Fast Running Amazon Flywheel

Jeff Bezos (JeffBezos) was founded in 1995.

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20 years later, Amazon's market capitalization has reached US $340 billion, becoming the largest Internet retailer in the world, and the second largest Internet Co in the world, after Alphabet (Google).

Amazon's huge success has also brought Bezos amazing wealth.

Bezos is still the largest shareholder of Amazon. In 2016, Forbes ranked fifth in global wealth and personal assets amounted to $45 billion 200 million.

In addition, Bezos is generally acknowledged as the most farsighted CEO.

Harvard Business Review commented on him:

He 's invented a new philosophy for running a business.

Bezos has always been interested in "newphilosophy".

Take the most direct example, as shown below, since Amazon's listing in 1997, Amazon's operating income has been increasing exponentially, but it is losing money most of the time.

What did Bezos think? How did he persuade Wall Street and investors?

Source: Amazon's calendar year financial statements

Fortunately, we can find enough information to understand his "new philosophy".

There are several books describing Amazon and Bezos, mostly written before 2010.

The latest and most widely recognized one is the Brad Stone's "The everything store:Jeff Bezo sand the age of Amazon" published in 2013 (all in one: Bezos and Amazon era).

At the same time, like Warren Buffett, Bezos will write a letter to shareholders every year, describing the past year's achievements and Amazon's main business philosophy and decision-making logic. There are 19 letters.

In addition, we can find many public speeches and interviews.

All of these add a lot of inspiration to Bezos's new business philosophy.

Dominant strategy vs. differentiation strategy

A classic saying about strategy:

Strategy is all about trade-offs.

As a company, is the strategic direction of high quality or low price?

Occupy different subdivisions

Or concentrate on one market and make a large single product to achieve economies of scale?

Amazon's strategy is not so. It does not choose two at high quality and low price.

It's like Dominant Strategy in game theory. No matter how competitors choose, Amazon uses its best strategy and never considers compromise: at the same time, it provides unlimited options, top-level shoppers' experience and lowest price.

In the past 20 years, this strategy has never changed.

For example, in 2005, Amazon launched the Prime, allowing users to pay $79 to enjoy free express two day service (at that time the user waiting time was generally more than 5 days at the time).

This service has always been controversial.

If the cost of a single order by a courier company is 8 dollars, while the Prime member has 20 orders a year, then the shipping cost of the company will reach 160 dollars a year, which is much higher than the membership fee of 79 dollars.

This service is too expensive for the company to achieve breakeven.

All in all: Bezos and the Amazon Era

In the end, Bezos bent on his own way.

Facts have also proved that Prime has achieved great success in the next few years.

The number of members joining Prime has doubled on average in Amazon, and a large number of customers have become Amazon's fans because of this service.

Prime has become one of the key decisions for Amazon to successfully shake off Ebay.

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Put strategy on the same thing.

After understanding Amazon's dominance strategy, a natural question is: why should low price, unlimited choice and shopper experience be the core of the dominant strategy?

At the re:invent conference in 2012, Bezos gave a clear explanation:

I am often asked a question: "what will happen in the next 10 years?"

But I was rarely asked, "what is the same in the next 10 years?" I think the second question is more important than the first one, because you need to build your strategy on the same thing.

In Amazon's retail business, we know that consumers will want products with lower prices, which will remain the same 10 years later.

They want faster logistics and more choices.

It's hard to imagine that customers will come to me 10 years later and say to me, "Jeff, I like Amazon, but can your price be more expensive, or the arrival time is slower?"

...

So we put our energies into these changeless things. We know that the energy we put in now will continue to benefit us in 10 years and 10 years.

When you find a right thing, even 10 years later, it's worth a lot of energy.

Putting strategy on the same thing, Bezos not only applies this philosophy to retail business, but also applies to Amazon's AWS Amazon Web Services.

The direction of cloud computing is also very direct.

For me, it's hard for me to imagine that 10 years later, someone will say to me, "I like AWS, but I hope it is not so trustworthy", or "I like AWS, but I hope it is a little higher" or "I like AWS, but I hope you can slow down and improve API".

It is based on this dominant strategy that Amazon continuously inputs energy and resources in several key areas to build a number of advantages in cloud computing.

This strategy has made AWS win in the field of cloud computing. Microsoft's Azure, Google GCE, IBMSoftlayer and Ali cloud's four market share is not as good as a AWS.

Deutsche Bank also expects Amazon AWS's revenue to reach $10 billion in 2016.

Fast running Amazon flywheel

But for many people, offering low prices and providing top shoppers' experience is still a contradiction.

Other retailers can't do that. Why can Amazon do that?

The secret is hidden in Amazon's financial statements. Bezos also gave his answer in his letter to shareholders in 2002.

In fact, Amazon has changed most of the cost associated with shopping experience into fixed costs, such as unlimited commodity selection, personalized recommendation, etc.

When the vast majority of shoppers' experience are fixed costs, with the rapid growth of sales, the cost of unit sales is declining rapidly.

In addition, even in the changing parts, such as the cost of defective products in order fulfillment, when the company is committed to reducing the defective rate, the cost of the company will decrease and shoppers' experience will continue to rise.

Compared with the real economy, the Internet makes hundreds of millions of touch ups possible, and when a company can make good use of its huge scale, changing the variable cost into fixed costs will create huge cost advantages.

It is worth mentioning that, unlike differentiation strategy, this strategy of superposing advantages in different fields often produces 1+1 far greater than 2.

The advantages of building resources into different fields are not isolated. They are like turning a flywheel. When you start the flywheel, you can use them to interact with each other, and the flywheels are moving faster and faster.

As early as 2000, Bezos and his executives discovered this:

Bezos and his assistant team described the prospect of the company entering a virtuous circle. They believe that this will become a powerful driving force for the development of the company.

The future blueprint of the company is to attract more customers at lower prices.

More customers mean higher sales and attract more third party retailers to Amazon.

This will also enable Amason to earn more profits from fixed costs, such as logistics centers and servers running websites.

Higher efficiency will further reduce prices.

They concluded that any flywheel would accelerate the entire cycle as long as it runs smoothly.

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Amazon executives are excited about this.

According to the description of several members of the Amazon executive team at that time, they felt that after years of training, the company finally realized the rules of operation.

All in all: Bezos and the Amazon Era

This is a vivid example of the Lollapalooza effect that Charlie Munger has always emphasized.

It is precisely because of this rapidly rotating flywheel that Amazon's revenue has drawn a pretty near exponential growth curve.

We reflect on China's electricity supplier, many people have always believed that the electricity supplier is a typical traffic economy.

Traffic can be bought, and the conversion cost between electricity providers is low. So how can an electric company set up its core competitive advantage? Do they have to invest heavily in advertising or traffic flow?

I think Amazon has given us a good answer.