MarketWatch Article: How Amazon succeeds by learning from failure

by | May 4, 2019 | Blog

A system for innovation is the backbone of a company

(published at MarketWatch HERE)

In 2014, Amazon acknowledged that the Amazon Fire phone, its proprietary smartphone, was an utter disaster.

The company wrote off over $170 million in inventory and pulled the Fire phone from the market. It sounds horrible, laughable and humbling. And it was. Although that big a failure is not a feat to admire, how manages, leads and learns from failure provides a template to help others develop a system for innovation. How much to risk, how to keep bets small and how to establish a process for innovation are the underlying areas to probe to build your innovation system.

When we look back at Amazon’s AMZN, +3.24%  biggest innovations, many are just commonplace capabilities that many companies have now adopted. Free shipping, authentic customer reviews, search inside the book, having multiple offers for the same item on the same product page including used items. They might not sound like innovations — but they were all bets. Amazon didn’t know if they were going to work or not, and they got ridiculed by the press and the incumbents. But these are the ideas and bets that worked. Amazon Destinations, Amazon Wallet, Amazon Music Importer, Amazon Webstore — the list of Amazon failures is long.

Innovation takes a willingness to try, try and try again. But brute force commitment is more likely to lead to continued underwhelming results than a home run. Your system for innovation is the backbone. Without a system for innovation, you might come up with a lucky hit, but odds are that you won’t become a hit machine. Let’s unpack Amazon’s system of innovation and from that, how to think like Amazon about failures such as the Fire phone.

Your innovation process

Before Amazon starts the journey of a new business, a new product, a significant new feature, a new geography or any big change initiative, it starts with a deliberate set of activities, simultaneously outlining the overall vision, gaining clarity on exactly what the idea and customer experience will be, and helping to shape small, iterative projects that can be tested quickly in the market. Amazon’s leadership principle No. 7 is “think big,” but the ability to “bet small” is the other side of that coin. Yes, you need a big vision, a north star. But the agile, hypothesis-driven disciplines to find product market fit allows for affordable, repeatable and superior results more than huge, monolithic investments in most situations.

Amazon calls its envisioning process “start with the customer and work backwards.” The hallmark of this envisioning work is writing narratives in which teams spend countless cycles teasing out ideas in completeness, sweating over single words and getting concepts to hit the quality bar of “clarity.” This is the “ready” phase where the two biggest benefits of envisioning are clarity and simplicity before proceeding in development.

To evaluate clarity, ask yourself whether the description of your product or service is razor sharp and clear. What delights your customer? What are the superpowers you are giving to users? You need to describe in detail exactly what that means. Saying that you are making the provisioning real-time, or that 100% of your medical history will be visible on one page are clear, unambiguous descriptions of a user’s experience.

The other attribute is simplicity in your explanation. Avoid vague and unnecessary language that can be redundant or easily misinterpreted. Clarity is simplicity coupled with clarity of thought. I wrote one sentence when envisioning Amazon’s Marketplace business that made all the difference. “A third-party seller, in the middle of the night, without talking to anyone, will be able to register, list an item, fulfill an order and delight a customer as though Amazon the retailer had done it.” Just to do self-service registration, there were dozens of teams that had to integrate their services and make their service real-time. The power of that clear statement gave me the permission to push until a third-party seller could register in the middle of the night without talking to anyone.

In the trial phase of innovation, the new concept is built, and when done right, tested until all the operational and customer experience details are ironed out. Truly understanding the risks and incrementally building to test the hypothesis is the essence of a “minimally viable product” approach with the goal of accelerating learning with using minimal resources and time. Now, with a successful prototype, it’s time to transition into a proxy production scenario. This is where you can work out all the kinks and attain product market fit — getting the exact solution your target customers will adopt, slows the natural desire to want to scale, but resist that temptation until proven ready.

Depending on the proper amount of risk you can tolerate, picking the right ideas and proceeding on ideas in this agile approach affords you the benefits of deciding how you make investments. No enterprise can afford to risk too much. Believe it or not, the best way of avoiding desperation and having to make a “Hail Mary” play is to start investing early and across many different initiatives in small ways.

Don’t rush to scale

When Amazon was launching the Amazon Go store concept, the scaling beyond the first couple of stores was delayed because they had to get better results before being ready. A less aware organization could have easily rushed to scale. Now that the business model, operations and the technology have been tested for a couple of years, Amazon plans to build thousands of Amazon Go stores. It’s a smart guess that Amazon’s other retail businesses such as Whole Foods will find ways to leverage the Amazon Go technology, but purpose fitted for their customer and business.

Only when you are confident that adoption and usability puts you in a winning position, do you think about scaling. What are the big mistakes made when companies try to scale too early? The most tempting trap is optimizing profitability in the short-term while sub-optimizing the long-term potential. This sub-optimization can come in many forms — not investing in the ecosystem, not continuing in solution development, creating closed versus opened approaches. Be thoughtful about the metrics you focus on early in the scaling cycle. Instead of pouring on the investment fuel too soon, the full potential is choked off by short term optics. Adoption and true value delivered metrics are better than financial or vanity metrics.

With the mindset of envisioning with clarity (ready), testing and proving market acceptance (aim) and then scaling (fire), you’ve got the right phases within your innovation process. If your enterprise is suffering from not innovating enough, think through the root causes. Do we have a defined process for innovation? Do we understand and govern innovation investments (bets) differently than typical projects and investments? Do we know how to achieve clarity before starting? Do we know how to iterate to true product market fit? Do we try to scale prematurely? Do we optimize for short-term results versus investing in big potential businesses?

The benefits of failure

Was the Fire phone a total failure? Yes, but as the saying goes, “never waste a good crisis.” From the bets that don’t work, evaluate what to salvage and continue. Amazon would absolutely do it again because the scorched earth of the Fire phone hatched the early germinations of critical capabilities and businesses that are now looking like another magical business for Amazon.

The Fire phone cemented Amazon’s commitment to their system of innovation. Do you have yours?

John Rossman is a former Amazon executive and the author of “Think Like Amazon: 50 ½ Ideas to Become a Digital Leader,” and “The Amazon Way” book series. He is a managing partner at Rossman Partners, an advisory firm helping clients innovate and compete in the digital era.

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