By Derek Parker
In his new book, The Amazon Management System, author and consultant Dr Ram Charan and co-author Julia Yang provide a crucial anecdote. In a meeting of senior managers, Amazon founder and CEO Jeff Bezos asked how long it took the call centre to respond to a call. He was told one minute. He then called the centre, using the speakerphone. The one-minute mark passed. Two minutes. Three. Eventually the call was answered – after 270 seconds. A failure in process that had to be addressed.
To some, this might seem like a waste of time for the executives of a trillion-dollar company. But Dr Charan says that Bezos was making two essential points: that serving customers in the best possible way was the key to Amazon’s success; and that no task or operation of the company was beneath the attention of senior managers.
“The Amazon Management System is designed for speed, agility, and scale,” says Dr Charan. “The technology is important but it is the management system that is critical. It has proven to be a winning formula to thrive in the digital age.
“The research for the book was based on public sources, interviews of past and current Amazon executives, and cross-checking of facts. Some of the Amazon tools and best practices introduced to our clients have proven very useful and effective.”
Bezos himself has been very willing to explain the company’s strategy. Since 1997, he has provided an annual letter to shareholders which sets out Amazon’s goals, approach and methodology.
Building blocks
A customer-obsessed business model is the foundational building block of Amazon’s operations, with the aim of collecting data to provide each customer with a personalised experience.
Many traditional companies are competition-centric, and use quarterly financial results as a measure of success. Amazon’s strategy is to focus on the long term, continually expanding and seeking to respond automatically to market changes. It has been able to deliver increasing cash flows and high returns on investment.
The Amazon Management System: The Ultimate Digital Business Engine That Creates Extraordinary Value for Both Customers and Shareholders, by Ram Charan and Julia Yang (Ideapress) is available now from amazon.com and booktopia.com.au
Another building block is to not only recruit the best people but also to continually raise the expectations on them. The talent pool is carefully defined and documented, and every interview panel includes a person designated as a ‘bar-raiser’. Their task is to ensure that the hire is a fit for Amazon’s culture of constant improvement. Performance bonuses are weighted towards share options rather than cash, which encourages employees to think like owners.
“Writing ability is also tested at the recruitment stage,” says Dr Charan. “The point is not so much as to test writing as to test thinking.
The company wants people who can think clearly, show imagination, and communicate directly.”
Being born as a digital company, Amazon has not had to overcome the silos and legacy issues faced by traditional companies. But very few digital-born companies have gone as far as Amazon in using artificial intelligence to power a real-time system of metrics and data analysis. This allows for a cross-department, input-oriented base of information. Every metric is ‘owned’ by an individual, who is responsible for tracking anomalies and fixing problems. There is an emphasis on system-wide transparency to ensure that information can reach the people who need it, with minimal layers of bureaucracy.
Dare to disrupt
Dr Charan identifies as a fourth building block a system for constant invention, rather than the focus on core competencies often practised by large companies. But he points out that invention is not pursued for its own sake. Amazon starts with anticipated customer needs and works backwards.
An illustrative case was the development of the Kindle e-reader, which was introduced even though the company was aware that it would dramatically reduce Amazon’s own sales of hard-copy books. This was pushed by Bezos personally, and the decision puzzled many people. Dr Charan provides the answer: because Bezos realised that if you don’t dare to disrupt your own business, someone else will.
A significant part of constant invention is the acceptance that some inventions will fail. Dr Charan supplies a long list of Amazon ideas that did not go anywhere. The point, however, is that enough ideas will succeed, and will move the company forward.
When it comes to making decisions, Amazon is able to act quickly. The process follows a set of clear principles which are enforced consistently across the company. Bezos has also fostered a culture of ‘disagree and commit’, meaning that all dissenting views are heard but once a decision is made everyone gets behind it. The lack of bureaucracy in the process also means that quick mid-course corrections can be implemented if needed.
Day-1
The final building block is what the company calls Forever Day-1. The idea is to combine the speed and agility of a start-up with the capital, reach and other advantages of a large company. This is enforced by strict resource constraints, very few administrative layers, rewards for innovation and frugality, and, of course, an emphasis on customer service.
Dr Charan sees lessons in the Amazon model that can be applied by other companies but he does not endorse attempts to blindly replicate it. In particular, Amazon’s policy of not paying dividends, instead ploughing all profits back into the company, only works because of high cash flow and capacity for continual expansion.
Dr Charan believes that the Amazon model will continue even when Bezos departs, as it is now entrenched in the company’s DNA and reinforced by a highly competent board. He predicts that Bezos could leave the company within a few years.
“We know only too well, from decades of consulting practice, that what really matters is the fit,” he says. “The Amazon Management System works because it fits the values, principles, and styles of Jeff Bezos and his core team, as well as the nature of Amazon’s platform and infrastructure business. Amazon’s experience offers important lessons but you also have to ask: what fits you and your business best? No-one has the perfect answer. You will have to experiment, iterate and invent your own.”
Further resource
IML ANZ Members enjoy free access to Ram Charan’s e-book Leaders at All Levels: Deepening Your Talent Pool to Solve the Succession Crisis.
Visit Leadership Direct via the IML ANZ Member Portal to read more of Dr Charan’s works.
This article originally appeared in the April 2020 print edition of Leadership Matters, IML ANZ’s exclusive Member’s magazine. For editorial suggestions and enquiries, please contact karyl.estrella@managersandleaders.com.au.
