Search This Blog

CCE in brief

My photo
Recovering backpacker, Cornwallite at heart, political enthusiast, catalyst, writer, husband, father, community volunteer, unabashedly proud Canadian. Every hyperlink connects to something related directly or thematically to that which is highlighted.

Sunday 14 April 2013

What Amazon Can Teach Business, Politics, Education


Not just business - politics too often turns to its shareholders (sometimes the membership, but always the funders) as the only voice that matters.  The people are seen as consumers whose opinions can be shaped; there role is to consume politics and policy, not inform it.
 
It's a failed methodology.  Always has been.  Political organizers, business leaders, educators, healthcare professionals, any institution can learn something from this:


Jeff Bezos
Late last week, Amazon CEO Jeff Bezos published his latest letter to shareholders.
This year's letter, like most of Bezos's letters, should inspire most companies to change the way they do business.
Specifically, it should inspire companies to do business the way Amazon does business — sacrificing this year's profits to invest in long-term customer loyalty and product opportunities that will create bigger profits next year and for years thereafter.
The way most companies do business is to focus primarily on today's bottom line: The prevailing ethos in corporate America, after all, is that companies exist to make money for their owners — and the more and the sooner the better — so every decision should be made in the context of that.
The result of this is that many (most?) companies scrimp on things like long-term investments, customer service, product quality, and employee compensation, in the interest of delivering a few more pennies to this quarter's bottom line.
corporate profits/gdp chart
FRED/Business Insider
American profit margins just hit an all-time high.
This obsession with short-term profits has helped produce the unhealthy and destabilizing situation that now afflicts the U.S. economy:

The profit margins of America's corporations are now higher than they ever have been in history, while the employee wages paid by America's corporations are the lowest they have ever been in history. Meanwhile, a smaller percentage of America's adults are working than at any time since the late 1970s.
Since the wages that America's corporations pay Americans become revenue for other American companies (most consumers spend pretty much every penny they earn), this fire-your-way-to-prosperity mentality is myopic short-term thinking at its worst.
Wages As A Percent of GDP
American wages just hit an all-time low.
So it's inspiring to see a striking example of success from a company that has never put short-term profits ahead of long-term investment and value creation.

Over the course of its spectacular 17-year history, Amazon has always put customers, and investing for the long-term, first.
Time and time again, for example, Amazon has voluntarily and proactively cut prices to increase its value to its customers. It has invested in technology and customer service practices that startle and delight customers and create long-term loyalty. It has made big, bold bets that had relatively low odds of paying off.
In so doing, Amazon has frequently and brazenly disappointed the short-term investors who tend to dominate Wall Street, investors who forever grumble that Amazon should be "making more money."
And, in so doing, Amazon has built one of the most dominant, enduring, and valuable enterprises that the Internet boom has yet produced.
Meanwhile many other promising companies that rode the Internet wave have stumbled, in part because they put too much emphasis on short-term profitability and failed to invest enough in long-term value creation. (Think AOL, Yahoo, eBay, Microsoft, and, most recently, Apple.)
America's obsession with short-term profitability has become so pervasive in our culture that even outside observers — journalists, for example — often snicker about Amazon's relatively low profit margins.
They should not be snickering.
They should be applauding.
And they should be encouraging other American corporations to follow Amazon's inspiring lead — to invest more of today's profits in tomorrow's opportunities, product development, customer loyalty, and dedicated employees.
Yes, if more corporations choose to do this, their stocks might temporarily drop.
But over the long haul, their stocks should do better than they would have done if the main mission of their enterprise remained to pile up more cash on the balance sheet. (See Apple's stock if you don't believe this.)
Bezos explains it this way:
Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company. “Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers,” writes one outside observer.
But I don’t think so.
To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in.
More fundamentally, I think long-term thinking squares the circle. 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.
"Take a long-term view, and the interests of customers and shareholders align."
That's the money quote. That's the philosophy that has made Amazon so successful. That's the philosophy that more American corporations need to embrace and understand.
Bezos's full letter is below.
(Note: An early reader of this letter, Peter Kafka of All Things D, pointed out that, much to my surprise, Bezos actually quotes an article I wrote that praised a small Amazon customer-service investment that benefitted me personally. I have linked the quote to the original article below. Jeff Bezos also recently invested in Business Insider, which was very exciting for us. Given this, if you want to dismiss this article as just mutual back-scratching, I understand. But I have made the same argument for years. And it is true regardless.)

LOGO
To our shareowners:
As regular readers of this letter will know, our energy at Amazon comes from the desire to impress customers rather than the zeal to best competitors. We don’t take a view on which of these approaches is more likely to maximize business success. There are pros and cons to both and many examples of highly successful competitor-focused companies. We do work to pay attention to competitors and be inspired by them, but it is a fact that the customer-centric way is at this point a defining element of our culture.
One advantage – perhaps a somewhat subtle one – of a customer-driven focus is that it aids a certain type of proactivity. When we’re at our best, we don’t wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience – importantly – even in those areas where we are already the leader.
“Thank you. Every time I see that white paper on the front page of Amazon, I know that I’m about to get more for my money than I thought I would. I signed up for Prime for the shipping, yet now I get movies, and TV and books. You keep adding more, but not charging more. So thanks again for the additions.” We now have more than 15 million items in Prime, up 15x since we launched in 2005. Prime Instant Video selection tripled in just over a year to more than 38,000 movies and TV episodes. The Kindle Owners’ Lending Library has also more than tripled to over 300,000 books, including an investment of millions of dollars to make the entire Harry Potter series available as part of that selection. We didn’t “have to” make these improvements in Prime. We did so proactively. A related investment – a major, multi-year one – is Fulfillment by Amazon. FBA gives third-party sellers the option of warehousing their inventory alongside ours in our fulfillment center network. It has been a game changer for our seller customers because their items become eligible for Prime benefits, which drives their sales, while at the same time benefitting consumers with additional Prime selection.
We build automated systems that look for occasions when we’ve provided a customer experience that isn’t up to our standards, and those systems then proactively refund customers. One industry observer recently received an automated email from us that said, “We noticed that you experienced poor video playback while watching the following rental on Amazon Video On Demand: Casablanca. We’re sorry for the inconvenience and have issued you a refund for the following amount: $2.99. We hope to see you again soon.” Surprised by the proactive refund, he ended up writing about the experience: “Amazon ‘noticed that I experienced poor video playback…’ And they decided to give me a refund because of that? Wow…Talk about putting customers first.” [Here's the original article.]
When you pre-order something from Amazon, we guarantee you the lowest price offered by us between your order time and the end of the day of the release date. “I just received notice of a $5 refund to my credit card for pre-order price protection. . . What a great way to do business! Thank you very much for your fair and honest dealings.” Most customers are too busy themselves to monitor the price of an item after they pre-order it, and our policy could be to require the customer to contact us and ask for the refund. Doing it proactively is more expensive for us, but it also surprises, delights, and earns trust.
We also have authors as customers. Amazon Publishing has just announced it will start paying authors their royalties monthly, sixty days in arrears. The industry standard is twice a year, and that has been the standard for a long time. Yet when we interview authors as customers, infrequent payment is a major dissatisfier. Imagine how you’d like it if you were paid twice a year. There isn’t competitive pressure to pay authors more than once every six months, but we’re proactively doing so. By the way – though the research was taxing, I struggled through and am happy to report that I recently saw many Kindles in use at a Florida beach. There are five generations of Kindle, and I believe I saw every generation in use except for the first. Our business approach is to sell premium hardware at roughly breakeven prices. We want to make money when people use our devices – not when people buy our devices. We think this aligns us better with customers. For example, we don’t need our customers to be on the upgrade treadmill. We can be very happy to see people still using four-year-old Kindles!
I can keep going – Kindle Fire’s FreeTime, our customer service Andon Cord, Amazon MP3’s AutoRip – but will finish up with a very clear example of internally driven motivation: Amazon Web Services. In 2012, AWS announced 159 new features and services. We’ve reduced AWS prices 27 times since launching 7 years ago, added enterprise service support enhancements, and created innovative tools to help customers be more efficient. AWS Trusted Advisor monitors customer configurations, compares them to known best practices, and then notifies customers where opportunities exist to improve performance, enhance security, or save money. Yes, we are actively telling customers they’re paying us more than they need to. In the last 90 days, customers have saved millions of dollars through Trusted Advisor, and the service is only getting started. All of this progress comes in the context of AWS being the widely recognized leader in its area – a situation where you might worry that external motivation could fail. On the other hand, internal motivation – the drive to get the customer to say “Wow” – keeps the pace of innovation fast.


Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company. “Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers,” writes one outside observer. But I don’t think so. To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in. More fundamentally, I think long-term thinking squares the circle. 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.
As I write this, our recent stock performance has been positive, but we constantly remind ourselves of an important point – as I frequently quote famed investor Benjamin Graham in our employee all-hands meetings – “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t 10% dumber when the stock goes the other way. We want to be weighed, and we’re always working to build a heavier company
As proud as I am of our progress and our inventions, I know that we will make mistakes along the way – some will be self-inflicted, some will be served up by smart and hard-working competitors. Our passion for pioneering will drive us to explore narrow passages, and, unavoidably, many will turn out to be blind alleys. But – with a bit of good fortune – there will also be a few that open up into broad avenues
I am incredibly lucky to be a part of this large team of outstanding missionaries who value our customers as much as I do and who demonstrate that every day with their hard work. As always, I attach a copy of our original 1997 letter. Our approach remains the same, and it’s still Day 1.

LOGO
Jeffrey P. Bezos
Founder and Chief Executive Officer
Amazon.com, Inc.
April 2013
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

 

No comments:

Post a Comment