Successful managers can turn razor-thin margins into profit

In 1997, an upstart company sent out its first letter to shareholders to explain its business philosophy. The young chief executive reportedly measured the firm’s success not by profitability but by market leadership as defined by growing market share. “We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure,” he said.

This is a textbook approach for a fledgling company during its early investment phase. Remarkably, the same strategy is still in place 19 years later, even though the company has grown to US$100 billion in annual sales. This company is Amazon, and in every earnings call, Jeff Bezos likes to attach his original 1997 letter to investors, reminding people, “It’s still Day 1.”

Amazon built its empire selling physical books, CDs and DVDs. Next came video streaming, then the Kindle e-book library, later followed by Audible, an audiobook company Amazon owns. Added recently is Echo, a wireless speaker and voice command centre that allows users, through voice interaction, to play music, make to-do lists, set alarms, stream podcasts, order takeout, and much more. If this is not nearly enough, Amazon’s Web Services, its cloud computing division, is raking in billions every year, outstripping all competitors, including Microsoft’s Windows Azure and Google’s Cloud Storage.

None of these frantic expansions comes cheap, as sprawling investments have condemned the company to subsist on razor-thin margins. Critics have scorned Amazon as “a charitable organisation being run by elements of the investment community for the benefit of consumers,” so much so that the firm registered a net loss of US$274 million in the third quarter of 2012.

However, observers soon shrugged the loss off, as sales kept climbing. By the end of that same year, Fortune had named Jeff Bezos its Businessperson of the Year.