Any company whose brand becomes a common noun (without the capital letter, called an eponym) has made a big impact. Generations have cleaned the house with a hoover, blown their noses with a kleenex, stored hot drinks in a thermos and xeroxed a document. Most of us google rather than search.
Although not exactly the same thing, the goal of many new companies is to become ‘the Amazon of’ something. In wealth management and superannuation, many new entrants describe their strategy as aiming to become ‘the Amazon of financial services’.
Well, good luck with that, because not only is Amazon a unique company, it may well want to become the Amazon of financial services itself. FinancialAdvisorIQ (part of the Financial Times group) recently published an article about digital financial advice (FA) called ‘Betterment Yearns to be Amazon of FAs. Does Amazon?’ including this statement:
“Amazon entering wealth management would cause a major disruption to the advice industry, pushing down prices and driving up demand for far faster delivery of financial services.”
And now Amazon is coming to Australia, and it will change retailing and other sectors such as property and shopping malls forever. Investors should consider whether other companies held in an investment portfolio can measure up to these challenges in a digital, fast-moving world.
CEO Jeff Bezos’s annual letter to shareholders
Amazon has disrupted many industries, and destroyed companies such as Borders Bookstores, but in its 20 years, it has had negligible impact on financial services.
Warren Buffett produces an annual letter to his shareholders which is widely quoted, but it’s less well-known that Amazon’s Chief Executive Jeff Bezos does the same. It’s a completely different style. Buffett focuses on his returns and investments, and it’s clear that making money is the main game. In his 2017 letter, Bezos does not mention ‘profit’ once, while ‘customer’ receives 19 hits.
There are a few highlights in Bezos’s letter that everyone can learn from, although the vast majority of large companies do not have the internal structures and processes to make them work. Bezos wants his company to always operate as if it’s Day 1, as Day 2 is a step to an excruciating, painful decline followed by death. Day 1 vitality requires obsessive customer focus.
He identifies four rules for making high quality decisions that apply to managing a company, and they may be useful for investing or even making the most of a relationship. The rules are:
1. High velocity decision making
Large organisations struggle to decide quickly because they fear failure. Speed matters, and where a decision is reversible, it should use a lightweight process. It doesn’t matter much if it’s wrong.
2. Don’t wait for certainty
Most companies overestimate the cost of being wrong, whereas being slow will be expensive.
“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 recognising and correcting bad decisions.”
3. Disagree and commit
It’s often difficult to achieve consensus, as nobody can know with certainty the outcome of a new initiative. He says ‘disagree and commit’ saves a lot of time:
“I disagree and commit all the time … (My staff) had a completely different opinion and wanted to go ahead. I wrote back right away with “I disagree and commit and hope it becomes the most watched thing we’ve ever made.” Consider how much slower this decision cycle would have been if the team had actually had to convince me rather than simply get my commitment.”
4. Recognise misalignment
Misalignment between teams and objectives must be identified early and addressed, or the problem will lead to exhaustion.
“Whoever has more stamina carries the decision. I’ve seen many examples of sincere misalignment at Amazon over the years. When we decided to invite third party sellers to compete directly against us on our own product detail pages – that was a big one. Many smart, well-intentioned Amazonians were simply not at all aligned with the direction. The big decision set up hundreds of smaller decisions, many of which needed to be escalated to the senior team. “You’ve worn me down” is an awful decision-making process. It’s slow and de-energising. Go for quick escalation instead – it’s better.”
Does it work?
Many analysts have criticised Bezos over the years for investing in the business rather than creating more profits and dividends. When $10,000 invested in 1997 now has a value of about five million dollars, it’s hard to criticise success and the way Amazon is challenging other businesses the world over. Are investments in your portfolio ready for the Amazon challenge?
Do you use Amazon?
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