correct just weeks later, when the program, Prime, launched. Customers who’d previously made a few purchases a year were suddenly ordering multiple times a month. “Instead of looking to protect the current business, Jeff saw the upside,” says Ravindran, now chief digital officer at Graham Holdings. “It was the most impressive display of business leadership I’ve seen in my career.” Today tens of millions of customers pay $99 a year for Prime, which generates more than $1 billion in membership fees and incalculable incremental sales.” (HBR Top Performing CEOs in the World; The Numbers in Jeff Bezos Head; McGinn; November, 2014)
Devotion to continuous improvement Amazon’s greatest innovations come on a daily basis, in the form of making core processes that are much more efficient and cost effective. In Jeff’s own words, ”I bet 70% of the invention we do focuses on slightly improving a process. That incremental invention is a huge part of what makes Amazon tick.”
Maintaining the long view In Jeff’s words to his shareholders, “We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.” One might read such words in any given shareholder value, penned by the Corporate Communications director prior to an annual meeting; but having such words matched by equally bold actions and decision-making is another thing entirely. As HBR reports, “ With 132,000 employees and $75 billion in annual revenue, Amazon is a 20-year-old corporation that routinely posts losses. (Its operating loss may top $800 million in the third quarter.) …Like every CEO, Bezos talks about managing for the long term—but he walks the talk, shrugging off investor concerns even as Amazon’s stock dropped from a high of $407 in January 2014 to $307 in August. Over the long haul, however, there’s no disputing his ability to generate shareholder returns: the company’s stock performance since its 1997 initial public offering has been so strong that its share price could have dropped to $250, and Bezos would still rank as HBR’s best-performing CEO.”
So what’s the real secret?
Great results – results that can be repeated – are never the result of dumb luck. Sustainable results are built. Sustainable growth is found in organizations with clear strategic intentions and identities that are constructed and built to translate those intentions into results. The organizations are constructed of cultures, processes, governance models and accountability processes, and the requisite talent that are all consistent with the strategies they are transposing into results. That is the key. They are not loosely aligned or close enough to the strategies they are purporting to deliver. They are deeply congruent with them. The organization fits the strategy.
But today’s organizational norms are far from that. Most companies’ version of a stated strategy is nothing more than short-term financial forecasts based more in hopeful guesses than competitive fundamentals. Simply walk the halls of the organization and ask a random set of 20 executives to articulate their organization’s strategy for you, and you’ll get as many versions in response. Then, look at the organization’s construction — not the organization chart, but the actual way the organization functions. Look at how talent is acquired and cultivated and rewarded. Look at how decisions are made, who is making them, with what resources and authority. Look at how financial results are reported, and to whom. Look at how financial resources are allocated and to and by whom, and look at what people say is the culture vs. the behaviors actually in practice; and if you can detect even a shred of congruence among all of it, especially in relation to a viable strategic intent, you will be staring at a potential Amazon because that’s what building sustainable results takes.