How Amazon Innovates: Lessons in Strategy for Microsoft and Others

2/25/10Follow @gthuang

Sometimes a question that sounds naïve at first can lead to a revealing answer. So here goes: What is it about Amazon’s corporate culture that seems to foster creativity and innovation, while Microsoft gets ripped constantly for failing to innovate? Are there simple principles at work inside Amazon that might explain the difference?

I choose to compare these companies for a basic, if unscientific, reason: they’re the two biggest publicly-traded tech firms in town. And just as Microsoft (NASDAQ: MSFT) helped define a generation of entrepreneurs and technologists in Seattle—and around the world—many would argue that Amazon (NASDAQ: AMZN) will help define what comes next.

OK, so comparing these two tech giants is like discussing apples and oranges. They have vastly different customers, business models, and technologies. And one is a lot bigger and older than the other. We’re talking about a 35-year-old Microsoft that is more than triple the size of 16-year-old Amazon, after all.

But people forget how much Microsoft has grown in just the past decade. The Redmond, WA, firm more than doubled in size from 2000 to 2009, going from about 40,000 to 90,000 employees worldwide. In that period, its revenues increased by a factor of 2.5 (from $23 billion to $58 billion), while profits also climbed, albeit at a slower rate (from $9.4 billion to $14.6 billion). By comparison, Amazon had just over 24,000 employees at the end of 2009, when it made about $900 million in year-end profits (on $24.5 billion in revenues). So Amazon’s size and revenues are more comparable to Microsoft’s in 2000, though its profit margins are much lower. My point is that Amazon today looks a lot like Microsoft did a decade ago on some important measures of business success.

So for now, let’s focus our questions more carefully. How has Amazon managed to remain nimble even as it has grown to 24,000 employees? After starting with a simple website that sold books online, it now offers a huge diversity of products, from books and other physical goods to an e-commerce platform, cloud computing services, Kindle e-books and readers, and now, mobile applications. What deeper lessons can startups and big companies, including Microsoft, take away from its story?

Amazon is a hard company to get to know. For better or worse, its executives rarely talk to the press, and they almost never comment publicly on business strategy or competitors. (The company declined to comment for this story.) So instead I’ve been talking with former Amazon employees, as well as outside tech observers, to get a better feel for the culture and strategy there. And to get some insights straight from the horse’s mouth—from founder and CEO Jeff Bezos—I had to dig around a bit more (see further below).

Without a doubt, Amazon’s culture comes from the top. From the beginning, Bezos did things a little differently. Former Amazon executives say the CEO liked to hire people fresh out of … Next Page »

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at Follow @gthuang

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