The Everything Store
Start with a vertical, expand horizontally
Amazon had the singular goal of unlimited selection. Bezos wanted to be the “everything store.” But building “everything” from scratch was insurmountably difficult, so Bezos decided to start with a single category--Books:
“Bezos concluded that a true everything store would be impractical--at least at the beginning...If [Bezos] couldn’t build a true everything store right away, he could capture its essence--unlimited selection--in at least one important product category.“ (Page 25)
“Joy Covey believes that from the beginning, Bezos planned to expand beyond books, but he was looking for the right moment to do it. ‘He always had a large appetite,’ she says. “It was just a question of staging the opportunities at the right time.” (Page 66)
Scale is the defining feature of the internet
‘With that huge diversity of products you could build a store online that simply could not exist in any other way,’ Bezos said. ‘You could build a true superstore with exhaustive selection, and customers value selection.’” (Page 25)
Using data at scale created a unique advantage in personalization for ecommerce:
“Bezos believed that [data] would be one of the insurmountable advantages of e-commerce over its brick-and-mortar counterparts. ‘Great merchants have never had the opportunity to understand their customers in a truly individualized way,’ he said. ‘E-commerce is going to make that possible.” (Page 50)
When Bezos was ready to expand past books, he instructed his team to:
research categories of products that had high SKUs, were underrepresented in physical stores, and could easily be sent through the mail. This was a key part of Amazon’s early strategy: maximizing the Internet’s ability to provide a superior selection of products as compared to those available at traditional retail stores.” (Page 66)
To focus on the customer’s journey is to solve transaction costs
Unlimited selection was only one piece of the customer’s shopping journey. Discovery and trust were equally important. Competitors like eBay actually had deeper selection, but it wasn’t reliable or trustworthy:
“Traffic on Amazon was oriented around Amazon’s reliable product catalog. On eBay, a customer might search for the Hemingway novel The Sun Also Rises and get dozens of auctions of new and vintage copies. If a customer searched for the book on Amazon, there was a one single page, with a definitive description of the novel, and that’s where customers flocked. (page 114)
Amazon’s ‘reliable product catalog’ was defined by trust:
“Bezos believed that if Amazon.com had more user-generated book reviews than any other site, it would give the company a huge advantage; customers would be less inclined to go to other online bookstores.” (Page 37)
Executives in the book industry thought it was important to advertise and hype their product. Bezos thought Amazon’s role was to aid in discovery and the purchasing journey:
“‘We saw it very differently,’ Bezos said…’I thought, we don’t make money when we sell things. We make money when we help customers make purchase decisions.’” (Page 37)
The decentralized approach to discovery and reputation did not scale immediately. Amazon created it manually with an editorial staff:
“[Bezos] started building an editorial group--writers and editors who would craft a literary voice for the site and give customers a reason to keep coming back. The group’s mission was to make Amazon the most authoritative online source of information about books and replicate the trustworthy atmosphere of a quirky independent bookstore with refined literary tastes.” (Page 47)
Overtime, scalable systems for solving the problems of discovery and trust would be implemented:
In 2002, Amazon’s personalization model Amabot, “replaced the personable, handcrafted sections of the site with automatically generated recommendations in a standardized layout. The system handily won a series of tests and demonstrated it could sell as many products as the human editors.” (Page 134)
Amazon’s ability to solve the transaction costs presented in the shopping journey did not always scale at the same rate. Introducing the Marketplace business boosted selection, but stressed discovery and trust:
“‘Imagine you’re the guy on the hook for a zillion dollars’ worth of inventory,’ says Chris Payne, recalling his initial reaction to Marketplace. ‘And this other lunatic comes over putting low-price crap on your page. You can bet that leads to some squabbles.’” (Page 115)
But in the end, these dynamics balanced out, and Amazon was left with a system optimized for the customer’s shopping journey -- selection, discovery, price:
“[Amazon] had limitless shelf space and personalized itself for every customer. It allowed negative reviews in addition to positive ones, and it placed used products directly next to new ones so that customers could make informed choices. In Bezos’s eyes, Amazon offered both everyday low prices and great customer service. It was Walmart and Nordstrom’s.” (Page 182)
These capabilities, combined with post purchase logistics and convenience, finally pushed Amazon past eBay in its ability to solve its customers needs:
“A customer wanted the convenience and certainty of a quickly completed purchase, not a seven-day waiting period to see if his aggressively low bid for a set of Cobra golf clubs had won the day...Amazon endured the pain of disrupting its own retail business with its eBay-like Amazon Marketplace, which allowed third-party sellers to list their products on the company's single-detail pages.” (page 263)
Leverage & Scale
As it entered a space, Amazon co-opted the brand equity of established players:
“At first Amazon couldn’t get music labels and movie studios to supply it directly. But as in the book business, there were intermediary distributors, like Baker and Taylor, that gave Amazon an initial boost and then allowed it to credibly make its case directly to the big media companies.” (Page 83)
Once Amazon got large, it flexed its scale with partners who then overestimated their importance. After negotiations with UPS stalled out, Amazon redirected its shipping volume to FedEx.
“‘In twelve hours, [UPS] went from millions of pieces [from Amazon] a day to a couple a day,’ says Jones, who flew to Fernley to watch the fallout. The standoff lasted seventy-two hours and went unnoticed by customers and other outsiders.” (Page 180)
Amazon repeated this process again with book publishers who wouldn’t offer Amazon bulk discounts or long payment periods:
“When a publisher did not capitulate and the company shut off the recommendation algorithms for its books, the publisher’s sales usually fell by as much as 40 percent. ‘Typically it was about thirty days before they’d come back and say, Ouch, how do we make this work?’ says Christopher Smith, a senior book buyer at the time.” (Page 243)
Amazon would pass the savings of these demands on to the customer, resulting in more engagement. This expanded Amazon’s market power, which in turn, gave Amazon more leverage to negotiate greater benefits:
“When Amazon passed on savings to customers in the form of shipping deals or lower prices, it had the effect of increasing the pressure on physical bookstores, including independent bookshops, and adding to Amazon’s growing market power.” (Page 244)
“[Amazon] exacted more concessions and passed the savings on to customers in the form of lower prices and shipping discounts, which helped it amass even greater market share—and more negotiating leverage.” (Page 256)
This tactic was inspired by Walmart, which did the same. What is perhaps most surprising is the length that Amazon went to squeeze its suppliers. Amazon executive Randy Miller would actively “screw with [publisher] performance” by changing price and ranking, to extract additional negotiating leverage. (Page 245)
Decentralization as the solution to complexity
As Amazon grew, its org structure had to keep up. This wasn’t always a smooth process and by the early 2000’s, “the company’s various interdependent divisions were wasting too much time coordinating with one other.” (page 160)
According to Bezos, a symptom of poorly functioning organizational structure is communication:
“Communication is a sign of dysfunction. It means people aren’t working together in a close, organic way. We should be trying to figure out a way for teams to communicate less with each other, not more.” (Page 167)
As a result, Bezos moved away from hierarchy and towards autonomous units:
“Bezos vowed to run Amazon with an emphasis on decentralization and independent decision-making. ‘A hierarchy isn’t responsive enough to change,’ he said…[according to Bezos] the people closest to problems were usually in the best position to solve them.” (Page 167)
According to Neil Roseman, Amazon “didn’t want to be a monolithic army of program managers, a la Microsoft. [Amazon] wanted independent teams to be entrepreneurial...Autonomous working units are good. Things to manage working units are bad.’” (Page 168)
Bezos called modular units “two-pizza teams,” which were teams small enough to be fed by just two pizzas.
“These teams would be independently set loose on Amazon’s biggest problems. They would likely compete with one another for resources and sometimes duplicate their efforts, replicating the Darwinian realities of surviving in nature.” (Page 169)
To create that Darwinian survival, the teams needed a feedback mechanism, a way to measure success:
“Each group was required to propose its own ‘fitness function’--a linear equation that it could use to measure its own impact without ambiguity.” (page 169)
Bezos hoped to create an org structure the created itself through this competitive self organization:
Bezos’ was “acknowledging the complexity of his organization by breaking it down to its most basic parts in the hopes that surprising results might emerge.” (Page 169)
This initiative ultimately had mixed success and received backlash from participants. The need for defined and linear measures of success ultimately created too much structure, which warped decision making.
However, the same concept of modular decentralization would eventually play a key role in AWS’s strategy. After many executives had read Creation by Steve Grand, they came to the conclusion that:
“If Amazon wanted to stimulate creativity among its developers, it shouldn’t try to guess what kind of services they might want; such guesses would be based on patterns of the past. Instead it should be creating primitives--the building blocks of computing--and then getting out of the way...”
“Bezos directed groups of engineers in brainstorming possible primitives. Storage, bandwidth, messaging, payments, and processing all made the list...Amazon then started building teams to develop the services described on that list.” (Page 212)
These primitives would eventually become S3 and EC2--the original products that made up AWS.