CEO Stories: How to “Think Like Amazon”

This Is Capitalism: John Rossman

RH: This is Capitalism. I’m Ray Hoffman. How did Amazon do it and how is Amazon going to continue to do it? John Rossman has the answer to both. He joined Amazon in 2002—that is to say after 23 interviews, he joined—and he led the creation of the Amazon Marketplace with all the third-party sellers that came in, which is what lifted Amazon from being just an online seller of books and videos to a seller of everything.

In fact, the operation he created between 2002 and 2005 accounts today for over half of all the merchandise units sold on Amazon. He then went onto lead the enterprises services business at Amazon and there he helped build such brands as Target.com and NBA.com.

So having had a front row seat to the ways and strategies to Amazon’s creator, Jeff Bezos, John Rossman has gone on to advise a lot of young startup companies on how to think like Amazon, which just happens to be the title of a very readable new book by John Rossman.

How does an industrial engineering major from Oregon State become a major player in digital disruption?
JR: Yeah. I was always interested in in my career, in efficiency, integration, how processes and data worked, and making commerce more effective. I was in Seattle in the early 2000s and a friend of mine, a former Arthur Andersen colleague of mine, was in the finance group at Amazon and he came calling and said, “John, we’ve got an interesting idea, I think you’d be a good candidate for it.” So that kind of started my introduction to Amazon and a rather lengthy interview process over a few months that I had with them.

But it really…hard for me to evaluate but I thought it was a great fit because the marketplace business, which is the business I got to launch and scale at Amazon in 2002—which is third parties selling at Amazon.com—that really is about integration at a maximum scale, right? So third-party selling and a lot of choreography and metrics and procedures had to be put in place in order to scale that business. So it was a great fit.

RH: Without that, Amazon is Borders.com today.
JR: Well yeah. We did launch over 14 categories. So when I started at Amazon, it was… 90% of the business was books, music, video. The first holiday season I was there, 2002, it was the first billion-dollar quarter for Amazon. Today it’s a $260 billion organization, right? And we launched over 14 categories, so we launched into apparel first, then sporting goods, then home, then on down the list. And we did it by leveraging partners, by leveraging third-party selection and doing that. So it really was the vehicle both for category expansion and then many geographies have been launched on the back of the marketplace business also.

RH: But before any of that happened, you had to go through twenty-three interviews.
JR: And so this was really the consulting project to bring it all together. And the great thing was, by the time I started I knew both where we were going and what the vision was, plus I knew all the actors involved, all the people involved. And so I was able to come on board and really hit the ground running.

RH: Does this go back all the way to Jeff Bezos at the very beginning and an insistence on not being in too big of a hurry to hire the right people?
JR: It does. And I think that that’s one of the ideas in the book. And it’s about the biggest mistakes I’ve ever made in business have typically been around hiring in a hurry. And if you think about when you’re a business leader, you’ve got a project or a business that needs to…something that needs to get done, you’re prone to hiring the first person who meets the qualifications and is available.

But at Amazon, they really look to both hiring for the role that you have in hand plus what the future might hold. And so they have some mechanisms to help avoid hiring in a hurry. Their mechanism is called the bar raiser, which is somebody that’s independent from the team at Amazon who is evaluating the candidate on their potential to be fungible, to do other things beyond just the job that you’re hiring for. They have veto power, meaning everybody else can say yes, the bar raiser says, “No, there’s no resolution to that, the answer is no,” and I think it really does help avoid hiring in a hurry.

And so for other people, like, you just need to be aware that hiring in a hurry can lead you to some of the hardest situations you have and figure out a way to help alleviate or avoid that situation.

RH: I’m assuming back at Oregon State there was a mechanical engineering class where you learned about the basics, the beauty, the simplicity, and the power potential of the flywheel.
JR: Yeah. So as you mentioned, this book really isn’t about Amazon, it’s about the tools that you can take from Amazon to put into your business, and one of those tools is a flywheel. And a flywheel is, in a physical sense, is a type of mechanism that, once it has momentum, it keeps that momentum. We all know there’s no perpetual motion machine but it does a very effective job at that.

In strategy and in business the concept of a flywheel is really systems modeling, which is understanding the system that you are operating in. It could be an ecosystem that you’re operating in, and what your various levers for how you see your business progressing, how you see change happening, and being able to articulate and dissect what that systems model is.

A flywheel is a really simplified version of what your systems model might be and it’s a great way for summarizing your strategy for others internally and externally. Amazon continues today to refer to their flywheel, which is about improving the customer experience by having more selection, by having more sellers, which lowers costs, which improves the customer experience, all on a fixed base platform.

That flywheel still resonates today both internally and externally at Amazon and has been a key way for simplifying and staying on the same page within the organization as to “this is what we are about.” And they have to tie their programs or proposals or investments and demonstrate how does this feed into the flywheel.

RH: And your drawing of the Amazon flywheel in the book looks like a two- dimensional atom to me.
JR: Oh, well, that’s great. It really is a flat structure but it’s great that it looks good to you.

RH: Now you, as a director of merchant integration, had the task of bringing in third- party sellers with millions of new items to make that flywheel generate more sales in more areas for more customers.
JR: That’s right. The whole concept of how we were going to make change happen, which is what a flywheel helps do, is that by bringing in more selection over time with patience the customers would learn “oh I can come to Amazon to search, discover, buy anything.” And our key design principle for the marketplace business was we wanted a customer to be able to trust buying from a third-party seller as much as they trusted buying from Amazon, the retailer.

Well, that was a very different model in 2002 than the kingpin marketplace at the time, which was eBay, which was a very laissez faire model kind of between buyer and seller and eBay didn’t take much accountability. From day one we took full accountability for customer trust. So that mandated we had a very different choreography and handshake, and set of contracts with our sellers.

RH: In terms of the mechanics, in 2000, especially 2001 and 2002, I think, Amazon was in really dicey shape. How difficult was it to execute on your assignment to bring in third-party sellers who were much healthier than Amazon, name brands, at a time when Amazon is an online book seller trading as low as nine dollars a share, to get those companies to come aboard?
JR: And you bring up an important concept, which is one of the ideas in the book, which is having constraints is actually a tremendous assistance to inventing and innovating. So the constraints that we are dealing with back in 2001, 2002, was headcount was flat at Amazon. It’s hard to believe, given the employment. I think they have over five thousand jobs listed today just in Alexa. But headcount was flat at that point.

So I had to honestly ask for headcount from other areas of the business to get a team together to help launch the marketplace business. But having that constraint forced us to innovate in ways that if we had been able to have more headcount and more expenses we wouldn’t have been able to do.

Now to your question relative to third-party sellers and selling them, a lot of them said no to us, right? They said no but we were able to talk to some great brands, great selection and convince them that, “Hey, having access to the Amazon customer, your brand being better, available from an ecommerce standpoint” at that time was going to be a good thing for the business. And I think in general it was.

RH: So after say 2003 and ’04 people started coming aboard.
JR: Yeah, absolutely, it got to be…again the flywheel started to gain momentum. It was really four or five years after we launched the marketplace when the combination of the Prime membership came into being and then a program that’s called FBA, fulfillment by Amazon, that allows third parties to use Amazon’s logistics centers, and those items are Prime eligible. That triangulation between marketplace, Prime, and FBA, that was really what accelerated the growth of the marketplace business.

And I think Amazon’s growth and their stock price growth really mirrors the growth of the marketplace at Amazon. And in Jeff’s shareholder letter this year, just released a month or so ago, he starts off by showing by year, over the past 20 years, how the marketplace has grown. And today it’s 58% of all units shipped and sold, that platform that we launched in 2002.

RH: So how easy or disruptive is it for would-be disruptors today to create their own versions of the Amazon flywheel?
JR: I think the opportunity today is bigger than ever. And I think that that’s…. Everybody, in whatever time you’re operating in, they look at the winners of today and they go, “Wow, they could never lose. They’ll never have a fall down. I could never win against them.” It always happens, right? So I think that developing your perspective of how does change happen, what does my digital and ecommerce and future strategy look like, but the key ingredient is patience.

None of this happened overnight. I think the part of Amazon and Jeff Bezos story that doesn’t get told enough is how he bet everything. He bet on himself, he walked way from a great job here in New York City at DE Shaw, he bet everything and he stuck with it when everybody was a naysayer about Amazon. And he continued to keep us engaged and to have this vision and to push off trying to have short-term profits because he always was trying to optimize for long-term enterprise growth based off of great customer trust. And so I don’t think that story gets told nearly enough about Amazon and Bezos.

RH: And seven, eight years into the company, the company was still a questionable proposition.
JR: Absolutely. I get asked a lot, “John, why did you leave Amazon?” Well, all people remember at this point is really since 2009, 2010, the stock has done nothing but up and to the right. But there was about…. So Amazon went public in 1999, 2000, went up, came hard back down. When I started at Amazon it was about $10 a share, when I left Amazon it was about $30 a share. But I was there during the middle of a nine-year period where the stock was essentially flat. I was there for four years in the middle of that.

And as a senior person at Amazon, all of your real compensation is tied to stock growth. And so at some point myself and my main shareholder, my wife, you just kind of lose patience with it. Nobody saw this coming and so I think that just understanding…. Everybody wants the outcomes but what you have control of is the input. And this book, Think Like Amazon, is about the controllable inputs of how to create innovation and how to grow your business. One of those inputs needs to be patience.

RH: Yeah, and one of the most enjoyable things about the book is chapter titles—the 50 1/2 ideas. And even though this is a business book, you really can jump around. And that’s the way I read it. I think there’s a reason why “Idea 1” is idea one. Your journey will not be short by taking the long, strategic view, as Jeff Bezos has done.
JR: Yeah. So that really gets to the first ingredient here, which is patience. Amazon—one of their strategic advantages is that on a lot of programs and investments, they’ll evaluate it over an eight- to ten- to even longer-year period of time. And so they are able to rationalize and to do things that other companies can’t.

And so when we hear about many of their big initiatives today—healthcare comes to mind, a lot of the logistics things that they’re doing—those are 8- to 10- to 15-year investments that they are willing to make. Most companies aren’t willing to be that patient.

RH: And how far back, for instance, was Jeff thinking about what you were doing, the third-party fulfillment?
JR: The third-party marketplace? I think he always had it in his mind that books was going to be the first category that Amazon opened and it had some unique characteristics that he really liked for an ecommerce business. But that Amazon would always be a multi-category retailer. Now there’s many aspects of Amazon’s business today that I don’t think he had in mind but I think that was part of Jeff, which was in one hand he held a plan and in the other hand he let it free for opportunity to come. And a lot of opportunities, the willingness to be an explorer, has then helped create this conglomerate business that we know of Amazon today. But he always saw Amazon as a conglomerate, as a multi-category retailer.

RH: And I think about the acquisition last year of Pill Pack.
JR: Yeah. So Pill Pack was a nice acquisition for Amazon. It’s a pharmacy company that creates custom packages of your medication. So instead of you as a customer having to find your prescription and everyday unscrew it, make your little cocktail of prescriptions, Amazon ships them to you with that cocktail, that combination of pills that you need to take already packages together. It also brings Amazon 50 state pharmaceutical licenses, which is a great asset.

But I think Pill Pack’s orientation to thinking through things from the customers’ perspective versus the traditional business perspective—I think that’s the combination that makes it a great alignment from the Amazon culture, because Amazon has always been willing to rethink traditions because of the customer perspective. In fact, the name of Amazon’s innovation approach is called “start with the customer and work backwards.” And it’s a set of the ideas in the book, which is actually “what’s the daisy chain”—what’s the combination of things they do to help build ideas before they go forward with them.

RH: And you can make investments by looking at the longer term. You can make investments and bets on the future that other companies cannot.
JR: But the thing I always talk about is you need to have a big vision for what your idea is but you need to be able to bet small. You need to be able to bring it back to small incremental steps. Hypotheses, things we need to test, the minimally viable product, agile methodology, are all about how to take incremental steps to test concepts, always having a big vision. Enterprises…

Like don’t confuse thinking big with betting big. The innovation engine is an engine of small incremental bets testing your way to ideas. So many of Amazon’s failures don’t get much publicity but they’ve done so many things that don’t work out but they daisy chain them together and so some of the concepts and things that fail feed into other concepts in the future.

RH: And one of the ideas that I particularly like, I think it’s 16…? Yes. The most important aspect I think of Amazon’s customer relationships: Make it easy.
JR: Yeah. I think that friction is everywhere and I think we’ve just grown, to borrow a song title, we’ve grown comfortably numb to so many things as customers…a great Pink Floyd song. And that type of just looking at the details and understanding the friction.

Like I saw Amazon had a great feature that released a few weeks ago, which was called Prime Day. And Prime Day, what it allows a customer to do is to select the day they want their packages delivered. So instead of like, “Hey, it’s here in a day or two days,” you actually get to select which day. I travel a lot so it’s great for me to be like, “Hey, I’m ordering something on Sunday but I’m gone until Thursday, I want it delivered on Thursday because I don’t want it sitting at my front door for three days.” Right?

That type of understanding small parts of customer friction and being able to deliver a new feature, that’s the backbone of innovation. We’re all looking for the big idea but reducing friction and customer friction and striving for perfection in our operations, operational excellence—those are where most companies have the opportunity to excel in innovation. And that definitely represents 80 to 90% of how Amazon innovates is through operational excellence and reducing small points of customer friction.

RH: Now in your current role as managing partner of Rossman Partners, which is based where…?
JR: In southern California.

RH: In that current role you help enable young disruptive companies to move forward. Let’s say I have a young, disruptive company that I want to move forward. We’ll call it Hoffman, but in the current spelling of disruptive companies, Hoffmn, okay? Right?
JR: Love it, yeah, skip the vowel, yeah.

RH: So what sort of things would you as my consultant be telling me to look for and think about in terms of making something easy for my customers?
JR: Yeah. I’m an advisor to most of these companies, which to me means I’m working with them over a long period of time so that we have a relationship and I can help coach and give you ideas over a long period of time. Oftentimes it’s really about you have a successful concept, a business, but it’s how to get it to scale. So either operationally you have to scale or you have to horizontally scale into new markets, into adjacencies. So it’s really working through the strategic options that you have and narrowing those down and then how to proceed with them on a small basis.

Oftentimes strategy is really about being deliberate, what you say “yes” to, and what you say “no” to. And it’s that saying “no” to things that so many executives and teams forget to do and that takes precious resources away from being able to say “yes” in an effective way to the best ideas that you have. So oftentimes the way I work with teams and leaders, it’s about practical strategy-setting and what are the things we’re going to say “yes” to, which things are we going to say “no” to for now and then how do we proceed on those new ideas in small incremental ways so that we can test and learn.

You know, the word gets…”failed fast” is kind of the common slang on the west coast at least. It really isn’t about failure, it’s about learning. Learning in a very disciplined way where we are setting a hypothesis, we’re testing that hypothesis and then we adjust. We fail and then we adjust going forward. And it’s really that combination that I work with teams on typically.

RH: And that leads me to Idea 20. [Laughs.] I know you don’t remember but I do because I just read the book.
JR: Yeah.

RH: The two-pizza teams.
JR: Yes. So the two-pizza team at Amazon is the concept of how to create small cross-functional teams that own a core capability, really a mini business, over a longer period of time. If you think about how most big enterprises are organized, it’s by functional expertise. And when there is a cross-functional idea or a new product or a new service or a go-to-market offering, you’re pulling from cross-functional teams. Everybody is fractional, very few people actually obsess about having the service or the product or the business win over a long period of time.

So Amazon’s two-pizza team is a cross-functional team. They own the core capability, the product management, the engineering, the go-to-market strategy, operations, they own everything about it and they get to obsess about it for a long period of time driving adoption for that capability both internally and externally at Amazon. And it breeds such better leadership. It helps grow leaders; they get to really focus on a concept and a market over a long period of time. And the ability to then innovate and operate is greatly accelerated.

RH: Where did that name come from?
JR: Well, I don’t know where the name came from but it’s basically the concept of a team that is no bigger than ten so that two pizzas could feed them. So I don’t know who, like, said, “Oh let’s call it a two-pizza team,” I don’t know where that came from. But Amazon is full of these clever little headlines that they constantly use and refer to and I think that they are just masters of strategic communication.

Another good one is a term that Bezos has used for years—is “day one.” Right? “We are a `day one’ organization.” And really what that points to is being optimistic and saying today’s business does not define what we are going to be in the future. And so he was recently asked, “If you’re a `day one’ company what does being a `day two’ company mean? And how do you avoid being a `day two’ company?”

And Jeff went on to talk about that day two companies are ones that are optimizing for today’s business. They can be very successful companies but they are optimizing for today’s business. They’re not testing and innovating and trialing new concepts and they’re a stasis-bound organization, meaning that they are static, more or less, in what type of business that they’re in.

And so the ways to avoid being a day two company are really about two main concepts that he brought forward. One was don’t manage by proxy. And management by proxy—what that means is solely managing by customer surveys or competitive analysis, what other people are saying to you—actually stay in touch with your customers by having direct customer contact and direct customer metrics. So that was idea one.

And idea two was about paying attention to the mega trends that are out there that you may not feel impact your business today but in five or ten years they present both big opportunity and big threats to your business. So the one that he highlighted that Amazon is paying a lot of attention to and that we should be paying attention to is machine learning and artificial intelligence.

But depending upon the industry and the segment you’re in, there’s probably other big trends that today it’s like, “oh these things sound like cute ideas” or “not for mature businesses.” Pay attention to those, be educating yourself early as a leader and figure out the right time to be doing a pilot, doing a trial, so that you’re building organizational capacity so that when the time is right to actually do something you’re not starting from ground zero.

RH: And a day two company would never deign to create a second headquarters, as Amazon certainly tried to do, here in New York.
JR: Yeah. HQ2 was really about the fact that Amazon cannot continue… Their biggest constraint in their business, the biggest long-term risk in their business was being able to attract more world-class talent. And they just couldn’t do that at scale in the Seattle marketplace.

And so HQ2 was really a great example of looking long term, what’s your biggest risks, and if you act on those risks early you can actually take advantage of the situation and get a lot of strategic benefits, instead of what most executive teams would do in that situation. It’s like, “I don’t want to take on the effort, the expense, the sub-optimization of today. I’m just going to kick the can down the road and let tomorrow’s leadership team deal with that really five- to ten-year issue.” Right? Amazon is not that type of company. They don’t kick big issues down the road.

RH: And now today we have an $850 billion company, current market cap.
JR: Market cap.

RH: $260 or so billion in sales, annual sales. So Amazon has to be more bureaucratic than it was when you were there. But how much more bureaucratic is it?
JR: Well it’s tough to measure that and certainly Amazon is a big organization today but that’s where the leadership principles and these mechanisms that I walk through… Jeff’s biggest concern for Amazon is becoming a bureaucracy. That was true when I was there and it’s true today. He doesn’t want it to slow down. He doesn’t want to slow down decision-making speed, he doesn’t want to dilute accountability. So, so, many of these ideas are about avoiding and breaking down bureaucracy.

So Amazon, in no way is perfect or a perfect place to be. There is bureaucracy. But relative to scale and relative to most other companies, it’s significantly better than most other companies. And that is truly why they are such a scary competitor because honestly I think they are just getting going.

RH: And when it comes to having the procedures and structures in place to prevent the bureaucracy from being an innovation killer, is there anything better in terms of procedures than the future press release?
JR: Part of Amazon, if you think about it, it’s like on one hand they’re tremendous operators and so it’s about operational excellence and being relentless about getting to perfection but then it’s also about working in the future. And it’s that combination. And oftentimes it’s the same people who have to do both.

So the future press releases—one of the tools of their innovation process, which is start with the customer and work backwards—the future press releases, one of the tools that they use to envision the future, announce it to a team, and get everybody on board as to “this is the program, this is the project, this is the vision we have and very clear articulation of what the customer experience is going to be and the big issues that we have to tackle.” But they give it to one person in the organization who is accountable for it and everybody knows, it doesn’t matter what organization, what job, what title, what seniority you have, if somebody is the leader for a future press release, we all work for that person to help make that vision happen. So it’s another tool to help avoid bureaucracy.

RH: And it forces decisions.
JR: It forces decisions, brings about better speed to the organization, which is again, speed is the opposite of what bureaucracy is about.

RH: And I know Jeff has talked about how he hopes the company that eventually comes along to disrupt Amazon won’t come along until after his life. What is your instinct about that?
JR: I think that there’s more opportunity today than there has ever been largely thanks to many of the tools that Amazon and especially Amazon Web Services provides to innovators and inventors and people who want to try new things. It has never been easier to build a new company or to try a new concept than it is today. Things that used to be really expensive take a long time, take a lot of expense and capital, today are extremely simple thanks to on-demand, cloud computing, access to logistics, access to data, that you have today.

So I think that there’s lots of great companies that are coming along that may disrupt Amazon. I don’t think it will be one company that disrupts Amazon and I think Amazon in all of their businesses has great competition today. And so yeah, I think it’ll happen. As Jeff said, he’s just trying to make it so it’s not in his lifetime.

RH: Is it possible that Amazon could eventually be as easily disrupt-able and as fragile as Sears and Roebuck?
JR: I highly doubt that. I really do. And that’s because I don’t think Amazon will fall in love with their current business to the point where they aren’t actively working to expand it or disrupt it themselves. And Sears and Roebuck is an example of an era-based organization that had a tough time transcending into new eras and they stopped reinventing themselves. And it’s a real shame because it was a tremendous brand.

RH: Now on your LinkedIn page I see some of the young companies that Rossman Partners consults, none of which I’ve heard of. You’re an advisory board member to such firms as Decisiv, without the E, Modjoul, and Terbine. Other than disrupting the King’s English with those crazy spellings what kinds of disruptions are these companies up to?
JR: Yeah, so I love all of these companies and I’m very fortunate to get to work with the leaders. Modjoul is a company that is a sensor-based belt that helps avoid, predict and better manage blue-collar worker injury, in particular lumbar injury. The leader there is a leader by the name of Eric Martinez, who was EVP of claims at AIG. And it really does, everybody wins with their solution. Workers win because they avoid injury, management wins, risk wins. And so that’s a great company.

Decisiv in Virginia is a nice midsized company. They help dramatically reduce the downtime for large operating assets like trucks. So they work between the OEMs, the truck manufacturers, the truck dealers, who provide service, and the operators of trucks to both predict and shorten the service time when trucks do need service. So I love that cycle time compression, optimizing revenue for the truck operators, it actually improves the service revenue for the dealerships and radically improves the customer satisfaction for the trucking OEMs.

And Terbine I think I would say is the biggest moon shot that I have in the companies that I work with. Terbine envisioned and is a marketplace for sensor-generated data. If you think about this whole concept of data is the new black gold and everything, the challenge or the big friction for that concept is the ability for companies to give data, sensor based data to a place where they can monetize it easily and for companies who want data, a place to discover and easily contract to be able to get access to that data. So that’s really Terbine’s concept is a marketplace for sensor-generated data.

RH: Can these young companies take the long strategic view that Jeff Bezos has so successfully taken?
JR: Yeah, I do think they can. And I think that’s part of the playbook not just of Amazon but of what you see going on in venture capital funding companies is that the time scales are expanding out  but they’re shooting for bigger market disruption. So I don’t think it’s just Amazon who is taking that perspective.

RH: And I can’t let you go without explaining the last idea, No. 50 1/2. A half? Principles are not a poster.
JR: Yes, so the half idea, it’s not that I just wore out and stopped at half of an idea. Really the half idea is back to the essence of the book, which is this book isn’t about Amazon, it’s about real tools, real strategies, that you can put to work. But at the end of the day it’s about what are you willing to change, what new habits are you willing to take on as a leader.

In no way am I prescribing or recommending that 50 ideas, you take on 50 ideas. Take two or three. Be patient, try to make them both a personal habit and a team habit for you and see what sort of change it makes in how you operate together. Everybody wants the outcomes; they want the outputs of innovation and growth. But it’s about the inputs, the hard, everyday, consistent efforts of where you’re willing to put time and resources and new habits that you’re willing to create.

So the half idea is the challenging question back to the reader about what are you willing to do to get the types of results that you want.

RH: John Rossman, former director of merchant integration at Amazon.com and today managing partner of Rossman Partners. This is Capitalism, I’m Ray Hoffman.