Jeff Bezos, Amazon and Thinking as a means of Leverage
A deep dive into Jeff Bezos's business principles as written in his 1997 letter to his shareholders
Jeff Bezos, the founder of Amazon, is currently the world’s richest man. He has built an incredible company -Amazon- which at close of trading on the 24th of June, 2020 traded for $2,734.40 per share, A 15,185% change in share price from its initial share price of $18 when Amazon went public in May 15, 1997.
The invention of writing put thoughts on paper and we are quite fortunate that an a-typical person such as Mr Bezos has put his thoughts on paper through his annual letter to his shareholders since 1997. The catalyst for this article is Bezos’s 1997 letter to his shareholders, a letter which I have read a couple of times in order to understand what business principles I can model.
There are a couple of themes in his 1997 letter that can be modelled and applied to building or running a business. These six themes are:
Simultaneously operating in the present and future.
Creating value using new technologies.
Going from business strategy to tactics in your business.
The power of long term thinking in business.
The importance of having a decision making process for your business.
A business must have focus.
Over the next couple of paragraphs, I will expand upon these themes using Bezos’s exact words from his 1997 letter as a frame of reference.
Simultaneously Operating in the Present and Future
As a business owner or potential entrepreneur, you must develop the skill of simultaneously operating in the present and in the future. While executing your business needs today, you must be prepared to execute the business needs of tomorrow.
Bezos, like other exceptional business leaders such as Elon Musk, operates in the present and in the future. In Bezos words:
But 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 personalisation, online commerce will accelerate the very process of discovery
Off course, it is incredibly hard to know with 100% certainty what tomorrow will bring but it is important to have an idea of where the powerful trends of your business might go. That’s where the day 1 mindset comes in handy; It keeps you on your toes; Executing in the present; and Ready to execute future opportunities.
Creating Value Using new Technologies
You must understand how and when to create value from new technology. To do this, it pays to pay attention to new technologies and study them. Very few people in 1995 were thinking about using the internet to create value through e-commerce. But not Bezos who knew that the internet was growing very fast and had immense potential for new industries to be built on it. In Bezos words:
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.
If you are considering building a business, these questions must be answered: What new technologies can you leverage to build your company on? How do you go about picking new technologies to build your business on?
Going from Business Strategy to Tactics in your Business
As a business owner, it is your duty to ensure that you know what your business strategy is and the tactics necessary to accomplish your business strategy. A common occurrence is that some entrepreneurs never figure out the risk associated with their business strategy and even when they do, there are no tactics to mitigate the risk.
As a business owner or potential entrepreneur, you must:
Have a business strategy.
Understand the potential risks that can derail your business from achieving your business strategy.
Draw up plans on how to mitigate the potential risks.
The specific set off actions needed to achieve the strategy and mitigate the risks associated with the strategy become your tactics. In Bezos words:
Our goal is to move quickly to solidify and extend our current position while we begin to pursue the online commerce opportunities in other areas. We see substantial opportunity in the large markets we are targeting. This strategy is not without risk: it requires serious investment and crisp execution against established franchise leaders
The above highlights some tactics Amazon used and still uses: Move quickly; Pursue new opportunities; Invest serious sums into the business; and Crisp execution.
The Power of Long Term thinking in Business
While operating in the present term, you must not forget about the long term. In fact, it can be argued that one of the reasons why most business fail within the first five years is that they get bugged down in the present without having a long term vision for where they want to be in the future.
As an entrepreneur, your business decisions in the present should be a function of your long term goals and company vision. In Bezos words:
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. Our decisions have consistently reflected this focus
Use the power of long term thinking as a leverage to take your business to the next level.
The Importance of Having a Decision Making Framework for Your Business
Another tool that is important to a business is how decisions are made. It’s not okay to just make decisions;It is very important to have a how behind decision making. Your business must have a decision making framework. This requires that you and your executive team consciously think about how the company makes decisions.
Bezos is famous for using decision making frameworks for various aspects of his life. Listed below are the principles that make up Amazon’s process for management and decision making:
We will continue to focus relentlessly on our customers.
We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best.
We will continue to learn from both our successes and our failures.
We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.
When forced to choose between optimising the appearance of our GAAP accounting and maximising the present value of future cash flows, we’ll take the cash flows.
We will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments.
We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses. •
We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritise growth because we believe that scale is central to achieving the potential of our business model.
We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.
I suggest that you and your management team or even whole company create a decision making process. It does not have to be the same as what was written above. It has to be unique to your business’s vision and mission. Your decision making framework is not static but dynamic; It must evolve as time goes on.
A business must have a Focus
The final thing that we can learn from the Bezos 1997 letter to shareholders is the importance of having a business focus. In Bezos words:
From the beginning, our focus has been on offering our customers compelling value. We realised that the Web was, and still is, the World Wide Wait. Therefore, we set out to offer customers something they simply could not get any other way, and began serving them with books
If you are a business owner, can you genuinely answer the following question: What’s your business focus? If you can’t, I implore you to take a page of Bezos’s book and set one.
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