Amazon's Long Public Haul

Amazon has become something like a close friend to many of us who aren't particularly fond of the shopping experience.  When they offered "Amazon Prime" many months ago, which gave you free two-day shipping for $79 a year, I jumped at it... and had it paid for within two months.  Books... and iPods and watches and jeans... all from Amazon.  Some day I may even try their new grocery service.

But this isn't about what you can get on Amazon, but about some of the stories behind the company.  When they began in the mid-90's they were the poster child for the internet... a radical, game-changing concept that leveraged a new technology.  They were also the poster child in that they were extremely unprofitable, but claimed that the fundamental financial rules that govern all enterprises... ie bottom line cash flow... could somehow be warped.  In mid-'97 they did an IPO to raise cash... and give effective control to the shareholders.  Going public seems contrary to the current trend of going private, but they needed cash to fund the obscene losses they were generating.  We've blogged quite a bit about the benefits private companies enjoy, especially in terms of operating to a long-term perspective instead of quarterly investory conference calls.

It took a pretty strong leader in Jeff Bezos to keep the focus on the long haul.  Amazon posted it's first net profit in the last quarter of 2001... and then hit the dot-com bust.  But they survived, stock price hammered a bit, and have been relatively steady (for a tech stock...) since then.  Top line growth is steady and fairly steep, and the bottom line is... well it stays positive at least.   Barnes and Noble took a run at them, but after doing more complaining than competing they now sell about 5% as much as Amazon.  Amazon's profits have bounced around a bit, making short-term investors nervous, but Alyce Lomax at the Motley Fool looks at the longer term:

I can't blame investors for getting nervous at this point. Some of Amazon's brightest advantages seem to be building awfully slowly. We all know that "slow and steady wins the race," but in practice, it's difficult not to feel nervous, especially with some unexpected twists and turns along the way. But if Amazon weren't investing in its future, it would risk becoming complacent, and sacrificing future growth for short-term profits -- not exactly what a long-term investor wants to see.

That's the outside story of Amazon.  It's the inside story that holds some lessons... that insidious thing called culture.  We've blogged quite a bit about the myths and realities of culture.  It is one of the least understood aspects of companies... and also one of the most abused by management.  As Bill put it many months ago,

Culture is not a product of what management says, it is the result of what management does.

Peter Abilla at the Shmula blog worked at Amazon for several years, and has a section where ex-Amazonians (?) can post stories about their experiences.  Almost all are favorable.  But what comes through loud and clear is the devotion and understanding by everyone to the core values:

• Customer Obsession: We start with the customer and work backwards.

• Innovation: If you don’t listen to your customers you will fail. But if you only listen to your customers you will also fail.

• Bias for Action: We live in a time of unheralded revolution and insurmountable opportunity–provided we make every minute count.

• Ownership: Ownership matters when you’re building a great company. Owners think long-term, plead passionately for their projects and ideas, and are empowered to respectfully challenge decisions.

• High Hiring Bar: When making a hiring decision we ask ourselves: “Will I admire this person? Will I learn from this person? Is this person a superstar?"

• Frugality: We spend money on things that really matter and believe that frugality breeds resourcefulness, self-sufficiency, and invention!

One writer gives several examples of how "customer obsession" was practiced, from Jeff Bezos on down.  As he summarizes,

Customer obsession is much more than customer satisfaction or customer happiness. the philosophy is about doing what is right for the customer first, then working backwards.

Another person comments on Amazon's six sigma efforts several years ago.   Many of them commented on the apparent conflict between "high hiring bar" and "frugality."  Does that mean that people "don't really matter?"  Although stock options were generous, wages were at or below par.  They apparently had some decent turnover... losing a lot of those "high bar employees" to higher-paying companies like Microsoft.  All of them liked the culture.  The culture was great... but it didn't stem the tide of talent going through the revolving door.

Amazon has now been around a while and has a loyal following.  Their culture is apparently deep, at least for the most part.  But that does not guarantee long-term success.  They are focusing on the long haul in terms of technology and effective investment, but it remains to be seen whether a business model based on "buying customers" in the near term will create long term bottom line growth.  They survived the web 1.0 bubble, now we'll see if they can survive the coming bursting of the web 2.0 bubble.

Comments

[John Hunter]

I am very impressed by what Amazon is doing, as I recently discussed in Amazon Innovation - http://management.curiouscatblog.net/2006/11/09/amazon-innovation/. I can also see why critics would say that the financial data is not all that great. It is a bit easier if not only are you thinking long term but are also "printing money" - like say Google. But I think that Amazon is managing well for the long term.

[Mark Graban]

Amazon operations are run by Jeff Wilke, who comes from a manufacturing background (Allied Signal) who was a graduate of the MIT Leaders for Manufacturing program. He's a strong leader and proponent of Lean/Six Sigma and definitely brought that into amazon.

[Timothy]

Kevin,

Thanks for another thought-provoking post. I think that in this case you are too hard on Amazon, which is a very cash-focused business. I have detailed some reasons for this view here:

http://zealandactvity.wordpress.com/2006/12/06/
managing-to-cash-at-amazon/

I do agree that cost containment and talent retention are to Amazon's continued success.

[Pete Abilla]

You make several relevant points on the collisions between the core values.

Amazon is *not* a company that subscribes to The Toyota Production System philosophy of "respect for people." I think it does a decent job, but it is a company that is largely still in survival mode.