A Mini-MBA from Jeff Bezos, Billionaire founder of Amazon.com
Hey there, glad you’re here.
But what exactly are you doing here? You see, we don’t want to waste your time by giving you generic information that is already available on the internet.
We want to make sure you receive the value you so deserve. But in order to do that, we want you to have very low expectations.
If you are a fan of Spider-Man, then you probably remember what MJ said about expecting disappointments.
“If You Expect Disappointment, Then You Can Never Really Be Disappointed.” — MJ, Spider-Man, No Way Home.
Spider-Man: No way Home.
Now, we’re not saying we will disappoint you. As a matter of fact, we will try hard not to.
But in case you do get disappointed by the information in this guide, we have given you a fair warning.
But since you took your sweet time and somehow stumbled across our blog, we’re glad you’re here.
In fact, we’ll go as far as predicting that you’re someone who wants to get insights into how a man like Bezos built a $1.6 Trillion empire, at a time when the bulk of the population is living hand to mouth.
If our prediction is correct, then this guide is definitely for you.
What you will learn from this mini-MBA
Are your expectations low enough?
Good.
Now, this guide is not a substitute for an actual MBA. We don’t claim we’re better than Havard Business or Stanford Business.
It is also not a one-size-fits-all approach to business. You will need years of learning and training to be as good as the CEOs of fortune 500 companies.
However, our free mini-MBA is a good start for anyone who is interested in business.
We have broken down Amazon’s shareholder letters since 1997, dissected them, and picked out the most useful business insights from Jeff Bezos.
What we can guarantee here is information you can’t find anywhere else on the internet, unless you are someone who is willing to read all the Amazon shareholder letters since 1997.
Anyway, why would you? We have already done that for you and even gone a step further to add a bit of our own razzle-dazzle!
Reading this guide will be akin to having a sit-down with Bezos and picking his brain as to how he built Amazon into what it is today.
Imagine that you and Bezos are seated somewhere in the beautiful Swiss Alps, with a glass of Dom Perignon in hand, talking business strategy! That would be nice, huh?
We have made that possible for you…
Sure, you’re probably in your Pyjamas, seated on a couch somewhere- Bezos not in sight, but the quality of knowledge you will receive is more or less the same.
A MINI-MBA FROM AMAZON’S SHAREHOLDER LETTERS.
We read two-and-a-half decades worth of Jeff Bezos’ Amazon Shareholder letters. We then turned the letters into actionable business advice that spans customer focus, Web3, business accounting, and investing in new technologies.
As you’ll be reading through this mini-MBA, be sure to have a notebook and pen with you. Chances are, you won’t grasp all the concepts outlined here in one sitting. You’ll constantly have to come back to this guide, check your notes, and do a little more research. That’s the beauty of learning…it’s a never-ending process.
Hope you’re ready! Let’s go…
These are the lessons we got from the shareholder letters:
Mini-MBA lesson 1: Obsess over your customers.
There are many ways to center a business. You can be competitor-focused, product-focused, technology-focused, business-model-focused, and more. But in Jeff’s view, obsessive customer focus is the most protective of a company’s vitality.
At HostGuest, one of our company values is that “The Customer is King”. What this means is that all our business decisions are made with the customer in mind, always.
There are many advantages to a customer-centric approach, but here is the big one: customers are always beautifully, wonderfully dissatisfied; even when they report being happy and business is great. Even when they don’t know it, customers want something better, and your desire to delight them will drive you to invent on their behalf.
“No customer ever asked Amazon to create the Prime Membership program, but it sure turns out they wanted it. The biggest needle mover will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own imagination about what is possible.“
When he was starting Amazon, Bezos set out to build the world’s most customer-centric company. He held as axiomatic that customers are perceptive and smart, and that brand image follows reality and not the other way around.
Bezos believes Amazon’s customers choose Amazon.com and tell their friends about them because of selection, ease-of-use, low prices, and services that they deliver.
As an entrepreneur, you should understand that there is no rest for the weary.
You should constantly remind your employees to be afraid, to wake up every morning terrified. Not of your competition, but your customers. Your customers make your business what it is, they are the ones with whom you have a relationship, and they are the ones to whom you owe a great obligation.
obsess over your customers
Your customers will eat you for breakfast if you don’t invent for them.
You should consider your customers to be loyal to you right up until the second someone else offers them a better product or service.
As a general rule, business people should get the energy to run their companies from the desire to impress customers rather than the zeal to beat competitors.
One should definitely work to pay attention to competitors and be inspired by them, but it is a fact that the customer-centric way is the best way to win.
Bezos on Customer Obsession at Amazon
“From the beginning, our focus has been on offering our customers compelling value. We realized 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. We brought them much more selecion than was possible in a physical store (Our store front would now occupy 6 football fields), and presented it in a useful, easy-to-search and easy-to-browse format in a store open 365 days a year, 24 hours a day. We maintained a dogged focus on improving the shopping experience and in 1997 substantially enhanced our store. We now offer customers gift certificates, 1-click shopping, and vastly more reviews, content browsing options, and recommendation feaures.
We dramatically lowered prices, further increasing customer value.
Word of mouth remains the most powerful customer acquisition tool we have, and we are grateful for the trust our customers have placed in us. Repeat purchases and word-of-mouth have combined to make Amazon.com the market leader in online bookselling.”
— Jeff Bezos.
One advantage- perhaps a subtle one- of a customer-driven focus is that it aids a certain type of proactivity. When you are at your best, you don’t wait for external pressures. You are internally driven to improve your services, adding benefits and features before you have to.
You can lower prices and increase value for customers before you have to.
You can invent before you have to. These inventions will be motivated by customer focus rather than by a reaction to competition.
At Amazon, one can sign up for Prime for the shipping and still get movies, TV, and books at no additional cost. Amazon didn’t have to make those improvements in Prime, they did so proactively.
AWS itself-as-a-whole is another example. No one asked for AWS. No one.
Turns out the world was in fact ready and hungry for an offering like AWS but didn’t know it.
They also announced 159 new features and services for AWS in 2012. They reduced AWS prices 27 times since launching the service, added enterprise support enhancement, and created innovative tools to help customers to be more efficient.
None of this would be possible without a culture of curiosity and a willingness to try totally new things on behalf of customers.
The customer experience pillars of Amazon:
“In our retail business, we have strong conviction that customers value low prices, vast selection and fast, convinient delivery, and that these needs will remain stable over time.
It is difficult for us to imagine that 10 years from now, customers will want higher prices, less selection or slow delivery.
Our primary objective is to earn customer trust, not optimize short-term profit dollars. We take is as an article of faith that pricing in this manner is the best way to grow our aggregate profit dollars over the long-term. We may make less per item, but by consistently earning trust, we will sell many more items.”
One thing you should love about your customers is that they are divinely discontent. Their expectations are never static- they go up. It’s human nature. We didn’t evolve from our hunter-gatherer days by being satisfied.
People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’. We see that rate of improvement happening at a faster rate than ever before.
It may be because customers have such easy access to more information than ever before.
In only a few seconds, and with a couple of taps on their phones, customers can read reviews, compare prices from multiple retailers, see whether something is in stock, find out how fast it will ship or be available for pick-up, and more.
These examples are from retail but the same customer empowerment phenomenon is happening broadly across industries.
You cannot rest on your laurels in this world. Customers won’t have it.
How to stay ahead of customer expectations.
How do you stay ahead of ever-rising customer expectations? There is no single way to do it- it’s a combination of many things. But high standards (widely deployed and at high levels of detail) are certainly a big part of it.
Essentials of high standards inside an organization:
Intrinsic or Teachable: Are high standards intrinsic or teachable? We believe high standards are teachable. In fact, people are pretty good at learning high standards simply through exposure. High standards are contagious. Bring a new person into a high-standards team and they will quickly adapt. The opposite is also true. If low standards prevail, those too will quickly spread. And though exposure works well to teach high standards, we believe you can accelerate that rate of learning by articulating a few core principles of high standards.
Universal or domain-specific: In other words, if you have high standards in one area, do you automatically have high standards elsewhere? We believe high standards are domain-specific, and that you have to learn high standards separately in every arena of interest. When Bezos started Amazon, he had high standards on inventing, customer care, and hiring. But he didn’t have high standards on the operational processes, how to keep fixed problems fixed, how to eliminate defects at the root, how to inspect processes, and much more. He had to learn and develop high standards on all these. Understanding this point is important because it keeps you humble. You can consider yourself a person of high standards in general and still have debilitating blind spots. There can be whole arenas of endeavor where you may not even know that your standards are low or non-existent, and certainly not world-class. It is critical to be open to that likelihood.
Recognition and Scope: What do you need to achieve high standards in a particular domain area? First, you have to be able to recognize what good looks like in that domain. Second, you must have realistic expectations for how hard it should be (how much work it will take) to achieve that result- the scope. Unrealistic beliefs on scope- often hidden and undiscussed- kill high standards. To achieve high standards yourself, or as part of a team, you need to form and proactively communicate realistic beliefs about how hard something is going to be.
Beyond recognizing standards and having realistic expectations on scope, how about skill? Is skill a required element? In our view, not so much, at least not for the individual in the context of teams. The football coach doesn’t need to be able to throw, and a film director doesn’t need to be able to act. But they both need to recognize high standards for those things and teach realistic expectations on scope. Someone on the team needs to have the skill, but it doesn’t have to be you.
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Benefits of having high standards in your organization
You’re going to build better products and services for customers (This would be reason enough).
People are drawn to high standards- they help with recruiting and retention.
More subtle, a culture of high standards is protective of all the “invisible” but crucial work that goes on in every company. We’re talking about the work that no one sees. The work that gets done when no one is watching. In a high standards culture, doing that work well is its own reward- it’s part of what it means to be professional.
Finally, high standards are fun! Once you have tested high standards, there is no going back.
“Insist on the highest standards. Leaders have relentlessly high standards- many people think these standards are unreasonably high.”
-Amazon Leadership Principles.
Mini-MBA tips on how to be customer-obsessed:
Really understand your customers: what they value, how you can provide more of what they value, less of what they don’t, and solve more of their problems.
Use technology to build low-cost ways to add value and increase margins.
Increase your productivity to offer substantially more value for the same or lower cost, while maintaining or increasing your margins.
Phew! There ends lesson 1 of your mini-MBA. Quite frankly, it’s impressive that you’ve read this far. We didn’t think you’ll get here.
We’re happy that you have proven us wrong.
Wanna take a stroll, or drink some water before we go one? Do it!
The journey ahead of us is still long.
Thus far, however, we believe you have the confidence to go forth into the world to wow your customers!
Alright, upwards and onwards aye!
If you find this mini-MBA enjoyable, you might also enjoy how to invest in NFTs.
Mini-MBA lesson 2: Hire Great people, then work as hard as you can to retain them.
The next lesson in your mini-MBA is on hiring amazing talent. Jeff Bezos believes that it’s impossible to produce results in an environment as dynamic as the internet without extraordinary people.
“Working to create a little bit of history isn’t supposed to be easy,and, well we’re finding that things are as they’re supposed to be. 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.”
Jeff Bezos.
During Amazon’s hiring meetings, they ask their recruiters to consider three things before making a decision:
Will you admire the person? If you think about the people you admire in your life, they are probably people you’ve been able to learn from or take an example from. For Bezos, he has always tried hard to work only with people he admires, and he encourages his team to be just as demanding. Life is definitely too short to do otherwise.
Will this person raise the average level of effectiveness for the group they are entering? At Amazon, they are interested in fighting entropy. The bar for hiring has to continuously go up. Bezos asks people to visualize the company 5 years ahead. At that point, everyone should look around and say, “The standards are so high now- boy, I’m glad I got in when I did.”
Along what dimension might this person be a superstar? Many people have unique skills, interests, and perspectives that enrich the work environment for everyone. It’s often something that is not even related to their jobs.
“It is 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 2 out of 3.’
We’re working to build something important, something that matters to our customers, something that we can tell our grandchildren about.”
Jeff Bezos.
What is a company after all? It’s the people that make it or break it. As a company founder, you will never be able to do everything on your own.
The greatest skill you can have is the ability to recognize talent, persuade it to join your vision, and then work tirelessly to retain it.
As a matter of fact, this will be your single most important responsibility. People are fragile and understanding that will give you the emotional intelligence required to lead them.
If you think Bezos is the only billionaire that thinks hiring is important, you should listen to Elon Musk.
Now calm down…calm down. We know the rivalry going on between Bezos and Musk. But that doesn’t mean Musk lacks useful insights to share on the matter:
“The other thing i’d say is that if you’re creating a company, or if you’re joining a company, the most important thing is to attract great people. Either join a group that is amazing and that you really respect, or gather great people.I mean, all a company is, is a group of people that have gathered together to create a product or service.Depending on how talented and hardworking that group is, and the degree to which they are focused cohesively in a good direction, that will determine the success of the company.
Do everything you can to gather great people if you are creating a company.”
-Elon Musk
Employee empowerment at Amazon.com
Career Choice.
Career choice is an Amazon program where they pre-pay 95% of tuition for employees to take courses for in-demand fields, such as airplane mechanics or nursing, regardless of whether the skills are relevant to a career at Amazon. The goal is to enable choice.
For some of their fulfillment center employees, Amazon will be a career. For others, Amazon might be a stepping stone on the way to a job somewhere else- a job that may require new skills.
Pay-to-quit
Once a year, Amazon offers to pay their associates to quit. The first year the offer is made, it is for $2000, then it goes up by $1000 a year until it reaches $5000. The headline on the offer is: PLEASE DON’T TAKE THIS OFFER. The goal is to encourage folks to take a moment and think about what they really want.
In the long run, employees staying somewhere they don’t want to be isn’t healthy for the employees or the company.
“We have the good fortune of a large, inventive team and a patient, pioneering customer-obsessed culture. Great innovations, large and small, are happening everyday on behalf of customers, and at all levels throughout the company. This decentralized distribution of invention throughout the company- not limited to the company’s senior leaders- is the only way to get robust, high throughput innovation. What we are doing is challenging and fun- we get to work in the future.”
Mini-MBA lesson 3: Think long-term, take bold risks and be willing to fail.
“It is truly Day 1 for the internet and if we execute our business plan well, it remains Day 1 for Amazon.com. Given what’s happened; it may be difficult to conceive, but we think the opportunities and risks ahead of us are even greater than those behind us. We will have to make conscious and deliberate choices, some of which will be bold and unconventional. Hopefully, some will turn out to be winners. Certainly, some will turn out to be mistakes.”
The other important takeaway from your mini-MBA is the ability to think long-term, take risks, and fail.
Failure comes part and parcel with risk-taking and invention. It’s not optional. You should understand that and believe in failing early, and iterating until you get it right. When this process works, it means your failures are relatively small in size (most experiments can start small), and when you hit on something that is really working for customers, you should double down on it with hopes to turn it into an even bigger success.
Inventing is messy, and over time, it’s certain that you’ll fail at some big bets too.
In order to maintain the vitality of your company, you need to experiment, plant seeds, protect saplings, and double down when you see customer delight.
Failure needs to scale too: As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a scale that can actually move the needle.
Of course, you won’t undertake such experiments cavalierly. You’ll have to work hard to make good bets, but not all good bets will ultimately pay out. This kind of large-scale risk-taking should be part of the service you offer as a company. The good news to your shareowners is that a single big winning bet can more than cover the cost of many losses.
In order to maintain this long-term mindset and willingness to take risks, you must at all times resist proxies. As companies get larger and more complex, there’s a tendency to manage proxies. This comes in many shapes and sizes and it’s dangerous, subtle, and very Day 2.
A common example is process as a proxy. Good processes serve your customers, but if you’re not watchful, the process can become the thing. You stop looking at outcomes and just make sure you’re doing the process right.
Good inventors and designers deeply understand their customers. They spend tremendous energy developing that intuition. They study and understand many anecdotes rather than only the averages you’ll find in surveys. They live with the design.
In order to take the right kind of risks, you also need to embrace external trends. The outside world can push you to your death if you do not embrace powerful trends quickly.
If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind. These big trends are not hard to spot (They get talked about and written about a lot).
For instance, the trends you should be pursuing right now are Extended Reality (Virtual Reality, Augmented Reality, and the Metaverse), Web3, Machine Learning and A.I, Blockchain technology, etc.
First, why focus on these emerging technologies? In the mid 90’s everyone equally wondered what this internet thing was. Fast forward to 2022, and folks today are wondering what Web3 is.
Bezos never wanted to disrupt retail from the onset. He simply wanted to come up with a business idea based on the internet and then let the internet grow around it while he kept working on it.
Today, that idea is worth $1.6 trillion and counting. Embracing trends really does pay off, huh?
Finally, experimenting requires making high-quality, high-velocity decisions. Most companies make quality decisions, but they make quality decisions slowly. Speed matters in business- plus a high-velocity decision-making environment is more fun too.
Here are some thoughts on decision making:
Never use a one-size-fits-all decision-making process. Many decisions are reversible, 2-way doors. Those decisions can use a lightweight process. For that kind of decision, so what if you’re wrong?
Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases you’re probably being slow. Plus either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think; whereas being slow is going to be expensive for sure.
Use the phrase “Disagree and commit.” This phrase will save a lot of time. If you have a conviction on a particular direction, even though there is no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble with me on it?” Disagree and commit! By the time you are at this point, no one knows the answer for sure, and you’ll probably get a quick yes. This shouldn’t be one way. If you’re a boss, you should do this too.
Recognize true misalignment issues early and escalate them immediately. Sometimes, teams have different objectives and fundamentally different views. They are not aligned. No amount of discussions, no number of meetings will resolve that deep misalignment. Without escalation, the default dispute resolution mechanism for this scenario is exhaustion. Whoever has more stamina carries the decision. “You’ve worn me down” is an awful decision-making process. It’s slow and de-energizing. Go for quick escalation instead. It’s better.
Intuition, curiosity, and the power of wandering.
From very early on in Amazon’s life, they knew they wanted to create a culture of builders- people who are curious explorers. People who like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind.
A builder sees the way you do things, as just the way you do things now. A builder’s mentality will help you approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, start over, rinse, repeat again and again. They know the path to success is anything but straight.
Often in business, you do know where you’re going, and when you do, you can be efficient. Put in place a plan and execute. In contrast, wandering in business is not efficient…but it is also not random. It is guided- by hunch, gut or intuition, curiosity and powered by a big conviction that the prize for customers is big enough that it’s worth being a little messy and tangential to find your way there.
Wandering is an essential counter-balance to efficiency. You need to employ both. The outsized discoveries- the ‘non-linear’ ones- are highly likely to require wandering.
Invention and risk-taking
Failure and invention are inseparable twins. To invent, you have to experiment, and if you know in advance that it’s going to work, then it’s not an experiment. Most large organizations embrace the idea of invention but are not willing to suffer the string of failed experiments necessary to get there.
Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right.
Given a 10% of a hundred times payoff, you should take that bet every time.
But you’re still going to be wrong 9 times out of 10.
We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs.
The difference between baseball and business is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is 4. In business, every once in a while, when you step up to the plate, you can score 1000 runs.
This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.
Long-term thinking
Long-term thinking will lever your existing abilities and let you do new things you couldn’t otherwise contemplate. It supports the failure and iteration required for invention, and it frees you to pioneer in unexplored spaces.
Seek instant gratification or the elusive form of it, and chances are you’ll find a crowd there ahead of you.
Long-term orientation interacts well with customer obsession.
If you can identify a customer need and if you can further develop conviction that the need is meaningful and durable, your approach permits you to work patiently for multiple years to deliver a solution.
Working backward from a customer’s needs can be contrasted with a skills-forward approach where existing competencies are used to drive business opportunities.
The skills-forward approach says, “We are really good at X. What else can we do with X?”
That is a useful rewarding business approach. However, if used exclusively, the company employing it will never be driven to employ fresh skills.
Eventually, the existing skills will become outmoded.
Long-term thinking
Always think long-term
Working backward from customer needs, often demands that you acquire new competencies and exercise new muscles, never mind how uncomfortable and awkward-feeling those first steps might be.
“It’s about the long-term. We believe that a fundamental measure for our success will be 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.
Because of our empasis on the long term, we make decisions and weigh trade-offs differently than some companies:
Continue to focus relentlessly on our customers.
Continue to make investment decisions in light of long-term market leadership considerations rather than short term profitability considerations or short term reactions.
Continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns and step up our investment in those that work best.
Make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages.
Work hard to spend wisely and maintain our lean culture. We understand the importance of continually enforcing a cost-conscious culture; particularly in a business incurring net losses.
Balance our focus on growth with emphasis on long-term profitability and capital management. At this stage we choose to prioritize growth because we believe scale is central to achieving the potential of our business model.
Continue to focus on hiring and retaining versatile and talented employees. Continue to weigh 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.
Trying to dote 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.
Quoting Benjamin Graham:
‘In the short-run, the market is a voting machine, but in the long run, it is a weighing machine.’
We do not celebrate a 10% increase in stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens, and conversely, we 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.”
-Jeff Bezos
Mini-MBA lesson 4: Measure your financial success on Free cash-flow per share
Your ultimate financial measure, and the one you must work to drive over the long-term, is free cash flow per share.
Why not focus, first and foremost, as many do, on earnings, earnings per share, or earnings growth?
The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings.
Future earnings are a component, but not the only important component of future cash flow per share. Working capital and capital expenditure are also important, as is future share dilution.
Though some may find it counterintuitive, a company can actually impair shareholder value in certain circumstances by growing earnings. This happens when the capital investments required for growth exceed the present value of the cash flows derived from these investments.
To illustrate with a hypothetical and very simplified example, imagine that an entrepreneur invents a machine that can quickly transport people from one location to another. The machine is very expensive- $160 million with an annual capacity of 100,000 passenger trips and a four-year useful life. Each trip sells for $1000 and requires $450 in cost of goods for energy and materials and $50 in labor and other costs.
Continue to imagine the business is booming with 100,000 trips in year 1, completely and perfectly utilizing the capacity of one machine. This leads to earnings of $10 million after deducting operating expenses including depreciation- a 10% net margin. The company’s primary focus is on earnings, so based on initial results the entrepreneur decides to invest more capital to fuel sales and earnings growth, adding additional machines in years 2 through 4.
It’s impressive. 100% compound earnings growth and $150 million of cumulative earnings. Investors considering only the above income statement would be delighted.
However, looking at cash flows tells a different story. Over the same four years, the transportation business generates a cumulative negative free cash flow of $530 million.
There are of course other business models where earnings more closely approximate cash flows. But as our transportation example illustrates, one cannot assess the creation or destruction of shareholder value with certainty by looking at the income statement alone.
Notice too, that a focus on EBITDA- Earnings Before Interests, Taxes, Depreciation, and Amortization- would lead to the same faulty conclusion about the health of the business. Sequential annual EBITDA would have been $50, $100, $200 and $400 million- 100% growth for three straight years. But without taking into account the $1.28 billion in capital expenditures necessary to generate this ‘cash flow’, we’re getting only part of the story- EBITDA isn’t cash flow.
What if we modified the growth rates and, correspondingly, capital expenditures for machinery- would cash flows have deteriorated or improved?
Paradoxically, from a cash flow perspective, the slower this business grows, the better off it is. Once the initial capital outlay has been made for the first machine, the ideal growth trajectory is to scale to 100% of capacity quickly, then stop growing. However, even with one piece of machinery, the gross cumulative cash flow doesn’t surpass the initial machine cost until year 4 and the net present value of this stream of cash flows (using 12% of cost capital) is still negative.
Unfortunately, our transportation business is fundamentally flawed. There is no growth rate at which it makes sense to invest initial or subsequent capital to operate the business. In fact, our example is so simple and clear as to be obvious.
Investors would run a net present value analysis on the economics and quickly determine it doesn’t pencil out.
Though it is more complex and subtle in the real world, this issue- the duality between earnings and cash flows- comes up all the time.
Cash flow statements often don’t receive as much attention as they deserve. Discerning investors don’t stop with the income statement.
“Our most important financial measure: Free Cash Flow.”
Amazon.com’s financial focus is on long-term growth in free cash flow per share.
Amazon.com’s free cash flow is driven primarily by increasing opertaing profit dollars and efficiently managing both working capital and capital expenditures.
We work to increase operating profit by focusing on improving all aspects of the customer experience to grow sales and by maintaining a lean cost culture.
This focus on free cash flow isn’t new for Amazon.com. We made it clear in our 1997 letter to shareholders- our first as a public company- that when forced to choose between GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.
-Amazon 2005 Shareholder letter.
Conclusion.
We’ll be damned!
You have actually come this far? You have read the entire mini-MBA, as seen in the Amazon shareholder letters.
How does it feel to have first-class access to Jeff Bezos’ brain? It feels awesome, right? You now have the confidence to go forth and conquer the whole world, huh?
Well, that is what we’re all about. Use a bit of razzle-dazzle to make your life amazing.
Mini-mba
Congratulations! You made it!
To conclude our amazing mini-MBA, we’ll quote Jeff Bezos on what it truly means to be a Day 1 company. As you’re reading his words, remember to maintain the vitality of a start-up that is still on Day 1.
“It is truly day 1 for the internet, and if we execue our business plan well, it remains Day 1 for Amazon.com. Given what’s happened, it may be difficult to conceive, but we think the opportunities and risks ahead of us are even greater than those behind us. We will have to make conscious and deliberate choices, some of which will be bold and unconventional. Hopefully, some will turn out to be winners. Certainly, some will turn out to be mistakes.
Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.
How do you fend off Day 2 and keep the vitality of Day 1?
Customer obsession.
A skeptical view of proxies.
The eager adoption of external trends.
High velocity decision making.
We did tell you to keep your expectations of the mini-MBA very low, but we hope we’ve been able to meet a portion of them.
As you leave, we want to remind you to create more than you consume.
So, what should your takeaways from this mini-MBA be?
If you want to be successful in business, you have to create more than you consume.
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Your goal should be to create value for everyone you interact with. Any business that doesn’t create value for those it touches, even if it appears successful on the surface, isn’t long for this world. It is on the way out.
We truly hope that through this mini-MBA, we have created enough value for you and that you’ll share it with as many of your friends as possible.
Remember: Differentiation is survival and the universe wants you to be typical.
“The world will always try to make Amazon more typical- to bring us into equilibrium. It will take continuous effort, but we can, and must be better.” — Jeff Bezos
