Amazon CEO Jeff Bezos has written a letter to shareholders every year since 1997, when he took his company public.
While the letter is intended to recap Amazon’s accomplishments over the year, it also comes with a lot of great business insights and management advice Bezos has picked up while running a company that’s now worth $300 billion — which is why a lot of people consider it a must-read for any aspiring business professional.
Here’s a run down of some of the most interesting excerpts from each of the shareholder letter published over the past 19 years:
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
'I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins...Given a ten per cent chance of a 100 times payoff, you should take that bet every time.
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...Big winners pay for so many experiments.'
'One common pitfall for large organisations -- one that hurts speed and inventiveness -- is 'one-size-fits-all' decision making...The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention.1 We'll have to figure out how to fight that tendency.'
On finding businesses to invest in:
On finding businesses to invest in:
'A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.
We’ll approach the job with our usual tools: customer obsession rather than competitor focus, heartfelt passion for invention, commitment to operational excellence, and a willingness to think long-term. With good execution and a bit of continuing good luck, Marketplace, Prime, and AWS can be serving customers and earning financial returns for many years to come.'
'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're doing is challenging and fun -- we get to work in the future.
Failure comes part and parcel with invention. It's not optional. We understand that and believe in failing early and iterating until we get it right. When this process works, it means our failures are relatively small in size (most experiments can start small), and when we hit on something that is really working for customers, we double-down on it with hopes to turn it into an even bigger success. However, it's not always as clean as that. Inventing is messy, and over time, it's certain that we'll fail at some big bets too.'
On focusing on the customer vs. competitor:
'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.
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.
Our technologies are almost exclusively implemented as services: bits of logic that encapsulate the data they operate on and provide hardened interfaces as the only way to access their functionality. This approach reduces side effects and allows services to evolve at their own pace without impacting the other components of the overall system.
All the effort we put into technology might not matter that much if we kept technology off to the side in some sort of R&D department, but we don't take that approach. Technology infuses all of our teams, all of our processes, our decision-making, and our approach to innovation in each of our businesses. It is deeply integrated into everything we do.
We live in an era of extraordinary increases in available bandwidth, disk space, and processing power, all of which continue to get cheap fast. We have on our team some of the most sophisticated technologists in the world -- helping to solve challenges that are right on the edge of what's possible today...Invention is in our DNA and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers.'
On setting goals:
'Senior leaders that are new to Amazon are often surprised by how little time we spend discussing actual financial results or debating projected financial outputs. To be clear, we take these financial outputs seriously, but we believe that focusing our energy on the controllable inputs to our business is the most effective way to maximise financial outputs over time.
A review of our current goals reveals some interesting statistics:
• 360 of the 452 goals will have a direct impact on customer experience.
• The word revenue is used eight times and free cash flow is used only four times.
• In the 452 goals, the terms net income, gross profit or margin, and operating profit are not used once.
Taken as a whole, the set of goals is indicative of our fundamental approach. Start with customers, and work backwards. Listen to customers, but don't just listen to customers -- also invent on their behalf. We can't assure you that we'll meet all of this year's goals. We haven't in past years. However, we can assure you that we'll continue to obsess over customers. We have strong conviction that that approach -- in the long term -- is every bit as good for owners as it is for customers.'
On creating the Kindle, an e-book reader:
'We started by setting ourselves the admittedly audacious goal of improving upon the physical book. We did not choose that goal lightly. Anything that has persisted in roughly the same form and resisted change for 500 years is unlikely to be improved easily. At the beginning of our design process, we identified what we believe is the book's most important feature. It disappears. When you read a book, you don't notice the paper and the ink and the glue and the stitching. All of that dissolves, and what remains is the author's world.
We knew Kindle would have to get out of the way, just like a physical book, so readers could become engrossed in the words and forget they're reading on a device. We also knew we shouldn't try to copy every last feature of a book -- we could never out-book the book. We'd have to add new capabilities -- ones that could never be possible with a traditional book.'
On entering new businesses:
'Before we invest our shareholders' money in a new business, we must convince ourselves that the new opportunity can generate the returns on capital our investors expected when they invested in Amazon. And we must convince ourselves that the new business can grow to a scale where it can be significant in the context of our overall company.
Furthermore, we must believe that the opportunity is currently underserved and that we have the capabilities needed to bring strong customer-facing differentiation to the marketplace. Without that, it's unlikely we'd get to scale in that new business...When you do see us enter new businesses, it's because we believe the above tests have been passed.'
On data-driven decision-making:
'Many of the important decisions we make at Amazon.com can be made with data. There is a right answer or a wrong answer, a better answer or a worse answer, and maths tells us which is which.
As you would expect, however, not all of our important decisions can be made in this enviable, maths-based way. Sometimes we have little or no historical data to guide us and proactive experimentation is impossible, impractical, or tantamount to a decision to proceed. Though data, analysis, and maths play a role, the prime ingredient in these decisions is judgment.
Maths-based decisions command wide agreement, whereas judgment-based decisions are rightly debated and often controversial, at least until put into practice and demonstrated. Any institution unwilling to endure controversy must limit itself to decisions of the first type. In our view, doing so would not only limit controversy -- it would also significantly limit innovation and long-term value creation.'
On focusing on free cash flow:
'Our ultimate financial measure, and the one we most want 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.
Amazon.com's free cash flow is driven primarily by increasing operating 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 structure.
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 optimising GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows.''
On keeping prices low:
'People see that we're determined to offer both world-leading customer experience and the lowest possible prices, but to some this dual goal seems paradoxical if not downright quixotic. Traditional stores face a time-tested tradeoff between offering high-touch customer experience on the one hand and the lowest possible prices on the other. How can Amazon.com be trying to do both?
The answer is that we transform much of customer experience -- such as unmatched selection, extensive product information, personalised recommendations, and other new software features -- into largely a fixed expense. With customer experience costs largely fixed (more like a publishing model than a retailing model), our costs as a percentage of sales can shrink rapidly as we grow our business. Moreover, customer experience costs that remain variable -- such as the variable portion of fulfillment costs -- improve in our model as we reduce defects. Eliminating defects improves costs and leads to better customer experience.
Our pricing objective is not to discount a small number of products for a limited period of time, but to offer low prices everyday and apply them broadly across our entire product range.'
On the three pillars of customer experience:
'Until July, Amazon.com had been primarily built on two pillars of customer experience: selection and convenience. In July, as I already discussed, we added a third customer experience pillar: relentlessly lowering prices. You should know that our commitment to the first two pillars remains as strong as ever.
As my last example, I'll just point out that one of the most important things we've done to improve convenience and experience for customers also happens to be a huge driver of variable cost productivity: eliminating mistakes and errors at their root.'
On operational excellence:
'To us, operational excellence implies two things: delivering continuous improvement in customer experience and driving productivity, margin, efficiency, and asset velocity across all our businesses.
Often, the best way to drive one of these is to deliver the other. For instance, more efficient distribution yields faster delivery times, which in turn lowers contacts per order and customer service costs. These, in turn, improve customer experience and build brand, which in turn decreases customer acquisition and retention costs.
Our whole company is highly focused on driving operational excellence in each area of our business in 2000. Being world class in both customer experience and operations will allow us to grow faster and deliver even higher service levels.'
'During our hiring meetings, we ask people to consider three questions before making a decision:
• Will you admire this person? If you think about the people you've admired in your life, they are probably people you've been able to learn from or take an example from. For myself, I've always tried hard to work only with people I admire, and I encourage folks here to be just as demanding. Life is definitely too short to do otherwise.
• Will this person raise the average level of effectiveness of the group they're entering? We want to fight entropy. The bar has to continuously go up. I ask people to visualise the company 5 years from now. At that point, each of us 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 all of us. It's often something that's not even related to their jobs. One person here is a National Spelling Bee champion (1978, I believe). I suspect it doesn't help her in her everyday work, but it does make working here more fun if you can occasionally snag her in the hall with a quick challenge: 'onomatopoeia!''
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