Sunday, October 30, 2011

Amazon gets it right

Being from overseas, I've always wondered at the obsession in American financial circles about companies' quarterly performance. I'm more accustomed to focusing on year-on-year performance, with five- and ten-year plans for corporate development. (Far Eastern companies think in terms of decades, even centuries!) I was therefore encouraged to read an article at Yahoo! Finance that had precisely the right perspective on the latest results from Amazon. Here's an excerpt.

Amazon is a highly unusual American corporation, for several reasons:

  • Amazon unapologetically builds its business for the long-term, without worrying about what short-term Wall Street traders think.
  • Amazon sacrifices near-term profits for long-term investments, again without worrying about what short-term traders think.
  • Amazon operates at a much lower profit margin than it could have if it were trying to "maximize near-term returns," which is what many (most) American corporations try to do.
  • Amazon is investing--and hiring--aggressively for the future, at a time when most American corporations are cutting costs, laying off workers, and hoarding humongous piles of cash.

In other words, Amazon is doing what many more American corporations could and should do: Balance the near-term "profit motive" with a more holistic mission of focusing on the long-term and serving customers, employees, shareholders, and the community at large.

The most pressing problems in the US economy right now are two-fold:

  • Near-record-high unemployment at the same time as near record-high profit margins;
  • Income inequality that is now the highest since the late 1920s, just before the Great Depression.

By balancing near-term profits with investing for the long-term, Amazon is helping to address these problems.

Amazon's profit "disappointment" this quarter was largely due to the fact that the company opened more fulfillment centers and hired more people than it expected to--8,100 people in just this quarter alone.

Amazon's projection of lower-than-expected profit margins next quarter, meanwhile, is likely the result of Amazon investing heavily in an innovative new product, the Kindle, that is revolutionizing the way media is distributed.

The Kindle "ecosystem," which did not exist four years ago, is providing jobs and opportunity for tens of thousands of people in the US and abroad. It is taking advantage of one of America's remaining strengths, technology innovation. Like Amazon itself, it is making consumer's lives better and easier and more convenient.

. . .

If more American companies started to do what Amazon does--ignore short-term pressures, sacrifice near-term profits, and invest for the long-term--the American economy would start to heal itself quickly. America would create more innovation, more jobs, and more long-term wealth. And, just as important, more Americans would be able to go back to being proud of our corporations and innovators and entrepreneurs... instead of camping in parks and protesting them.

There's more at the link.

I couldn't agree more with the authors. As a former corporate manager and company director, I give full marks to Amazon for focusing on the medium to long term, and building the business accordingly.



Unknown said...

Good article.

In a world where capitalism has become a dirty word, maybe Amazon will be a high-profile example of the fact that capitalism isn't just a short-term, non-sustainable motivator.

Old NFO said...

Good post, good links, and good points Peter! They ARE doing things right!

Ritchie said...

One of the roots of the quarterly report mania may very well be the federal requirement for corporate quarterly estimated tax payments.