Book: LP #8: Think Big

Thinking small is a self-fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers.

When people hear “Think Big,” they seem to believe that Amazon has a fairy godmother like in Cinderella. With Amazon’s magic wand it can create huge businesses at the flick of their wrist. When I was at Amazon, banks were impressed by Amazon Go, Amazon’s cashier-less convenience store. Executives from around the world would ask me, “How can we build something innovative like an Amazon Go store? We don’t want that exactly, but something innovative like that.” Amazon is very open about what it takes to create the Amazon Go store. Just use the Working Backwards process that I detailed as part of LP #1: Customer Obsession. Then be willing to fail a lot for many years, being firm on your long-term goal but flexible on the tactics to get there. The game plan is simple but it takes an enormous amount of work and dedication.

Think Big is not about copying others but coming up with completely new ideas. In 2003, Steve Jobs invited Jeff and some other senior executives to Apple’s headquarters in Cupertino. After some chitchat, Steve revealed iTunes for Windows, allowing Apple to sell digital music to anyone. Steve told Jeff, “Amazon has a decent chance of being the last place to buy CDs. The business will be high-margin but small. You’ll be able to charge a premium for CDs since they’ll be hard to find.” Jeff did not try to create a better iTunes. After a few months with the senior team, he created a team to focus on digital. They focused on eBooks and eventually created the Kindle.⁽¹⁾Bryar, Colin. Working Backwards (p. 166). St. Martin’s Publishing Group. Kindle Edition.

When you look at some of Amazon’s biggest businesses like AWS, Kindle, and Prime, it’s hard to wrap your mind around how a company that started as a bookstore built these businesses. Someone had to envision this huge business and work tirelessly on what might have seemed like a fools’ errand. As Bill Carr, a member of the original Kindle team, said, “This could either mean getting one of the best seats on a rocket ship or working for years on a small business that never gets off the ground.”⁽²⁾Bryar, Colin. Working Backwards (p. 163). St. Martin’s Publishing Group. Kindle Edition.

Let’s walk through how Amazon used Think Big to completely change retailing with Amazon Prime. In 2004, Amazon was beginning to lose some of its luster. It was mainly selling books and DVDs, and while it was growing, its rate of growth was slowing down significantly. It was being attacked by its far larger brick-and-mortar rivals like Best Buy and Barnes & Noble.⁽³⁾Much of what follows about Amazon Prime comes from this oral history of Amazon (audio).

While Amazon was offering a superior selection and great prices, it had a big problem delivering these things fast and cheaply. Customers have a real aversion to paying for shipping. It makes them feel like they are throwing away money. Free shipping was Amazon’s most popular promotion. Offering someone free shipping was far more valuable to the customer than giving them an equivalent discount.⁽⁴⁾From Page 195 of Working Backwards. Not clear if I need this footnote.

Jeff had been questioning the team about different shipping alternatives. Then, in mid-October 2004, he gave the team the following challenge:

We should not be satisfied with the growth of our retail business. This is a house-on-fire issue and we need to dramatically improve the customer experience around shipping. We need a shipping membership program. Let’s build and launch it by the end of the year.

Bryar, Colin. Working Backwards (p. 188). St. Martin’s Publishing Group. Kindle Edition.

This was the most important time of the year, the holiday season. Jeff scheduled a meeting to discuss Prime (then code-named Futurama) for a Friday afternoon. Vijay Ravindran, then directory of ordering, was knee-deep understanding why the website had a multi-hour crash that morning. He took a risk and canceled on Jeff due to the production issue. Vijay remembers Jeff responding, “Of course I understand. But this is so important that you have to come over to my house on Saturday morning.”⁽⁵⁾From Vox.

At the Saturday meeting, Jeff said, “I want to draw a moat around our best customers. We’re not going to take our best customers for granted.” He asked the team how Amazon could offer a shopping experience so compelling that you would want to buy almost everything you wanted, and it would be easier and cheaper (including shipping) than your neighborhood store.

Eventually, the team settled on subscription-based free 2-day shipping. Then it became a challenge for the internal supply chain teams to make money. The initial finance models for Prime were horrifying because shipping is expensive, people love free shipping, and the first Prime customers were the ones that shipped the most.⁽⁶⁾Amazon was charging $79 a year which got you free 2-day shipping and $3.99 for overnight shipping. The regular prices of these things was $9.48 for 2-day shipping and $16.48 for overnight. As Jeff said later, “It cost us a lot of money because what happens when you offer a free all-you-can-eat buffet? Who shows up to the buffet first? The heavy eaters. It’s scary. It’s like, oh my god, did I really say as many prawns as you can eat?”⁽⁷⁾Economic Club of Washington on September 13, 2018 (David Rubenstein interviewer)

Marc Onetto, former Amazon SVP of Worldwide Operations, told Jeff that it was going to cost $15 to ship by air vs. $1.50 by ground. When he told Jeff, “This is what Prime is going to cost because of the percentage by air,” Jeff said, “You aren’t thinking correctly.” If customers liked Prime that meant demand would go up and there would be more flexibility to build more fulfillment centers.⁽⁸⁾From Vox.

Over time, Amazon made many tweaks to its system. They located more fulfillment centers closer to customers to reduce air shipping costs. They would only ship small items 2-day if they were added on to another order. For large bulky orders, you’d still get free shipping but it wouldn’t be 2-day.

Eventually, more things came under the Prime umbrella. Prime Video and Prime Music were bundled in. Other services, like Amazon Fresh, the grocery service that used to cost $14.99/month was now free for Prime members. Now, with 200 million members, Prime is a core powerhouse driving Amazon revenue, with over $20B.

Jeff wanted to change the way people thought about Amazon. He wanted to change people’s behavior and wanted them to buy everything, both online and offline, from Amazon by default. As one journalist wrote, “Amazon single-handedly—and permanently—raised the bar for convenience in online shopping. That, in turn, forever changed the types of products shoppers were willing to buy online. Need a last-minute gift or nearing the end of a pack of diapers? Amazon was now an alternative to the immediacy of brick-and-mortar stores.”⁽⁹⁾From Vox.

How Amazon Hunts for Black Swans

It’s easy to talk about these leadership principles and about growing huge businesses from scratch but does Amazon really reward this work? Just look at Amazon’s new CEO, Andy Jassy. Jassy was previously the CEO of AWS. At the time, AWS was only 12% of Amazon’s total revenue. The obvious successor Jeff Wilke, the head of Amazon’s worldwide consumer business. However, Jeff chose Andy because he knew how to take a business from zero to a multi-billion dollar business.

Andy was one of Jeff’s early Technical Advisors, informally called Jeff’s shadow. The shadow follows Jeff around to ever meeting taking notes, is his primary sounding board for new ideas, and even drafts the annual shareholder letter. Many of Jeff’s shadows go on to create new businesses. In addition to Andy, there’s also Amit Agarwal who left launch Amazon’s business in India and Dilip Kumar who launched Amazon Go.

Why is Amazon so fascinated in taking these risks? Jeff describes Amazon’s innovation process like this.

Most large organizations embrace the idea of invention but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

Amazon 2015 Letter to Shareholders

This was of thinking was inspired by the book The Black Swan, by Nicolas Nassim Taleb, one of Jeff’s favorite books. He even had the Amazon Senior Leadership Team read it. The idea that something was “as rare as a black swan” meant something that was so rare it didn’t exist. The story goes back to 2nd century Rome, where the only swans in recorded history were white. However, on the other side of the world, black swans were swimming around Western Australia, only to be discovered by Europeans in the next millennia. So black swans existed at the time, even though people couldn’t fathom them.

In the book, Taleb coins the term black swan events to describe rare events that come as a surprise to most observers. Though, after they happen, these same observers look at the previous data and realize that the events that happened are obvious. These events are invisible to most observers but clearly can be sussed out in the data. The trick is to predict the black swans before they happen and to bet against the other people that can’t see them.

Black swans are often overlooked because they cause an existential threat, causing a business to cease to exist. About a decade ago, one of my friends was working at the college board, the company that makes the SATs. I asked him what the biggest risk price for the SATs? He said it’s the ACT, the competing test that was taking students from the SAT. While that was the short-term risk, there was a much larger threat that schools will no longer require the SATs. That was the real existential threat to the business.⁽¹⁰⁾This risk became very real in 2021 when the University of California said that they are no longer considering SAT or ACT scores for admission.

Malcolm Gladwell tells the story about Taleb and his nemesis, Victor Niederhoffer. Niederhoffer was one of the world’s great options traders. If somebody wanted to place a bet, Niederhoffer would put a price on it and take the other side. He was one of the world’s biggest options traders and will take a small cut of each transaction. He was secure that each of the small bets had a very small chance of going wrong so in the aggregate he could make a lot of money and he did. He was like the bookie at the world’s largest casino, taking a vig off of each bet. He had a twenty-thousand-square-foot neo-Tudor mansion in Connecticut crammed with books, manuscripts, silver jewelry, artwork, and a collection of seashells.

Taleb had a different philosophy on investing. Taleb would make a lot of very large, cheap bets on out-of-the-money options. These bets would only pay out if something highly unexpected happened. Almost every day these options expired. However, when something crazy happened in the market, Taleb would clean up. In 1987, Taleb made $35 million in the stock market crash.

In the early 2000s, Taleb warned of the highly unstable real estate market in the United States. He spoke publicly about the fragility of Fannie Mae and Freddie Mac. No one believed him. Then, in the subprime mortgage collapse in the late 2000s, Taleb made significant money while Niederhoffer went bankrupt.

How to Make Randomness Work for You

Many businesses innovate around the margins. They start with what they have and look for areas to improve it. However, as a business matures, and it needs to continue growing, it keeps trying to improve on that original value proposition. Because it has so much invested in the current market, it continues to push forward in that direction. It becomes more fragile and sees randomness and disruption as the enemy.

After Black Swan, Taleb extended on the idea of black swans and randomness in his book Antifragile. Being antifragile is about more than being robust. You have fragile things that break if they’re shaken. You have robust things that don’t break when they are shaken. And you have anti-fragile things that actually get stronger when they are shaken.

He points out that the natural world is inherently random. Nature loves randomness but man-made things hate it. Take the example of sexual reproduction. When you look at the fight between organisms and germs, it’s a lot like a fight between locks and keys. The organisms are the locks and there germs are the keys. The germs are constantly evolving to figure out how to fit into these locks and take them over as hosts. ⁽¹¹⁾This analogy comes from Stephen Pinker’s book How the Mind Works.

However, with sexual reproduction, these locks are always changing slightly, making it far more difficult to take over a whole population of organisms. Sexual reproduction creates a lot of variation in the world. This means that some results will be better than average and some are worse. As people, and especially as companies, we strive for perfection by reducing variation. But the more we strive for perfection and fight the natural world, the more at risk we become. This fight is currently manifesting in the fight for the survival of the banana.

Did you realize that every banana you’ve eaten looks and tastes similar? That’s because they’re all the same: the Cavendish banana. This is a banana that’s quite firm easy to ship and relatively tasty. It has a strong case to be made as the world’s best banana from an economic perspective. It produces asexually so each Cavendish banana is genetically identical to every other one in the world. However, there’s currently a fungus travelling around the world called Panama Disease TR4 that targets the Cavendish Banana. Because the all of the Cavendishs are identical, they all have the same genetic locks and are all susceptible to Panama Disease TR4. Once it infects a banana plant in a plantation it can quickly travel across all of these identical plants, destroying them all, and putting at risk 99% of the $44B banana industry.⁽¹²⁾Note that in other parts of the world, like Singapore, have a much larger variety of bananas than I’ve eaten.⁽¹³⁾Here’s some background on Panama Disease TR4.

On a personal level, embracing antifragility can be very powerful. These are times when an uncertain upside is larger than a more common downside. Think about going to a party. The downside is fixed, a wasted night. The upside is big though unlikely. You could make a lifelong friend or a new business partner. I met my wife at a party that she didn’t want to go to. She was out for the entire day and it was raining. But her mother always told her to go to every party she was invited to because you never know who you’re going to meet. It was certainly true for us.

I learned about fragile and antifragile careers when I was turning 40. I had been at Citi for 10 years. I realized that my career was fragile and that if I were laid off, the best thing I’d be able to say was, “I know how to get things done at Citi.” I realized I needed to do something else, to try something that I hadn’t learned before, flex my muscles, and jump into something new. I moved to AIG and joined a fantastic team of technologists who’d worked at strategy consulting firms. While it was hard in the beginning, learning these new skills greatly improved my long-term career. Even though it was scary to change, I knew that shaking things up would make me a much stronger leader.

Finally, the best way to take advantage of randomness is to have some flexibility in your life. Having flexibility lets you take advantage of great opportunities as they come up. Whether it’s an old college friend or expectedly in town, a new special project that the boss dreamed up, or your kids wanting to play a board game, you can take advantage of that rather than having to run from it.

Questions for You to Think About:

• Think about the other opportunities that you have for antifragility. Where can you take a rest with a fixed downside but unlimited upside?
• How can you take advantage of the randomness you run into every day.
• What’s an epistemilogical risk in something you know about? Is it really as unlikely as you imagine? Can you take advange of it?