Theres a topic that our Pattys Pioneers group had been buzzing about all last week: Why, when Amazon.com posted a 45% drop in net income and a loss for 2012 of $39 million, did its stock go up? And why, when Apple announced an increase of 18% in revenues to $55 billion for the quarter and net income of $13 billion, did its stock go down?

Apples stock vs. Amazons stock from Dec 23 rd to Jan 29 th

In the midst of the lively debate, Scott Jordan posted a link to a great article in the Atlantic by Derek Thompson on February 1st, titled: Why Amazon Is Special and Apple Is Notin 1 Paragraph . Derek Thompson writes:

Why is Wall Street so punishing toward Apple, the most profitable tech company in the world, and so forgiving of Amazon, which can barely turn a profit? This remarkably clear-eyed post by Eugene Wei, Amazon, Apple, and the beauty of low margins , is the most elegant answer to the question Ive read yet. Here is the money paragraph on competitive risk:

An incumbent with high margins, especially in technology, is like a deer that wears a bullseye on its flank. Assuming a company doesnt have a monopoly, its high margin structure screams for a competitor to come in and compete on price, if nothing else, and it also hints at potential complacency. If the company is public, how willing will they be to lower their own margins and take a beating on their public valuation?

Eugene Wei

So, what both of these authors are saying is that, while Apple does a great job designing and delivering products and customer experiences that customers love, its profit margins are high. That makes Apple vulnerable to competitors who can try to offer products that are as elegant and seductive and charge less because they are willing to settle for lower profit margins.

Amazon, on the other hand, optimizes its business to run at the smallest possible profit margin in order to keep prices low and to keep customers coming back for more.

I have long been fascinated by Amazons business strategy. Im not sure that I understand it. This weeks article is my attempt to wrap my mind around it.

Our Pioneers group debate about Amazon and Apple migrated to the question of whether its okay for a public company to pursue a long-term strategic direction without taking into account the needs of its shareholders for quarterly earnings. You can join the discussion here.

Heres my article:

What Makes Amazon Tick?

Understanding the Levers that Amazon Uses to Run its Business

By Patricia B. Seybold, CEO and Sr. Consultant, Patricia Seybold Group, February 7, 2013

What levers does Amazons management team use to steer their $60+ billion global ecosystem? The management teams goals appear to include: Drive margins down, generate sustainable growth in free cash flow, leverage Internet infrastructure, and invent constantly. Some of the strategies they employ to achieve those goals include: eliminate defects early, reduce variable costs and leverage fixed costs, and invest in automation to deliver value and convenience to customers.

Read a sample and download the full report in PDF.