In 2001, Amazon’s stock fell 90%. In a hail-mary attempt, Bezos invited a book author to Amazon. Together, they created the foundation for trillions in market cap:
The author was Jim Collins, who published Built to Last in 1994. By 2001, Bezos had already adapted several of its concepts into Amazon’s principles:
· Tyranny Of Or → Avoid 1-Way Doors
· Homegrown Leadership → Hire & Develop the Best
· Good Enough Never Is → Insist on the Highest StandardsSo, Bezos was intrigued when Jim said, in front of the whole executive team:
“In times like this you want to respond not by reacting to bad news, but by building a flywheel.”
Collins had in mind the 5,000 lb old-style flywheels. They took hours to turn at first. But at some point, WHOOSH! Their own momentum kept them going.
Collins had quite a bit of reason to believe in his statement. He had commissioned a large team of Harvard MBA researchers for his new book, Good to Great. They compared companies that had delivered sustainable, S&P 500-beating results to mediocre companies that had flailed.
What the team found is the great companies were spinning flywheels. It wasn’t the first, fifth, or one-hundredth rotation that got them spinning. It was their concentrated effort that led to the breakthrough momentum.
On the other hand, mediocre companies were constantly launching new initiatives. Instead of achieving breakthrough momentum on one flywheel, they tried to create many. But each never achieved breakthrough velocity. They had to keep manually cranking them.
Given the insight, Bezos and Collins began sketching out Amazon’s e-commerce flywheel. They identified that Amazon could generate self-reinforcing momentum in 2 ways:
- Lower cost structure leading to lower prices leading to more scale and back to lower costs.
- Greater selection leading to customer experience leading to traffic leading to more sellers and back to greater selection.
These two elements have been the backbone of Amazon’s e-commerce business for the 20+ years since the pair initially founded them.
To this date, the flywheel continues to extract market share for Amazon. Last year, Amazon reached a tremendous 57% of total US e-commerce sales. At $514B in revenue, it has left the competition – like Walmart – in the dust.
So, what can we learn from Amazon’s e-commerce flywheel? As product and business people, we are tempted to start new flywheels constantly. But, it usually pays to focus on spinning our main one with self-reinforcing momentum faster.
Sketch out your flywheel, and go get it.
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As an observer, I have always believed Bezos also used Edward Deming’s Deming Cycle to grow and improve Amazon. Since Bezos departure as CEO, it seems Deming is being forgotten. Fees are higher, service is worse. ABN
American Buddhist Net 