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The Secrets of Bezos

Intensity is hardly rare among technology CEOs. Steve Jobs was as famous for his volatility with Apple (AAPL) subordinates as he was for the clarity of his insights about customers. He fired employees in the elevator and screamed at underperforming executives. Bill Gates used to throw epic tantrums at Microsoft (MSFT); Steve Ballmer, his successor, had a propensity for throwing chairs. Andy Grove, the former CEO of Intel (INTC), was so harsh and intimidating that a subordinate once fainted during a performance review.

Bezos fits comfortably into this mold. His drive and boldness trumps other leadership ideals, such as consensus building and promoting civility. While he can be charming and capable of great humor in public, in private he explodes into what some of his underlings call nutters. A colleague failing to meet Bezos’s exacting standards will set off a nutter. If an employee does not have the right answers or tries to bluff, or takes credit for someone else’s work, or exhibits a whiff of internal politics, uncertainty, or frailty in the heat of battle—a blood vessel in Bezos’s forehead bulges and his filter falls away. He’s capable of hyperbole and harshness in these moments and over the years has delivered some devastating rebukes. Among his greatest hits, collected and relayed by

Amazon veterans:

“Are you lazy or just incompetent?”

“I’m sorry, did I take my stupid pills today?”

“Do I need to go down and get the certificate that says I’m CEO of the company to get you to stop challenging me on this?”

“Are you trying to take credit for something you had nothing to do with?”

“If I hear that idea again, I’m gonna have to kill myself.”

“We need to apply some human intelligence to this problem.”

[After reviewing the annual plan from the supply chain team] “I guess supply chain isn’t doing anything interesting next year.”

[After reading a start-of-meeting memo] “This document was clearly written by the B team. Can someone get me the A team document? I don’t want to waste my time with the B team document.”

[After an engineer’s presentation] “Why are you wasting my life?”

Some Amazon employees advance the theory that Bezos, like Jobs, Gates, and Oracle (ORCL) co-founder Larry Ellison, lacks empathy. As a result, he treats workers as expendable resources without taking into account their contributions. That in turn allows him to coldly allocate capital and manpower and make hyperrational business decisions, where another executive might let emotion and personal relationships figure into the equation. They also acknowledge that Bezos is primarily consumed with improving the company’s performance and customer service and that personnel issues are secondary. “This is not somebody who takes pleasure at tearing someone a new a-‍-hole,” says Kim Rachmeler, an executive who worked at Amazon for more than a decade. “He is not that kind of person. Jeff doesn’t tolerate stupidity, even accidental stupidity.”

To the amazement and irritation of employees, Bezos’s criticisms are almost always on target. Bruce Jones, a former Amazon supply chain vice president, describes leading a five-engineer team figuring out ways to make the movement of workers in fulfillment centers more efficient. The group spent nine months on the task, then presented their work to Bezos. “We had beautiful documents, and everyone was really prepared,” Jones says. Bezos read the paper, said, “You’re all wrong,” stood up, and started writing on the whiteboard.

“He had no background in control theory, no background in operating systems,” Jones says. “He only had minimum experience in the distribution centers and never spent weeks and months out on the line.” But Bezos laid out his argument on the whiteboard, and “every stinking thing he put down was correct and true,” Jones says. “It would be easier to stomach if we could prove he was wrong, but we couldn’t. That was a typical interaction with Jeff. He had this unbelievable ability to be incredibly intelligent about things he had nothing to do with, and he was totally ruthless about communicating it.”

Jones cites another example. In 2002, Amazon changed the way it accounted for inventory, from the last-in first-out, or LIFO, system to first-in first-out, or FIFO. The change allowed Amazon to better distinguish between its own inventory and the inventory that was owned and stored in fulfillment centers by partners such as Toys “R” Us and Target (TGT). Jones’s supply chain team was in charge of this complicated effort, and its software, riddled with bugs, created a few difficult days during which Amazon’s systems were unable to recognize any revenue. On the third day, Jones was giving an update on the transition when Bezos had a nutter. “He called me a ‘complete f-‍-‍-‍-‍-‍- idiot’ and said he had no idea why he hired idiots like me at the company, and said, ‘I need you to clean up your organization,’ ” Jones recalls. “It was brutal. I almost quit. I was a resource of his that failed. An hour later he would have been the same guy as always, and it would have been different. He can compartmentalize like no one I’ve ever seen.”

Amazon has a clandestine group with a name worthy of a James Bond film: Competitive Intelligence. The team, which operated for years within the finance department under longtime executives Tim Stone and Jason Warnick, focuses in part on buying large volumes of merchandise from other online retailers and measuring the quality and speed of their services—how easy it is to buy, how fast the shipping is, and so forth. The mandate is to investigate whether any rival is doing a better job than Amazon and then present the data to a committee of Bezos and other senior executives, who ensure that the company addresses any emerging threat and catches up quickly.

In the late 2000s, Competitive Intelligence began tracking a rival with an odd name and a strong rapport with female shoppers. Quidsi (Latin for “what if”) was a Jersey City company better known for its website Grammar school friends Marc Lore and Vinit Bharara founded the startup in 2005 to allow sleep-deprived caregivers to painlessly schedule recurring shipments of vital supplies. By 2008 the company had expanded into selling baby wipes, infant formula, clothes, strollers, and other survival gear for new parents. In an October 2010 Bloomberg Businessweek cover story, the Quidsi founders admitted to studying Amazon closely and idolizing Bezos. In private conversations, they referred to Bezos as “sensei.”

In 2009, Jeff Blackburn, Amazon’s senior vice president for business development, ominously informed the Quidsi co-founders over an introductory lunch that the e-commerce giant was getting ready to invest in the category and that the startup should think seriously about selling to Amazon. According to conversations with insiders at both companies, Lore and Bharara replied that they wanted to remain private and build an independent company. Blackburn told the Quidsi founders that they should call him if they ever reconsidered.

Soon after, Quidsi noticed Amazon dropping prices up to 30 percent on diapers and other baby products. As an experiment, Quidsi executives manipulated their prices and then watched as Amazon’s website changed its prices accordingly. Amazon’s pricing bots—software that carefully monitors other companies’ prices and adjusts Amazon’s to match—were tracking

At first, Quidsi fared well despite Amazon’s assault. Rather than attempting to match Amazon’s low prices, it capitalized on the strength of its brand and continued to reap the benefits of strong word of mouth. After a while, the heated competition took a toll on the company. Quidsi had grown from nothing to $300 million in annual sales in just a few years, but with Amazon focusing on the category, revenue growth started to slow. Venture capitalists were reluctant to furnish Quidsi with additional capital, and the company was not yet mature enough for an initial public offering. For the first time, Lore and Bharara had to think about selling.

Meanwhile, Wal-Mart Stores (WMT) was looking for ways to make up ground it had lost to Amazon and was shaking up its online division. Wal-Mart’s then-vice chairman, Eduardo Castro-Wright, took over, and one of his first calls was to Lore to initiate acquisition talks. Lore said Quidsi wanted to get close to “Zappos money”—more than $500 million, plus additional bonuses spread out over many years tied to performance goals. Wal-Mart agreed in principle and started due diligence. Mike Duke, Wal-Mart’s CEO, visited a fulfillment center in New Jersey. The formal offer from Bentonville was around $450 million—nowhere near Zappos money.

So Lore picked up the phone and called Amazon. In September 2010, he and Bharara traveled to Seattle to discuss the possibility of Amazon acquiring Quidsi. While they were in that early morning meeting with Bezos, Amazon sent out a press release introducing a service called Amazon Mom. It was a sweet deal for new parents: They could get up to a year’s worth of free two-day Prime shipping (a program that usually cost $79 a year). Customers also could get an additional 30 percent off the already-discounted diapers if they signed up for regular monthly deliveries as part of a service called Subscribe and Save. Back in New Jersey, Quidsi employees desperately tried to call their founders to discuss a public response to Amazon Mom. The pair couldn’t be reached: They were still in the meeting at Amazon’s headquarters.

Quidsi could now taste its own blood. At one point, Quidsi executives took what they knew about shipping rates, factored in Procter & Gamble’s (PG) wholesale prices, and calculated that Amazon was on track to lose $100 million over three months in the diaper category alone.

Inside Amazon, Bezos rationalized these moves as being in the company’s long-term interest of delighting its customers and building its consumables business. He told Peter Krawiec, the business development vice president, not to spend more than a certain amount to buy Quidsi but to make sure that Amazon did not, under any circumstance, lose the deal to Wal-Mart.

As a result of Bezos’s meeting with Lore and Bharara, Amazon had an exclusive three-week period to study Quidsi’s financial results and come up with an offer. At the end of that period, Krawiec offered Quidsi $540 million and called the number a “stretch price.” Knowing that Wal-Mart hovered on the sidelines, he gave Quidsi a window of 48 hours to respond and made it clear that if the founders didn’t take the offer, the Amazon Mom onslaught would continue.

Wal-Mart should have had a natural advantage. Jim Breyer, the managing partner at one of Quidsi’s venture capital backers, Accel, was also on the Wal-Mart board. But Wal-Mart was caught flat-footed. By the time it increased its offer to $600 million, Quidsi had tentatively accepted the Amazon term sheet. Duke left phone messages for several Quidsi board members, imploring them not to sell to Amazon. Those messages were then transcribed and sent to Seattle, because Amazon had stipulated in the preliminary term sheet that Quidsi turn over information about any subsequent offer.

When Bezos’s lieutenants learned of Wal-Mart’s counterbid, they ratcheted up the pressure, telling the Quidsi founders that “sensei” was such a furious competitor that he would drive diaper prices to zero if they sold to Bentonville. The Quidsi board convened to discuss the possibility of letting the Amazon deal expire and then resuming negotiations with Wal-Mart. But by then, Bezos’s Khrushchev-like willingness to use the thermonuclear option had had its intended effect. The Quidsi executives stuck with Amazon, largely out of fear. The deal was announced on Nov. 8, 2010.

Blackburn, Amazon’s mergers-and-acquisitions chief, said in a 2012 interview that everything the company did in the diapers market was planned beforehand and was unrelated to competing with Quidsi. He said that Quidsi was similar to shoe retailer Zappos, which Amazon acquired in 2009: a “stubbornly independent company building an extremely flexible franchise.”

The Federal Trade Commission scrutinized the acquisition for four and a half months, going beyond the standard review to the second-request phase, where companies must provide more information about a transaction. The deal raised a host of red flags, such as the elimination of a major player in a competitive category, according to an FTC official familiar with the review. The merger was eventually approved, in part because it did not result in a monopoly. Costco Wholesale (COST), Target, and plenty of other companies sold diapers online and off.

Bezos won, neutralizing an incipient competitor and filling another set of shelves in his Everything Store. Quidsi soon expanded into pet supplies with and toys with Wal-Mart missed the chance to acquire a talented team of entrepreneurs who’d gone toe to toe with Amazon in a new product category. And insiders were once again left marveling at how Bezos had engineered another acquisition by driving his target off a cliff.

The people who do well at Amazon are often those who thrive in an adversarial atmosphere with almost constant friction. Bezos abhors what he calls “social cohesion,” the natural impulse to seek consensus. He’d rather his minions battle it out backed by numbers and passion, and he has codified this approach in one of Amazon’s 14 leadership principles—the company’s highly prized values that are often discussed and inculcated into new hires:

Have Backbone; Disagree and Commit

Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly.

Some employees love this confrontational culture and find they can’t work effectively anywhere else. “Everybody knows how hard it is and chooses to be there,” says Faisal Masud, who spent five years in the retail business. “You are learning constantly, and the pace of innovation is thrilling. I filed patents; I innovated. There is a fierce competitiveness in everything you do.” The professional networking site LinkedIn (LNKD) is full of “boomerangs”—Amazon-speak for executives who left the company and then returned.

But other alumni call Amazon’s internal environment a “gladiator culture” and wouldn’t think of returning. Many last less than two years. “It’s a weird mix of a startup that is trying to be supercorporate and a corporation that is trying hard to still be a startup,” says Jenny Dibble, who was a marketing manager there for five months in 2011. She found her bosses were unreceptive to her ideas about using social media and that the long hours were incompatible with raising a family. “It was not a friendly environment,” she says. Even leaving Amazon can be a combative process—the company is not above sending letters threatening legal action if an employee takes a similar job at a competitor. Masud, who left Amazon for EBay (EBAY) in 2010, received such a threat. (EBay resolved the matter privately.)

Employee churn doesn’t seem to damage Amazon, though. The company, aided by the appeal of its steadily increasing stock price, is an accomplished recruiter of talent. In its second-quarter earnings report in July, Amazon said its ranks had swelled to 97,000 full-time and part-time employees, up 40 percent from the year before. New hires are given an industry-average base salary, a signing bonus spread over two years, and a grant of restricted stock units spread over four years. Unlike Google (GOOG) and Microsoft, whose stock grants vest evenly year by year, Amazon backloads the vesting toward the end of the four-year period. Employees typically get 5 percent of their shares at the end of their first year, 15 percent their second year, and then 20 percent every six months over the final two years. Ensuing grants vest over two years and are also backloaded to ensure that employees keep working hard and are never inclined to coast.

Managers in departments of 50 people or more are often required to “top-grade” their subordinates on a curve and must dismiss the least effective performers. As a result, many Amazon employees live in perpetual fear; those who manage to get a positive review are often genuinely surprised

There are few perks or unexpected performance bonuses at Amazon, though the company is more generous than it was the 1990s, when Bezos refused to give employees city bus passes because he didn’t want to give them any reason to rush out of the office to catch the last bus of the day. Employees now get cards that entitle them to free rides on Seattle’s regional transit system. Parking at the company’s offices in South Lake Union costs $220 a month, and Amazon reimburses employees—for $180. Conference room tables are a collection of blond-wood door-desks shoved together side by side. The vending machines take credit cards, and food in the company cafeterias is not subsidized. New hires get a backpack with a power adapter, a laptop dock, and orientation materials. When they resign, they’re asked to hand in all that equipment—including the backpack. These practices are also embedded in the sacrosanct leadership principles:

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