Road Trip

An older man “Poobah” and his younger protégé “Sunshine” stop at Starbucks on their road trip. Poobah gives the barista $20 for two coffees and tells her to keep the change. Sunshine doesn’t understand why he tips a stranger $10. Poobah replies that he likes to surprise people pleasantly to change their day for the better. The men launch into an extended conversation that considers how Amazon and other great companies wow their customers and why once-great companies have fallen.

Eastman Kodak

Sunshine recounts the history of pioneering photography firm Eastman Kodak, founded by George Eastman in 1881 under the name Eastman Dry Plate Company. Eastman followed four “unifying principles”:

1. Keep your product’s prices low so customers will “find more uses” for them.
2. “Always sell by demonstration”.
3. “Be the first to embrace new technologies”.
4. “Listen to your customers”.

“When things get complicated, we simplify by saying, ‘What’s best for the customer?” (Jeff Bezos)

By 1976, Eastman Kodak sold 90% of the camera film and 85% of the cameras in the United States – and was still growing. It had 145,000 employees worldwide by 1988, and $16 billion in revenue by 1996. It went bankrupt in 2012 because it abandoned its third and fourth principles. Instead of pioneering new developments in digital photography, Kodak stuck to its roots in film. It didn’t listen to customers who were moving toward digital.

“Mission statements and slogans don’t change what people believe, because most people aren’t listening to what you say. They’re watching to see what you do.”

“Drifting, Surfing, Drowning” and “Navigating”

Poobah explains that only four kinds of people live in the “ocean of life”: “drifter, surfer, drowner and navigator.” Drifters take whatever comes their way and “go with the flow.” Business surfers ride one wave after another, waiting for the next big one to come along. Skilled surfers ride certain trends but eventually fall. Drowners cry and whine, but they get nowhere. Navigators succeed because they steer according to unifying principles and know how to use the tools at hand.

Companies falter or fail when they forget their unifying principles and start thinking of their organization in terms of departments and divisions rather than as one holistic unit. Departmental thinking leads to turf wars or the blame game – passing the buck.

“When you really care, you never quit trying to make things better.”

Amazon’s Unifying Principles

Like navigators, successful companies follow unifying principles. When they abandon those standards, they fail. Every company identifies customers and seeks to delight them. They fail when they forget what their customers need and want. Unifying principles differ from mission statements. Mission statements are what you say. Unifying principles are what you do. Actions speak louder than words.

“Excellent customer service leads to customer retention and loyalty, and it generates positive feedback, but rarely is customer service the basis for word-of-mouth advertising.”

Amazon calls its unifying principles its “four stone pillars.” They are: “customer centricity, continuous optimization, culture of innovation” and “corporate agility.” These tenets define the Amazon brand. Amazon started making a profit in the fourth quarter of 2001 with $5 million net income. By 2015, it achieved $100 billion in annual sales and claimed 50% of all e-commerce worldwide.

Some people say Amazon isn’t profitable. Poobah calls those critics the “marshmallow eaters” – a phrase that derives from a renowned 1960s Stanford psychological experiment about instant gratification versus delayed gratification.

“Word of mouth is triggered when a customer experiences something far beyond what was expected.”

Stanford psychologists told four- and five-year-olds that they could eat a single marshmallow immediately or – if they waited about 15 minutes – they could have two marshmallows. Years later, the psychologists learned that those who waited had higher SAT scores, better social skills, better ability to cope with stress, and lower levels of obesity and substance abuse. Poobah said that Jeff Bezos probably wasn’t a marshmallow eater, and neither were Facebook’s Mark Zuckerberg, Apple’s Steve Jobs, Starbucks’s Howard Schultz or Julius Rosenwald, who led Sears to its former glory.

“Surprise is the foundation of delight, Sunshine. Without an element of surprise, there can be no delight. And delight triggers word of mouth. So always have some­thing special up your sleeve that the customer doesn’t see coming.”

Customer Centricity

When founder Jeff Bezos started Amazon, he branded it as “the world’s biggest bookstore.” Employees wrote most of the book reviews, and he directed them to be honest. Negative reviews angered authors and publishers. But Bezos saw his job as helping customers make better purchasing decisions, the essence of customer centricity.

Forrester Research rates public companies by how they treat their customers. It lists the 10 best and 10 worst performers as “customer experience leaders and customer experience laggards,” respectively, by comparing their stock performance against the S&P 500 Index. From 2007 to 2013, the S&P Index was up 14.5%. Leaders were up 43%; laggards fell 33.9%. Customer centricity correlates with stock price and with success.

“Talent is unconscious competence…Talented people know the right thing to do, but they usually have a hard time explaining it.”

Continuous Optimization

Richard Kessler owns a jewelry shop in a strip mall in Menomonee Falls, north of Milwaukee. Most jewelers inflate prices, forcing customers to negotiate – but not Kessler. He cares about his customers, so his list prices reflect a reasonable profit. He doesn’t run sales or offer discounts, but he provides a “miraculous no-loopholes guarantee.” Kessler guarantees diamonds and other gemstones for life. If you lose a diamond, he replaces it for free. Kessler gives employees two months of training before they can speak with customers. Then he empowers his staff members to make their own decisions. Although price isn’t negotiable, Kessler tells his employees that customers will ask for other concessions – some large, some small – but employees needn’t check with him first to take actions that make customers happy.

“If you hire people just because they can do a job, they’ll work for your money, but if they believe what you believe, they’ll work for you with blood and sweat and tears.” (organizational consultant, Simon Sinek)

When Kessler opened a second store in Milwaukee, an employee wanted to upgrade the bathroom so it was “more cozy” for customers, like their bathrooms at home. Kessler spent $400 upgrading the bathroom. When employees at the flagship store in Menomonee Falls heard about it, they wanted to go crazy with Christmas lights and decorations. Kessler told them to go for it. They did: It took 10 men on ladders and bucket trucks to hang the lights, six people to position a sleigh brimming with gifts, and several teams to carry eight life-sized reindeer. The cost came to about $36,000, but Kessler felt it was a great investment. Kesslers Diamonds made its money back in 24 hours. Every TV station in Milwaukee aired a story about cars lining up to see the display, and the mayor gave the company a city beautification award.

Culture of Innovation

Before Jim Collins published his book Good to Great, Jeff Bezos paid him to come to Amazon’s 2001 executive retreat. Collins told Amazon’s leaders to “picture a huge, heavy flywheel.” Their goal was to get that heavy flywheel spinning – a difficult feat at first – and then to build the momentum to keep it going. Bezos described Amazon’s flywheel as lower prices, which “lead to more customer visits,” more sales and, in turn, to lower fixed costs and greater efficiency. This becomes a virtuous cycle that continues to enable lower prices, which also encourages more third-party sellers who pay commissions to Amazon on their sales.

“Never, never stop learning.”

Amazon also creates a culture of innovation by doing what most companies avoid whenever possible: failing. Many corporate leaders say they embrace innovation, but they also seem unwilling to embrace the necessary failure that innovation may entail. Bezos praises experimentation and says doubling your experiments doubles your chance of invention.

“Experiments matter. Thinking ahead matters. Companies that think ahead and experiment are the ones that innovate.”

Decision Types 1 and 2

Businesspeople face two types of decisions. Consider Type 1 decisions carefully, because they lock you in. Once you walk through that door, you can’t go back. With Type 2 decisions, the door swings both ways, and you can redo a bad choice. Companies become stagnant when they make Type 2 decisions using a careful, methodical Type 1 thought process. This slows them down and makes them more risk-averse.

In a 2016 interview with Timothy B. Lee for Vox.com, Bezos explained that he doesn’t believe in standardization. His teams must operate independently. He makes sure they are free to use whatever technology or resources work best for them. That helps explain why Amazon can be a stressful place to work. Team members can’t easily switch to other projects, because Amazon’s corporate culture is team-specific. Amazon doesn’t spend much time on internal testing. It launches products first to see whether an idea on paper turns out to provide real-world value.

“I believe we are the best place in the world to fail…Failure and invention are inseparable twins.” (Jeff Bezos)

Corporate Agility

Bezos keeps Amazon agile by employing its “two-pizza rule.” He keeps small enough that two pizzas can feed the whole team. Smaller teams mean faster decisions without the cumbersome hierarchy characteristic of larger companies. Some companies don’t operate under the four pillars. Instead of the first pillar of customer centricity, they focus on their own organization. Instead of the second pillar of continuous optimization, they maintain the status quo and avoid risks. Instead of the third pillar of a culture of innovation, they watch what their competitors do. Instead of the fourth pillar of corporate agility, they avoid being accountable for their actions while blaming others.

“It has nothing to do with tech. Even a lemonade stand can brand like Amazon. If you don’t eat the marshmallow, you can build anything you want on those four pillars.”

Costco

Like Amazon, warehouse club retailer Costco sets an example of corporate agility. As of 2017, Walmart had 11,528 stores compared with Costco’s 715, yet Costco ranked third in retail sales worldwide behind first-place Walmart and second-place Amazon. Costco sells more choice and prime beef, organic food, rotisserie chicken, and wine than any other retailer worldwide.

Despite its size, Costco acts like a small company. Executives, including CEO W. Craig Jelinek, usually answer their own phones. Costco’s overhead is 10% of its revenues versus about 20% for Walmart. Costco pays workers a higher wage and stays lean by offering a limited selection of products. Costco’s mantra is “do the right thing.”

“Buyer Legend [is] a rock-solid business tool built on the simple fact that anything important to your success should be measurable and held accountable.”

The company lives by this Golden Rule, and its employees try to live up to that standard. Workers say they hear about the company’s customer-focused policies every day. For example, when Costco found out that a shirt it had advertised as 100% silk wasn’t silk, it contacted every person who bought the shirt and provided refunds.

Word of Mouth

Best-selling business books have four elements in common: “a big idea”; “nuts and bolts” like examples, how-tos, and step-by-step explanations; an “entertainment” factor; and “hope” for a personal transformation on the part of the reader. Those four characteristics also describe successful businesses. Amazon is so successful because Bezos is adamant about listening to customers and inventing – even if some inventions fail. Bezos expects most inventions to fail. He regards those failures as fuel for long-term growth.

Excellent customer service doesn’t automatically lead to extensive word of mouth. Companies inspire positive word of mouth when – instead of spouting promises – they take action to please their customers. Specific actions – in design, performance and generosity – generate word of mouth. When companies advertise what they think will delight customers, they lose the element of surprise and the possible word-of-mouth momentum that surprise can precipitate. Bad advertising focuses on a company or its services or products. Good advertising focuses on the customer.

“Buyer legends” are tools successful companies use to “design a system that measures everything that matters and ignores everything that doesn’t.” These firms prioritize the four pillars – plus “focus, unity, measurability” and “accountability.” Buyer legends start when companies identify their typical customers and perfect their customer experience.