3 Secrets Of Amazon's Success Anyone Can EmulateSubmitted by Silverlight Asset Management, LLC on February 5th, 2018
Today is Groundhog Day, and word has it Punxsutawney Phil saw his shadow. Six more weeks of winter. Meanwhile, it may be rainy and cold in Seattle, yet there is an aura of perennial summer emanating from one company’s headquarters. Amazon just reported another banner quarter.
In the film Groundhog Day, Bill Murray’s character relives the same day over and over. That’s what it’s starting to feel like with Amazon’s remarkable winning streak. Another earnings beat, another new high for the stock, another few billion tacked onto Jeff Bezos’ staggering net worth. Just another day.
When Murray’s character was trapped in a time warp, he detested the monotony until he started recognizing the power of patterns. The film reminds us that life has a funny way of repeating itself, and success leaves clues.
Understanding what makes Amazon tick starts with the philosophy of its founder. Jeff Bezos revealed key tenets of his plan to take over the world in 1997, when he penned his first letter to shareholders. Here are three insights from that letter.
The key to business is adding unique value
In the second paragraph of the letter, Bezos succinctly outlined his vision for Amazon.
This is Day 1 for the Internet and, if we execute well, for Amazon.com. Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery. Amazon.com uses the internet to create real value for its customers and, by doing so, hopes to create an enduring franchise, even in established and large markets.
Simply put, Bezos has always pushed Amazon to be cheaper and better than the competition. It's very hard for a single company to execute that type of dual mission. Every business faces trade-off decisions related to price and product quality.
For example, why do most people shop at Wal-Mart? To save money. Anything special about the experience? Nope.
On the other hand, why do people shop at an Apple store? The experience of toying with high-end gadgets. Are the products cheap? Nope.
In his excellent book, Simplify: How The Best Businesses In The World Succeed, Richard Koch explains there are only two types of businesses that win over time: Price simplifiers (i.e. Wal-Mart) and proposition simplifiers (i.e. Apple).
Most firms are lucky to be competitive in just one silo. Amazon is a rare exception in that it does well simplifying both the price and proposition for its customers.
Amazon has taken share across a wide number of categories using scale and thin margins to offer unbeatable prices. Simultaneously, Amazon has also enhanced the shopping experience with initiatives like its 1-Click checkout and doorstep delivery.
The purpose of any business is to offer creative solutions to peoples’ problems. Paying attention to how firms differentiate on price and quality will allow you to become a more enlightened employee, business owner, and investor.
It’s all about the long term
It’s always easy and tempting to focus on where the best short-term payoffs are. This creates opportunity for those with the discipline to play a more deliberative, long-term compounding game. For years, that’s been Amazon’s playbook.
We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
Whereas most retailers maintain operating profit margins between 3% to 15%, Amazon has long averaged between 1% to 2%. They could raise prices, but they don't. They're more interested in building sticky long-term relationships with customers than maxing out how much the stock rises in the next quarter or two.
Amazon also prioritizes long-term thinking in its aggressive reinvestment program. Capital expenditures totaled more than $10 billion in 2017, up from $6.7 billion the year prior. A lot was funneled toward increasing physical capacity to enable faster deliveries. Amazon’s footprint across warehouses, offices, and data centers grew last year by 42% to 254 million square feet. The company is building an immense scale advantage that will be hard for competitors to catch up to.
Excellent people make excellent companies
Amazon has always maintained a high standard when it comes to the caliber of people it recruits.
Setting the bar high in our approach to hiring has been, and will continue to be, the single most important element of Amazon.com’s success. It’s not easy to work here (when I interview people I tell them, “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of the three”), but we are working to build something important, something that matters to our customers, something that we can tell our grandchildren about.
There’s a saying: “You are the average of the five people you spend the most time with.” The first five employees of a company matter quite a lot, because their caliber will influence the caliber of the next five teammates. Talent attracts talent. Prioritizing culture from the outset is a key reason why companies like Amazon, Google and Facebook became so successful so quickly.
Jeff Bezos, whose personal fortune is now estimated at around $120 billion, did not get there alone. He is where he is because he's managed to do right by customers, while amassing an army of more than 500,000 talented teammates working toward that shared goal.
The key thing that separates Bezos is smart systems thinking. He sees the big picture well, and is disciplined about sticking to core principles.
Whatever our dreams or ambitions, we can all do a little better realizing them if we follow his lead in the three ways outlined here. To recap: (i) add unique value, (ii) prioritize long-term impact over short-term when making decisions, and (iii) carefully curate the caliber of people we associate with.
Originally published by Forbes. Reprinted with permission.
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