9 Management Principles of Jeff Bezos, Founder of Amazon
Updated: Nov 28, 2022
Founded in 1994, Amazon is now the world's largest e-commerce company. With a market value of $1.5T, over $280B in annual revenue and 800,000 employees, it is literally the store of everything.
But not all of this just comes from digital retail. Amazon has more than 40 subsidiaries, and competes in several other segments such as cloud storage, entertainment, games, robotics, autonomous vehicles, among others.
And if there's one big name behind all of Amazon's success, it's the world's richest man today - Jeff Bezos, who has amassed a fortune of $175B. When your success story is that big, people pay attention to what you do.
In this post, we'll show you some of the main business principles and strategies that Jeff Bezos used to revolutionize online commerce and build one of the largest and most innovative companies in the world.
1. It's always Day 1
"It's always Day 1" is an Amazon management tenet that is deeply embedded in the company's culture and used by Jeff Bezos since his first letter to shareholders in 1997. As companies grow, they tend to become bureaucratic, slow and risk-averse.
For Jeff Bezos, Amazon's big secret is being able to be a giant, with great advantages of scale, global scope and financial resources, while maintaining the entrepreneurial and agile spirit of a startup.
The Day 1 mindset is Amazon's cultural element that underscores that it is only at the beginning of the digital revolution and that there will always be new innovations for the future.
2. How to make decisions
According to Jeff Bezos, we are all the result of the decisions we make, in our lives and especially in our business. This management principle establishes that it is necessary to know how to make intelligent decisions, which is directly related to the day 1 mentality. According to Bezos, decisions can be categorized into 2 types: reversible and irreversible.
Type 1 decisions must be made methodically, calmly and with great deliberation. These are those decisions where, in case something goes wrong, we can't just give up and go back to the way we used to be.
However, the vast majority of decisions we make are not of this type. They are Type 2 decisions. These are those decisions where if we choose a suboptimal path we don't have to live forever with the consequences.
They are like 2-way doors, we can easily walk through the door and then go back to where we were before. Type 2 decisions can and should be made with speed and by small groups of people. Furthermore, decisions of this type can usually be made with only 70% of all the information that would be needed to be sure of the chosen path.
Where most companies get it wrong is that, as they grow, they start making all decisions as if they were Type 1 decisions, even if in fact they were totally reversible decisions. The result is a slow, bureaucratic, committee-driven company with a risk-averse culture that will not be able to generate innovation.
3. Customer Obsession
There are many ways to build a business. You can be focused on competitors, you can be focused on the product, the technology, the business model and many others. But, according to Jeff Bezos, obsessive customer focus is by far the biggest protector of day 1 vitality and is thus a fundamental management principle.
In his letters to shareholders, from the beginning, Bezos has always made it clear that his goal was for Amazon to become the most customer-centric company in the world.
A good example of this was the introduction of product review spaces on the Amazon website, when this did not exist in other e-commerces. Even if negative reviews could reduce the amount of sales in the short term, helping the customer to choose what he needs, in the long term, would generate much more positive results.
Another great example of this in practice is that every Amazon employee works for 2 days every 2 years in the customer service industry, including Jeff Bezos himself. No wonder Amazon has hit the record for the best customer satisfaction rating in the United States several times among all service companies.
4. Long Term Thinking
"We will continue to make investment decisions with a focus on long-term market leadership rather than seeking short-term profits or pleasing Wall Street analysts." This sentence was written by Jeff Bezos in his first letter to Amazon shareholders and is so important that, every year since then, Jeff Bezos has repeated it in his annual letter.
A great example of the very long-term mindset of Jeff Bezos is the very business plan developed before founding Amazon, which did not foresee any profits during the first 5 years of the company's existence. Prediction that actually ended up coming true.
According to Jeff Bezos, he and all of his senior executives are always working and living in the future. None of them should be focused on the results of the current quarter but on the results of the coming years. Amazon takes this management principle very seriously, so whenever the company beats market expectations for the quarter, those results were actually built 3 years ago.
Another great example of the long-term mindset is the emergence of Amazon Prime - a service where customers pay an annual fee and receive various benefits, such as free shipping and delivery within 1 day.
In the early years, Prime lost Amazon millions of dollars due to the high cost of meeting the promise of speed of delivery made to customers. But it is precisely Amazon Prime that made Amazon, in the long run, create the habit of online shopping among its customers and build the largest logistics infrastructure for companies in the industry to be able to transform its Prime customers into extremely profitable ones.
5. Frugality
As an example of applying this Frugality Management Principle, in 1995, when Jeff Bezos could still count the number of Amazon employees on his fingers, they needed to buy desks for the employees.
When evaluating the prices of tables and doors on sale at Home Depot, Jeff Bezos noticed how doors were much cheaper than tables. That's how Jeff Bezos adapted a door including 4 feet to make it a table.
Thousands of Amazon employees still work with modern desks that resemble an adapted door, as a symbol of the company's frugality - which avoids any type of expense that does not generate value for the customer. Additionally, Amazon recognizes great ideas that help offer customers low prices with an Award called the “Door desk award” or “Door Desk Award”.
6. How to conduct meetings
You've probably attended many meetings that could have been an email or that felt more like a lecture than a meeting. The management principle applied to meetings conducted by Jeff Bezos on Amazon is often quite different from traditional meetings of large corporations. In general, Bezos meetings follow 3 main rules:
2 Pizzas: The number of participants in a meeting cannot exceed the number of people who could be fed up to 2 pizzas. If you've ever attended meetings full of attendees, you've probably experienced how, with many people, there is an excess of opinions and it's much harder to reach any kind of decision.
No PowerPoint: At Amazon, PowerPoints are not used in meetings. The meeting leader should write a document clearly explaining what will be discussed at the meeting.
Start in silence: The start of meetings consists of all participants calmly reading the written document for approximately 30 minutes. Only after that, the debate on the subject of the meeting begins, ensuring that all participants really understand what is being debated.
7. Minimize regrets
Before founding Amazon, Jeff Bezos was vice president at D.E. Shaw, one of the most famous quantitative investment funds on Wall Street - a very well-paid and relatively stable job. For the vast majority of people, the thought of leaving Wall Street to start a book e-commerce would be really unthinkable.
To make the decision if this really was the right choice - Jeff Bezos projected himself at the age of 80 and thought: "When I am 80 years old, I want to minimize the amount of regrets in my life". And in the vast majority of cases, regrets are often linked to omission, not doing something. We asked ourselves “what would have happened?”.
Using this logic of thought, Jeff Bezos came to the conclusion that, at age 80, he wouldn't be sorry for trying to create the company he was so excited about. Even if the company failed, Jeff Bezos knew he still wouldn't regret trying.
On the other hand, he also knew that the idea of never having tried would forever haunt him. That is, there was practically a 0% chance of regretting trying to create Amazon and a 100% chance of never trying. It was precisely this way of thinking that made Bezos resign, cross the country and found in Seattle what would become one of the largest companies in the world. This principle is even applicable outside the professional sphere.
8. Jeff Bezos Virtuoso Cycle
This management principle is what guarantees Amazon to have recurring purchases from its customers. For most companies, there is always a trade-off between price and customer service. Companies with a high level of service and quality are usually expensive. Companies that offer the best prices to the consumer tend to have low levels of quality or poor customer service.
This dichotomy is definitely not true for Amazon. The company's great strategy consisted of offering the largest and best selection of products in the world, including leveraging other sellers in its marketplace space.
Thus, using the advantages of scale to reduce variable costs and dilute fixed costs and then transfer cost savings to product prices, offering the best shopping experience to customers who will buy more again. Allowing for ever lower costs and better technologies, such as personalized product recommendations.
9. Relentless search for innovation
This management principle linked to the relentless pursuit of innovation is easily perceived over the years, as Amazon has innovated in several ways in the sector:
Introduced product review spaces;
Added third parties to sell on your own website;
Created the buy button with 1 click;
It was one of the pioneers in the development of personalized product recommendation systems;
Created the Kindle, the world's most famous e-reader;
It used its logistical infrastructure to store and deliver products sold by partners;
It revolutionized the software development market by offering its cloud computing services.
These were all highly successful results of the company, which generated an unparalleled shopping experience against competitors and billionaire businesses such as digital books and Amazon Web Services. But not everything is success. This is only possible because Amazon has an enormous agenda of innovations, many of which go wrong, as Bezos quotes in his letter to shareholders:
“Failure is an integral part of the invention. It is not optional. We understand this and believe in failing early, iterating until we get it right. When this process works, it means our failures are relatively small in size (most experiments can start small), and when we find something that actually works for clients, we increased our investments in the hope of making it an even greater success.” One of Amazon's famous failures, for example, was the Fire Phone, the company's smartphone that didn't work and was discontinued, costing Amazon $170M.