Amazon's Shareholder Letter -- Why are we discussing "unit costs" and "primitives"?

Strategies and Techniques for Change Agents, Strategists, and Innovators

We spend enormous energy thinking about how to empower builders, inside and outside of our company. We characterize builders as people who like to invent. They dissect a customer experience, assess what’s wrong with it, and reinvent it. Builders tend not to be satisfied until the customer experience is perfect. — Andy Jassy

I was initially uninspired by Amazon’s 2023 Shareholder Letter (released April 7, 2024). Typically, this letter is an annual fountain of inspiration, insights, and tactics that I use in my quest to help leaders and teams pursue their transformation and develop leadership. But this year’s letter didn’t catch my imagination.

I thought about a title for this newslettter like “I fell asleep reading Amazon’s shareholder letter” or “Amazon’s GenAi writes a boring shareholder letter.” But the problem wasn’t the quality of the shareholder letter. Quite the opposite. The problem was me. I wasn’t looking at a garage sale throw-away painting; I was reading a Picasso full of critical insights.

After re-reading and thinking about it, this is one of the most powerful and actionable Amazon shareholder letters written. Here’s what you should be reading from it.

Unit Costs

Let’s open with an exciting discussion on unit costs (perhaps you now know why I yawned upon first reading!) Unit costs represent the total expense incurred to produce, store, and sell one unit of a product or service, encompassing all relevant expenditures such as materials, labor, and overhead. It is the direct expense for one unit of product or service. What most enterprises experience is at a certain point they stop or have an eroding unit cost basis. They can do "more”, but they don’t do “more” on an improving unit cost and improved service level.

In Big Bet Leadership, I outline why pursuing a cost structure transformation is a critical pathway to competing:

Warren Buffett, the Oracle of Omaha, recognizes the importance of cost structure innovation. “The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle.” Build a formidable economic castle with your Big Bet by applying sufficient focus on this often-underdeveloped aspect of innovation.¹

Already world-class in service, speed, quality and cost in their logistics and order delivery capability, Amazon does not rest or stop inventing. Amazon is willing to do the hard and expensive work to reinvent it’s fulfillment services to improve the customer experience and create an economic moat.

Andy Jassy notes “In 2023, for the first time since 2018, we reduced our cost to serve on a per unit basis globally. In the U.S. alone, cost to serve was down by more than $0.45 per unit YoY.” At the same time, customer experience was improved and total prime-eligible selection increased. This only comes by a willingness to challenge the already world-class status quo and reinventing their supply chain. He goes on to say:

Amazon delivered at the fastest speeds ever to Prime members, with more than 7 billion items arriving same or next day, including more than 4 billion in the U.S. and more than 2 billion in Europe. In the U.S., this result is the combination of two things. One is the benefit of regionalization, where we re-architected the network to store items closer to customers. The other is the expansion of same-day facilities, where in 2023, we increased the number of items delivered same day or overnight by nearly 70% YoY.²

Amazon did more, did it faster and better, and did it more efficiently resulting in a lower unit cost! Customers are happy, investors are happy and Jeff B is happy!

The lesson — don’t pursue the vague notion of “improvement” or “transformation.” Instead, identify the hard problem, the wicked problem in your business, and work backwards from a substantial improvement in cost, quality and speed. Doing this forces you to simplify, re-design and re-architect the process. THEN apply technology and AI.

Primitiatives

The second sexy topic put forth in Amazon’s shareholder letter is the concept of primitives. (Don’t yawn like I initially did!).

Here’s how Andy describes primitives, quoting from a 2003 narrative memo:

“Primitives are the raw parts or the most foundational-level building blocks for software developers. They’re indivisible (if they can be functionally split into two they must) and they do one thing really well. They’re meant to be used together rather than as solutions in and of themselves. And, we’ll build them for maximum developer flexibility. We won’t put a bunch of constraints on primitives to guard against developers hurting themselves. Rather, we’ll optimize for developer freedom and innovation.”

You might think that primitives are just a software concept. Incorrect! Core processes and capabilities can (and should) be broken into primitives, which are the foundational and often repeated steps used in key processes.

Andy goes on to describe the many benefits of both the effort to create these reusable bite-sized lego pieces as well as the benefits of having them once established.

Connecting Unit Costs & Primitives

Although not pointed out in the shareholder letter, there is a connecting thread. By a continuous pursuit of scale, customer experience excellence, growth and innovation, Amazon carefully designs, architects, and engineers processes, tools, and digital capabilities. This is what a “builder” does. Build your core capabilities in defined modular pieces, and wrap them in software. Every business has this same opportunity.

I had a client recently comment about Amazon’s fulfillment network and how it is powered by AI and data. This is not new and it was not a project. This is how they design, architect and build processes enabled with software. This will not end. The pursuit of “perfection” never ends. It’s not a “project”. Their operating model and leadership principles are always pursuing both incremental improvements and transformational capabilities. Always.

We will chase perfection, and we will chase it relentlessly, knowing all the while we can never attain it. But along the way, we shall catch excellence. — Vince Lombardi

Whether your “units” are orders, projects, devices, deals or bytes, you should design your core capability thoughtfully and precisely, leverage modular design, and drive innovation through a target unit cost.

This is how you build a lasting, differentiated and anti-fragile business. One that delivers today and is prepared to compete and win in the hyper-digital era.

A Powerful Lever for Lasting Change

If your team or clients are looking for a powerful lever for driving change, consider a book club event. A book club picks a book, reads it and then discusses it. Want to make it really special? Have the author participate.

I’ve done with with multiple teams, clients and audiences. Reach out to me at info@rossmanpartners.com or message me with your idea.

Onward!

John

About The Digital Leader Newsletter

John Rossman is a keynote speaker, innovation coach, and strategy advisor. The Digital Leader Newsletter is a weekly coaching session focused on customer-centricity, innovation, and strategy. We deliver practical theory, examples, tools, and techniques to help you build better strategies, plans, and solutions—but most of all, to think and communicate better.

1. Rossman, John; McCaffrey, Kevin. Big Bet Leadership: Your Transformation Playbook for Winning in the Hyper-Digital Era (p. 46). Rodin Books. Kindle Edition.

2. https://s2.q4cdn.com/299287126/files/doc_financials/2024/ar/Amazon-com-Inc-2023-Shareholder-Letter.pdf