Amazon's success is unparalleled — and 'Type 2 decisions' are a major reason why

Jeff Bezos

In his 2016 shareholder letter, Amazon CEO Jeff Bezos distinguished between Type 1 and Type 2 decisions.

Type 1 decisions are irreversible and should be made with caution. Type 2 decisions are reversible, like "two-way doors," and should be made quickly.

Amazon's willingness and ability to make Type 2 decisions has been a major factor in its success.

That's according to Scott Galloway, a clinical professor of marketing at New York University's Stern School of Business and the founder of the digital intelligence firm L2.

In his new book, "The Four: Or, How to Build a Trillion-Dollar Company," Galloway explains how Bezos' risk-taking mentality has helped Amazon become one of the most powerful companies in the world.

Galloway mentions a few reasons why Amazon's fearlessness when it comes to Type 2 investments — like a floating warehouse — have paid off.

1. Amazon isn't shy about swiftly killing the investments that aren't panning out — think Fire Phone — meaning it frees up capital to invest elsewhere.

2. Some of those crazy investments have become huge wins — think Amazon Prime and Amazon Web Services.

Galloway says Amazon is incredibly careful not to go full-steam-ahead on any projects until it knows those projects will work. For example, Amazon has built a relatively small number of brick-and-mortar stores because hasn't found an appropriately scalable format.

Amazon is different from many other organizations in this respect, Galloway says. He writes:

"My experience in traditional firms is that anything new is seen as innovative, and the people assigned to it, like any parent, become irrationally passionate about the project and refuse to acknowledge just how stupid and ugly your little project has become. As a result, traditional companies not only have less capital to invest, but fewer swings at the plate."

What's more, Galloway says, most CEOs "won't even take risks that have less than a 50 percent chance of success — no matter how big the potential payoff." In contrast, Bezos said in 1997, "Given a 10% chance of a hundred times payout, you should take that bet every time."

When he visited the Business Insider office in October, Galloway said Amazon's current success is unparalleled: "Amazon can now borrow money for less than the cost of what China can borrow money [for]. As a result, they're able to throw up more stuff against the wall than any other firm."

So if a project doesn't work out, "it's a speed bump for them, whereas other companies would either probably be put out of business or see their stock cut in half."

Amazon's access to cheaper capital has enabled it to do things like spend about $4.5 billion on TV programming and video, Galloway said. "Amazon can go into non-core categories and show up and be dominant in record time because they have access to cheaper capital. Effectively, this company is playing unfair and winning."

Join the conversation about this story »

NOW WATCH: SCOTT GALLOWAY: Amazon opening brick and mortar stores is the 'biggest PR coup in history'