Lessons from Jeff Bezos’ Shareholder Letters (1997–2017) and Working at Amazon
Working at Amazon has been unlike anything I’ve seen at any other company (in my relatively short career so far) — the pace of growth, the innovation, the scrappiness, and the potential. To better understand the juggernaut that is Amazon, what has differentiated it, and lessons of its success, I recently read Jeff Bezos’ letters to shareholders (available here and here) and summarized some of his insights / lessons. I also read the, somewhat controversial, book The Everything Store by Brad Stone and included some of my notes from my orientation period at Amazon. The below bullet points are mostly direct quotes with some paraphrasing.
I’m not the first person on Medium to write about lessons from Jeff Bezos’ shareholder letters and at the end of this article I’ve included links to other articles.
The first part of this article provides Amazon’s three key business principles i.e. “Customer-centricity, Invention, and Long-Term Thinking”. The second part contains general insights and lessons from Jeff’s letters to shareholders, categorized by topic: Customers, Long-Term Focus, Perspective, Business Models, Invention, Growth, Employees, Corporate Culture, Operations, Management, General & Other, and Amazon Web Services.
This article doesn’t include discussion of Amazon’s 14 Leadership Principles for Employees, which go beyond anything I’ve seen at other companies for building a common high-achievement corporate culture, nor does this article include much detail on Amazon’s peculiar approach to organizational structure, meetings, or business goal setting.
1. Amazon’s Three Key Business Principles
(1) Customer-centricity
Amazon’s core-principle is “customer-centricity” and its mission is to be “the world’s most customer-centric company”. The interpretation of every other principle is builds on this first principle.
Jeff explains, “There are many ways to center a business. You can be competitor focuses, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality [the energy of a hungry, innovative, agile startup].
Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf…
Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen”. (2016, p.1, para. 7–8)
(2) Invention
For a company to be truly customer-centric, it needs to be innovative. Said differently, customer-centricity pushes companies to be innovative. Amazon aims to invent for customers. Amazon sees customers as, “always dissatisfied, even when they don’t know it, even when they think they’re happy, they actually do want a better way, and they just don’t know yet what that should be.” Therefore, “customer obsession is not just listening to customers but also inventing on their behalf, because it’s not their jobs to invent for themselves”.
(3) Long-Term Thinking
Customer-obsession and invention require long-term thinking to be effectively implemented.
2. Lessons from the Shareholder Letters
On Customers…
· Focus relentlessly on the customer / obsess over customers. (1997, page 1, para 6)
· Create real value for customers. For example, Amazon / online shopping saves customers’ time, money, allows personalization, and speeds the discovery process. (1997, page 1, para 2)
· Customers are perceptive and smart. Brand image follows reality and not the other way around. (1998, p. 2, para 7)
· Wake up every morning terrified of customers (not competitors), they are the ones the business has a relationship with and they are the ones the business owes a great obligation. Customers will be loyal to a business — right up until the second that someone else offers them a better service. (1998, p. 2, para 8)
· Start with the customer and work backwards. Listen to customers, but don’t just listen to customers — also invent on their behalf. (2005, p. 2, para 10 and 2009, p. 2, para. 6)
· “Working backwards” from customer needs can be contrasted with a “skills-forward” approach where existing skills and competencies are used to drive business opportunities. The skills-forward approach says, “We are really good at X. What else can we do with X?” That’s a useful and rewarding business approach. However, if used exclusively, the company employing it will never be driven to develop fresh skills. Eventually the existing skills will become outmoded. Working backwards from customer needs often demands that a business acquire new competencies and exercise new muscles, never mind how uncomfortable and awkward-feeling those first steps might be. (2008, p. 1, para. 1)
· Amazon does pay attention to competitors and is inspired by them [Amazon executives were apparently concerned by companies such as E-Bay], but being customer-centric is the defining point of the culture. A customer-driven focus aids proactivity. When Amazon is at its best, it doesn’t wait for external pressures. Amazon is internally driven to improve its services, adding benefits and features, before they have to [before driven by competition or profit]. This earns more trust with customers and drives rapid improvements in customer experience — importantly — even in those areas where Amazon is already the leader. (2012, p. 1, para. 2 and The Everything Store, p.77)
· According to Jeff Wilke, CEO of Amazon Worldwide Consumer, “Every anecdote from a customer matters. We [Amazon] research each of them because they tell us something about our metrics and processes. It’s an audit that is done for us by our customers. We treat them as precious sources of information. ” (The Everything Store, p. 327)
On Long-Term Focus…
· Focus on the long term. (1997, page 1, para 4)
· Long-term focus requires a fundamental management and decision-making approach, because it requires making decisions and weighing tradeoffs consistent with a long term approach. (1997, page 1, para 6)
· Investment decisions should be based on long-term market leadership considerations rather than short-term profitability or Wall Street reactions. (1997, page 1, para 6)
· Stay heads down, focused on the long term and obsessed over customers. Long-term thinking levers existing abilities and lets Amazon do new things they wouldn’t otherwise contemplate. It supports failure and iteration required for invention, and it frees Amazon to pioneer in unexplored spaces. (2008, p. 1, para 1)
· Long-term thinking is a requirement and outcome of true ownership. Owners are different than tenants [many stock ‘investors’ and speculators], tenants are more short sighted and treat things worse for short-term gain in ways owners wouldn’t. Many stock investors are “tenants”. (2003, p. 1, para 1)
· Seek instant gratification — or the elusive promise of it — and chances are you’ll find a crowd there ahead of you. (2008, p. 1, para. 1)
On Perspective…
· The current online shopping experience is the worst it will ever be, but it will get so much better… Amazon had a market-size unconstrained opportunity in an area where the underlying foundational technology improves every day. (1999, p. 5, para 23)
· When Amazon introduced reviews [including negative reviews] on their website, vendors criticized them by saying “you make money when you sell things”, but Jeff views Amazon as helping customers make better purchase decisions [and that involves earning trust]. (2003, p. 1, para 4)
· New products that solve a similar issue to existing products don’t necessarily need to copy every last feature of the existing solutions, but should have new capabilities that wouldn’t be possible traditionally. This was the case with an online everything store vs. brick and mortar stores (instant search, larger catalogue, recommendations etc.) and the kindle vs. the traditional book (storage, instant download, portability, highlighting, adjustable text size etc.). (2007, p. 1, para 5 and 6)
· Look for adjacent opportunities early on, have a Day 1 mentality, and move quickly, even despite the threat of very large players maybe entering the market. (1997, p. 1, para 3)
· Regret-Minimization Framework [for making personal decisions]: project yourself forward to the age of 80, then look back on your life and make the decisions that minimize your list of regrets.
On Business Models…
· Customer Experience Flywheel/Virtuous Cycle/Loop: A self-reinforcing loop, where when you feed any part of the flywheel, you accelerate the flywheel.
o Low prices and a large selection leads to convenience for customers, which drives more sales. More sales drives growth and economies of scale which allows Amazon to lower prices (growth spreads fixed costs across more sales, reducing cost per unit, which makes possible more price reductions — improving operating leverage). Lower prices drives more sales. More sales improves economies of scale and gives Amazon better leverage to get better deals from suppliers, allowing Amazon to reduce prices and increase selection. The flywheel spins faster.
o Each new product and service makes Amazon more relevant to a wider group of customers and increases the frequency with which they visit the store. As Amazon expands its offerings it accelerates the virtuous cycle for the whole business and the more frequently customers visit the store, the less time, energy, and marketing investment is required to get them to come back again. Marketing budget can instead be used to allow “everyday low prices”. (1999, p. 3, para 12 and The Everything Store, p. 126)
o Everyday Low pricing: spend marketing dollars on reducing prices; the marketing strategy is the pricing strategy. If you can achieve high sales volume, you can use your size to demand the best deals from suppliers and raise per-unit gross profit. (The Everything Store, p. 118)
o Many costs, such as software engineering, are relatively fixed and many of the variable costs are better managed at larger scale, therefore driving more volume through Amazon’s cost structure reduces those costs as a percentage of sales. (2003, p. 1, para 6)
o Amazon Prime initially looked like it would be a huge money-loser for Amazon, according to the data. However, removing barriers to purchase, encouraged Prime members to shop ~3x more, which increase sales volumes and accelerated the Amazon flywheel.
o Amazon Marketplace allows third party sellers to sell on Amazon: More customers increases sales volume and attracts more commission-paying third-party sellers to the website. Greater efficiency then allows Amazon to lower prices further. (The Everything Store, p. 126)
o Fulfillment by Amazon allows third parties to use Amazon to stock and fulfill their orders. Amazon’s network scales and fixed costs per unit decline, so Amazon can offer better rates for fulfillment on items for itself and third parties. Thereafter, Amazon’s sales grow and it makes more sense for third parties to choose Fulfillment by Amazon and the flywheel keeps generating energy. (2005, p. 2, para. 8)
o The flywheel works well with Amazon’s e-commerce business model of online retailing which is cash favored, capital efficient, and has a negative working capital i.e. the bigger Amazon gets and the more revenue it generates, the larger the size of its “interest-free loan” from negative working capital that it can use to invest in new businesses and expand.
· Identify the advantages of certain business models. For example, Amazon’s online model is cash-favored and capital efficient. Amazon’s e-commerce website doesn’t need to build physical stores or stock stores with inventory. This allowed them to scale faster than brick and mortar businesses. (1998, p. 2, para 6)
o Amazon’s online retailing model was also more robust than brick and mortar stores during economic downturns. For example, Borders and Circuit City struggled to cut costs during the financial crisis because they were locked into multi-year leases on their bad locations. (The Everything Store, p. 276)
o Online selling (relative to brick and mortar retailing) is a scale business characterized by high fixed costs and relatively low variable costs. This makes it difficult to be a medium-sized e-commerce company (2000, p. 1, para 5)
· Amazon has many more turns of inventory per year versus brick and mortar stores. Huge negative working capital (the difference between Accounts Receivable and Accounts Payable) means that Amazon effectively has an “interest-free” loan of billions and it can use its cash to invest in growth initiatives [like AWS]. (2002, p. 1, para 1)
o For example, Amazon sells inventory in ~2 weeks, but has up to ~12 weeks to pay suppliers. The difference in time period means that Amazon is holding the cash for ~10 weeks. Walmart, Costco, Target, Barnes and Noble etc. do not have this advantage.
· See the potential of platforms that scale. For example, the Amazon platform is comprised of brand, customers, technology, distribution capability, deep e-commerce expertise, and a great team. This platform then allowed them to launch new e-commerce businesses faster, with better customer experience, lower incremental cost, and higher chance of success, and a faster path to scale and profitability than other [specialized] e-commerce businesses. (1999, p. 2, para 8)
· Platforms: offer a set of tools that other businesses/entrepreneurs etc. can use to reach customers. For example, Amazon Marketplace, Fulfillment by Amazon, and Amazon Web Services. (The Everything Store, p. 107)
· The most radical and transformative of inventions are often those that empower others to unleash their creativity — to pursue their dreams (AWS, Fulfillment by Amazon, Kindle Direct Publishing). (2011, p. 2, para. 9)
· In 2000, Jeff highlighted how Amazon helped their partner Toysrus.com sell more than $125 million of toys and video games in Q4 2000. This is used as an example to highlight how Amazon created value for customers and partners, but it also teaches a lesson because Toys “R” Us didn’t build their own technology expertise (neither did Barnes and Noble etc.) and instead relied on Amazon which eventually ate their business and there wasn’t anything Toys “R” Us could do about it by that stage. (2000, p. 1, para 1)
o By relying on Amazon, retailers such as Toys “R” Us delayed developing their own technology and online sales channel (something that would become a necessity) and ceded loyalty of their customers to Amazon (The Everything Store, p. 110)
· Real Estate doesn’t obey Moore’s Law [but technology does] (2000, p. 2, para 6)
· Businesses don’t necessarily need to do everything, they just need a few advantages over competing models. For example, Jeff acknowledges there are many reasons to shop in the physical world such as immediacy, but shopping online saves money, time, allows for a larger selection and can leverage technology to improve the customer experience with tools such as reviews, suggestions etc. (2002, p.1, para 1 and p. 2 para 11)
· Amazon aims to start new business only when they believe the opportunity is currently underserved and that Amazon has the capabilities needed to bring strong customer-facing differentiation to the marketplace. Without that, Jeff views it as unlikely that Amazon would get to scale in that new business…The culture demands that new businesses be high potential and innovative and differentiated, but it does not demand that they be large on the day that they are born. (2006, p.1 , para. 3 and p. 2, para. 9)
· When looking to start a business, don’t always ask “what is changing”, also ask what is staying the same over time and try building a business around that. For example, customers value low prices, vast selection, and fast, convenient delivery. For example, ten years from now customers won’t want higher prices, less selection, or slower delivery. (2008, p.1, para. 4)
· Look for business opportunities with these four characteristics: Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time — with the potential to endure for decades. (2014, p. 1, para. 1)
· Network Effects: some products or services become increasingly valuable as more people use them. (The Everything Store, p.79). Here’s an article discussing Power Laws for VC.
· When asked about the profitability prospects soon after the launch of AWS, Jeff Bezos apparently replied that he didn’t want to repeat “Steve Jobs’ mistake” of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition. High margins justified rivals’ investments in R&D and attracted more competition, while low margins attracted customers and were more defensible. (The Everything Store, p. 221)
· Amazon’s large size now allows it to sustain relatively considerable losses in certain product categories when it prices competitively to win market share that will benefit Amazon over the long-term. The scale of losses which Amazon can incur could put other retailers out of business. For example, prior to Amazon’s acquisitions of Zappos (shoes) and Quidsi (diapers and goods for babies). (The Everything Store, p. 279, 298)
On Invention…
· Failure comes part and parcel with invention. It’s not optional. Fail early and iterate until you get it right. When this process works, it means failures are relatively small in size and when you hit on something that is really working for customers, double-down on it with hopes to turn it into an even bigger success. (2013, p. 6, para. 34)
· Amazon prides itself on being distinctive [to other large enterprises] on failure. 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. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time [10% * 100 = 0.1 * 100 = 10x payoff]. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments. (2015, p. 1, para. 4)
· See the 2013 letter for examples of Amazon’s invention on behalf of customers.
· Jeff also appears to learn from predecessors and rivals, for example the Apple iTunes music store quickly decimated Amazon’s music sales. This was likely a motivation behind the development of the Kindle, to prevent what happened to Amazon’s music business happening to Amazon’s book business, and Amazon’s attempt to own the hardware platform that allows for digital distribution while also owning the digital marketplace. [I believe this will inform Amazon’s Alexa and smart device category — e.g. breakeven hardware pricing that allows Amazon to be the portal through which sales are made from hardware such as Fridges for groceries, echo Show for apparel, and Fire Stick for movies]. (The Everything Store, p. 229)
· Amazon’s many relatively unsuccessful acquisitions in the 1990’s helped create a “building culture” of building rather than buying new capabilities. Amazon aimed later aimed to acquire companies only when they had fully mastered their virtuous flywheel, and then “as an accelerator of flywheel momentum, not a creator of it.” (The Everything Store, p. 268)
On Growth [Business]…
· Make bold investment decisions where there is sufficient probability of gaining market leadership advantages; some will pay off, some won’t, but you’ll have learned another valuable lesson in either case. (1997, page 1, para 6)
· Target large markets and move quickly. (1997, page 1, para 3)
· Market leadership should be extended and solidified, because market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital [and more leverage over suppliers]. (1997, page 1, para 4)
· Measure investments analytically, jettison those with sub-acceptable returns, and increase investment in those that work best. Learn from both successes and failures. (1997, page 1, para 6)
· Maximize cash flows, rather than GAAP accounting. (1997, page 1, para 6)
· Balance growth with emphasis on long-term profitability and capital management. Prioritizing growth may be necessary to achieve that scale central to achieving business model.
· One factor for why big companies sometimes innovate slower [and miss trends] than small upstarts is that big companies can be reluctant to lose money on a relatively small part of their business and don’t want to put their most resourceful employees behind efforts that would siphon sales from more profitable stores (fail to perceive the end-state of trends, scared to lose profitability, don’t want to cannibalize own products, not to mention slow decision making). “…You might be underestimating the degree to which established brick-and-mortar business, or any company that might be used to doing things a certain way, will find it hard to be nimble or to focus attention on a new channel.” (The Everything Store, p. 59 and p. 65)
On Employees…
· Maintain a lean culture.
· Hire and retain versatile and talented employees and weight their compensation to stock options rather than cash. Employees should think like and must actually be owners in the company. (1997, p. 2, para. 7)
· Employees are motivated by building something important, something that matters to customers, something that they can tell their grandchildren about. (1997, p. 3, para 15)
· Ask three questions before making a hiring decision:
o (1) Will you admire this person,
o (2) Will this person raise the average level of effectiveness of the group they’re entering (raise the bar),
o (3) Along what dimension might this person be a superstar. (1998, p. 2, para 11)
· Hire “Bar-Raisers”: every time you hire someone, he or she should raise the bar for the next hire, so that the overall talent pool is always improving.
· All new employees should be interviewed by a “Bar-Raiser”. A “Bar-Raiser” is a senior employee who is experienced in hiring decisions and interviews the candidate last. The “Bar-Raiser” gets to make the final judgment on the hire and is able to veto any hiring decision (even veto the hiring manager’s decision) if they do not believe the interviewee will “raise the [average] bar” at the company. (The Everything Store, p. 88)
· Strive for doers and independent entrepreneurial teams, not a monolithic army of program managers. “Autonomous working units are good. Things to manage working units are bad.” (The Everything store, p. 168)
· Amazon’s stock grants to employees and new hires are back loaded over a four year period, with 5% vesting at the end of year one, 15% vesting at the end of year two, and 20% vesting every six months after the first two years. Ensuing grants vest over two years and are also back loaded. Stock grants align employee interests with performance of the company (employees become owners) and the relatively long vesting period motivates employees to stay at the company longer and perform for longer (i.e. not get fired before vesting). This also, arguably, benefits talent and institutional knowledge retention. (The Everything Store, p. 328)
On Corporate Culture…
· One common pitfall for large organizations — one that hurts speed and inventiveness — is “one-size-fits-all” decision making. Some decisions are consequential and irreversible or nearly irreversible — one-way doors — and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that — they are changeable, reversible — they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups. As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. (2015, p. 5, para. 30–32)
· “The Institutional No”, even strong companies [have the urge to] push back against moves in unusual directions (hinders innovation, adaptability, agility) and this should be resisted (The Everything Store, p. 195)
· “It’s always Day 1!” Jeff views Day 2 as stasis, followed by decline and death for a company and tries to keep the mentality of Day 1. The key cultural elements to keep a Day 1 mentality are: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making (2016, p. 1, para. 5)
o True customer obsession — discussed above
o Resist Proxies — As companies get larger there’s a tendency to manage proxies. A common example is process as proxy. Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing. The process becomes the proxy for the result you want. You stop looking at outcomes and just make sure you’re doing the process right. The process is not the thing. Another example is when market research and customer surveys become proxies for customers…(2016, p. 1, para 10–11)
o Embrace External Trends — If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind. These big trends are not that hard to spot (they get talked and written about a lot), but they can be strangely hard for large organization to embrace. (2016, p. 2, para. 14)
o High Velocity Decision Making — First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you’re wrong? Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure. Third, use the phrase “disagree and commit.” This phrase will save a lot of time. If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?” By the time you’re at this point, no one can know the answer for sure, and you’ll probably get a quick yes… Fourth, recognize true misalignment issues early and escalate them immediately… (2016, p. 2–3, para. 24–27)
· High Standards inside an organization.
o Intrinsic or Teachable? High standards aren’t intrinsic (employees would be selected for high standards), they are teachable and especially learnt through exposure. The rate of learning can be accelerated by articulating a few core principles of high standards. (2017, p. 1, para. 5)
o Universal or Domain Specific? If you have high standards in one area, do you automatically have high standards elsewhere? Jeff believes that high standards are domain specific, and that you have to learn high standards separately in every arena of interest. (2017, p. 1, para. 6)
o Recognition and Scope: To achieve high standards in a particular domain area you need to be able to recognize what good looks like in that domain and have realistic expectations for how hard it should be (how much work it will take) to achieve that result — the scope… (2017, p. 2, para. 8)
o Skill: Is skill a required element? Not in the context of teams. The football coach doesn’t need to be able to throw, and a film director doesn’t need to be able to act. But they both do need to recognize high standards for those things and teach realistic expectations on scope… its team work. Someone on the team needs to have the skill, but it doesn’t have to be you. (2017, p. 2, para. 14)
o Benefits of High Standards: You’re going to build better products and services for customers. People are drawn to high standards — they help with retention and recruiting. A culture of high standards is protective of all the “invisible” but crucial work that goes on in every company (the work no one sees). (2017, p. 3, para. 15)
o Summary: High standards are teachable, they are domain specific, you must recognize them, and you must explicitly coach realistic scope. (2017, p. 3, para. 16)
· *My own explanation: one perspective on having effective employee leadership principles, having high standards for employees, and trying to “raise the bar” with hiring decisions is the compound effect of these behaviors. To explain, imagine these actions have an incremental gain on human capital investment of 4% per year, then compound that every year.
· Communication [between divisions] can be a sign of dysfunction. It could mean people aren’t working together in a close, organic way. Less communication, not more, can be more efficient. Cultivate decentralization and independent decision-making. A hierarchy isn’t responsive enough to change. I.e. coordination among employees can waste time, and the people closest to problems are usually in the best position to solve them. For example, Frederick Brooks argues that adding manpower to complex software projects actually delays progress because the time and money spent on communication increases in proportion to the number of people on the project. (The Everything Store, p. 167–168)
· Use narratives (Word documents) rather than PowerPoints for meetings. PowerPoints are an imprecise communication mechanism where you are never forced to express your thoughts completely and you can hide behind bullet points. (The Everything Store, p. 175)
On Operations…
· Measure the right metrics. For example, the metrics most indicative of market leadership like customer and revenue growth, degree of repeat purchases, and brand strength. (1997, page 1, para 4)
· Operational Excellence implies two things (1) delivering continuous improvement in customer experience and (2) driving productivity, margin, efficiency, and asset velocity across all businesses. (1999, p. 3, para 14)
· Operating Efficiency Flywheel: More efficient distribution yields faster delivery times, which lowers contacts per order and customer service costs. These in turn, improve customer experience and build brand, which in turn decreases customer acquisition and retention costs. (1999, p. 3, para 15)
· Eliminating root causes of errors [and mistakes] saves money and saves customers time. (2001, p. 2, para 9)
· Amazon Andon cords, lessons learnt from Toyota.
· Quantitative analysis [and data] improves the customer’s experience and a business’s cost structure. (2005, p. 1, para 2)
· Build and implement automated systems that are proactive. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. (2012, p. 1, para. 4 and p. 2, para. 8)
· Many small teams with single-threaded owners enable rapid innovation. (2015, p. 4, para. 23)
On Management…
· Math-based decisions command wide agreement, whereas judgement-based decisions are rightly debated and often controversial. Any institution unwilling to endure controversy must limit itself to decisions of the first type. In Amazon’s view, doing so would not only limit controversy — it would also significantly limit innovation and long-term value creation. (2005, p. 2, para 8)
· Focusing energy on the controllable input to the business is the most effective way to maximize financial outputs over time. (2009, p. 1, para. 3)
· Amazon focuses on providing self-service platforms. Even well-meaning gatekeepers slow innovation. (2011, p. 2, para. 12)
· Asking teams for good intentions doesn’t work — this is because you’re not asking for change, because people already have good intentions. Instead, mechanisms work. Good mechanisms are complete processes (adoption, inspection, tools). For example, Toyota’s Andon Chord.
· The book The Everything Store repeatedly mentions how Amazon’s management were inspired or got ideas from by books the senior executives had read and discussed. (The Everything Store, p. 212, 234)
On General and Other…
· Benjamin Graham said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.” i.e. in the short term the market reflects a stock’s perceived popularity and people’s perceptions, but in the long-term the market reflects the value (weight) of a company and its assets (also according to some sort of analytical criteria/valuation methodology). (2000, p. 1, para 2)
· Amazon made mistakes too, and not all their “bold bets” paid off. For example, investments in pets.com and living.com failed. Amazon wasn’t wiped out by mistakes and learnt from mistakes. (2000, p. 1, para 3)
· An Investment Framework: Focus on cash flow. Cash flow is best predictor / explainer of stock price over the long term. Amazon aimed to keep fixed costs largely fixed, even at significantly higher unit volumes and generate meaningful, sustained, free cash flow. (2001, p. 2, para 13)
o See the 2004 Letter to Investors for far more detail regarding why investors and businesses should be focused on generating cash flow rather than earnings.
On Amazon Web Services (AWS)…
· AWS was a by-product of many of the technology problems that Amazon’s e-commerce business solved and expertise they developed such as setting up internal infrastructure services (database, compute, and storage) and it was also the opportunity to leverage expertise in APIs and more efficiently utilize its unused data center capacity by selling it to other companies. (See 2010 shareholder letter)
o From an R&D perspective, AWS selling solutions as services provides a better return on engineering R&D than if only the E-commerce portion of the business used the solutions.
o From a growth perspective, AWS and E-Commerce complement each other in a virtuous cycle. The E-Commerce business provides AWS with an anchor customer for AWS services, thereby guaranteeing revenue and reducing customer-acquisition risk and providing a relatively large starting scale. This also reduces the financial risk for AWS to update its technology / hardware, which allows AWS to offer customers superior compute and storage power faster than is economical for competitors. This wins AWS new customers and helps AWS to retain existing customers. The relatively large starting scale also allows AWS to price competitively for other customers to use AWS services, which allows AWS to scale. As AWS grows it has more leverage on suppliers for better pricing and faster delivery and can spread fixed costs across a larger scale, which allows AWS to reduce prices. As AWS prices competitively it attracts more customers, which helps it grow, which means the retail / E-commerce business also has lower cost of operations.
o From a services perspective, E-commerce alerts AWS to cutting edge new features and products faster than if they were totally separate, and the solutions need to be scalable and advanced enough to meet the needs of the world’s largest online retailer (Amazon E-Commerce). Having scale and being able to accommodate the biggest customers allows you to win those customers and scale even faster e.g. Netflix. (2015, p. 5, para. 27)
o From an operating model perspective, the large negative working capital / negative operating cycle of the E-Commerce business effectively acts as a large interest free loan that allows Amazon to invest in businesses like AWS that require lots of capital to grow but can be highly profitable and lead to large free cash flow.
o These are some of the reasons why it would be detrimental, as things stand, for AWS to split off from the E-Commerce business as recommended by equity analysts like this one from Citi Bank.
· AWS has better margins than Amazon’s thin-margined retail business, so Amazon has always had strong incentive to invest in cloud computing. In contrast, cloud computing has lower margins and is more capital intensive than Google’s legacy business of digital advertising and it also has lower margins than Microsoft’s legacy software business. Google and Microsoft have had a disincentive to invest in their cloud businesses. Oracle appears to have missed the boat.
Conclusion
I hope you found the above insights interesting and I recommend reading the original shareholder letters for better context. If you enjoyed this article, please give it a clap.
All the best,
Alex
* Disclaimer: I have an economic interest in Amazon as a stock owner and this article is not intended as investment advice.
Other Medium posts about lessons from Jeff Bezos’ annual shareholder letters:
1. This and this — The first being the best summary of Bezos’ letters that I found on medium
2. This — With nice diagrams
3. This — with lessons categorized by year
4. This — Which tries to apply the Jeff’s lessons to the Banking / Financial Industry to help big players survive disruption
5. This — If you can get past the section headings
6. This — A few quick takeaways
7. This — A few lessons and some explanations
8. This — Which actually uses a technique for organizing your logic that is also used in Amazon’s interview process
