Just as the Toyota Production System revolutionized manufacturing, Amazon revolutionized the world of e-commerce. But unlike Toyota's system, Amazon's system has not been as widely studied.
However, there are plenty of clues that can be found between Bezos' shareholder letters, and their leadership principles. Ram Charan and Julia Yang's The Amazon Management System captures these key ideas into a usable framework.
Genesis of the Amazon Management System
In his very first shareholder letter in 1997, Jeff Bezos outlined the core principles of Amazon’s management and decision-making approach :
Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies. Accordingly, we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy:
• We will continue to focus relentlessly on our customers.
• We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
• We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.
• We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.
• When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.
• We will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments.
• We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses.
• We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.
• We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.
Bezos’ first shareholder letter was the genesis and precursor to the current version of Amazon’s leadership principles. He wrote one every year — the last being in 2021 — expanding on many of the tenets he outlined in the very first one.
Between his shareholder letters and Amazon’s leadership principles, there’s a ton of useful frameworks for any manager or leader in a modern organization.
Ram Charan and Julia Yang, in The Amazon Management System, captured these ideas into a usable system anchored by six building blocks. If you are a student of how Amazon and Bezos operate, their system and checklist is a useful one to revisit regularly.
Building-blocks of the Amazon Management System
They anchor the system into six building blocks, with a checklist for each block:
- Customer obsessed business model
- Continuous bar-raising talent pool
- AI-powered data and metrics system
- Ground-breaking invention machine
- High-velocity and high-quality decision-making
- Forever-day-1 culture
Each block highlights how Amazon is fundamentally different compared to traditional companies.
1. Customer-obsessed business model
Despite their espoused commitment to putting the customer first, most traditional companies operate quite differently: they tend to be competition centric. They pay a huge amount of attention to financial results, especially earnings per share, and dance to the quarter-by-quarter short-term rhythm set by the capital market.
Amazon’s business model, on the contrary, is customer-obsessed, continuously expanding, built on novel concepts of platform, ecosystem and infrastructure, able to defy traditional laws of diminishing returns, and actually delivers increasing cash flows and higher return on investment.
Checklist for building block 1:
• Online and offline platform, ecosystem, and infrastructure provider
• Central idea based on customer obsession, inventing for the customers, long-term thinking and cash generation over earnings
2. Continuous bar-raising talent pool
Most traditional companies spend enormous amounts of money and effort in recruiting, developing, and retaining talent, and yet still encounter huge difficulty in finding the right people and deploying them in the right jobs. Take recruiting for example, many companies lack specific standards, and even if there are standards, they will easily give way to the pressing business urgency.
Amazon’s talent pool is carefully defined, meticulously documented, and rigorously chosen; and coupled with complete end-to-end follow-through and feedback to ensure continuous bar-raising, both for the talent pool itself and for the self-reinforcing mechanism of talent acquisition and retention.
In all interviews, Amazon includes a designated and trained person known as the “bar-raiser.” They ensure that the hire is a fit for Amazon’s culture and its continuous bar-raising.
Checklist for building block 2:
• Definition: builder, owner and mental toughness
• Recruiting: bar raiser, rigorous process and self-selective mechanism
• Motivating: builder’s dreamland, young man’s paradise and the high standards
3. AI-powered data and metrics system
In most companies founded pre-digital, data is scattered and fragmented within different silos, layers, and business units producing significant latency of weeks and months. People seeking a full picture of what is really happening in any day-to-day operation must spend intensive efforts involving many people, and suffer long wait times, in order to dig beneath the results on the surface. …
In such a setup, monthly or quarterly reviews could easily last hours or even days, as business and functional leaders sort through their pieces of the jigsaw puzzle one by one; then such work spirals out of control when the business grows bigger, the number of employees increases, and layers are added, due to the limitation of time and energy of any human being, i.e., the rule of “span of control.”
Amazon leverages modern technology to run day-to-day operations differently. Amazon’s data and metrics system is ultra-detailed, cross-silo, cross-layer, end-to-end, real-time, input-oriented and AI-powered; therefore everything can be tracked, measured, and analyzed in real time with anomaly detected, insights generated, and routine decisions automated.
In this way, it provides a single source of truth and significantly minimizes the need for “personal supervision,” thus enabling massive reduction in organizational layers.
Checklist for building block 3:
• Single source of truth
• Metrics: ultra-detailed, end-to-end, real-time, tracking inputs and need to be verified and be assigned to specific metric owner
• Powerful AI-powered tools able to automate decision-making
4. Ground-breaking invention machine
Most companies began before Amazon build their success on one brilliant innovation they made a long time ago. After that super-lucky and destiny-defining moment, many shy away from ground-breaking inventions, and seem complacent with minor improvements afterwards, here and there, year after year, and sometimes limited to only the packaging.
... Amazon’s invention machine is continuous, accelerating, and aimed at generating ground-breaking, game-changing, and customer behavior-shaping inventions that create new market spaces and economic opportunities of massive magnitude.
Checklist for building block 4:
• Relentless drive to invent: daring to learn new skills, to kill own business, to fail, in a big way
• Seek and build big ideas continuously (the press release), and construct cross-functional full-time and co-located two-pizza team with the right project leader
5. High-velocity and High-quality decision-making
Another systematic flaw with legacy management systems: decision-making happens at what feels like a glacial pace, with a “one-size-fits-all” approach applied to almost all matters requiring a yes or no. All kinds of frustrations litter a typically lengthy approval process composed of numerous executives and committees, and decisions are further stalled by all kinds of politics, backstabbing, gaming-the-system, and the routine charades of maximizing requests on resources, and minimizing commitments on results. …
Amazon’s decision-making is high-quality, high-velocity, and strictly follows a set of clearly articulated principles and uniquely designed toolsets enforced with striking consistency throughout the organization. This can make the company a very demanding place to work, but it frees employees from many of the headaches mentioned above.
Checklist for building block 5:
• Two types of decision-making: type 1 (one-way doors) and type 2 (two-way doors).
• For type 2 decisions, speed matters. Let the metrics owner make the call. If approval required, one level only.
• For type 1 decisions, focus on a few. Find out the best truth, imagine the possible change, combat group thinking, and if facing disagreement, disagree and commit.
• To scale up good decision-making, need to crystalize consistent principles and methodologies (the six-page narratives) and enforce them in every decision.
6. Forever- day-1 culture
As they get bigger, most legacy companies find they have long lost the initial speed, agility, and vitality commonly found in start-ups. They have become rigid, slow, and risk-averse; complacency and bureaucracy have crept in. Some could sustain for a while, some would gradually fall into oblivion or irrelevance, some would become the prey for aggressive acquirers, and only a few could continuously refresh themselves.
Amazon, as an organization, is committed to be forever Day 1, that is, to combine the size and scale advantages of a big company, the speed and agility of a startup, and the continuous upgrade of organizational capabilities.
Checklist for building block 6:
• To fend off Day 2: true customer obsession, resist proxies, embrace external trends, high-velocity decision-making, fight complacency, kill bureaucracy, and own dependency
• To build a forever-Day-1 culture: operationalize by observable behaviors, create forcing mechanisms, live and breathe them yourself, and invent memorable symbols and rewards.
It's rare for successful companies to articulate their philosophy, and also do it in a simple, usable way. Even rarer is formulating it upfront, and then sticking with it for twenty-five plus years.
Charan and Yang take the key ideas one step further by collating them into a usable framework. The Amazon Management System is a short read that introduces you to all the core tenets of how a trillion-dollar behemoth operates.
📚 HBR 100 Best Reads: You also get a curated spreadsheet of the best articles Harvard Business Review has ever published. Spans 70 years, comes complete with categories and short summaries.