We’re optimists, but a healthy dose of skepticism pays the bills. The Amazon Filter has become a foundational piece of Permanent Equity’s process.

Here are a series of questions we typically ask when evaluating an investment opportunity. Since we only look at North American-based businesses with three or more years of $1 million to $10 million in annual owner earnings, some of these questions aren’t universally applicable.

• For any distribution or retail operation, is there a high-value service component? If so, how sticky is that component for their customers?

• How strong is the brand? Has the company’s trajectory suffered as Amazon has risen to prominence?  

• What, if anything, does Amazon currently control about the company’s business model and/or profit margins?

• Is Amazon currently a friend or foe of the company’s model? If currently considered independent (neither friend nor foe), why?

• If/When Amazon is a foe, what makes the company competitively viable? How could that change in the future? What investments will be required?

• If Amazon is currently a friend, under what circumstances would they be likely to become a foe?

• If the company is currently considered independent, under what circumstances would they be likely to become a foe?

• What, if any, intellectual property or regulations would make it difficult for Amazon to enter the company’s market as a viable competitor? Is there an expiration date on any barriers?

• In what ways, if any, has the company made changes to their margins, operations and/or model in response to Amazon? What kind of pressure has Amazon applied through re-setting customer expectations?

• Review gross margins history. How have they changed over time? How does that compare to when there was noteworthy Amazon advancement within the company’s industry?

• How has the company’s income statement been altered by Amazon-oriented activity (i.e. free shipping, returns)?

• How has the company’s balance sheet been altered by Amazon-oriented activity (i.e. having to hold more inventory)?

• Under what circumstances could Amazon serve as an enabler for the company?

• Under what circumstances could Amazon’s scale of market and consumer intelligence threaten the company?

• How has the company responded to the rise of online reputation management? Does the company take online reviews/ratings seriously?

• What is the day-to-day leadership’s view of Amazon? How proactive are they in consideration of future threats and opportunities?

• In what ways can the company “beat” Amazon within its niche?

Broadly, the subject of Amazon serves as one vehicle to better understand how a company’s leadership considers opportunities, obstacles and competition. How are they thinking about market forces? How quickly do competitive forces come up? What future growth sources are mentioned? Is the overall discussion optimistic or pessimistic? Is Amazon friend, foe, both, or unanalyzed?

What we are certain of is that Amazon should be a topic of discussion in every business. Independently, we’ve sought to understand the gorilla broadly so that our conversations with an investment prospect can focus on the nuances of Amazon in relation to their operations.

Amazon is one of many reasons why we only pursue businesses with a defined target and niche. At the scale of business size we consider for investment, it is extremely unlikely a business will out-compete Amazon on general business tactics that benefit from scale (i.e marketing spend, online checkout experience, inventory). So, the business needs to be better at something else.

A niche does not need to be defined by distribution strategy (or even related to it). We’ve considered businesses that sell through Amazon, including some that use Fulfillment by Amazon. If such distribution aids a company in meeting customers’ needs, while remaining profitable, that’s great. But, as long-term investors, we will also analyze why Amazon wouldn’t go direct or change the market conditions to erode profitability.

Some niches are better protected than others. One of the reasons we seek out more blue collar, regional businesses is that their competitive moats seem more durable. Every time Google updates its search algorithm, for instance, it doesn’t send their team into a frenzy. Rather, they know the people, they know the building codes, they know the processes, they know when and where to call B.S. They have reputations built through handshakes and multi-decade histories of successful outcomes; perhaps this has started to translate into “stars” and reviews online, or perhaps that’s an opportunity for further reputation development.

Going beyond how we target and analyze individual opportunities to invest, Amazon is a company we respect and admire, and an entity with which we want to collaborate and compete against in our portfolio. For a variety of reasons, from antitrust regulation and consumer psychology, to supplier frustration and it’s sheer size, we don’t envision a future in which every purchase will be facilitated by Amazon. We don’t envision they will enter every market. And we don’t envision that they are capable of wiping out competition and profitability in every industry. However, we believe there are still a lot of tricks up Bezos’ sleeve.

For now, we see two distinct groups emerging: those that will be (or already have been) swallowed by Amazon, and those that, due to niche, market barriers and many other factors, are able to maintain various levels of autonomy. In investing, we focus on the latter.

For any company, there is an ocean of opportunity to explore. Whether it’s improving product information, sourcing customer data and feedback, utilizing Amazon distribution or warehousing services, or advertising on one of their platforms, there are lessons to be learned and capabilities to be leveraged from Amazon. It is possible for the marketplace’s gorilla to be both friend and foe.

What we focus on is not how to beat Amazon by being like Amazon, but how to be the best with, without, or in spite of, Amazon in the marketplace. Bezos doesn’t own the “Day One” mentality of continuous improvement, and “never resting on our laurels” can manifest in many ways.

For the business owners continuing to grind, maintaining autonomy while seeking to build and hold a competitive moat, you have a challenging, but not impossible road. But, that’s always been true. Nothing worthwhile ever comes easily. If we thought the road impossible, we wouldn’t invest.

We can offer you no quick fixes, nor a step-by-step resiliency guide, but we can offer you the core lessons we work to remember when evaluating investment opportunities and advising our portfolio leadership teams:

First and foremost, not thinking about Amazon is not an option. Doing so is akin to burying your head in the sand. The company exists and is a dominant force in the economy. Ignoring them just gives them more power to determine potential outcomes for you. Pay attention and put up a fight.

Conversely, obsessing over Amazon is not a leadership strategy. The company is a trendsetter and you should pay attention to how they operate, but it’s also run by messy humans. They make mistakes. Don’t try to be Amazon. Be you.

As you define what “being you” means with each market shift, you will come to a crossroads in which you must determine whether you are better off adapting to, accommodating, or resisting Amazon. This may mean selling through Amazon, depending on them for fulfillment, relying on their tech stack, or possibly even taking a loan from them to fuel increased working capital needs. Evaluating the cost/benefit analysis of autonomy at each crossroad is admittedly tricky. What you give up, you may not necessarily be able to get back. Conversely, stubbornly refusing resources may eventually leave you in the competitive dust.

Paying attention to Amazon may also yield unexpected prospects. Their scale and capabilities may be impressive, but they also create niche opportunities for others. Occasionally, you may find areas in which Amazon fails to meet customers’ needs. Or you may find an industry in which they make conditions so hard for manufacturers that the segment willingly breaks ties and scales back. Or you may discover something smaller and not very scalable, but a potentially compelling differentiator for your brand. If you don’t look, you won’t find.

All of this analysis will mean nothing if you do nothing with it. Being relentless is critical. If you ever need inspiration on this point, just enter Relentless.com into your browser (spoiler: it redirects to Amazon). Amazon invests in R&D, and so should you. Amazon is constantly evaluating areas for improvement, and so should you. Amazon always considers it Day One, and so should you.

Above all, remember that quality matters. If something negative can be said about your offering, in the age of Amazon, it will be said. You won’t be able to control every brand touchpoint. So work towards excellence at every step along the way, and know that it’s a moving target.