If you double the number of experiments you do per year you’re going to double your inventiveness.

—JEFF BEZOS¹⁹

Bezos loves to say that thinking small is a self-fulfilling prophecy. It’s no surprise, then, that Amazon’s eighth leadership principle, one of the ideas Bezos uses to guide leadership at Amazon, encourages company leaders to think big. (Remember, Amazon’s leadership principles are different than the ten principles for successful IoT strategies outlined in this book. For a refresher on the difference, you can revisit my introduction.)

Amazon leadership principle number eight is “Think Big: Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers.”

From revolutionizing online retail to reinventing publishing, the company is known for successfully tackling big opportunities. What many people don’t realize is that the key to successfully building these big visions is to start small. That grand vision will guide you all along the way, but in order to get there, you’ll need to test your vision—and adjust accordingly—by carrying out lots of little experiments. This is one of the keys to Amazon’s innovation and IoT strategies.

Principle 5: Successfully innovating with the Internet of Things requires a big and powerful vision, but to reach that vision, you’ll need to create and learn from a series of small, agile experiments.

In this principle, I’ll point you toward the processes and strategies you need to get started designing those experiments. The exact steps you’ll need to take to create this kind of experimentation within your business or organization will be specific to your circumstances.

Let’s start with the obvious—thinking big.

THINKING BIG

In 2002, I launched the third-party business at Amazon, which allowed retailers to sell their products through Amazon’s website. Today that business is responsible for more than 50 percent of all units shipped and sold at Amazon. The platform supports more than three million sellers.

As we built the third-party business, we focused on three core principles that would allow it to grow. First, the customer’s experience with third-party sellers needed to be as good as when they bought directly from Amazon the retailer. Second, the experience of selling on Amazon’s third-party platform had to be intuitive and easy, even though the process was relatively complex. Third, we had to design the platform for and strategize around supporting hundreds of thousands—not tens or hundreds—of sellers.

Because of our strategy, the data and transaction choreography between seller and Amazon had to be more complex. We built tools, examples, test environments, and lots of supports to make selling as intuitive and efficient for sellers as possible. Those tools included three different types of integration paths—XML transactions, which allow more sophisticated sellers to directly connect and automate their product info, inventory, and fulfillment systems; flat-file transactions for sellers who still want machine-to-machine systems integration, but need less sophistication; and a portal-based integration tool where a basic seller could create items and manage orders manually.

Since we were thinking big, we also had to think through topics of scale. Amazon had parity agreements in place with its third-party sellers, requiring them to list items on Amazon at the same price and availability as any other sales channels they might be using. How could we keep track of whether sellers were living up to this obligation?

The most obvious but least scalable and effective option would have been to rely on manual audits or reviews. That would have been an expensive process that only allowed us to review a subset of items. So instead we built an automated system to verify that sellers were living up to their parity obligations. Using the item information they sent us, we were able to crawl their website and any other sales channels to verify the consistency of their pricing and availability.

Having and holding a big vision for creating an outstanding customer and seller experience was critical in laying the foundation for success.

All of this was us thinking big.

But don’t confuse “thinking big” with “betting big.” The business and art of innovation lie in the many failures—the learning, adjusting, and moving ahead—that come along the way. The principle you’ll find below the waterline is about how to scale failure.

STARTING SMALL

The better you become at creating ways to fail repeatedly in small ways, the more likely you are to achieve big success. In other words, think big, but act small.

It took years before the third-party business became the force that it is today. Before I even joined the marketplace team, Amazon had already tried—and failed—to build two other third-party seller platforms. Amazon Auctions iterated to Z-Shops, which iterated to Marketplace. The first two were failures; the third is now a huge success.

And although Amazon certainly invested in the Marketplace business, it was not a high-risk investment. Instead leadership invested in relatively small individual experiments that would improve Amazon’s long-term understanding of the winning formula.

What do those smaller experiments look like? At Marketplace, we thought up front that customers would want to shop through seller-specific storefronts, so we built out the infrastructure for sellers to create branded online storefronts. Once we actually launched storefronts, though, we found customers were actually more likely to shop by category across Amazon’s entire site. As a result, we wound up deemphasizing merchant-specific storefronts and focusing instead on improving Amazon’s core browsing and searching capabilities.

It wasn’t until Marketplace eventually found the right long-term formula—through this and many other experiments—that the company shifted its focus to growth.

These are two of the traits of successful innovators: They execute on lots of small experiments, and they hold a patient, long-term approach to product and business success. It is rare, though not impossible, that innovation and short-term profits go together.

When a company is developing IoT capabilities, these ideas become even more important.

GETTING SMALL IN YOUR BUSINESS

Executed well, these kinds of small experiments help you understand your customer’s needs and how your product might fit the market. Executed poorly, they can be worse than not experimenting at all.

A failed experiment could just as easily be the result of bad execution as it could a valid test of your hypothesis about a product.

Luckily, Amazon and others have developed tactics for acting small and moving iteratively to help you avoid this trap.

Low-fidelity prototyping. If you’ve ever created something that only partially works just to test a few critical components, you’ve created a low-fidelity prototype. Google’s Cardboard is an example of a low-fidelity virtual-reality prototype: By sticking their phones inside a VR viewer made out of cardboard, users can test and experiment with VR. The first version of this was likely hacked together with a few off-the-shelf parts and a cardboard box. Meanwhile, Google is using Cardboard to build out its developer community and to test the popularity of virtual reality without spending valuable time and money developing a more complex VR product.

From an IoT perspective, think about ways you can test the effectiveness or viability of adding sensors to a product without actually building it out. This could mean strapping sensors onto a physical product rather than hardwiring them in. Low-fidelity prototyping can be useful as a visual demonstration of how a product might work and as a way to build buy-in for a full prototype development.

Minimum Viable Product. The idea of a minimum viable product, or MVP, was popularized by Eric Ries’s 2011 book, The Lean Startup, which encouraged business owners to identify and test the critical assumptions behind their businesses and solutions. Ries, inspired by the work of his mentor, Steve Blank, popularized the idea of using a minimum viable version of your product to help you prove or disprove assumptions about your business and customers through carefully constructed trials.

Functioning prototypes. Once you’ve used low-fidelity prototypes to test some of your early assumptions, it may be time to build a functional prototype or early working version of your product. Unlike your MVP, which generally includes little technical development, your prototype is generally used as the technical basis for your product. These can still be incomplete in many ways—an early version to drive future iteration—but you will want to be sure you’re working from a solid basis for future full-throated product development.

Fail Fast, and Fail Forward. Building a team that can make the most of its failures—and that knows how to create new learning for itself—comes down to one thing: encouraging smart, quick failure. Your job is to make sure your team understands the difference between a failure that drives learning and a failure of execution. The first gives you valuable data. The second only wastes your time.

GETTING COMFORTABLE WITH SMALL FAILURES

“One area where I think we are especially distinctive,” Bezos wrote in Amazon’s 2015 shareholder letter, “is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and 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. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there.”²⁰

Amazon’s most prolific failure was the Fire Phone, launched in July of 2014. It was a short-lived market miss that resulted in a $170-million inventory write-off.

“What the hell happened with the Fire Phone?” Henry Blodget, the famous stock analyst, asked Jeff Bezos in a Business Insider discussion.

Jeff’s response that day came down to this: the Fire Phone, like all of Amazon’s projects, was an experiment. In Jeff’s mind, its failure was a learning experience—another chance to iterate or pivot. The phone, Jeff explained, was just one more entry in Amazon’s “device portfolio”—with “portfolio” being the operative word.

As a leader in the IoT space, Jeff views every project as an investment in Amazon’s portfolio. And yes, he has diversified.

“It’s early,” he said, “and we’ve had a lot of things we’ve had to iterate on at Amazon. One of my jobs as the leader at Amazon is to encourage people to be bold,” he explained; “to create a shield around the teams innovating so they can focus on the hard things they are accomplishing and minimize the noise and concerns of detractors within the company.”²¹

As Amazon launched its next round of smart devices, we saw them resorting to their standard playbook: launch a product or service quickly, don’t make too big of deal of it, and spend almost nothing on marketing. Instead, get customer feedback and make adjustments or cut quickly. Launch more experiments.

The Amazon Echo was an invitation-only product for Amazon Prime customers. It was advertised as a “beta” product and in limited edition, keeping expectations low and company learning high. It followed the same playbook for the Dash and Dash Button. Only when feedback and reviews of the Echo and Dash Button were fantastic did Amazon open them up to the public.

This is the role of the IoT leader. It’s also the reason Amazon is leading the way into the IoT space.

CAN YOU COACH SPEED?

What’s incredible about Amazon is that it innovates and scales so aggressively, while also leveraging operational excellence across its supply chain. It has made a name for itself on predictability—as an Amazon customer, you know when your order ships, how long it will take to arrive, and that Amazon Web Services outages will be resolved as quickly as humanly possible. Amazon has done this by focusing on ruthless efficiency and discipline.

These are the same traits that can make it hard to create an environment of innovation, where experimentation, breaking from industry norms, figuring out new partnership scenarios, and potentially cannibalizing existing businesses are encouraged.

That’s why Gartner recently ranked Amazon the number one supply-chain company in the world—because of its singular ability to be world class at both operational excellence and innovation. Gartner calls this ability “bimodal” and explains it as “an environment where business models must change quickly, where the expectation is that they will spend as much or more time growing and innovating as they will streamlining and promoting efficiency.”²²

There’s a common belief in sports that you can’t coach speed; you are either born fast, or you weren’t. Training and technique can develop, hone, and refine that speed, but nothing can make a slow athlete fast.

Most teams and companies are the same when it comes to being innovative. Take the Fortune 1000, a list of top companies stack ranked by revenue. Churn among the Fortune 1000 has accelerated pretty rapidly over the years—from 35 percent in the 1970s to more than 70 percent in the 2000s. Hold out your ten fingers. If each of those fingers represents a company in the Fortune 1000, eight of those fingers will be replaced over the next decade. In most cases, that’s the direct result of an inability or lack of will to innovate.

How do you keep from becoming a victim of churn? The Internet of Things provides a unique opportunity for companies to leverage their established products, services, and channels; create new value for customers; and build innovation in their businesses. It just might be the best basis to build speed ever presented.

The key to doing this successfully, though, is finding the right leaders. Finding leaders with the critical eye and instincts necessary to identify and execute on this kind of opportunity is tough—it’s a magical skill set.

As innovation researcher Maxwell Wessel wrote in Harvard Business Review,

When corporations reach maturity, the measure of success is very different: its profit. Once a business figures out how to solve its customers’ problems, organizational structures and processes emerge to guide the company towards efficient operation. Seasoned managers steer their employees from pursuing the art of discovery and towards engaging in the science of delivery. Employees are taught to seek efficiencies, leverage existing assets and distribution channels, and listen to (and appease) their best customers.

    Such practices and policies ensure that executives can deliver meaningful earnings to the street and placate shareholders. But they also minimize the types and scale of innovation that can be pursued successfully within an organization. No company ever created a transformational growth product by asking: “How can we do what we’re already doing, a tiny bit better and a tiny bit cheaper?”²³

In other words, asking the same teams and people to be both operators and innovators will fail.

The two things a company leader (be that CEO or middle manager) is best positioned to do are to communicate vision and allocate resources. For enterprises to combine operational excellence and systematically create innovation, to help give permission to move quickly and “fail forward,” leaders must create the environment to nurture tiny seeds.

“Both [Amazon Retail and AWS],” Bezos explained, “were planted as tiny seeds and both have grown organically…one is famous for brown boxes and the other for APIs…under the surface, the two are not so different. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles.” Those principles, as designed by company leadership, have created the scaffolding for a culture of forward failure that carries success across Amazon’s many lines of business.

The key to innovation, within Amazon or your own company, is to imagine and build your own scaffolding of trial and error. “You need to select people who tend to be dissatisfied by a lot of the current ways,” explains Bezos. “As they go about their daily experiences, they notice that little things are broken in the world and they want to fix them. Inventors have a divine discontent…you want to embrace high-judgment failure—this was worth trying, it didn’t work, so let’s try something different. All of our most important successes at Amazon have been through that kind of failure: Fail, try again, and repeat that loop.”²⁴

HOW TO GET YOUR ELEPHANT TO DANCE

How does Amazon consistently build this bimodal capability? How to get large companies, the elephants, to continue to consistently innovate is a question for the ages. But if you’ve studied Amazon like I have, you’ll realize that there are a few tricks and approaches that can help an elephant—or any other company—innovate, particularly when it comes to the Internet of Things.

1. Invest Like a Venture Capital Firm, and Create a New Portfolio. Many companies squash innovation and invention because they want predictable results—predictable timeframe, predictable investment, predictable financial returns. This is how a private equity company invests.

       There are times in IoT where this is the right mentality. When you’re improving and automating an internal process, for example, you should have a good idea of what the returns and risks are. But when you’re creating new, innovative customer features or developing new IoT business lines, your investments, risks, and returns will be harder to predict. In this case, the job of a successful IoT leader is to act like a venture-capital firm. The key is a balanced portfolio, understanding the differences between different segments of your investment portfolio. Many of your IoT customer facing and business model investments are going to be high risk. For high risk investments, they need to be small experiments to prove out key aspects before scaling. Think big, but act small.

   

2. Create Autonomy and Separation. To create significant departure and disruption from current business practices, the teams within your company that are dedicated to creating innovation need to be separated from the teams representing the status quo. In Amazon’s case, the company has built a special team called Lab126 that is focused only on creating innovation in their devices. Tellingly, that team is based in California, far from the company’s Seattle base.

       While separation is key, so is direct, unfiltered communication and collaboration with a company’s CEO or senior leader. Jeff Bezos is often referred to as “chief product officer” for projects. It is his job to keep that team insulated while maintaining detailed collaboration and visibility with senior leadership.

3. Dedicate a Senior, Capable Leader to the Initiative. At many companies, you can identify a leader’s cachet by the headcount and expense budget he or she manages. Not so much at Amazon, where senior people are often dedicated to leading new big bets. Take, for example, Steve Kessel, the longtime executive who launched the first Kindle. Kessel’s latest project is Amazon’s nascent retail-store initiative, the first of which just launched in Seattle.²⁵

       Jeff and Amazon believe there’s added power in opening up key teams and leaders to focus on something new. The critical word we used at Amazon was “obsession”—let a top leader obsess about his or her objectives. If the initiative is just one of the teams and objectives that leader manages, it won’t possibly benefit from the level of obsession that complete dedication brings.

4. Craft the Right Metrics and Goals. Hint: They’re Not Typically about Profit. One of the things I remember most about my time at Amazon was the company’s intense focus on solidifying a new initiative’s metrics and goals. Long before a new project launched, the team behind it would outline its goals—whether growth, operational performance, customer experience, or costs—and create a set of metrics to measure those goals over time. The idea was that if we got the goals and metrics right, the team could succeed with more independence and less governance. That independence also leads to more creativity, as team members found creative ways to meet those goals.
5. Integrated Multidisciplinary Teams. Amazon has two rules of thumb for building teams they can count on to think and act innovatively. The first is to create a team composed of people with a variety of disciplines and backgrounds. Unique ideas and the ability to execute on them usually stem from teams that can think broadly. Working in the Internet of Things, capabilities in user experience, industrial design, user-interface design, business-model design, and data science are especially useful.

       The second rule of thumb is to focus on small teams: Amazon often quantifies this as a “two-pizza team.” In other words, you should be able to feed your whole team with two pizzas. That means no more than eight people. Two-pizza teams not only own a capability, but they’re responsible for everything from market definition and product roadmap to building and operations.

6. Create an Insanely Better Product or Service. In the end, the result and by-product of the above ingredients has to yield an insanely good product or service. This is not just a marginal improvement. It is not a completely new but still average product. Successful innovation results in an incredible experience, at the right price point. It surprises users, and it very quickly becomes indispensable to your customers.

You’ll remember at the beginning of this book that we talked about the IoT triple threat—the idea that you can use IoT to (1) improve customer experiences, (2) improve and streamline operations, and (3) develop new business models. If you’re clever about strategy, you can do all three of these things with one move.

At this point in the book, we’ve talked about using IoT to make customer experiences better and to integrate those experiences across platforms and services. We’ve also covered how IoT can help you make operational improvements in your business or organization.

In the coming chapters, we’ll talk about the third part of the triple threat—the business models that can be powered by IoT. Many companies will start their IoT journey by focusing on the first two parts of the triple threat, but if you plan ahead, you can actually build in the flexibility that will allow you to take advantage of IoT-driven business models.

Even if you’re not planning to implement a new business model at this time, understanding how they work can create more flexibility for you and your business and open more doors down the line.