Blitzscaling by Reid Hoffman and Chris Yeh

By: Reid Hoffman and Chris Yeh

42 MINUTE AUDIO / 5,400 WORDS (20 PAGES)

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SYNOPSIS

Blitzscaling is all about rapidly growing and scaling a business or product. Learn the techniques that digital companies like Google, Linkedin and Facebook use to scale and double in size in a short period of time.

Read case studies on how entrepreneurs have applied these techniques to build massive companies in short time frames. Blitzscaling is a process that must be understood by managers, executives and venture capitalists who want to invest or develop such companies.

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TOP 20 INSIGHTS

  1. Blitzscaling is an aggressive growth program that prioritizes speed over efficiency. It is both a general framework and a set of specific strategies and tactics.

  2. While Blitzscaling is credited as a Silicon Valley creation, many of the tactics and benefits can be used and enjoyed by just about any industry.

  3. Blitzscaling uses 3 Techniques, the most important of which is design an innovative business model that can truly grow—ideally, before starting the company.

  4. Within the innovative business model are 4 Growth Factors: Market Size, Growth Size, High Distribution Margin, and Network Effects. The most important is Market Size: Eliminate ideas that serve too small of a market.

  5. 2 Obstacles that can limit the company’s growth: lack of product/market fit and operational scalability. Are you able to scale without major failures, such as overloaded servers or routinely malfunctioning products?

  6. Next, the 7 Business Model Patterns. If you want to scale at warp speed, consider about a digital business. Think software as a service, or a social network, or some other kind of digital good.

  7. There are 4 Principles that power the technological and business innovation: Moore’s Law, Automation, Adaptation, and Contrarianism. Of these, Contrarianism is perhaps the most difficult.

  8. The only time to blitzscale is when you have determined that speed is THE critical strategy to achieve massive outcomes. This means tolerating greater uncertainty or less efficiency than competing companies do.

  9. If your market stops growing or reaches its upper limit, it’s time to stop blitzscaling.

  10. As you Blitzscale, you will encounter 5 Stages: Family, Tribe, Village, City, and Nation. At the Family stage, the founder pulls all the levers of growth.

  11. At the Tribe and Village levels, the founder manages the people who are pulling the levers. The founder also designs an organization that pulls the levers.

  12. At the City stage, the founder makes high-level decisions about goals and strategies. And at the National stage, the founder pulls he organization back from blitzscaling and starts growing new product lines and business units.

  13. There are 8 Transitions through blitzscaling. The most important are transitioning from Small to Large teams, from Inspiration to Data, and Single-focus to Multithreading.

  14. Next come 9 Counterintuitive Rules. Of these, we think the most interesting are Let Fires Burn and Ignore the Customer.

  15. “Let Fires Burn” means to focus on the really big fires that, if left unchecked, could destroy the company. If anything can wait, let it wait.

  16. “Ignore the Customer” means “Provide whatever customer service you can as long as it doesn’t slow you down.”

  17. Established companies can also blitzscale, even when slowed by caution and processes. They can overcome these barriers by leveraging the people and businesses that have prior blitzscaling experience.

  18. China may become an even better landscape for blitzscaling than Silicon Valley. It has an entrepreneurial culture that encourages risk taking, a highly developed financial sector that is willing to fund aggressive growth.

  19. If competitors are trying to out-blitzscale your business, you can either beat them, join them, or avoid them.

  20. The speed of technological change is increasing the speed of change for every business. All of this means that speed and uncertainty are the new stability. To thrive, you need to be an infinite learner and a first responder.

 

SUMMARY

Blitzscaling is a strategy of prioritizing speed over efficiency in the face of uncertainty. It is an offensive strategy that thrives on positive feedback loops. It is based on three key techniques. First, design an innovative business model that can truly grow—ideally, before starting the company. Second, implement an innovative strategy—build growth factors into the model through network effects and implement a financial strategy that supports aggressive spending. Third, use an innovative approach to management, recognizing that the rapid growth of blitzscaling brings significant human resources challenges. This means acknowledging key transitions and following some counterintuitive rules. Although blitzscaling was developed in Silicon Valley it can—and, increasingly, does—apply to industries and regions throughout the world. It is the key business development approach to use in a rapidly-changing world.

 

Definition of blitzscaling

Blitzscaling is an aggressive, all-out program of growth that prioritizes speed over efficiency, even in an environment of uncertainty. It is both a general framework and a set of specific strategies and tactics to use in any business where scale really matters and getting in early and fast can make all the difference. Classic business strategy emphasizes correctness and efficiency over speed, but when a market is up for grabs the risk isn’t inefficiency, it’s playing it too safe.

For startups, there comes a point where the company has the opportunity to scale-up; and the fastest and most direct way to do it is through blitzscaling. Amazon’s phenomenal growth in the late 1990s is a prime example: in 1996 Amazon Books had 151 employees and $5.1 million in revenues; by 1999 the company had jumped to 7,600 employees and $1.64 billion in revenues, renaming itself Amazon.com along the way.

Most of the prominent examples of successful blitzscaling come from Silicon Valley—not just because of its concentration of talent, capital, and entrepreneurs, but because this was where the secret of blitzscaling was first put into practice. However, blitzscaling can actually be done anywhere.

Not just growth

A classic start-up prioritizes controlled, efficient growth as it tries to establish certainty. Classic scale-up growth means growing efficiently as the company tries to maximize returns in an established market. Fast-scaling happens when a company sacrifices efficiency for the sake of growth, but is doing so in an environment of certainty, for example where a company is trying to gain market share.

Blitzscaling is different. It’s not just about rapid growth, but rather is a strategy of prioritizing speed over efficiency in the face of uncertainty. Blitzscaling means waiting to achieve certainty on whether the sacrifice will pay off. It combines the frightening uncertainty of start-up growth with the potential for an even bigger failure. It means convincing investors to give you money for a calculated gamble rather than a sure thing.

The basics

Blitzscaling is an offensive strategy: you take the market by surprise; build a long-term competitive advantage before anyone else; and get the attention of investors as the new market leader. It is also a defensive strategy in that you set a pace that leaves competitors gasping to keep up.

Blitzscaling thrives on positive feedback loops. Once a company occupies the high ground, the networks around it recognize its leadership, and talent and capital flood in. It also comes with massive risks.

A company will employ different types of scaling at different stages in its lifecycle. What works for a Family-size company (1-9 employees) will not work for a Tribe (10-90 employees), a Village (hundreds of employees), a City (thousands of employees), or a Nation (tens of thousands).

Blitzscaling is based on three key techniques. The first is to design an innovative business model that can truly grow—ideally, before starting the company. Uber and Airbnb are examples of companies that grew rapidly based on novel business models. The second key technique is strategy innovation—build the growth factors into the model through network effects and implement a financial strategy that supports aggressive spending. Third is management innovation; bearing in mind that the rapid growth of blitzscaling brings significant human resources challenges.

 

Innovative business model

The first core technique of blitzscaling is to design an innovative business model that is capable of exponential growth. There are plenty of start-ups that relied on technology innovation without any real business model innovation, and most of them went bust—Netscape’s IPO kicked off the dotcom boom, but the company followed a tried-and-true business model and was soon beaten by Microsoft, an established company that knew how to use its economic might.

Growth factors

No one model will work for every business, but to blitzscale successfully your model should maximize four key growth factors.

Market size

Eliminate ideas that serve too small of a market. A large market has more potential customers and a variety of channels for reaching those customers. Amazon began as Amazon Books, but Jeff Bezos saw bookselling as a beachhead from which Amazon could expand to “the everything store.”

Distribution

Find creative ways to tap into existing networks to distribute your products. Think, too, in terms of ‘virality,’ getting users of the product to bring in more users, who in turn bring in more, and so on. Virality usually starts with something that is free or freemium—i.e., free up to a certain point, after which the user has to pay to upgrade, like Dropbox.

High gross margins

Gross margins represent sales minus the cost of goods sold. Successful blitzscalers tend to have gross margins over 60%. However, for a company such as Amazon, which deliberately prices its products to maximize market share, the gross margin is potential rather than realized.

Network effects

This factor plays the key role in sustaining growth long enough to build a valuable and lasting franchise; and, thanks to the rise of the internet, network effects can reach levels never before seen. Network effects generate a positive feedback loop that generates superlative growth and value creation.

There are direct network effects, where increases in usage lead to direct increases in value (e.g., Facebook and WhatsApp); and indirect effects, where increases in usage prompt consumption of complementary products that in turn increase the value of the original product (e.g., iOS encouraging third-party app developers whose products boost the value of the operating system). Marketplaces such as eBay are two-sided networks where increased use by one set of users boosts the value to a complementary set.

You cannot start small and hope to grow slowly; the network effect won’t kick in until your product is widely adopted in a particular market.

Growth limiters

In addition to the four growth factors, there are two obstacles that can limit the company’s growth. The first is a lack of product/market fit; have you really discovered a nonobvious market opportunity where you have a unique advantage or approach? The second is operational scalability. For example, Friendster was the first online social network that grew to millions of users within months; but its servers couldn’t handle the volume and it was soon over-taken by MySpace (which in turn lost out to Facebook). Tesla Motors’ growth has been held back by infrastructure limitations.

Seven business model patterns

The following are good patterns for an innovative business model:

Bits not atoms

Bits-based businesses like Google and Facebook have an easier time serving a global market. Bits are easier to move around than atoms and can iterate more quickly.

Platforms

A software-based platform like Amazon or iOS can achieve global distribution almost-immediately.

Free or fremium

At LinkedIn, the free basic account is a tool for discovery and gaining a critical mass of users. It encourages distribution and virality, with a percentage of users upgrading to a paid version.

Marketplaces

Think eBay, Google, and Airbnb—even local marketplaces have long been a valuable business model, but the internet age allows online marketplaces to go global.

Subscriptions

Software-as-a-service (SaaS) has become the dominant model for enterprise software and for streaming entertainment such as Netflix or Spotify. Once a subscription business achieves scale it can be more aggressive with long-term investments.

Digital goods

These are intangible products that have no intrinsic value but sit at the intersection of bits and atoms—such as in-app purchases, or the messaging service LINE that gets revenue from selling “stickers” (images incorporated into smartphone messages).

Feeds

A news feed with sponsored updates is the most effective way to monetize internet ‘eyeballs.’

Underlying business model principles

There are four underlying principles that power the technological innovation that enables business model innovation. The first is Moore’s Law, which predicts that computing power tends to double every eighteen months. The second is automation, the principle that increases the productivity of Amazon’s warehouses and keeps Google’s server farms running 24/7. The third principle is adaptation, not optimization, with companies that practice continuous improvement. Finally, being contrarian is often critical to the process of creating a massively valuable technology company—Amazon pursued e-commerce when most people believed that consumers would never feel comfortable using credit cards online.

 

Innovative strategy

Once you have a business model that can support massive growth and value creation, the next step is to decide your strategy; and the first strategic choice is whether or not to blitzscale.

When to blitzscale

The only time when it makes sense to blitzscale is when you have determined that speed into the market is THE critical strategy to achieve massive outcomes.

Perhaps a big new opportunity has arisen because a technological innovation has created a new market or scrambled an existing one. The most frequent offensive reason for blitzscaling is to achieve a critical mass that confers a lasting competitive advantage. This is not the same as first-mover advantage—unless you are first to scale, being first to launch will not leave you as the dominant player.

Blitzscaling can also be used to create a lasting competitive advantage if you are the first to climb a steep learning curve. Netflix climbed a series of steep curves, first by developing a subscription video service, then by building out a massive streaming infrastructure and refining its consumer recommendation engine, and now by developing original content. The most common driver of blitzscaling is the threat of competition; the more intense it is, the faster you should try to move.

Once you decide to blitzscale, the key question to answer is, “How can we move faster?” This means tolerating greater uncertainty or less efficiency than competing companies do.

Just because you can blitzscale doesn’t mean you should. If taking on additional cost and uncertainty doesn’t confer an advantage, follow the traditional rules of business—at least, for now. Don’t blitzscale if…

 
 

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