Blitzscaling Beyond Startups

Blitzscaling Beyond Startups

While the hypergrowth of blitzscaling is often synonymous with the latest high-tech startup from Silicon Valley, blitzscaling isn't limited by geography, industry, or even company size. Blitzscaling is a technique that can also help an established company make the most of a great opportunity. Yet while blitzscaling can be practiced by anyone, it isn't appropriate for everyone.

Blitzscaling isn't a free option. It's costly in a variety of ways, from lower operational efficiency to higher capital expenditure and employee (and founder) burnout. Here's how your company can decide if blitzscaling will work for you.

Is Blitzscaling Right For My Company?

Blitzscaling consists of sacrificing efficiency in order to pursue extremely rapid growth in the face of uncertainty. This implies several key points:

First, blitzscaling fits best with new products and markets that have blockbuster potential. These represent the situations where it is possible (though not easy) to grow from 1 to 1 billion. You can't do that in mature markets, or in new markets that are limited to a small niche. The uncertainty of these new markets drives one of the under-appreciated benefits of blitzscaling: staging your commitment gives you the option to abandon the project if it fails to progress.

A classic big company mistake is to attack a new market at scale right from the beginning. This seems to make sense because a big company appears to have major advantages in resources, brand awareness, and so on. However, trying to scale before achieving product-market fit is a high-risk maneuver which could potentially result in massive losses and little success. Groupon opted for an all-out blitzscaling approach to growth because it thought it had achieved product-market fit with consumers; the problem was that it hadn't achieved the same fit with the local merchants who were providing the deals. When merchants fled the platform, Groupon's growth proved to be unprofitable and unsustainable. Today, Groupon is worth about 1/10th what it was on the day of its IPO, and revenues have been flat for years.

Even successful blitzscalers such as Google have suffered this fate with much-ballyhooed projects like Google Wave and Google+, both of which represented enormous investments that were ultimately unsuccessful. Google felt that they had to launch Google+ to respond to the threat of Facebook, while Google Wave was an attempt to attack Microsoft's email franchise. Both were launched with great fanfare, but failed to win over users. In contrast, Google's push with Android had similar motivations (i.e., responding to the threat of the iPhone), but started as a much smaller effort that was ultimately successful. Blitzscaling requires walking a delicate line between committing too soon (and pursuing the wrong product/market strategy) and committing too late (and falling behind the competition).

Second, the high cost and uncertainty of blitzscaling means that it only makes sense if you have the chance to win a big prize — either an enormous short-term payoff, or a lasting, long-term advantage.

It may be worthwhile to blitzscale if you identify a short but enormously valuable window of opportunity. This tends to happen more in the world of finance — think of the farsighted investors from “The Big Short” who bet against the subprime mortgage market. In 2006, John Paulson raised a $147 million fund to bet against subprime mortgages. The fund generated $17 billion in returns in 2007.

The more common big prize is a lasting, long-term advantage. These advantages, once seized, can generate years or even decades of profits. These advantages can include:

  • Network Effects: This is the primary — though not the only — justification for blitzscaling. Network effects occur when increased usage of a good or service leads to an increase in its value, which in turn makes it more attractive and this leads to further increases in usage. Social networks such as Facebook or LinkedIn are a clear example of the power of this long-term advantage, as are two-sided marketplaces such as Airbnb or eBay.
  • Customer Loyalty: While customer loyalty lacks the feedback loop of network effects, it can still confer a strong and lasting advantage. This loyalty can be based on brand loyalty (the classic approach taken by consumer goods), habit and convenience (Amazon is the example par excellence), or legal enforcement (the winners in the shale oil and gas boom relied on signing long-term leases on the mineral rights of key areas such as Bakken Formation in Montana and North Dakota). Customer loyalty can also take the form of being built into regular processes and workflows.
  • Data/Learning: A final key driver of lasting advantage is your organization's ability to derive key learnings from operating the business. A company that blitzscales ahead of the competition will have more data points from which to learn. This increased data can drive product improvements, which attract more customers, who generate more data to feed back into the start of the loop. Google's search engine is a classic example of this loop. Google built a great search index, but didn't stop there. Google adjusts its search results pages based on what its users do and do not click on. The same applies to its ads. This gives Google a major advantage in delivering relevant results and in maximizing advertising revenue.

In these cases, blitzscaling is essentially a form of long-term investment. You sacrifice efficiency and incur heavy short-term costs in hopes of recouping those expenses (and then some) once you have established your long-term advantage. If you hear people talking about pursuing a “land grab” strategy, but can't explain the source of lasting advantage, close your wallet and consider whether they should be a part of your organization.

Finally, you need to be one of the few or only people who have a key insight into the opportunity that others lack or disagree with. My old friend Peter Thiel famously likes to ask job candidates the question, “What important truth do very few people agree with you on?” This question applies to businesses as well as people. If a large number of players can clearly see the potential of a new market opportunity, know what actions to take to realize that potential, and have the resources to carry out those actions, it is highly likely that a fierce competition will ensue, and highly unlikely that any of the competitors will realize an outstanding return. Even when you're an existing company, there are a lot of startups that are going after the same opportunity, so your chances of success are low. If you're one of 30 companies, your chances of success, all other things being equal, are 3%. And if one of the competitors is already blitzscaling successfully, the only chance to catch them is if they stumble.

Another common misconception, however is that having a truly unique insight eliminates the need for blitzscaling. Your unique advantage is almost certainly temporary. Your own success will draw in competitors, shortening the duration of your window of opportunity. Even the value of enduring market leadership can erode over time. Almost 20 years ago, Microsoft's dominance of the desktop operating system was considered so powerful a monopoly that the Department of Justice sued on antitrust grounds, and the company was ordered to be broken up (this ruling was overturned on appeal). Today, Microsoft still retains over 90% market share of desktop operating systems, but that franchise is less important, thanks to the shift to mobile devices and cloud computing. Microsoft's return to its status as the world's most valuable company has come about because it blitzscaled its new cloud business, not because of the desktop market.

You won't always have a choice whether or not to blitzscale. When a competitor attacks one of your markets and starts to successfully blitzscale, you have to respond in kind or risk conceding the market. This dynamic holds true regardless of whether the blitzscaling competitor is another large company, or more likely, a new startup. Earlier in its history, Airbnb was busy blitzscaling its business in the United States when it suddenly faced a serious challenge in Europe. Rocket Internet, the startup factory run by Germany's Samwer brothers, raised $90 million and hired 400 people to rapidly scale up an “Airbnb of Europe.” At the time, Airbnb had just raised $7 million, and had only 40 employees. This was an existential threat, because a global accommodations business simply doesn't work if it can't offer options in Europe. Airbnb responded by launching its own blitzscaling effort — the company raised more money, opened 10 European offices in less than three months, hired hundreds of European employees, and won the battle.

Assuming that you've decided that blitzscaling makes sense for your company, established companies that try to blitzscale have both advantages and disadvantages over startups. It's critical to be realistic — startups have inherent advantages when it comes to blitzscaling. Blitzscaling is all about speed and risk-taking, and startups are far more nimble, and have far less to lose. Established companies that want to blitzscale need to find major advantages to overcome their inherent disadvantages in speed and risk-taking.

Advantage 1: Scale

This sounds obvious and self-evident, but is actually somewhat unintuitive. The scale that comes with being a large, established player isn't always an advantage for blitzscaling. If a startup can play the same game, scale doesn't provide any inherent advantage unless it is a massive, 10X advantage. For example, when Airbnb was blitzscaling, it was competing with Homeaway, an established player that had much greater scale. However, Homeaway had achieved its scale via a string of 21 acquisitions (before being acquired by Expedia itself), which meant that all of its acquisitions were running on different technology platforms and serving different clienteles. Indeed, Homeaway's scale was actually a disadvantage.

On the other hand, there are some opportunities that you can only tackle if you already have scale. For example, Amazon couldn't have launched Amazon Web Services without achieving massive scale in its datacenter operations. Trying to build that product from scratch, without being able to leverage Amazon's economies of scale and reputation for operational excellence, would have been nearly impossible. Even today, AWS's main competitors come from other scale companies like Microsoft, Google, and IBM.

Advantage 2: Iteration

Another advantage that established companies have is the ability to make multiple blitzscaling attempts. Blitzscaling is a risky strategy, and you might not achieve success on the first try. You need to have enough capital to stay in the game. Microsoft was famed for its ability to iterate its way from cheap knockoff products to market dominance. The first and second versions of Microsoft Windows were unsuccessful attempts to copy Apple's Macintosh operating system; the third version, while inferior to its inspiration, was good enough; and the follow-up versions such as Windows 95 and Windows NT were good enough to allow Microsoft to unleash a marketing blitz that carried them to dominance. Microsoft later repeated this strategy with its Xbox business, which evolved from the Xbox, to the Xbox 360, to today's Xbox One.

To borrow an analogy from sports, you may need to take repeated shots on goal before scoring. Established players have a much easier time financing multiple shots on goal.

Nor is this advantage limited to technology. In the shale oil industry, financial wherewithal played a major role in the success of pioneers like Chesapeake Energy. The late Aubrey McClendon said, “To be able to borrow money for 10 years and ride out boom-and-bust cycles was almost as important an insight as horizontal drilling. If something didn’t work for a little bit of time, we could regroup and find something that did work.”

Advantage 3: Longevity

While the ability to undertake multiple attempts at blitzscaling is an advantage, so is the ability to be patient with a single attempt. Large companies can have longer time horizons than startups, who need to show immediate results to continue raising money. Google often plays this long game with technologies ranging from self-driving cars to a cure for aging. Facebook is also playing the long game with Oculus Rift and virtual reality. The key is knowing when to scale up. Microsoft tried to scale smartphones too early with Windows CE. As it turns out, the modern smartphone only arrived when Moore's Law made mobile CPUs powerful enough, and Apple combined software with capacitative touchscreens, Corning's Gorilla glass, and high-volume Chinese manufacturing to create the iPhone.

Advantage 4: M&A

One final advantage that established players have is the ability to use acquisitions to drive blitzscaling. Acquiring a business that is already blitzscaling (or has the potential to blitzscale) can transform an existing company. Priceline, for example, best known for "name your price" airfares, executed this strategy to perfection when it acquired Booking.com, allowing it to achieve a lasting advantage in the hotel booking market. In 2015, Priceline actually had the highest 10-year return of any stock in the Fortune 500. As with direct blitzscaling, this requires having a rare or unique insight into the market. Had all the players in the travel space known the value of online hotel booking, Priceline wouldn't have been able to afford the Booking.com acquisition. Established players can also use a string of acquisitions to blitzscale. Google used the acquisitions of Android and YouTube to blitzscale to market dominance in two key product categories: smartphones and online video.

Disadvantage 1: Incentives

A major issue that established players face are that the incentives tend to favor cautious expansion, rather than aggressive blitzscaling. Successful companies generally assume that they already have something valuable, which means risk-taking tends to be penalized. If you make the play and fail, you've destroyed a valuable thing. (That's not something a startup faces — a startup is already dead by default.) Companies also face pressures from shareholders, analysts, the press, etc. The thing is, they're not wrong! Similarly, the potential rewards have to be huge to matter. A $10 million opportunity, which a startup might see as a company-making bet, is seen as rounding error by a big company. This is why the common answer is to leave this to startups.

The incentives that drive individual employees can also have a negative impact on blitzscaling attempts inside an established company. The employee or executive who proposes a risky blitzscaling initiative is the one who stands to gain the most (promotions, bonuses, clout, etc.) from its success. In contrast, other employees stand to lose a great deal from that success, especially if the organization has a forced ranking program. And if the initiative is unsuccessful and costs the company a large sum of money, they all bear the cost of failure as well. Is it any wonder that so many bold initiatives are buried by colleagues pointing out all the risks?

Disadvantage 2: Unstaged Commitment

Another (largely self-inflicted) disadvantage for large companies is the inability or unwillingness to stage their investments. This results from internal incentives, which tend to reward managers based on the revenues that they oversee, and thus penalize failure and undervalue growth opportunities. Even a small commitment is just another commitment — the overhead cost is nearly the same — and once a lot of people are involved, you have finite options. Doing a staged commitment means you have to re-litigate the decision at each stage, which makes the overhead costs prohibitive.

Senior managers may also, for ego reasons, prefer splashy announcements and major commitments to small experiments that can be blitzscaled if successful. Larger companies also impose a great deal more managerial overhead, which means that it's harder to justify experiments because the price tag is simply too high. Even Google's famous 20% isn't free — its cost is effectively 20% of Google's payroll.

Disadvantage 3: Public Market Pressure

Finally, established companies that are publicly traded face an additional set of pressures to deliver short-term financial results. Blitzscaling generally requires sacrificing short-term efficiency — and thus financial results — to achieve long-term value creation. Privately-held companies are usually closely-held; this makes it easier to get the major shareholders to agree on a risky, long-term investment. A widely-held public company may face activist shareholders and other such shareholder rebellions if it attempts to carry out a blitzscaling strategy. This could even lead to the worst of possibilities — incurring the initial expense of blitzscaling without the necessary commitment and follow-through to reap the long-term rewards.

With these advantages and disadvantages in mind, there are specific management techniques that large companies can use when they set out to blitzscale.

One productive hack to help your existing company blitzscale is to find ways to leverage people and businesses with prior blitzscaling experience. One obvious play is to partner with a blitzscaling startup. For example, GM responded to Uber's blitzscaling (and the corresponding threat it represents to the market for cars for human drivers) by investing $500 million in Uber's blitzscaling rival, Lyft. A less obvious technique is to leverage venture capitalists. Venture capitalists are keen fans of blitzscaling (and the returns it brings), and if you ask them to invest their money in your project, even if your company is contributing the majority of the funding, they will provide a realistic assessment of your situation. For example, many large companies misprice their own assets. They may overvalue their own advantages, and attempt to blitzscale even if an objective observer would consider the attempt ill-advised. Approaching venture capitalists is a quick way to get a sense of how a market of knowledgeable professionals assess the value of your assets.

Once your blitzscaling project is underway, you will also need to manage it differently than regular projects. Blitzscaling's increased pace and decreased efficiency can seem reckless and wasteful when evaluated against conventional initiatives designed to provide steady growth. As a result, a blitzscaling project needs to be insulated from the rest of the company so that the executive in charge can run it effectively. The classic example is Steve Jobs' approach to managing the original Macintosh team, which had separate offices that were off-limits to regular Apple employees. More recently, Larry Page applied this same technique to Android's team, who worked in separate offices (Google employee badges didn't grant access to Android offices) and adopted different hiring practices. Much the same is true for the PlayStation project at Sony, the Kindle project at Amazon, and the Watson team at IBM.

Blitzscaling is rarely a natural act. It often feels uncomfortable to move so quickly and invest so much, especially if you're an established company and have a standard approach to new projects and initiatives. But when the opportunity is big enough, and the competition fierce enough, it can be the only path to winning. Big players who understand their inherent advantages and disadvantages can successfully use blitzscaling to distance themselves from their competitors and to fend off threatening startup upstarts.

To learn more about why, when, and how to blitzscale your organization, visit Blitzscaling.com to order your copy of our book Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies.

Basem Salah

T.V DIRECTOR🔛entrepreneur🔛🔛🔛 Owner of one world APP

5y

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Kelvin Nana Dadzie

German African Startup Consultant/ EXIST Grant Accelerator Coach , Serial Entrepreneur , Green innovationist, AGYLE 40 under 40, MBA,Sous Chef

5y

i checked the article out. great post Reid

Lola B.

Profesora de FP rama Comercio y Marketing

5y

Hey! My LinkedIn profile Lola B. Has been partially hacked. Probably by spanish Government/ authorities because I am an activist against banks' criminality and politicians' corruption in Spain. If someone could check it, It would be great. Thank you for let me express myself in your network with #freedom. Lots of #LOVE.

Martina Haas

Networking-Expertin 🎙Keynote Speaker 📽️ TEDx Talk 2022: Vergesst Networking 📚 Bestsellerautorin: Crashkurs Networking 📙Löwen-Strategie: Mehr Zeit! Mehr Leben! Mehr Geld! 🎙️Dozentin 💡Mission: Ihr nachhaltiger Erfolg

5y

Thank you for this article! I read your book The Alliance - great stuff. I can't find #TheAllianceFramework account or group on LinkedIn. Could you please give a hint/link? Thank you!

Abheesh Dinavahi

Head of Customer Success at Almabase

5y

Thank you for sharing this wealth of knowledge!

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