Building great companies with long-termism

  On July 5, 2021, Jeff Bezos officially stepped down as Amazon CEO. Since the creation of Amazon in 1995 and the successful listing of the company two years later, it took only 23 years for Bezos to top the Forbes Global Billionaires List with $177 billion on April 6, 2021. . At the same time, he left behind 23 letters to shareholders. Walter Isaacson, CEO of the Aspen Institute, a well-known academic research institution in the United States, edited it into a book, resulting in the book “Secularism”.
  Bezos saw the bright future of the Internet firsthand and sparked the desire to start a business. He stumbled upon the fact that the Internet was growing at a rate of almost 2,300% per year, and that anything that was growing so fast would eventually grow to a considerable scale, even if the underlying traffic was insignificant at the time. Therefore, he came to a conclusion: we should propose an Internet-based business idea, let the Internet develop and grow around this idea, and make continuous efforts to improve it. The idea of ​​creating a bookstore with millions of titles on the Internet that would never exist in the real world got him excited. Thus, Amazon came into being.
  Bezos pioneered the application of “long-termism” to business practice. Bezos has implemented the great idea of ​​long-termism since its listing in 1997. Long-termism is expressed as “everything revolves around long-term value”. Bezos firmly believes that a key dimension of measuring success is delivering long-term value to shareholders. Long-term thinking leverages existing capabilities and enables companies to do innovations they would not normally think of. Can help companies navigate the failures and cycles that innovation must go through. You can also get rid of the shackles of tradition and enter an unknown field to be a pioneer. But if you pursue immediate returns, you will find that there are already huge crowds in front of you.
Long-term thinking aligns with users first

  If a company finds a user need and thinks it’s a long-standing pain point that can be improved, it can give the company the patience to spend years trying to fix the problem. The value built over time is a direct result of the company consolidating and expanding its existing market leadership. The better a company is able to lead the market, the stronger its business model, and that market leadership can translate into higher revenue, higher profits, faster capital turnover, and a correspondingly more rewarding return on capital .
  In implementing his long-term strategy, Bezos established Amazon’s market leadership through key metrics, including user and revenue growth, customer retention rates, and the strength of the brand. To this end, Amazon has devoted a lot of resources to expand its customer base, enhance its brand image and consolidate its infrastructure, in order to establish a sustainable leadership in the market. In this way, Bezos has formed the basic strategy of relentlessly focus on the customer; make decisions for long-term market leadership, not short-term profits or Wall Street’s short-term reaction; drop those projects that do not bring satisfactory returns and add those that are most profitable. investment in superior projects; bolder investment decisions in the face of opportunities that have the greatest potential to expand market leadership; if a choice has to be made between optimized financial reporting and maximizing future cash flow, it must be the latter; Share with shareholders when major decisions are made so that shareholders can assess whether the company is making a sensible investment for long-term growth; strive to be budget-conscious and maintain a lean corporate culture; balance focus on growth with a focus on long-term profitability and capital management ; Continue to attract and retain talented and versatile employees.
  Many companies claim to be user-centric, but few really are. The vast majority of tech companies focus on their competitors, see what other companies are doing, and rush to do what they do. Amazon’s motivation comes from constantly pleasing customers rather than trying to beat rivals. Amazon also doesn’t compare which of the two approaches maximizes commercial success. There are a lot of companies that are adept at beating their rivals consistently, and Amazon looks at its competitors, but takes inspiration more from them.
Do not be discouraged when faced with difficulties

  Any company will encounter serious difficulties in the process of development, and Amazon is no exception. Amazon was also hit hard during the dot-com bust of the late 20th century. At $106 in December 1999, Amazon’s stock price fell 40% just a month later, and fell to as low as $6 in less than two years, a drop of more than 80%. 2000 was Amazon’s worst year. News outlets and stock analysts said Amazon was “finished” and has been “down the road” ever since.
  Amazon, however, has survived the bubble doggedly. Bezos pointed out from first principles that by any measure, “Amazon is in a stronger position than ever before”: serving 20 million users in 2000, an increase of 1.4 million users from 1999; Sales increased from $1.64 billion to $2.76 billion; operating loss fell from 26% in the fourth quarter of 1999 to 6% in the same period of 2000; US operating loss fell from 24% in the fourth quarter of 1999 to the same period in 2000 2% of the total, gross profit increased from $291 million to $656 million, an increase of 125%…
  The operating conditions of the entire company have improved significantly, but the company’s market value has shrunk significantly. Bezos quoted Benjamin Graham, the godfather of Wall Street, as saying, “In the short run, the stock market is a voting machine; in the long run, it is a weighing machine.” It is clear that during the stock price surge in 1999, Amazon was heavily “voted”, not “weighed.” And Bezos wants Amazon to be a company that can “get on the scale.” Therefore, a 10% increase in stock price should not be celebrated. Amazon works so hard that it wants to be “fat, heavier, and stronger.”
  Why is Bezos so confident in Amazon? Moore’s Law tells us that processor performance at the same price doubles roughly every 18 months, 12 months for memory, and 9 months for bandwidth. Even based on doubling the slowest bandwidth, every 5 years the available bandwidth to Amazon customers will increase by a factor of 60, and still without any additional investment. At the same time, the improvement of hard disk storage and processor performance can also empower Amazon. In the real world, traditional retailers do continue to use technology to reduce costs, but they are unlikely to disrupt the user experience like Amazon. Amazon can also use new technology to reduce costs, but the role of technology for Amazon is more to drive the increase in user volume and revenue. Therefore, Bezos firmly believes that about 15% of retail business should be moved online forever. The development of the industry and the joining of new users will promote the barbaric improvement of the user experience in the online shopping industry in the future. This improvement and innovation is driven by technological developments, especially increases in available bandwidth, increased hard disk space, and increased processor performance, all of which are becoming faster and cheaper.
  Innovation occurs in various forms on many dimensions. The most disruptive innovations are often the ones that empower others, free their imaginations, and enable others to pursue their dreams. That’s exactly what Amazon’s AWS, FBA, and KDP are doing. These innovative large-scale platforms are not zero-sum games. They create a win-win situation and create unlimited value for developers, entrepreneurs, users, authors, and readers. However, innovation can mean failure. Bezos believes that the sooner you fail, the better, so you can keep repeating until you succeed. When the business is done, these failures are trivial, especially when the company focuses on user pain points, which can turn these failures into greater successes.
  A distinguishing characteristic of Bezos is his attitude towards failure, which he believes is the best place in the world to fail. Many organizations want to innovate, but cannot tolerate the series of failures that must be experienced along the way. However, the magic of the business world is that we can try again and again. True success has gone through countless attempts.
  Bezos wants to be both a big company and an innovation machine. He hopes to combine the user service capabilities brought by the volume with the spirit of flexibility and risk acceptance in startups. A very common trap that many large companies fall into is the one-size-fits-all policy. Many decisions are irreversible once they are made. This kind of decision is called “first type of decision”, but most of the decisions are not like this. You don’t need to bear particularly big consequences and you can try again and again. This is the “second type of decision”. class decision”. As organizations get larger, there is often a tendency to make very big Type 1 decisions, and even Type 2 decisions are made using Type 1 methods. The end result is slow, unthought-out risk aversion, inability to experiment enough, and jeopardizing innovation. Bezos works hard to avoid this trend: “Never use a one-size-fits-all decision-making process.”
The importance of cash flow

  Unlike most companies, Bezos has always emphasized future cash flow rather than current short-term profits. He believes that future cash flow is better than any other indicator for measuring the long-term trend of a company’s stock price. The reason Bezos doesn’t focus on earnings is that earnings are not directly reflected in cash flow, and the value of a stock reflects the discounted value of a company’s future cash flows rather than future earnings. Future earnings are an important, but not the only, measure of future cash flow.
  Therefore, Amazon’s most important financial metric is free cash flow per share, and its financial goal is to achieve long-term growth in cash flow per share. Amazon boosts sales by improving the user experience in all aspects, while controlling the cost structure to increase operating profit. Amazon’s fast turnover rate means less investment in inventory. Bezos is confident that if Amazon continues to improve the user experience and lower prices, the company’s value proposition and cash flow will get better. Such decisions, which seem costly in the short term, can bring immeasurable value to the company in the long run.
  In particular, it should be pointed out that the long-term interests of shareholders are highly related to the interests of users. If Amazon is doing well, its users will spend more, have more customers, and generate more cash flow, with correspondingly higher shareholder returns. To that end, Amazon must improve its lead in the e-commerce market and create more benefits for its users and investors — both of which go hand in hand.