The power of 2,300%
An assessment of Amazon’s business model shows how numbers lie at the centre of Jeff Bezos’ management ethos, writes
Jeff Bezos believed that no physical bookstore could be competition in the long run to what he was starting, and so he chose the name Amazon
This “reflect as you read” book on Amazon comes at a time when most of the world is in lockdown and e-commerce is the go-to option for your daily needs. But readers in India, largely dependent on neighbourhood stores during the current phase, may beg to differ with the writers while rating Amazon, because the American major hasn’t been able to keep pace with orders for a variety of reasons. Even so, this is an informative and easy read for businesses as well as management students on how to be different and spectacularly big. Unlike many management books, this one is short — you can finish reading it one straight session. That is among the appealing features of The Amazon Management System by Ram Charan, a renowned advisor to several CEOS worldwide, and co-authored by Julia Yang, a former consultant at Mckinsey.
The book, which comes with an exercise for the reader to jot down reflections and ideas after every chapter, illustrates the essence of Amazon through what appears to resemble a physical Powerpoint presentation. Many of the things mentioned here, including customer obsession and “day one culture”, are known to anybody familiar with the company or its celebrity founder, Jeff Bezos. Even so, the book reveals many of the striking aspects of the ecommerce company that has changed the way people shop around the world and the man behind it all rather well.
For instance, it narrates the origin of Amazon in storytelling form, making it interesting. Bezos worked at DE Shaw and Co, a Wall Street firm known for its quantitative trading methods. “In 1994, founder David
Shaw appointed Bezos to lead the effort to study potential business opportunities that could be created by the Internet. The two would spend a few hours brainstorming each week, and Bezos would conduct further study to explore the feasibility of their ideas.” Amazon followed as a magic number — 2,300 per cent caught his attention. He had just discovered that web activity had increased by a factor of roughly 2,300 per cent in the past year, and there was no looking back. He quit the lucrative Wall Street job and began his own business.
The book explains how the name Amazon was chosen for what began as an online book business. The other names that were considered include awake.com, browse.com, bookmall.com, relentless.com and many others. Bezos believed back then that no physical bookstore could be competition in the long run to what he was starting, and so he chose Amazon. Bezos had reasoned then that the Amazon was not just the largest river in the world, but that it was also many times larger than the next biggest river. “It blows all other rivers away,” Bezos had said.
The Amazon journey may have begun because of a number (2,300 per cent), but maths has been at the centre of everything that Bezos has done, and the book brings that out effectively. Somewhere in the middle of the book, the writers say so in those many words. “Jeff Bezos is a man of numbers. This is his unique way of understanding the world, having fun in life and running business at Amazon.” Citing a speech by Bezos at the 2010 Princeton Commencement, the book talks about how he deciphered an ad campaign about smoking which stated that each puff of a cigarette would cut short people’s life span by a few minutes. Making his calculations on the daily consumption of cigarettes and the number of puffs per cigarette, Bezos as a little boy had told his grandmother, “at two minutes per puff, you’ve taken nine years off your life”.
Everyone at Amazon knows the famous line by W Edwards Deming — in God we trust, all others must bring data — the book points out. In fact, it goes on to say the first thing many people working in Amazon do every day is look at the numbers. “Armed with smartphones many of them start this daily ritual even before getting out of bed. They have become masters of cutting through a bevy of numbers to know what is really happening.”
But it’s a different kind of maths at work when it comes to earnings and profits at the company. And this is the most important point in the Amazon Management System. The writers rightly point out that many people have been baffled by Amazon, which has long been on the verge of barely break-even but has enjoyed an unbelievable leap forward in terms of market valuation.
Charan, the management guru, does the Bezos maths. He explains it this way: In 2018, Amazon made $232.9 billion in revenue. At a gross margin of 40.25 per cent, this translates into $93.7 billion gross margin cash generation in one year alone. From the operating cash flow point of view, Amazon generated $30.7 billion in net cash from operations in 2018. However, instead of leaving this enormous cash as profits on its financial statement, Amazon has been consistently and massively investing gross margin cash into technology and infrastructure to fund its “exponentially fast scaling”.
Where the book goes a little over the top is in its narration of Amazon’s “customer first” focus. Against the competition-centric approach of most traditional companies, Amazon’s business model is customerobsessed, the authors say. That’s the same line the Seattle-headquartered company’s top executives intone — and that includes what Bezos had said in an interview to Business Standard a few years ago. That may well be the guiding principle for the company, but that shouldn’t detract from the fact that it believes in competition the way any rightthinking business would. How else will you explain the annual Amazon Dhamaka in India during Diwali, competing full blast with now Walmartowned Flipkart?
Also, while Amazon has elsewhere been criticised for its allegedly harsh work culture where employees were expected to work till late, attend long meetings and tear apart each other’s ideas, Charan and Yang seem to have given a positive twist to all that. They talk about “continuous bar-raising”. In a telling line that’s seemingly innocent, the book says: “In all interviews, Amazon includes a designated and trained person known as the barraiser. They ensure that the hire is a fit for Amazon’s culture and its continuous bar-raising.”