Amazon: Stubborn and Flexible

No matter how big a company is, there is the chance for risk and uncertainty while strategic decisions are being made, and it can be argued that the way a company reacts can make or break them. Risk arises when there is a possibility for multipole outcomes, which results in uncertainty. During this time, decisions that enhance flexibility are more important than ever.

Under conditions of high uncertainty, flexibility is crucial for survival. Luckily, Amazon is not hurting in this area. Jeff Bezos, CEO of Amazon, has publicly stated that "We are stubborn on vision. We are flexible on the details."

In reality, a company has six 'real options,' or the right to make an irreversible investment on or before the date an opportunity ceases to be available. This is one way that businesses can implement flexibility. It also helps value a company that can provide some type of future flexibility in a way that traditional financial analytics can't provide (like NPV or IRR).

1. Defer
2. Grow
3. Contract
4. Shut down and restart
5. Abandon
6. Expand

For example, when Amazon only sold books, their real options were as follows:

1. Grow
1. New business options (zShops, AmazonAuctions)
2. Acquisitions (including Drugstore.com, Ashford.com, Della.com, Pets.com, Greenlight.com ....and 23 more)
3. New customers (began selling music, videos and DVDs in 1998; software, toys, electronic products and home products in 1999; kitchenware and gardening products in 2000)
2. Expand
1. In 1999, they expanded outside the United States and entered the European market

In fact, over 90% of Amazon's innovative ideas is incremental and, as a result, less risky (see the year gaps). We can tell by their history of real options that giving up is not in their cards.

In Amazon's case, they hate risk. Bezos says, “Good entrepreneurs don’t like risk; they seek to reduce risk…Starting a company is already risky, and then you systematically eliminate risk step by step in those early days….you kind of need to systematically identify risk and then as the company gets bigger and more robust, you can start taking risks again but in those early days a lot of it is about ‘okay I have a good idea, how do we reduce risk?’”

Stay stubborn and flexible, Amazon.

Sources:

• 12 Business Lessons You Can Learn from Amazon Founder and CEO Jeff Bezos by Zach Bulygo [https://blog.kissmetrics.com/lessons-from-jeff-bezos/]
• Amazon’s Innovation Philosophy Braden Kelley [http://www.innovationexcellence.com/blog/2012/07/30/amazons-innovation-philosophy/#sthash.KBbCt75C.dpuf]
• Using real options in strategic decision making by Chris Walters and Tim Giles http://mba.tuck.dartmouth.edu/paradigm/spring2000/articles/walters-decision_making.html]
• Valuing real options: frequently made errors by Pablo Fernández [http://www.ucema.edu.ar/u/jd/Inversiones/Articulos/Paper_Valuing_Real_Options_Frequent_errors.pdf]