What I learned from Jeff Bezos after reading every Amazon shareholder letter

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In every Amazon annual report, Jeff Bezos publishes a shareholder letter where he provides a broad overview of the company’s operations throughout the year. His letters are incredibly thought-provoking and are a must-read for anyone working in tech or interested in business. Bezos knows how to communicate with Wall Street and is both clear and concise in his writing. Recently, I discovered a link that included the complete set of these letters (from 1997 to 2016) in one handy PDF. Here are a few of my key takeaways from reading through it.

It’s all about the long-term…

In his 1997 shareholder letter, Jeff Bezos issued a manifesto “It’s all about the long-term” where he laid out his approach to business and to running Amazon. He pledged that decisions would be made with a long-term lens and with a focus on market leadership. This manifesto has been included in every single shareholder letter for the last 20 years! After reading these letters, it is clear that the fundamentals of how Amazon does business remain the same. Talk about commitment and consistency.

A focus on the long-term is important for several reasons. First, for a company that drives growth through innovation, a long-term approach allows for experimentation and an acceptance of short-term failures. “Failure comes part and parcel with innovation. It is not an option.” A lot of Amazon’s growth has been driven by AWS, Marketplace, and Prime. Each of these offerings was a bold bet at first, with many skeptics. In Bezos’ 2014 letter, he noted that sensible people “worried (often!)” that these initiatives could not work. Bezos believed in his vision and stayed heads down.

“If you’re going to invent, it means you’re going to experiment, so you have to think long term”

Second, having a long-term orientation reduces the impact of stock price fluctuations on decision-making. In 2000, the company’s shares were down 80%. It would be natural to become reactive in this situation. Bezos, however, made decisions to build a “heavier company” against the vision that 15% of commerce eventually would move online (he made this statement in 2000 when e-commerce was less than 1% of total retail sales). Even though the stock had dropped dramatically, Bezos felt Amazon was better positioned than it was the year prior and marched forward with the same strategy.

“In the short-term, the stock market is a voting machine; in the long-term it’s a weighing machine” — Benjamin Graham

Third, when you are long-term oriented it aligns customer and shareholder interests. In the short term, this is not always the case. Some skeptics have criticized Amazon for being a “charitable organization being run by the investment community… for the benefit of consumers.” Bezos argues that long-term thinking “squares the circle” and that proactively delighting customers creates trust and more business.

“Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.”

Customer centricity as a north star

There are many different ways to structure a business: competitor-focused, product-focused, technology-focused, business model-focused, or customer-focused. From the outset, Amazon’s goal was to build the world’s most customer-centric company. Bezos would constantly remind employees to wake up every morning terrified… not of the competition, but of Amazon’s own customers. Customers are fickle; they are loyal to a company until a competitor offers a better service. Amazon designed its core value proposition around keeping customers happy by constantly offering more selection, better convenience, and lower prices.

Jeff Bezos’ napkin sketch outlining Amazon’s strategy

A low-cost structure leads to lower prices, which combined with a large range of products leads to a better customer experience. These happy customers return to purchase more items on Amazon sites, driving traffic and attracting more third-party sellers. This leads to more selection, which further contributes to a better customer experience.

Amazon’s energy internally comes from its desire to impress its customers. This means reinventing normal and delivering products before customers even know they want them. Some companies may rely on customer surveys and market research to understand their users. This is especially dangerous when designing and inventing new products. “Good inventors and designers deeply understand their customer. They spend tremendous energy developing that intuition.”

“A remarkable customer experience starts with the heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.”

High-quality, high-velocity decision-making

While it is important to make high-quality decisions, Bezos stresses the importance of making these decisions at high velocity. Speed matters in business and slow decision making is de-energizing and a competitive disadvantage. Bezos offers a set of guidelines for how to make decisions at high-velocity:

  • Understand that decisions can be reversed: These “Type 2 decisions” are two-way doors that can be reversed. If you make a suboptimal Type 2 decision, you can reopen the door, and unwind the consequences. Because of this, these decisions should be made quickly. As organizations grow, there is a tendency to turn all decisions into Type 1 decisions that are made methodically and with great deliberation. The end result is slowness and diminished innovation.
  • Bias towards action: Most decisions should be made with close to 70% of the information needed. Waiting for 90%+ information will slow you down.
  • “Disagree and commit”: When consensus is not possible but you have conviction in a particular direction, “disagree and commit”. This means that while you disagree with the decision, you remain committed to a successful outcome. Staying focused on trying to change the team’s mind is too slow of an approach.
  • Recognize when an agreement isn’t achievable: Sometimes different teams have different objectives and see the world differently. No discussion will change these views. A quick escalation in these scenarios is much better than constant argument, which will lead to exhaustion.
“If you’re good at course correcting, being wrong is less costly than you think, whereas being slow is going to be expensive for sure”

Put effort into inputs, not financial outputs

While Amazon takes financial outputs seriously, 100% of the company’s time is focused on inputs. This is because these inputs are controllable and are the most effective way to maximize financial outputs. Bezos has instilled a rigorous annual goal-setting process at Amazon which is lengthy, spirited, and detail-oriented. In 2010, the company had 452 detailed goals with individual owners, deliverables, and target completion dates. Interestingly, however, across all these goals, the word ‘revenue’ was only used eight times and ‘free cash flow’ only four times. ‘Net income’, ‘gross profit’, and ‘operating profit’ was never used.

As an exercise, let’s apply this logic to the goal of increasing the company’s stock price. We must work backward until we find something that is controllable as an input.

No reasonable person would know how to drive up the stock price, but by working backward we identified a tangible input of improving picking efficiency to manage towards. This will drive down costs, which will increase free-cash-flow, which will drive up the stock price. This is only one of many strategies.

“Focusing our energy on the controllable inputs to our business is the most effective way to maximize financial outputs over time”

Build a disciplined, patient, and nurturing culture

Today, Amazon’s main growth engines are largely AWS, Prime, and Marketplace. Each of these established businesses is a well-rooted tree that enjoys high returns on capital and operates in a large market. Each of these businesses was however once a tiny seed itself. Many large companies fail to launch new businesses from scratch because of the patience and nurturing required. One of Amazon’s competitive advantages is its culture which is supportive of small businesses with large potential.

While Amazon’s culture demands that these businesses be high potential and differentiated, it does not require them to be large the day they are born. In 1996, Amazon crossed $10 million in book sales, a monumental feat for the company at the time. Today, a new business crosses that threshold would increase the company’s overall sales from $136 billion to $136.01 billion. Executives don’t scoff, but support these milestones. Celebrating wins and progress is important!

AWS, Prime, and Marketplace are three big ideas which continue to be nurtured internally at Amazon. The company is actively searching for its fourth pillar which some claim could be Alexa. There’s clearly a growing trend toward using voice search and interacting with digital assistants. Some analysts predict Echo and Alexa-family revenue to generate over $11 billion by 2020. Only a couple years ago this category didn’t exist.

Raise the bar on hiring… again and again

Setting the bar high on hiring has been the single most important element of Amazon’s success. During the interview process, Amazon asks each interviewer to consider three questions before making a hiring decision:

  • Will you admire this person?
  • Will this person raise the average level of effectiveness of the group they’re entering?
  • Along what dimension will this person be a superstar?

Leaders recognize exceptional talent and take seriously their role in coaching others. Recently, Amazon developed the ‘raising the bar’ method by getting employees more involved in the interview process. The goal is to make sure every new hire is as good as, if not better than the one before.

“You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three”

Final Thoughts

Not only did Jeff Bezos predict the future, he helped shape it. In the 20 years since Amazon’s IPO, the company has grown from $148 million in revenue to over $136 billion. That’s close to 1000x! We are lucky that Jeff Bezos takes the time each year to share his knowledge with the world in these shareholder letters. As an investor (late-stage VC at IVP), in order to improve, I have to read… a lot. Bezos’ shareholder letters are a must-read for anyone interested in business. I have relinked the document here. It’s only 66 pages!

“Our approach remains the same, and it’s still Day 1” — Jeff Bezos