How Amazon Tackles The 3 Stages of Disruptive Innovation
The Three Stages of Disruptive Innovation in Action
Excelling at one or two of the three stages of disruptive innovation is unlikely to lead to success. If a firm generates new ideas but cannot adequately determine which are likely to succeed as a new business, it will waste resources on unsuccessful ventures. If a company is good at both ideation and incubation, it may initially identify promising new ventures only to fail as it tries to scale. Similarly, a company that has no skills at ideation but is good at incubation and scaling is likely to grow businesses that are not truly innovative. Success requires all three disciplines. Amazon is one of those firms that has perfected all three disciplines.
Amazon was founded as an online bookstore. Twenty-seven years later it is a $380 billion company with more than one million employees competing in businesses as disparate as selling books, clothes, diapers, and groceries (Amazon.com) to producing television shows (Amazon Studios) to being the largest provider of cloud computing (Amazon Web Services) to providing fulfillment services to other companies (Fulfillment by Amazon) to being a leader in artificial intelligence (Amazon Echo). Recently it has entered the bricks-and-mortar retail business (Amazon Go) and begun competing with FedEx and DHL in delivering packages (Prime Air, Amazon Flex). In 2017, it was named by Fast Company magazine as the world’s most innovative company.1 How was it able to do this? The answer is in how it has mastered ideation, incubation, and scaling both to exploit its existing assets and capabilities and to leverage these into new businesses.
The essence of its innovation process begins with Jeff Bezos’s belief in three big ideas that pervade Amazon’s organization and culture. First is the idea that customers are at the center of everything Amazon does. This means that the people closest to the problems are the best equipped to solve them. The second principle is that innovation should focus on long-term thinking, not short-term profits. New initiatives are thought of as “programs,” not “projects,” with a recognition that they may take years to have a significant impact. The final principle is to encourage a passion for invention.2 This means being patient and persistent—and recognizing that failure and invention are inseparable twins.
This is a culture designed to promote adaptability and innovation. Its leadership principles include not only customer obsession but also invent and simplify, think big, and a bias for action. To make innovation a part of daily life, Bezos encourages small teams to continually come up with new ideas. He says, “If you can increase the number of experiments you try from a hundred to a thousand, you can dramatically increase the number of innovations you produce….3 To accomplish this the emphasis is to maximize the number of experiments but keep the cost of each as low as possible. He argues that the real barrier to innovation isn’t a lack of imagination but the bureaucracy of large organizations. This also means accepting failure—and Amazon has plenty of failures, including such high-profile examples as the Fire smartphone, Amazon auctions, and Z-shops.
How does it do this? The solution is based on a systematic process of ideation, incubation, and scaling that generates hundreds of new ideas every year, most of which either fail or add only incremental value and a few that result in new multibillion-dollar businesses.
The core process begins with a person or team proposing a new idea that will enhance the internal or external customer experience. To formally propose the idea, the originator begins by composing a six- page narrative called the PR/FAQ (never a PowerPoint presentation). The six pages follow a strict format. It is based on the idea of “working backwards” from a customer problem and begins with a one- page press release announcing the release of the final product. This includes the name of the product in language that the customer will understand, who the customer is, what benefits they will receive, a description of what problem the product or service solves, and an explanation for how the product will elegantly solve the problem. The PR announcement may also indicate how easy it is to use the product and even hypothetical customer quotes. The PR is followed by five pages of “Frequently Asked Questions” (FAQs) that explain why customers will want the product, how they will use it, how much it will cost, and what benefits they will reap. It would also indicate the potential market size and any risks associated with the product. The FAQ is often supplemented by an appendix and a mockup of a prototype.
Once the narrative is prepared, it is presented to a group consisting of colleagues, the immediate boss, someone from higher management, and a “bar raiser” who is from another function who can act as a sanity check. Again, there is a strict process to be followed. The narrative is not circulated in advance but passed out in the meeting, and the first thirty minutes are in silence as participants read the memo. This format ensures that all those in the meeting begin with a common understanding of the proposal. In evaluating the proposal, the discussion focuses not just on the technical merits of the idea but also whether it has the potential to be a big idea that the customers would really love. After a discussion, the most senior person in the room will make a decision to allocate minimal resources to continue the project. These may include release time for the proposal, a small budget, or some engineering support. Estimates are that about 50 percent of proposals move to the next stage. If successful, the revised PR/FAQ will then be presented at the next higher level of management. Several aspects of this process are noteworthy with respect to ideation. First, like design thinking, it is a bottoms-up process that begins with an obsessive focus on improving the customer experience. Second, the structure of the meeting also acts to focus the discussion on an evaluation of the specifics of the proposal with everyone having the same information. Finally, the Amazon culture is one that encourages people at all levels to identify and propose incremental innovations to enhance unit productivity and drive efficiency or new business ideas that leverage existing assets and capabilities. Estimates are that the business leaders at Amazon will see about a hundred PR/FAQs a year, suggesting that the process is successfully generating a constant stream of new ideas.
Once an idea is approved and with some limited resources the next step is to build a minimally viable product and to quickly get this in front of customers. Like the lean start-up methodology, the priority is not on internal testing but on getting the product launched and learning quickly what features are valuable and which are not. This is usually done using a small market niche. Customers are probed as to whether they would actually buy the product. Do the early adopters love it? Can it lead to a big business? Like the business model canvas, variants of the product are often explored using A/B tests. The concern in this phase is not profitability or the competition but whether the product or service is strategically important and will really deliver a better customer experience. Sometimes teams employ the business model canvas to ensure completeness.
To enhance speed and accountability during incubation, Amazon relies on what are called “single-threaded teams” or “2-pizza teams.” These are small teams (that can be fed with two pizzas) of six to ten people. Each team consists of a small number of people with the skills needed to develop the idea (e.g. a handful of engineers, a product manager, and a designer). The team is free to act autonomously with little or no need to coordinate across functions. There is often a single agreed upon metric used to provide focus and accountability. Unlike many organizations for which internal projects are required to use a standardized technology or set of tools (like Google), teams at Amazon are able to use whatever tools and technologies they think are best for the task at hand. This single or small set of metrics and the freedom to use whatever approaches are most useful becomes the equivalent of a P&L so that the team itself becomes like a small profit and loss center and the team leader is like a mini general manager. Often the person who proposed the idea becomes the team leader, so that these projects act to attract and retain entrepreneurial talent.
The use of small, highly focused and accountable teams, the emphasis on a minimally viable product, fast iteration, and a customer- centric focus replicate the lean start-up methodology but do this in a large organization with access to more talent and resources than a start-up. The use of small teams also enhances the speed with which experiments can be run. Experiments are designed to fail early. To facilitate this, a distinction is made between one-way and two-way doors. With two-way doors, the consequences of a failure are minimized because you simply return to where you started. Because the teams are self-contained, lengthy and costly coordination across functions is minimized. There is an acknowledgment that this approach may result in some duplication and inefficiency, but the benefits of rapid iteration and learning outweigh these costs.
If the product or process proves viable, the team may modify their PR/FAQ and submit the next request to more senior management. This request includes an account of the resources needed to begin to scale the program. If approved, the team will be given the additional resources to begin to roll out the product or service on a larger scale.
The use of small de-coupled teams also makes scaling easier. As they begin to grow, teams (especially in product and engineering) continue to own the product or service on an end-to-end basis. They interact with other parts of the organization in a manner similar to APIs (application programming interfaces). They request specific inputs and outputs but continue to have their own budget, so maintain control of the project. With senior management oversight, additional resources are provided to ensure that the project is receiving what is needed to scale the effort.
Supporting this process is a tenet referred to as “the institutional yes.” In most organizations, approval for additional resources is made through a committee or review process in which a single veto can either kill or slow down an initiative. Recognizing this, managers at Amazon, rather than asking, “Why are we doing this?” ask, “Why not?” They believe that most big errors are not of commission but of omission. For example, Amazon Go, the new retail store with no checkout, was begun by envisioning how great it would be for customers to simply walk in, grab their item, and walk out without having to wait in line to pay. Presented with this idea, most organizations would say, “Why do we need this?” and note that it required skills that currently don’t exist (sophisticated cameras and artificial intelligence). Amazon said, “Why not?” Once there is evidence of early success, the program doesn’t compete for resources with others but is funded on its merits. The emphasis is to double down quickly on winners and not get caught up in trying to coordinate across projects.
It is worth noting that it is the combination of ideation (the PR/FAQ process), incubation (single-threaded teams with MVPs), and scaling (institutional “yes” and the escalation of resources with senior manager oversight) that accounts for Amazon’s remarkable success at innovation. Many of these projects begin as incremental improvements but morph over time into new businesses. It is this process that underlies Amazon’s ability to move into new businesses in cloud services, third-party fulfillment, logistics, retail sales, and consumer technology.
Amazon is a special business with a leader able to play a long game. However, there are clear applicable lessons for how they manage innovation any business manager wanting to develop new sources of growth. They put a laser focus on the customer problem – it all starts with the one-page press release – so that innovation is not driven by the views of the insiders, but by the needs of the outside world. They are careful to learn and experiment without committing resources too quickly – the two-pizza or single-threaded team. They are committed to experimentation – Bezos says there is a direct correlation between how often you experiment and how successful you are at innovation. And, they are careful to understand the difference between the one and two way doors, so that the decision to commit is made with clarity, so reducing the chances that they back out later and make the company look foolish. These are simple lessons that can guide corporate innovation in any environment.