Why Jeff Bezos Says Amazon Is 'The Best Place in the World to Fail'

It may not be Warren Buffett's eagerly anticipated letter to shareholders, but Amazon.com chief executive Jeff Bezos's annual investor missive has become known for offering its own yearly insights into how he runs the online retail giant.

Two years ago, for instance, Bezos, who also owns The Washington Post, shared in his letter that Amazon had adopted an approach from Zappos, offering fulfillment center employees between $2,000 and $5,000 to leave if they didn't want to work there anymore. As part of each year's letter, he republishes the one he wrote in 1997, in which he set out his belief in "long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."

This year, among other things, Bezos shared his thoughts on decision-making, failure and Amazon's corporate culture, which came under tough scrutiny last August in an investigation by the New York Times that received lots of attention.

Near the top of the letter, Bezos addressed the issue of the company's culture. "A word about corporate cultures: For better or for worse, they are enduring, stable, hard to change," he wrote. "They can be a source of advantage or disadvantage. You can write down your corporate culture, but when you do so, you're discovering it, uncovering it - not creating it. It is created slowly over time by the people and by events - by the stories of past success and failure that become a deep part of the company lore."

(Also see:  Bezos Defends Workplace Culture in Shareholder Note)

Though he did not directly mention the Times story, he said that a distinct corporate culture fits some people but not others. "The reason cultures are so stable in time is because people self-select," he wrote. "Someone energized by competitive zeal may select and be happy in one culture, while someone who loves to pioneer and invent may choose another." He wrote that "we never claim that our approach is the right one - just that it's ours - and over the last two decades, we've collected a large group of like-minded people."

Bezos went on to describe the importance of experimentation at Amazon, using words that are rare for a typical CEO to use in a letter to investors.

"One area where I think we are especially distinctive is failure," he wrote. "I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it's going to work, it's not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there."

He cited the three "bold bets" at Amazon that have worked: Amazon Web Services, the company's cloud computing business; Marketplace, its business for third-party sellers; and Prime, its rapid delivery subscription service. Marketplace, he wrote, began after two efforts that missed (Auctions and zShops), while Amazon Web Services, which has now reached $10 billion in annual sales, was initially greeted with skepticism.

Using much more common verbiage for CEOs, Bezos's letter included the ubiquitous baseball analogy. "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 1,000 runs. This long-tailed distribution of returns is why it's important to be bold. Big winners pay for so many experiments."

Bezos seems conscious, however, of the difficulties large companies have in remaining "an invention machine," as he put it, writing that a common trap is "one-size-fits-all" decision-making. "Type 1 decisions," he wrote, are those that are "consequential and irreversible or nearly irreversible - one-way doors - and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation." Meanwhile, "type 2 decisions," which can be reversed if they aren't made well, should be made much faster.

The problem with many big companies, he wrote, is they apply the methodical process they use for bigger calls to less weighty decisions too often: "The end result of this is slowness, un thoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We'll have to figure out how to fight that tendency."

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