5 key business lessons from Amazon's Jeff Bezos

Tim Mullaney, special to CNBC.com
Amazon CEO Jeff Bezos is sizing up locations for its second US headquarters. Among the criteria: convenient access to mass transit and an international airport, a highly educated labor pool, a strong university system and a diverse population.
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Amazon CEO Jeff Bezos has spent nearly half of his life inventing and revolutionizing e-commerce, and now he is the fifth wealthiest man alive.

His philosophy, which helped him build the online retailer into a colossus with a current market cap of about $380 billion, can be gleaned from his letters to shareholders since Amazon went public in 1998.

This side of Berkshire Hathaway CEO and chairman Warren Buffett, no American business leader stuffs his annual letters to shareholders more full of business wisdom than Jeff Bezos, who is now 53 years old. From Amazon's first annual report as a public company in 1998 to the letter he wrote in advance of the company's May 17 annual meeting this year, he's set a consistent tone: Build culture, take risk and focus on the long term.

Chamath Palihapitiya, a venture capitalist and early Facebook employee, said at the Sohn Investment conference that Amazon is on its way to becoming a $3 trillion company in a decade.

If true, it would be in large measure due to the business philosophy of Bezos. The "Amazon Way," as it has become known, has attracted some controversy, but it can be relevant to businesses of all sizes.

In honor of his birthday today, here are five lessons to take away from his success.

1. Obsess over customers, not competitors

Bezos makes the point that tech companies especially obsess over competitors: They wait and see what rivals introduce, then try to match and one-up it. By listening to customers instead, Amazon built its Amazon Web Services (AWS) business, which was designed to solve the problems with too-expensive in-house application hosting and open-source products that weren't robust enough to easily support fast-growing or already-large companies. AWS is now an over $10 billion business.

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"Many companies describe themselves as customer-focused, but few walk the walk. Most big technology companies are competitor focused. They see what others are doing, and then work to fast follow," he wrote in a 2015-dated letter.

The moral: To get ahead of the market, you have to think for yourself.

2. Take risks for market leadership

It took Amazon three tries to get its business as a selling and fulfillment platform off the ground. First it tried Amazon Auctions, a more-or-less direct aping of the model that put eBay on the map. That morphed into zShops, and finally into Amazon Marketplace, which accounts for nearly half the units sold on Amazon.com.

"Given a 10 percent chance of a 100-times payout, you should take that bet every time," Bezos wrote in his very first annual letter (1997). "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."

Moral: Make bold, rather than timid, investment decisions. Even if they don't work out, you'll learn something for the next time.

Given a 10 percent chance of a 100-times payout, you should take that bet every time. 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.
Jeff Bezos
Amazon founder and chairman

3. Make employees think like owners

When Bezos wrote this in the first Amazon annual letter, Bezos had 614 employees, up from 158 a year earlier. It has 230,000 now and plans to hire 100,000 full-time employees over the next 18 months.

One key component of the approach has been to use stock options in hiring. "We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash," Bezos wrote in the 1997 letter. "We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.''

Moral: Whether it's stock, bonuses or profit sharing, give workers a stake in the success of the company.

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4. Build a culture that's right for your company

Amazon's own culture is famously breakneck-paced, and notoriously cost-conscious, as befits a company that has run only a small profit, or a loss, under generally accepted accounting principles for most of its life as a public company.

"We never claim that our approach is the right one — just that it's ours," Bezos wrote in the 2015 letter. "Over the last two decades, we've collected a large group of like-minded people. Folks who find our approach energizing and meaningful."

Moral: There's no one set of goals a company must be about. The point is to decide what few things are most important, repeat them often, and make sure everyone buys in.

5. Empower people — up to a point — to avoid bureaucracy

Bezos argues that there are two kinds of decisions: Irreversible turning points he calls "Type 1 decisions" that top executives should be involved in and a larger number of tactical calls he calls "Type 2 decisions" that a business can reverse if it gets wrong.

"Type 2 decisions can and should be made quickly by high judgment individuals or small groups," Bezos wrote in the 2015 letter. "As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions."

The end result of this is stagnation and risk aversion, he wrote. Fighting that has let Amazon nurture even out-of-the-box fits like Amazon Prime Video, which the company credits with driving the growth of both Amazon Prime and, indirectly, the core retail business.

Moral: To keep innovating, push power down low in the organization.

This piece has been revised and updated.

You don't have to live in Silicon Valley or Seattle to work for Amazon
You don't have to live in Silicon Valley or Seattle to work for Amazon