Amazon continues to fire on all cylinders. In its first quarter earnings report on April 26, the company announced that its earnings per share came in at $3.27, or more than double the $1.22 estimates that were expected.
Meanwhile, the company's Amazon Web Services (AWS) division, the industry leader in cloud computing, racked up $5.4 billion in net sales, up 49% year over year.
While there is much that business leaders can learn from Amazon's extraordinary innovation model, a common quibble from enterprise executives is that Amazon's innovation model can't easily be transferred to their organization.
To explore these and other lessons that can be picked up from Amazon, HMG Strategy recently caught up with Wes Arens, a former Amazon executive and partner at Alvarez and Marsal who now advises CEOs and boards on digital strategy. Wes Arens will be speaking at HMG Strategy's upcoming summits in Minneapolis on May 17 and in Boston on September 13.
HMG Strategy: What are some of the key lessons around innovation and developing a culture of innovation that we can learn from Amazon?
Wes Arens: While innovation is certainly not unique to Amazon, I tell my clients that they may need to rethink how they are approaching innovation because of Amazon. The reality is that many companies have built their entire culture around products or technology or specific business models. Amazon on the other hand has built their culture of innovation around obsessing over their customers.
By starting with the customer and working backwards business leaders need to be aware of their competitors but not consumed by them. For example, today's customers expect excellence across their whole experience. This includes real-time feedback even before things go wrong. So instead of looking in the rearview mirror asking "how did I do?" the focus should be looking through the front windshield and asking "How is my driving?" This requires integrating processes, technology and data into every step of the operations with service-oriented business models that respond and adjust as needed. For many companies this way of thinking may be new but necessary to stay ahead of ever-rising customer expectations.
What are some of the unique ways in which Amazon cultivates a culture of innovation?
WA: One way Amazon cultivates a culture of innovation is their use of leadership principles.
The easiest way to understand just how critical these have been to Amazon's business success is to read Jeff Bezos' annual letters to stockholders.
In his latest 2017 letter, Bezos discusses how Amazon leaders should always insist on the highest standards when innovating - leadership principle #7. He says, "First, you have to be able to recognize what good looks like. Second, you must have realistic expectations for how hard it should be (how much work it will take) to achieve that result - the scope."
Amazon also stresses the importance of developing written narratives to understand the basis of the really hard problems, learn faster and think bigger. Amazon's peculiar practice of writing out narratives becomes a cultural forcing function to maintain its innovative standard of excellence. Without this deep dive, even the best teams might get frustrated and simply give up too early.
Can you describe how Amazon employees are encouraged to look for new ideas outside of the company that can be brought inhouse or adapted? Are there any examples you can point to?
WA: Sure, let's look at Amazon's acquisition of Whole Foods. For years Amazon has been experimenting with delivering groceries and having mixed results. They began to understand that the challenges of selling and storing and delivering quality fresh foods was hard and that other innovators like Whole Foods had deep expertise they didn't have.
Someone in Amazon then had to think big enough (leadership principle # 8) that buying a company like Whole Foods and combining it with Amazon's existing set of capabilities would allow Amazon access to not only expertise they didn't have but also a great set of high income retail locations that could serve as strategic distribution points in their logistics network. This would allow Amazon to also be the first and largest customer of Whole Foods for services like Amazon Prime, Amazon marketplace, and Amazon Web Services.
Combining business models creates a "flywheel" effect of growth for all these businesses and even greater value for customers.
Some executives will tell us they have trouble determining how to apply the Amazon model to their organizations. What advice would you offer there as to how they might go about cultivating a culture of innovation?
WA: Here are three ways to start. First, more than ever, leaders need to have a clear vision for their customers that delivers superior value. This takes customer insight on where to place your innovation bets. To do this, leaders need to first develop a point of view on the changes in their customers behavior. Next, they might ask themselves, what would Amazon do if they were running this business?
Second, a willingness to challenge long held assumptions around organizational risk taking is also very important. You can't expect innovation to happen without failing. Establishing a greater tolerance for failure and how and where you invest and manage risk is necessary to increase the volume of experimentation. To use a baseball analogy, it isn't about hitting grand slams but getting more times at bat that counts most.
Third, getting leadership and the Board all on the same page is a big part of this. This requires leaders to take a hard and unbiased look at their organization's operations and business model. What capabilities do they have and need to build? Where are their blind spots? What assumptions are they making about their market or business model that may no longer be true or at risk? Then prioritize this into a roadmap that aligns investments with the new business strategy and a balanced set of priorities.
Any final thoughts?
WA: I started my career at IBM. Much like Amazon today, they were the dominant company and were celebrated for their innovation. But they had a near-death experience because of one thing: they lost sight of their customer.
No matter how big your company is, customer obsession will always be vital to success. Today more than ever, you must insist on a culture of innovation that has the agility and fearlessness of a start-up. It's a point that leaders intuitively understand but may not emotionally understand how much is at stake. CIOs play a critical role in that conversation and in providing new ways to stay relevant and create a culture of innovation.
And that is why Bezos' first leadership principle is to stay obsessed over the customer and keep a start-up culture no matter how big you get. That is why he says it always must stay Day 1 at Amazon!
To learn more about Wes Arens and other distinguished speakers at HMG Strategy Executive Leadership Summits, click here.