Jeff Bezos released his 2016 letter to shareholders and it has many implications.
Bezos takes on a lot of the issues that drive mediocrity at large companies, including speed, decision making, and customer intimacy.
Let’s walk through his key lessons, implications, and how investors can uncover these traits.
It is not often that I find myself enamored by the thoughts of Corporate America, with the exception of visionaries like Warren Buffett, Mark Zuckerberg, Elon Musk, and, among others, Amazon’s (NASDAQ:AMZN) Jeff Bezos. After reading the wonderful Amazon biography, The Everything Store, my first action was to buy Amazon’s stock. For far too many years, I toiled away as a classic value investor who couldn’t see the long-term promise of a company with incredibly high internal returns on invested capital.
Earlier this week, Bezos published his 2016 annual letter. As you might expect, in spite of its brevity, it contains several important takeaways for those who like to think about business.
Be a Day 1 Company
Bezos does not hold back that he clearly has little respect for the modus operandi of typical Fortune 500 companies. The primary topic of his letter is “how to prevent becoming a Day 2 company,” which Bezos describes as an excruciating death that can happen suddenly or after a number of years.
Anyone who has worked inside of a large organization can speak to the difficulty of this problem: companies get big, bureaucracy gets bigger, and employees who should be focused on tasks that grow or improve the business in some way spend all of their time reporting to senior management and distracting others in the process. I have noticed this is especially true in consensus-decision companies, where everyone from the janitor to the c-suite has to be “aligned” for something to happen.
Bezos goes into his “starter kit” that describes how to defend against this dynamic, but I think the investing implications of identifying this flaw are fascinating. If possible, when making an investment decision, evaluate the culture. Is it a fast-moving, dynamic culture? Or, are employees spending all of their time trying to convince senior management to get on board with a certain project? Are employees busy filling in templates? Or, are employees thinking strategically about growing the business?
True Customer Obsession
Interestingly, Bezos acknowledges that there are various ways to focus your business, whether it is on competitors, products, technology, or business models. Bezos opts to have Amazon focus on the customers, and I certainly see the value of this focus. As Bezos states:
“There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers 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, and I could give you many such examples.”
This point is absolutely brilliant. Today’s differentiation is tomorrow’s cost of doing business. What once impressed customers from one company tends to become the standard within an industry. By focusing on incremental improvement, you are able to stay relevant and hopefully stay one step ahead of your competitors without spending all of your time thinking about what your competitors are doing.
Good companies are always focused on improvement, even if current products or services are acceptable. Imagine if Apple (NASDAQ:AAPL) decided the original iPod was “good enough” and customers were perfectly happy with an iPod in one pocket and a phone in the other. Or, imagine a company like Grainger (NYSE:GWW) decided it could improve inventory turns by removing a few low-running SKUs – I don’t think customers would be happy to find out they couldn’t get a valuable but rare input in the usual service time.
I love Bezos’ argument about resisting proxies potentially more than any of his other arguments. As companies grow, they simply become more and more disconnected from their customers. In response to the size and disconnect, companies resort to “market research” and “surveys” to understand how customers feel about their products or services.
Bezos is famous for allowing customers to email him about issues, and I actually have sent (and received) a response for my feedback – and eventually a fix. Across all industries, be it healthcare, consumer products, technology, or B2B services, businesses need to deeply understand their customers. And frankly, many large companies do not. Decision makers are so far away from the business that they have no idea happens on a day-to-day basis and what customers value.
I would be willing to bet that companies that have better customer knowledge make better capital allocation decisions and stay ahead of the competition. Unfortunately, in many large organizations, decision makers are too busy making PowerPoint presentations for their managers and thus have little idea what’s happening in the real world.
Unfortunately, investors can have a difficult time assessing this ability, but I think it often reveals itself in new product/service development and ultimately financial results.
Embrace External Trends
This point sounds straightforward, but I do not believe it is a simple decision for large companies to make. Bezos simply believes that if you have external trends, i.e. technology, machine learning, etc., you should follow them and embrace the tailwind rather than face a massive headwind.
Amazon is the best example of this dynamic in recent memory. Retail competitors continued to open storefronts and remodel existing locations as opposed to investing heavily in an online presence. As we all know, Amazon is now destroying a business model that thrived for hundreds of years.
The investing takeaway here is simple: look for companies that have identified which way the wind is blowing and don’t try to fight it. In the end, battling external trends is not a way to survive.
High-Velocity Decision Making
Again, Bezos highlights one of the largest problems in a corporate bureaucracy: decision-making speed. It isn’t that large corporations make bad decisions, which Bezos acknowledges. Remember, your typical Fortune 500 company is armed with relatively intelligent legions of MBAs from prestigious universities. However, these companies don’t want to make a decision with 70% of information, rather they require 90% or, often times, as close to 100% as humanely possible.
This lag in information accumulation causes large companies to fall behind, and, in my view, it kills momentum. It also destroys an organization’s risk tolerance and makes the idea of failure unpalatable.
Bezos was correct in identifying this issue, and I have seen it first-hand obliterate excellent growth opportunities at large companies. Amazon always keeps some room for error, and frankly, they don’t drive for a consensus. Bezos tells his team he disagrees and commits. He gets behind the decision and doesn’t sabotage projects.
Overall, this speaks to the value of ownership: employees must own their areas of the business and feel empowered to drive it going forward. Otherwise, companies will fall prey to ineptitude, sloth, and a lack of motivation.
How it all ties together: small and agile mindsets win
In total, I think Bezos’ letter did a terrific job of reinforcing some of the key issues at large companies, and more importantly, identifying key traits that investors can look for at companies of any size. Small and agile mindsets help drive employee empowerment, creative thinking, innovation, and quick decisions. Customer intimacy keeps companies ahead of the competition and focused on continual improvement.
In order to discover companies that have these traits, I would listen to management conference calls, talk to employees, and do anything possible to get a feel for the corporate culture.