Book Notes: Blitzscaling

Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies by Reid Hoffman and Chris Yeh
My rating: 4 of 5 stars

There are some markets where there is a winner takes all/most, in this environment the risk is different to when you are scaling in an environment where this is not the case. In a winner takes all environment if you don’t become the biggest the quickest then you risk loosing to other businesses. As such the common strategy of efficient and careful scaling with the intention to reduce risk actually increases the risk of failure as other businesses could overtake and win the market. In this environment Blitzscaling provides an alternative, and counter intuitive approach to growing the bussiness. Blitzscaling is when you have determined that speed into the market is the critical strategy to achieve massive outcomes, or die trying.

EfficiencySpeed
UncertaintyClassic Start-up GrowthBlitzscaling
CertaintyClassic Scale-up GrowthFastscaling

To achieve Blitzscaling you need both financial capital and human capital as these are the oxygen of the Blitzscaling. Blitzscaling is:

  • Both an offensive and defensive strategy – Offence by exploiting a niche, build an advantage and people prefer to back market leaders. Défense by you setting the pace, others are forced to respond to your moves meaning they don’t have focus on being unique.
  • Thrives on positive feedback loops
  • There are massive risks – you need to keep re-inventing the company as it grows
Stage 1 – Family1~9 employees
Stage 2 – Tribe~ 10s employees
Stage 3 – Village~ 100s employees
Stage 4 – City~ 1,000s employees
Stage 5 – Nation ~ 10,000s employees
Stages of Blitzscaling

Technique #1 – Business Model Innovation
Innovating in how the bussiness is going to make money is key e.g. the idea of Netflix subscription was novel.

Growth factors:

  • Market size – a large number of potential customers and a variety of efficient channels to reach them (TAM). Ideally the market itself is growing making small markets attractive and large irresistible.
  • Distribution – a good product with great distribution will beat a great product with poor distribution. Generally by leveraging existing networks and virality.
  • High gross margins – it is not necessarily easier to sell a low vs high margin product, so aim for the large. Smaller sales of higher margin products tend to be cheaper.
  • Network effects –
    • Direct – increase usage leads to direct increase in value e.g. more Facebook users, more posts they make so the more people want to go back
    • Indirect – increase in usage leads to increase of complimentary products e.g. more Android user the more that people want to use Android applications
    • Two-sided – increase in one set of users benefits another e.g. more eBay shoppers results in more people selling on eBay
    • Local – increase in usage of a subset increases value for the connected e.g. incentives for your friends to be on the same mobile network if that saved money
    • Compatibility/Standards – increase usage of a proprietary standard e.g. MS Word file format starved out the growth of other players

Growth limiters:

  • Lack of product market fit – being in a good market with a product that can satisfy that market. You need to discover a nonobvious market opportunity where you have a unique advantage or approach. This can come about through disruptive technology innovation, changes in laws or financial regulations, rise of new customers, or other major shift.
  • Operational scalability – if you cant scale up your operations to meet demand you are doomed.
    • Human – how do you scale the organisation, how do you get the needed skills, etc
    • Infrastructure – how do you scale production, etc (more of a challenge with physical products)

Proven patters:

  • Bits rather than atoms – aka software is easier than hardware
  • Platforms
  • Free or freemium – it kick starts growth
  • Marketplace
  • Subscriptions
  • Digital goods
  • Feeds – it’s ability to drive user engagement

Principles:

  • Moor’s law – the exponential growth in computing power
  • Automation – technology evolves much quicker than people
  • Adaptation, not optimisation – constantly trying new things out and seeing what works
  • Contrarian – if you just follow everyone else it’s a loosing game. Brilliant thinking and courage to purse something with others disagree with, if you are right, you win big.

Technique #2 – Strategy Innovation
Innovation in how you are going to scale e.g. Uber heavily subsidising rides when it moves into a city so that it scales up it’s user base.

When…

  • There is a big opportunity
  • First-scaler advantage
  • First to climb the learning curve
  • Threat of competition

When to stop…

  • Declining rate of growth
  • Worsening unit economics
  • Decrease per-employee productivity
  • Increase management overhead

The process…

  1. Do things that don’t scale
  2. Reach the next stage of blitzscaling
  3. Figure out how to scale while doing a different set that don’t scale
  4. Reach the next stage of blitzscaling
  5. Repeat until you reach market dominance

Stages of growth

  1. Family
    • Founder has to do everything
  2. Tribe
    • Founder manages a team – helping them be productive
  3. Village
    • Founder manage managers and needs to take the bigger picture
  4. City
    • Founder is there to make the key decisions, the tactics are others to work out
  5. Nation
    • Founder makes key decisions over new product lines and business units

Technique #3 – Management Innovation
With a company that is scaling so fast how does it make this work and not just burn out.

Transitions:

  • Small to large teams – every aspect of people management from recruitment to coaching to communications has to adapt to different stages. The people you need are different e.g the marines deal with chaos and ambiguity to capture the beach, then the army rapidly secure the territory, finally the police bring stability rather than disruption. Sometimes you need to let people go who were critical earlier – but if they can’t scale then neither can the business.
  • Generalist to specialist – initially you need generalists but as you grow you need to bring in specialists, when this happens this frees up generalists to be moved on to other initiatives. Early employees may also chafe against the narrowing confines of their changing role.
  • Contributors to managers to executives –
    • Managers are front line leaders who worry about the day-to-day tactics
    • Executives lead managers focusing on vision and strategy
    • The transition from manager to executive is generally far more difficult than from contributor to manager. In small companies the lack of executive role models means these can’t draw on the experience working with them. “Standard Start-up Leadership Vacuum”
    • Solution
      • Hire someone who is already a known quantity to at least one member of the team
      • Bring the new executive in at a lower level initially and let the executive prove himself or herself
      • Once the executive has earned the team’s trust and credibility consider promoting him or her
  • Dialogue to broadcasting
  • Inspiration to data – data insight of a small number of key metrics help to drive conversations. A/B testing is a great tactic for optimisation but broader view need to be taken to not just focus on local optimisations. Use with care e.g. when fewer people used a feature they made the button bigger which reduced the use of more popular features.
  • Single focus to multithreading – start-ups have a singular focus but as they grow this needs to be parallelised. This means you can explore and exploit different markets or products at the same time. The challenge is for these threads to have ownership as well as not competing with each other over the same pool of cash.
  • Pirate to navy – evolving from just offence to offence and defence through some discipline and order to prevent chaos.
  • Scaling yourself from founder to leader – delegation, amplification and make yourself better

Rule

  1. Embrace chaos
  2. Hire Ms. Right Now, not Ms. Right – hire the person for your current stage, the skills running a 1,000 person company is totally different to 100 and hiring someone from 10,000 might be counter productive. You want people to be great at the current and next phase
  3. Tolerate “bad” management – you might have to promote people before they are ready and swap them out if they sink. You have to be quick and decisive. in the Tribe stage promotion processes are messy and job titles are not always correct. You might tolerate job title inflation and fix it later. Classic “good” management presume a certain amount of stability.
  4. Launch a product that embarrasses you – if it does not embarrass you then you have over invested and not gained insight/feedback early enough.
  5. Let fires burn – the default end for a start-up is death, there is no time to dot all the is and cross all the ts. As such there are going to be fires which you are not going to focus on so you can focus on the ones which are constraining the bussiness firstly distribution, then product, revenue model, operations, competition, what’s next?
  6. Do things which don’t scale – yes it means you have a hack that won’t work in the end meaning you need to re-do things but investing much less up front lets you focus on the things which are most valuable.
  7. Ignore your customers – this can be a fire that continues to burn while focusing on other things.
  8. Raise too much money – your plans will be optimistic, so have more money than you think you will need will give you more space.
  9. Evolve your culture – culture is not a fire that you can leave to burn. Culture is a substitute for bureaucracy and rules. The more you can build the culture the less you’ll have to bind people’s behaviour with rigid directives. Over paying brings in mercenaries not missionaries – with large growth the culture can move from missionary to mercenary in a single year.

Culture is a substitute for bureaucracy and rules.

Reed hasting

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