How Amazon Innovates: Lessons in Strategy for Microsoft and Others

2/25/10Follow @gthuang

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product competition. That means when budget priorities are established, new ideas sometimes get crushed to protect cash cows like Windows and Office. Frei says of Amazon, “The innovative things they are doing to be better at their core businesses [are] invigorating. They don’t seem to have any sacred cows and will creatively destroy anything in the way of ‘better and more profitable.’”

From what I gather, product teams at Amazon tend to be smaller and less centralized than at Microsoft. It can take 10 times as long to develop a new product at Microsoft as it does at Amazon—sometimes years instead of months—and it’s clear Microsoft still thinks in terms of “shipping software.” So it maps out release plans and feature sets years in advance. “Amazon, when I was there, was much more seat of the pants,” Petersen says. “But what Amazon had that I never saw at Microsoft was an incredible focus on real-time metrics. Amazon projects would deploy, be tested, adjusted, re-tested and continuously tweaked.”

And then there are the products themselves. Petersen says, “The tone at Microsoft was that the product had to be good enough (or maybe not even that good) to win, but it wasn’t worth going beyond that. Several times I heard new ideas dismissed with responses like, ‘The competitor’s product doesn’t have that feature.’ To delight or amaze or entertain was never on the agenda. Business results and competitive position were probably focused on more than what I saw at Amazon, but that focus didn’t lead to better outcomes for Microsoft.”

These observations of Amazon’s culture fit well with what Bezos has said publicly—but he goes much further. One of his most compelling interviews to date is from the October 2007 issue of Harvard Business Review. In it, Bezos discussed an impressive range of issues—from Amazon’s “friendly and intense” culture to its willingness to plant innovative seeds and “wait a long time for them to turn into trees” (typically five to seven years before having any real economic impact). He also described Amazon’s focus on process management and its defining business principles and unique strategies.

Bezos explained his overarching philosophy partly as follows. Everyone else seems to focus on things that will change over time, he said—competitors, technologies, and other factors that force companies to adjust their strategy rapidly. Amazon bases its main strategy on things that won’t change—in this case, the fact that its customers want a wide selection of goods, low prices, and fast delivery; developers who use its e-commerce or Web services platforms want reliability; and sellers want sales. Because 10 years from now, those things will still be true, and will still pay off for the company.

At the same time, Bezos told HBR, it’s important to adjust quickly to customers—not to competitors whom you might be tempted to follow closely into various markets. “The strategic value of close following is in not having to go down all the blind alleys. You let smaller competitors check those out, and when they find something good, you just quadruple down. If you’re following close enough, and the arena is slow-moving enough, the fact that you’re not first down that path doesn’t hurt you much. But in our environment there’s so much rapid change on the Internet, in technology, that our customer-obsessed approach is very effective,” he said. “If you’re competitor focused, you tend to slack off when your benchmarks say that you’re the best. But if your focus is on customers, you keep improving.”

He told the story of when Barnes & Noble launched its website in 1997, and at least one prominent tech pundit predicted Amazon would get wiped out. After all, Barnes & Noble had 30,000 employees and $3 billion in annual sales, versus Amazon’s relatively puny 125-person staff and $60 million annual revenue line. Bezos said he called an all-hands meeting, where he told his staff: “Forget about this. We can’t be thinking about how Barnes & Noble has so much more in the way of resources than we do…Yes, you should wake up every morning terrified with your sheets drenched in sweat, but not because you’re afraid of our competitors. Be afraid of our customers, because those are the folks who have the money. Our competitors are never going to send us money.”

As for how to deal with self-competing product lines, Bezos said, “We take a simple-minded approach. There’s an old Warren Buffett story, that he has three boxes on his … 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 gthuang@xconomy.com. Follow @gthuang

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