In admiration of Amazon - Management Theories in Practice

In any management school there is a lot of excellent philosophy (call it research or theories) taught for running a business successfully. What I have enjoyed the most are studies of several successful and unsuccessful businesses and stories of transformation and lessons learnt, taught through case studies.

Amazon is a fine example of an organisation that has succeeded in managing a business really well. It's transformation to what it has become since its foundation in 1994 is exemplary and a great education in management.

What is unique to the organisation is its diversification of its portfolio of products and services and being successful in most of them, be it e-commerce, cloud computing, logistics, media or AI and IoT devices. Every business venture it has succeeded in, it has passed the 'Porters Five Forces analysis' and continued to generate great returns for the investors.

Such a diversification could be considered a risk by most entrants especially when the businesses would turn profitable only after a significant period and continuous investments. While it has taken over two decades for the company to become profitable, it has shown steady growth through its operational and forecasting excellence, customer capitalisation and positioning.

*For a full list of Amazon's innovations, please visit the official site of the company.

The diversification into Amazon Cloud Services and revenue generation through advertising is paying off. The online retail business has created a mindshare and value for customers that is unparalleled in e-commerce business (of course, Alibaba needs a special mention here for its revenue model and profitability although different from Amazon's. The direct retail customer outreach touching lives daily across the globe by Amazon still reigns supreme.)

For any company to reach out to a large number of retail customers with its products and services and go global requires the perfect amount of localisation, region specific knowledge, geo-political understanding and ability to sustain in the local and global competitive environments in addition to the factors noted below.

Amazon has over the years developed the maturity in all of the following strategic aspects.

Some of the achievements and outstanding qualities of the organisation due to a cohesive and efficient management, best of the breed strategy and finest minds working for Amazon are (reference Wiki):

1. In 2015, Amazon surpassed Walmart as the most valuable retailer in the United States by market capitalization.
2. Amazon is the fourth most valuable public company in the world
3. It is the largest Internet company by revenue in the world
4. It's the eighth largest employer in the United States.
5. In 2017, Amazon acquired Whole Foods Market for $13.4 billion, which vastly increased Amazon's presence as a brick-and-mortar retailer. The acquisition was interpreted by some as a direct attempt to challenge Walmart's traditional retail stores.
6. Consistent investment in results based innovation. Amazon's Lab126 has created from Kindle E-readers, Fire TV Stick to Amazon Echo and Echo Dot. At the time of writing this article Amazon is already working on testing and capitalising its idea and patent on 'Anticipatory Shipping' that allows Amazon to ship products to customers before they order it leveraging the best of big-data and predictive analytics technology.
7. For the Amazon.com (and country specific e-commerce business) the customer service strategy, customer focus, automation in customer support tasks (order processing, editing, cancelling, refund processing etc.) has been so good that it has a huge consistent word-of-mouth publicity driving its business higher.
8. Excellence in all of the functions as noted above have insured the trust of the public and investors in this brand. In spite of a high P/E ratio (over 243 at the time of writing this article with the stock touching a new high of $1500 and a market cap of $726 billion) the investors faith in the growth of the stock, its earnings has been very high.

The company is guided by three principles: customer obsession rather than competitor focus, passion for invention, and long-term thinking. 

Looking at only the financial statements of Amazon it would have been a difficult bet to invest on it but it is irrelevant when we consider all the other factors that show consistent growth (as noted in this article). Here is an excellent article on "Why Financial Statements Don't Work for Digital Companies", a recommended reading.

For non-digital companies I would recommend examining the financial health by looking into the financial ratios, offering a good summary, as described in my other article (Stock Analysis using Financial Ratios) that you can read at the link given below.

Amazon has been a consistent performer and a delight for customers for the value it has consistently created. In addition to Amazon, other organisations that I admire are Netflix, Apple, Adobe, Starbucks, Southwest airlines, Intel and Alphabet as they also have been great examples of management done right and the best of management theories being practiced.

Disclaimer: Views expressed are personal. This article is not a recommendation for stock investments.