We Can Learn a Lot About Risk Management from Jeff Bezos
I always look for a reason to visit Florida in the depth of winter. Separately, I have great respect for SCORE, a nonprofit organization with local chapters that help entrepreneurs start up new businesses.
I jumped on an invitation by the Manatee and Sarasota SCORE Chapter to address a January gathering.
The presentation was titled, “A Risk Management Perspective on Jeff Bezos.” I started with asking “How well do we know the man and his company?” Here is a test.
1. Bezos has the same name as his father. True/False
2. He was a poor student in school. True/False
3. He had no idea of what he wanted to do when he started Amazon. True/False
4. He has a balanced work life. True/False
5. His philosophy is “reach for the stars.” True/False
6. His salary provides a lavish lifestyle. True/False
7. In 2002, his company made a big profit. True/False
The answers are below, but first let’s consider the importance of question number three. If we don’t know where we are going, how will we know when we arrive?
Using different wording, did Bezos have a business model for Amazon? Was he prepared to develop a product or service, identify a market for it, and create a competitive link between product and market?
A business model is his particular genius:
- Product or Service. He started by selling books published by others, purchasing them at wholesale prices and distributing at retail. No manufacturing or other expertise was needed.
- Market. People bought books from Amazon in the late 1990s. A few years later, they would use his distribution system to buy everything else.
- Creativity and Innovation. He understood the importance of timely and accurate delivery, working with an existing network of UPS, FedEx, and the post office. He built an electronic system that enabled people to shop 24 hours a day from their homes. He collected money on the date of the sale and delivered the item in a day or so.
This, in simple terms, is the risk management model of Amazon. Pursue opportunity. Mitigate or avoid risk.
So how did you do on the true-false quiz?
All of the answers are false.
Same name as father? No. Theodore Jorgensen was his birth father. Bezos changed his last name when he was adopted at age 4.
Poor student? No. He was the class valedictorian in high school.
No idea about his business? No. As already discussed, he had a dynamite business model.
A balanced work life? No. He expected that he and his key employees would routinely work 60 or more hours a week.
Philosophy? “Minimize your regrets.” Do everything to succeed. If you fail, move on.
Lavish lifestyle? Yes, but not from his annual salary of $80,000.
A big profit in 2002? No. Amazon was preparing to file for bankruptcy if needed to hold off creditors. A different story a year later, when the company made a profit of $400 million.
Whatever else we know about Bezos, he shows us how to minimize our regrets. The bigger the risk, the more satisfying the success. Be resilient when encountering uncertainty. Have a backup plan if things are not working out.
In my Florida presentation, I gave Mr. Bezos grades for his business model.
#1. Desired and products or services: A
#2. Reliable distribution: A
#3. Effective marketing: A
#4. Management of capital: C
The “C” grade is assigned because of the 2002 cash flow problem. Entrepreneurs should manage their startup and growth without flirting with a liquidity crisis.
Overall, Mr. Bezos receives an A minus in risk management. Class valedictorian? I’m worried that he may not like this grade.
Tonight, my wife and I plan to watch Yellowstone, Season 4, using Amazon Prime. Tomorrow, we are expecting two packages shipped by Amazon. If we get banned by Mr. Bezos, we may have to minimize our regrets. We could put ourselves on a limited diet of Netflix and shop in person at Macy’s.
That might not work. Netflix streams its videos using Amazon Web Services, and Mr. Bezos may be planning to acquire and shut down Macy’s. &