The Most Innovative Thing About Amazon Is Not What You Think

By | AgileBusiness, Digital Disruption, Disruptive Innovation, Organisational Structure, Retail, Strategy | No Comments

There is much to take from this piece by Zach Kanter on how Amazon is building an unassailable dominance and competitive advantage (‘I believe that Amazon is the most defensible company on earth’). Beyond the standard Amazon attributes that are oft talked about (innovation rate, longterm view, customer-centricity, vision, culture, CEO) it is, says Zach, their truly innovative approach to organisational structure and capability that is swiftly making them unreachable.

Key to this approach is the application of a service-oriented architecture to successive capabilities which establishes separate parts of the company as individual platforms. This in turn opens each of these businesses to outside competition, ensuring that they avoid the inefficiences that can come from vertically integrated businesses (in other words avoiding the danger of becoming fat and complacent from having a captive, internal customer without external competition).

The most obvious, and perhaps original piece of this SOA architecture he says, is Amazon Web Services, where Amazon turned their own technology infrastructure into a hugely valuable external product ($14Bn annual run rate valuable). The biggest lesson from this stroke of genius was how by ‘carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation’.

This taught Amazon the value of rebuilding each of its key tools as an externally consumable service, something which it has been systematically doing ever since. Think about its approach to Alexa which most legacy companies would likely have kept as a closed service that worked only on proprietary Amazon devices (like the Echo). Opening up Alexa as a platform for developers to build on has resulted in it gaining over 10,000 ‘skills’ in just over a year, immeasurably increasing its value to customers. Opening up the capability to integrate Alexa into third party devices means that it is now being incorporated into everything from TVs to lighting to clocks to cars. It is now fast becoming Amazon’s Operating System and in the process on its way to positioning itself as the default voice Operating System for the smart home and smart car.

Similarly, Kanter gives the examples of their cloud-based, self-service contact centre platform AWS’s Amazon Connect (based of-course on the same technology as that used in their own call centres) and their Fulfillment By Amazon (FBA) programme which provides a highly competitive end-to-end fulfilment service for third-party sellers involving shipping, storage, ordering, despatch, delivery, returns, and even customer service. And they don’t limit this to products sold on Amazon.

There are some more obvious benefits that come from this approach such as revenue, increased shipping volume and leverage, and improved usage of excess capacity (according to the piece 25% of their total revenue, or $6.4Bn in Q1 2017, now comes from third party seller services and commissions). But the point adeptly made is that the lasting benefit is the ability to hone and improve internal operations through external competition and the best kind of feedback loop that there can possibly be – whether that specific piece of Amazon can survive and prosper in the open market.

They would have been a time (and not so long ago) when allowing the open market to utilise your infrastructure in this way would have been unthinkable. And yet for Amazon, the application of this approach is systematic and comprehensive. Amazon Marketplace has long enabled third party sellers to not only sell their products on Amazon but benefit from their exceptional sales and service infrastructure. But they are so customer-centric in this approach that they have even gone as far as making the tools they use to set their own prices available to third parties so that prices on Amazon are the most competitive that they can possibly be. Their Marketplace Web Service (MWS) API enables sellers to be notified instantly of competitive price changes (including those from Amazon itself), which has in turn led to a burgeoning ecosystem of algorithmic price optimisation tools akin to high frequency trading.

Amazon’s approach is reflective of a broader shift from pipeline to platform business models but this is taken to a uniquely comprehensive level. Proposition by proposition they are capitalising on external competition for discrete parts of their business, and in doing so are creating an unrivalled powerhouse of infrastructure and services that can enable horizontal innovation (and not just vertical) to propel them into new categories.

We hear a lot about how innovative Amazon is as a business and yet we are in danger of missing the most ground-breaking innovation of all – the fabric of how their business itself operates.

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Doing Agile and Being Agile

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One of the questions that often comes up in the workshops on organisational agility that I run with senior leadership teams is when are agile, iterative processes appropriate and conversely when are they not?

My belief is that in general, many of the principles that surround agile (like data-driven decision making, regular delivery of value, customer-focus, continuous learning, adaptability) are undervalued in business and should be more broadly applied in an environment of rapidly changing competitive, consumer and company contexts. But the wider point is that agile is not just a process, it defines a culture. This is what agile practitioner Michael Sahota described as the difference between doing agile and being agile.  It’s the difference between practices and mindset. And as Michael points out, being agile should not be an isolated goal — it needs to run alongside other objectives that give direction. An agile mindset and culture can be a powerful enabler to progress, but it’s about progressing towards those organisational goals in an agile way.

In my experience this is a significant mindset change for leaders schooled in more structured, waterfall-like, processes and thinking, operating in an environment characterised by embedded organisational practice, routines and conventions that are far from agile.

But what of agile as a process? Whilst doing agile (and more generally iterative, sprint working) is, I think, also undervalued and overly confined in most businesses, it is not applicable to absolutely everything. Simon Wardley talks a lot of sense about this when he describes the reasons that you need multiple methods within a company,  appropriate for different evolutionary stages of a value proposition or components to a system. Such components can mature from the new and uncharted (characterised by discovery, higher levels of unpredictability, uncertainty, and potential differential), to the more common and industrialised (more certain and predictable, appearance of linear order). Agile is naturally suited to charting new territory and building new value in an environment of rapid change since it is far more adaptive. More industrialised, well-established and well-understood components that are highly stable and repeatable are more effectively managed by a highly structured method (like six-sigma for example).

It makes sense that different methodologies are appropriate for different contexts. My point to many leadership teams though, is that in the context of a modern operating environment that is characterised by heightened levels of change and uncertainty, we need far greater emphasis on emergent strategy, experimentation and adaptive, iterative, agile ways of working. Put simply, we need to completely reset the balance.

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High Velocity Decision-Making

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In the book we talk about how organisational agility is not just about speed. Speed is desirable of-course, and an increase in velocity may well be an outcome and a benefit of becoming more agile as a business but heightened agility is really all about manoeuvrability (or speed of response) and momentum, which is not quite the same thing.

Key to this idea of manoeuvrability is how you make decisions. In his most recent shareholders letter Jeff Bezos of Amazon talks about how focused they are on ‘high velocity decision-making’ as a way of retaining agility as they scale. Many larger, well-established businesses, he says, make high-quality decisions, but they make them slowly. So making high quality but also high-velocity decisions helps retain the nimble, responsive abilities of a much smaller, younger business.

It’s important not to operate by a one-size-fits-all decision-making process. Many less complex, more easily adapted decisions can be subjected to a more light-weight process. In many cases, decisions can be made with around 70% of the information you wish you had, which is important since waiting for the 90% can easily mean you’ll be too slow, and slow decision-making can be more costly than needing to do a quick course correction if necessary as long as you jump on misalignment quickly. At Amazon they also use the phrase “disagree and commit” as a useful way of acknowledging disagreement whist preventing a lack of consensus from slowing things down.

In my experience there is also a high correlation between the degree of empowerment and autonomy present in teams and how quickly you’re able to make decisions and therefore the manoeuvrability of the organisation. In slow-moving environments it might work to have most of the decision-making power centralised at the top of the company but amongst rapidly shifting contexts this practice is not fit for purpose. Yet as Mark Raheja points out, there are many different things that can contribute to this greater (but safe) devolvement of authority including the clarity that comes from being more explicit about decision rights, how you set the team up, more agile forms of governance, the ownership of team members and the willingness of senior staff to let go. And there’s a whole bunch more intangible (but no less powerful) factors that I think contribute to this, not least whether the culture supports greater autonomy or acts to stifle it, the behaviour and expectation of leaders in the organisation (at every level), and the degree of trust that permeates the business.

Once again, the ability to make decisions quickly and become a more responsive organisation is as much about culture and people as it is about process.

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Building Momentum for Change: The Progress Principle

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In Building the Agile Business, we focus on how sprint working can be a powerful driver of both rapid organisational learning and strategic adaptability. Done right it can not only create new value and be applied in the creation of new products and services, but can support far wider organisational change and be used to find a way through key business challenges, and re-orient the business towards heightened levels of experimentation. Learning and continuous improvement are embedded in the fabric of this working methodology (not least in the regular retrospectives that are conducted at the end of each sprint). Flexibility and adaptation are too, in the regular reprioritisation of the backlog or jobs to be done. As continuous learning generates improved ways of getting stuff done and achieving key goals, sprint working can support growing organisational momentum towards an over-arching vision or objective.

But there is something else about sprint working, another way in which it can contribute to building momentum for change, that is less often discussed – it’s role as an inclusive, motivating, energy-generating way of working. When I’ve been demonstrating the benefits of operating in sprints to clients in talks and workshops, a couple of people have mentioned to me Teresa Amabile’s concept of the Progress Principle.

At the heart of this concept is a simple, but very compelling idea – the power of progress:

‘Of all the things that can boost emotions, motivation, and perceptions during a workday, the single most important is making progress in meaningful work. And the more frequently people experience that sense of progress, the more likely they are to be creatively productive in the long run.’

Amabile’s extensive workplace research (based on thousands of daily surveys) has shown that above more visible and extrinsic rewards and incentives, a key driver of creative and productive performance is the quality of what she calls a person’s ‘inner work life’, or that mix of emotions, motivations and perceptions experienced over the course of a work day:

‘…How happy workers feel; how motivated they are by an intrinsic interest in the work; how positively they view their organization, their management, their team, their work, and themselves.’

A positive inner work life, characterised by these qualities, is fundamental in enabling higher levels of achievement, commitment and even collaboration. When the team looked at the triggers that shaped how positive this inner work life was on any given day, it was meaningful progress (however large or small) made by the individual or team that was the key determinant. Setbacks against progress created a negative inner work life. Surrounding this were ‘catalysts’ (those actions that directly support work) and ‘nourishers’ (including encouragement, respect or recognition) that contributed towards positive emotions. ‘Inhibitors’ (things that negate progress), and ‘toxins’ (things that discourage or undermine) had the opposite affect.

This makes intuitive sense, and yet so much in the workplace seems designed to inhibit or discourage. Waterfall processes can often involve lengthy time periods where work is done but with limited visible signs of value (particularly value for the end users) being generated. It is often characterised by large project teams that become unwieldy and difficult to move forwards at pace. How often have we stepped away from a project and returned later only to find that nothing has really moved on from where we left it? Sprint working is not a panacea, but the point about it is that it is designed around tangible, visible progress. Releasing early and often. tracking velocity against goals. Reprioritising based on learning.

It is my belief that digital transformation is as much about employee experience as it is about customer experience. And if employee engagement is so key to the process we need to consider ways of working and operating environments that are intrinsically motivating and emotionally engaging. We need to generate a positive sense of progress to generate momentum.

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