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In the 1990s, amid the dot-com boom, one company decided to change the way we buy books.
At the time, bookstores imitated most retail supply chains, purchasing titles directly from publishers to stock in-house. This meant they enjoyed a nice markup, but inventory was limited to square footage of a physical store.
The new company changed the approach, serving as an Internet-based go-between, connecting consumers directly with publishers. People now enjoyed cheaper prices and a far-greater selection of titles.
Then, as society became increasingly digitized, the company took advantage of the e-reader trend, creating a “so-easy-to-use-your-grandmother-could-do-it” device that could house thousands of books in once place. Today, this device accounts for 65 percent of the e-reader market.
The success of Internet-based book sales laid the foundation for an innovation powerhouse. Since the 1990s, this company has become an e-commerce giant, a company that leads dramatically in the U.S. for online retail purchases, offers top-notch cloud computing services that generated more than $12 billion in revenues for 2016, and this year began building stores that operate entirely without a human workforce.
This company, of course, is Amazon.
Amazon is one of several tech giants today, among the ranks of Google, Facebook and Apple. However, as Vox.com points out, Amazon is unique in its ability to enter new markets (publishing, retail, cloud computing) and dynamically alter them quickly, but permanently.
The other tech giants of today are known for doing one thing really well. Google is synonymous with Search; Facebook with social and digital advertising; and Apple with beautiful, user-friendly hardware. In these areas, they are unbeatable.
But problems arise when the companies attempt to enter new markets. Google Plus flopped, despite Google’s attempts to integrate it into its YouTube platform. Apple’s iCloud services are nice, but they have never really taken off like Amazon’s cloud computing Web Services platform. Facebook and Google are both attempting to launch projects that will spread WiFi to low-income areas of the world – but these are seen more as CSR projects, and not fundamental revenue-producing wings of the business.
Amazon is different.
“Amazon has figured out how to combine the entrepreneurial culture of a small company with the financial resources of a large one,” writes Vox.com. “And that allows it tackle problems most other companies can’t.”
For instance, Amazon is unique is that it doesn’t rely on buying talent, as do Google, Twitter and Facebook. (It’s a running joke in the startup world that the ultimate goal is to get a buyout from Google, largely due to the proliferation of the tech giant’s takeovers to gain access to proprietary software or talent.)
“Amazon doesn’t need to rely so heavily on expensive and risky acquisitions because it has developed a system for nurturing entrepreneurial projects internally,” writes Vox.com. “And as technology invades the real world, there are going to be more and more opportunities for these kinds of entrepreneurial projects.”
So what is Amazon’s secret?
The State of Today’s Market Environment: Constant Disruption
With the rapid changes that have resulted from the digital revolution, the old way of doing business no longer exists, according to a recent report by the Boston Consulting Group (BCG). The report, which argues that companies today must constantly innovate or risk falling behind, ascribes the never-ending need for transformation to three main reasons:
Reason 1: Technology is allowing markets to change faster than ever before.
“Across industries and regions, the competitive environment today is far more unpredictable than it was even a decade ago, with disruption arising from all directions,” writes BCG.
Mobile banking. Ride-sharing. E-commerce. A new media environment. These new trends mean the fundamental existence of most market structures is under threat. Says BCG:
“Unprecedented disruption and market turbulence, coupled with the aspirations of leaders to reach higher, require organizations to launch more-frequent transformations, often of different types, with several underway at any given time. … The increased frequency of such efforts, together with the wide range in types of transformation, heralds a new era: ‘always on’ transformation, in which companies no longer launch individual transformations but are, in effect, always transforming.”
In fact, BCG research found that 85 percent of companies that have undertaken transformations over the past decade have pursued more than one type, with the most common being organizational, operational, and rapid financial improvements.
Reason 2: Traditional sources of competitive advantage are diminishing.
According to a separate report from BCG, public companies traded in the U.S. now have a one-in-three chance of failing within the next five years—up from one in 20 just 50 years ago. A leading company that misses one market shift loses three to five years in development time, which is enough to cede the leading position. A miss of two turns, and the company risks bankruptcy.
This is because traditional sources of competitive advantage, such as market share, legacy, and deep financial pockets are less important than they were in the 20th century.
As both Kodak and Xerox found, a 100-year history does little to prevent huge losses if a company cannot innovate. And taxi companies, which up until five years ago enjoyed what was all but a monopoly in most cities, are under severe threat from ride-sharing apps.
Today, innovation, quality customer service and a “forward-thinking” brand matter far more.
Reason 3: Increasingly, transformation starts from market leaders; not laggards.
With the ever-present need to innovate and adapt, nothing can be taken for granted in today’s disruptive markets. Thus, industry leaders must not only avoid falling behind, they must also be at the forefront of change. Says BCG:
“In the past, transformations have often been perceived as radical solutions for companies with broad and systemic problems—that is, companies with no choice but to change. That perception is increasingly outdated. A comprehensive survey revealed that fewer than half of the BCG clients that underwent a transformation over the past decade had been market laggards when they launched their change initiative.
“Indeed, more than half of them were market leaders. Leading companies in the sample chose to undergo preemptive transformations that further reinforced their competitive strengths.”
Clearly, the old way of doing business isn’t going to work. Success these days often results from a company taking the initiative to transform itself long before it has to.
So what are the essential characteristics of companies who manage this transformation process well?
Let’s go back to Amazon.
Employee Empowerment: How Amazon Is Able to Dominate New Markets
In 1999, a man named Steve Kessel joined Amazon to run the book division. Five years later, Amazon CEO Jeff Bezos called Kessel into his office and fired him.
This wasn’t due to a lack of performance; instead, Bezos wanted Kessel to manage the growing digital wing of Amazon, and he didn’t think Kessel could devote enough energy to both areas of the company. Kessel agreed to the change, and Bezos immediately put him to work. His task: To dismantle the book division.
“Your job is to kill your own business,” Bezos told Kessel, according to the book The Everything Store. “I want you to proceed as if your goal is to put everyone selling physical books out of a job.”
Kessel worked relentlessly, and a few years later, the Kindle was born. As mentioned previously, it accounts for 65 percent of today’s e-reader market.
Amazon’s secret is simple: It innovates. Constantly.
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Before he asked Kessel to switch roles, Bezos read The Innovator’s Dilemma, written by Harvard professor Clayton Christensen. The premise, which Bezos quickly implemented into Amazon’s core operating procedures, is that companies avoid enthusiastically tackling new market opportunities due to a fear they will disrupt their current business efforts.
In other words, companies, out of concern for short-term gain, are afraid to innovate.
To solve this issue, Christensen wrote that companies should empower employees to pursue new ideas and “set up autonomous organizations charged with building new and independent businesses around the disruptive technology.”
It’s why Bezos had to fire Kessel from the books department so that he could kill the books department. Kessel had to be freed from the need to succeed in his original job.
This example is one of many examples in which Amazon boldly attacked new opportunities, even at the detriment of its current business model. But this boldness has been necessary.
Innovation is key to obtaining first mover advantages.
According to the Harvard Business Review, to obtain the kinds of first-mover advantages enjoyed by Amazon (which include huge market shares in e-commerce, e-readers and cloud computing), a company must have strong R&D capabilities and thriving methods for new product development.
Companies that are slow to adapt will fall behind, even if they entered the market first. Amazon avoids this trap by promoting a culture hospitable to experimentation.
“At a normal company, when the CEO endorses an idea, it becomes a focus for the whole company, which is a recipe for wasting a lot of resources on ideas that don’t pan out,” writes Vox.com. “In contrast, Amazon creates a small team to experiment with the idea and find out if it’s viable. Bezos famously instituted the ‘two-pizza team’ rule, which says that teams should be small enough to be fed with two pizzas.”
After a product idea gets the go-ahead from Bezos, engineers are told to create a minimum viable product so that the company can get feedback from actual users as quickly as possible. This allows for rapid change and products that best meet consumers’ needs.
Granted, this experimentation hasn’t always worked out: When Amazon tried to enter the mobile phone market, for example, things were a disaster. According to Fortune, Amazon’s Fire phone earned 2.6 out of 5 stars in customer reviews. Things went so badly that Amazon cut the price from $200 to 99 cents just one month after the Fire’s debut in 2014, and ultimately, Amazon had to write off the project as a $170 million loss.
However – and this important – no one was demonized. The company moved on.
“If you think that’s a big failure, we’re working on much bigger failures right now — and I am not kidding,” Bezos said in early 2016 at a press conference. “Some of them are going to make the Fire Phone look like a tiny little blip.”
This is Amazon’s second secret: Failure is allowed to happen.
Amazon wrote off the Fire and shifted focus to other things: This year, the company released Echo, a digital assistant, and launched Amazon Go, a string of brick-and-mortar stores that operate entirely by computer. Amazon Go, a dramatically complex system of cameras and robots, is truly the first of its kind, and it has the potential to again radically alter the current retail business model.
More importantly, the public forgot about the Fire flop as well. Both Echo and Go have been met with positive reviews and praises for Amazon’s forward-thinking approach. The company’s market valuation continues to rise.
“It is our job, if we want to be innovative and pioneering, to make mistakes and as the company has gotten big — we have $100 billion-plus in annual sales, 250,000-plus people — the size of your mistakes needs to grow along with that,” Bezos said at the press conference.
“The great thing is that, when you take this approach, a small number of winners pay for dozens, hundreds of failures, and so every single important thing we’ve done has taken a lot of risk, risk-taking, perseverance, guts, and some have worked out. Most of them have not. That has to happen at every scale level all the way down.”
In order to move your company forward, you’ll need to allow for (and even encourage) failure. As the next section illustrates, the key is instilling the right culture.
Allowing Failure: How Culture Plays a Role in Innovation
“What do potato chips, Post-It Notes, pacemakers, penicillin and Silly Putty all have in common?” asks a piece in Forbes. “They were all created by making mistakes.”
Mistakes are crucial. As my colleague Bryttany has written, the cost of preventing errors is far greater than the cost of fixing them:
“Being captive by the time, effort, and planning that goes into ‘preventing failure’ is fruitless. Problems are inevitable. You cannot plan your way out of them. Planning is important, but over-planning – trying to control a creative environment that inhibits action – doesn’t give you any advantage over failure. It just takes you longer to be wrong.”
I could list many examples of how great ideas resulted after a string of failures, from Edison’s light bulb to Steve Jobs’ Apple computer. But I don’t think that’s where I need to convince you. Most people understand that failure is a necessary part of the innovation process.
Here’s the key takeaway from this blog post: If you’re employees are too afraid to fail, they will be too afraid to innovate. This, at its core, is not an employee problem. It’s a culture problem.
Amazon didn’t luck out because it happened to hire entrepreneurial employees. Instead, it hired bright people and told them to pursue big dreams, even at the cost of failure, and as Kessel found, even at the cost of disrupting Amazon’s own business units.
Bezos was explicit in his mandate to Kessel: Kill the book division. After the Fire debut, Bezos didn’t frame the failure as a loss; instead, he championed the idea that it proved Amazon had a “healthy innovative spirit.”
Bezos recognized that culture starts at the top, and he took these intentional steps that allowed for a single, clear goal: innovation at all costs.
Money helps. Expertise helps. But the key element is a culture dedicated to experimentation. That’s why Amazon is the tech giant of today.
Conclusion:
Today’s market is in constant turmoil, due to the pace of innovation and disruption. Falling behind can have drastic long-term consequences. To avoid falling behind – especially in the tech sphere – a company is required to constantly innovate, meaning great product development and R&D teams are necessary.
Failure is also a necessary part of innovation, which is why Amazon encourages it through a strong culture of experimentation.
At Novareté, we know that a strong culture doesn’t just “happen.” It’s created.
“Culture as a conscious, deliberate, long-term strategy can be the key to sustainable differentiation and success for companies in the 21st century,” says Dov Seidman, CEO of LRN, who highlights the benefits of examining your own culture as a means to success in your industry.
If you feel like your company is falling behind and no one is bringing new ideas to the table, you could have a culture problem, and it may be time to examine if you vilify failure.
This blog post by my colleague Bryttany provides ways to help you examine if this describes your own culture. In my next blog post, I’m going to cover what you can do about it.
I also suggest trying out our free culture assessment tool, which measures the health of your culture by calculating how engaged your employees are. In less than two weeks you’ll receive actionable data and a recommended plan to make an impact – all for FREE.
