Amazon’s Long Term Objectives

Amazon’s Long Term Objectives

Jess Mader – MSM 9034

Amazon’s primary long term goal is to aggressively grow their market shares to achieve consistent profit for shareholders. Amazon does not typically generate substantial profits. The main reason why Amazon does not generate meaningful profit is that it generates substantial revenue from sales and then reinvests the money into other business lines. Jeff Bezos, Amazon’s CEO believes that in order to grow, companies must aggressively reinvest revenue into growing business.  Those revenues may also be profitable, and those profits can in turn be immediately spent again on more growth. By eschewing profits, the company can also offer the lowest prices possible (which is why consumers are so loyal to it). Some parts of the company are profitable and fuel growth in others (Edwards, 2015). Unlike most publicly traded companies, Amazon does not focus earnings per share for investors. It is somewhat of an unusual model but due to the growth of Amazon, it has yet to negatively impact the company. In other words, the company may be losing (a lot of) money, but they’re generating huge sales volumes and growing market share. Revenue is increasing; profit can come later. Short-term gains are sacrificed for long-term goals — and it seems to be working so far. Amazon’s growth is outpacing overall ecommerce and retail growth which means it’s succeeding at stealing market share from competitors (Shpanya, 2013).

[pic 2]

The chart above is a good illustration of how Amazon generates strong revenues but little or no profit as it’s reinvested into other businesses.

The unusual dynamic that Amazon has enjoyed is that investors have continued to invest in the company even when profits are slim or non-existent. The patience investors have with Amazon is impressive and it shows they believe in the long term potential for profitability in the future. Amazon does have to tread carefully when it comes to investments. When Amazon went into the phone business, they entered a market with a slim margin where they had to compete against entrenched competitors. The result was not good; Amazon’s Fire phone could not compete with the iPhone, Samsung Galaxy, or the Android phone. Another reason for Amazon’s failure in the mobile phone market is that they simply arrived too late. The Fire phone was plain and non-descript so from a technical standpoint, it was an inferior product compared to the brands it was competing against.  

To really understand this strategy as it applies to Amazon, you simply need to recognize that not every investment—in the sense of a future-oriented financial commitment—is an investment according to the rules of corporate accounting. If you take a bunch of money and use it to build a server farm or buy an office building, that’s an accounting investment. Amazon does plenty of this kind of investment but what doesn’t show up on the balance sheet in the same way is the company’s most important investment: the firm commitment to ultra-low prices (Yglesias, 2014). Amazon’s driving goal is to dominate markets through aggressive pricing. Unlike the Fire phone, the Kindle Fire is a tablet developed by Amazon to compete with Apple and Samsung; however, the main difference is you can get a Kindle for hundreds of dollars less than you could buy an Apple or Samsung tablet. Amazon’s philosophy is essentially it will break even or even lose margin on the sale of the device, but that is not where they are focusing on for generating revenue. Amazon looks at the Kindle as a device of consumption. They want to provide a cost effective device for consumers who in turn will use that device to purchase additional Amazon products and services. For example, many purchasers of Kindle devices will by eBooks from Amazon or stream media through Amazon’s streaming services.