029: John Rossman of Amazon and Rossman Partners

This is Capitalism: Up Close, Inspired, Explained

Ray Hoffman introduces the guest for this episode. How did Amazon do it? And how is Amazon going to continue to do it? John Rossman has the answer to both questions. He joined Amazon in 2002, after 23 interviews, and he led the creation of the Amazon Marketplace, with all the third-party sellers that came in, which is what lifted Amazon from being just an online seller of books and videos to a seller of everything. In fact, the operation he created between 2002 and 2005 accounts for over half of all the merchandise units sold on Amazon today. He then went on to lead the Enterprise Services Business at Amazon, and there he helped build brands such as Target.com and NBA.com. So, having had a front-row seat to the ways and strategies of Amazon’s creator, Jeff Bezos, John Rossman has gone on to advise a lot of young startup companies on how to think like Amazon, which just happens to be the title of a very readable new book by John Rossman.Listen in to hear more of John Rossman’s story of innovation in capitalism.

Key Takeaways:

[:22] Ray Hoffman introduces the guest for this episode of This Is Capitalism.[1:23] John was always interested in efficiency, integration, and how processes and data worked in making commerce more effective. In the early 2000s in Seattle, a former colleague of John’s was in the Finance Group at Amazon, and called John as a candidate for “an interesting idea” they had. John interviewed over a few months.

[2:05] John thought it was a great fit because the Marketplace business at Amazon, which was the division John was hired to run, with third parties selling merchandise on Amazon.com, really is about integration at a maximum scale. It required a lot of metrics and procedures that had to be put in place to scale that business.

[2:36] John launched 14 categories. When John started at Amazon, 90% of the business was books, music, and video. The first holiday season John was there, in 2002, was the first $1 billion quarter for Amazon. Today, Amazon is a $260 billion organization.

[2:55] Categories John launched included Apparel, Sporting Goods, and Home. They did it by leveraging partners. They expanded categories and geographies.

[3:19] John had 23 hiring interviews with people from departments all over Amazon. He learned that the Marketplace was the third iteration of a third-party selling program. The first two, Auctions and zShops, had failed. By the time John started, he knew where they were going, what the vision was, and the people who were involved.

[4:09] The slow hiring process led back to Jeff Bezos’s desire not to be in too big of a hurry to hire. This is also covered in John’s books. The biggest business mistakes John has made have revolved around hiring in a hurry. When you have an urgent need, you are prone to hiring the first person who has the qualifications and is available.

[4:44] At Amazon, they look to hire for the role at hand, plus what the future might hold.

[4:52] Amazon uses a bar-raiser, a person independent from the team who evaluates the candidate on their potential to do other profitable things for Amazon. The bar-raiser has veto power that is not subject to appeal. It really helps Amazon not to hire in a hurry. Hiring in a hurry can lead to very hard situations.

[5:46] John’s book is about the tools you can take from Amazon for your own business. One of those tools is a ‘flywheel,’ which tends to maintain momentum. In business, the concept of a flywheel is systems modeling: understanding the system you are operating in and your various levers for creating change in your business.

[6:32] A flywheel is a really simplified version of your systems model and it’s a great way to summarize your strategy.

[6:42] Amazon continues to refer to their flywheel, which is about improving the customer experience by having more selection and more sellers, which lowers cost, all on a fixed-base platform. That flywheel has been a key way to simplify and keep the whole organization on the same vision and mission page.

[7:13] Everyone at Amazon has to demonstrate how their programs, proposals, and investments feed into the flywheel.

[7:34] As Director of Merchant Integration, John brought in third-party sellers with millions of new items to make the flywheel generate more sales in more areas from more customers. The concept was that by bringing in more selection, the customer experience, over time, is that they can search, discover, and buy anything on Amazon.

[8:07] The key design principle for Marketplace was to get the customer to trust a third-party seller as much as they trusted buying from Amazon the retailer. That was a very different model from eBay. From day one, Amazon took full accountability for customer trust. That mandated a special relationship with their sellers.

[9:14] Amazon was constrained by their circumstances in the early 2000s. They wanted to build relationships with sellers who were much more stable than Amazon was at that time.

[9:40] Headcount was flat at Amazon. John had to ask for headcount from other areas of the business to get a team together to help launch the Marketplace business. That constraint forced John to innovate in ways that they wouldn’t have done with more employees and a bigger budget.

[10:00] A lot of third-party sellers said “No,” to Amazon, but a lot of great brands did sign on to have better e-commerce access to the Amazon customer.

[10:32] The flywheel started to gain momentum. Four or five years after Amazon launched the Marketplace, Prime membership and the Fulfilled By Amazon (FBA) program were created. The triangulation between Marketplace, Prime, and FBA accelerated the growth of the Marketplace business.

[11:04] Amazon’s growth and Amazon’s stock price growth mirrors the growth of the Marketplace. Jeff Bezos released a shareholder letter this year graphing how the Marketplace has grown by year. Today, the Marketplace accounts for 58% of all units shipped and sold.

[11:32] John believes the opportunity today is bigger than it has ever been. Develop your perspective of how change happens and what your digital e-commerce strategy looks like. The key ingredient is patience. None of this happened overnight.

[12:07] The part of Amazon and Jeff Bezos’s story that doesn’t get told enough is how he bet everything on himself by walking away from a great job. He stuck with it when everybody was a naysayer about Amazon. He was always optimizing for long-term enterprise growth based on great customer trust.

[12:51] For nine years, the Amazon stock was flat. That includes the four years John was there. As a senior executive, his compensation was tied to the stock growth and he wanted to see better performance. He lost patience and left. He didn’t see the future growth coming.

[13:50] Everybody wants good outcomes. What you have control of are the inputs. Think Like Amazon is about the controllable inputs, how to create innovation and how to grow your business. Patience is a required input.

[14:02] Idea 1 is “Your Journey Will Not Be Short by Taking the Long Strategic View.” Amazon evaluates many of its programs and investments over an eight-to-ten-year period. They are able to rationalize things that other companies can’t.

[14:48] Some of Amazon’s current big initiatives include healthcare and logistics. Those are eight-to-fifteen-year investments. Most companies are not willing to be that patient.

[15:14] Jeff Bezos always had it in mind that Books was going to be the first of many categories that Amazon opened. Amazon was always going to be a multi-category retailer. Jeff Bezos was open to finding opportunities.

[16:04] PillPack was a nice acquisition for Amazon. It creates custom packets of your medication. It has 50 state pharmaceutical licenses. PillPack thinks things through from the customer’s perspective. That makes it a great alignment with Amazon. Amazon has always been willing to rethink traditions because of the customer perspective.

[16:59] Amazon’s innovation approach is called “Start With the Customer and Work Backward.” They have a daisy chain of things they do to help build ideas before they go forward with them.

[17:27] You need a big vision for your idea but you need to bring it back to incremental steps with testable hypotheses, minimally viable products, and agile methodology. Don’t confuse thinking big with betting big. Amazon has done things that didn’t work out, but they daisy-chained some concepts from failures into later successes.

[18:18] Idea 16 is “Make It Easy.” Friction is everywhere. John cites Pink Floyd: We have grown “comfortably numb” to so many things. Amazon recently released a great feature in Prime Day. The customer can select the day they want their packages delivered. That shows an understanding of customer friction.

[19:28] That’s the backbone of innovation. We’re all looking for the big idea, but reducing customer friction and striving for operational excellence are the places where most companies have the opportunity to excel in innovation.

[19:46] That represents 80 to 90% of how Amazon innovates - through operational excellence and reducing small points of customer friction.

[19:56] Rossman Partners is based in Southern California. John helps enable young disruptive companies to move forward. Ray Hoffman gets advice from John on moving his “young disruptive company” forward.

[20:30] John advises companies in a relationship over a long period of time. Often the business concept is successful but the hard part is getting it to scale. You can scale operationally or scale horizontally into new adjacent markets. It’s about narrowing down options and proceeding on a small basis.

[21:10] Strategy is about being deliberate. You have to know what to say “Yes” to and what to say “No” to. Many executives forget to say “No.” That takes resources away from being able to say “Yes” effectively to the best ideas that you have. John helps teams set practical strategies and see when to say “Yes” or “No,” and how to proceed.

[21:48] “Failing fast” is not about failure but about learning in a very disciplined way - setting and testing hypotheses, “failing” and then adjusting to go forward. That is John’s typical work with teams.

[22:13] Idea 20 is “The Two-Pizza Team.” This is how to create small, cross-functional teams that own and obsess over a core capability over a long period of time. It is a mini-business. It helps grow leaders while they focus on a concept and a market over a long period. Their ability to innovate and operate is greatly accelerated.

[23:30] A two-pizza team has no more than 10 members so they could be fed with two pizzas. Amazon is full of clever names that they constantly use and refer to. They are masters of strategic communication. Another term Bezos has used for years is ‘Day 1.’ Amazon is a ‘Day 1’ company where today’s business does not define their future.

[24:12] Jeff Bezos recently said a ‘Day 2’ company optimizes for today’s business. They can be very successful today but they’re not testing and innovating for tomorrow. They are static in the type of business they are in.

[24:45] To avoid being a ‘Day 2’ company: 1.) Don’t manage by proxy. Stay in touch with your customers by having direct customer contact and direct customer metrics. 2.) Pay attention to the megatrends that you may not feel impact your business today. In five or ten years, they present both big opportunities and big threats to your business.

[25:24] Amazon is paying a lot of attention to the megatrend of machine learning and artificial intelligence. Depending on your industry, there are probably other big trends today that may sound like they are not for mature businesses. Educate yourself and prepare your company for a pilot or a trial so you are ready when the time is right.

[26:10] Amazon wanted to put a second headquarters in New York. Their biggest constraint is being able to attract more world-class talent. They can’t do that at scale in the Seattle market. HQ2 was an effort to act in advance of the situation. They don’t kick big issues down the road.

[27:19] How much more bureaucratic has Amazon become since John was there? Becoming a bureaucracy was Jeff Bezos’s biggest concern in John’s day. He doesn’t want to slow down decision-making speed. He doesn’t want to dilute accountability. Relative to scale, Amazon is significantly less bureaucratic than most other companies.

[28:28] Amazon is about operational excellence but also about working in the future. The Future Press Release is one of the tools they use to envision the future, announce it to a team and get everybody on board with the vision for the project with a very clear articulation of what the customer experience is going to be and the issues to tackle.

[29:14] Amazon gives the accountability for the Future Press Release to one person and everyone in the organization knows that they work for that person to help make that vision happen. It reduces bureaucracy and forces decisions and gives better speed to the organization.

[29:57] John thinks there’s more opportunity today than there has ever been, largely thanks to many of the tools, especially Amazon Web Services, that Amazon provides to innovators, inventors, and people who want to try new things. It has never been easier to build a new company or to try a new concept than it is today.

[30:17] On-demand services, cloud computing, and access to logistics and data take less time and capital than before. There are lots of great companies coming along that may disrupt Amazon. John doesn’t think it will be one company that will disrupt Amazon. Amazon in all of their businesses has great competition today.

[30:48] John doesn’t think Amazon will “fall in love” with their current business to the point where they aren’t actively working to expand it or disrupt it themselves.

[31:11] Sears, Roebuck and Co. is an example of an era-based organization that had a tough time adapting to new eras; they stopped reinventing themselves.

[31:44] John is an Advisory Board member to companies like Decisiv, Modjoul, and Terbine. He describes these disruptive companies and what he likes about them.

[33:53] John considers that these companies can take the long, strategic view. The timescales of venture capital funding are expanding out, while they shoot for bigger market disruption. It’s not just Amazon that is taking the long perspective.

[34:20] Idea 50½ is “Principles are Not a Poster.” The ‘half-idea’ is the essence of John’s book. The book is not about Amazon; it’s about real tools and real strategies that you can put to work.

[34:52] John doesn’t recommend that you take on 50 ideas. Take two or three. Be patient. Try to make the ideas you choose both a personal habit and a team habit, and see what sort of change they make in how you operate together.

[35:09] Everybody wants the outcomes of innovation and growth. It’s about the inputs of hard, everyday, consistent efforts of where you are willing to put in the resources and new habits that you are willing to create. The ‘half’ idea is the challenger question back to the reader: What are you willing to do to get the types of results that you want?

[35:31] John Rossman, former Director of Merchant Integration at Amazon.com and today, Managing Partner of Rossman Partners. This is capitalism.

Mentioned in This Episode:

Stephens.com

Amazon

John Rossman

Amazon Marketplace

Target.com

NBA.com

Jeff Bezos

Think Like Amazon: 50 1/2 Ideas to Become a Digital Leader, by John Rossman

Oregon State University

Arthur Andersen

Borders.com (Now Barnes & Noble)

eBay

D.E. Shaw

PillPack

Pink Floyd

Future Press Release

Amazon Web Services

Sears, Roebuck and Co.

Decisiv

Modjoul

Terbine

Eric Martinez

AIG

This Is Capitalism