Upscaling With Blitzscaling
Somewhere during the latter half of the 1990s, the world of business saw a number of scrappy start-ups suddenly skyrocketing and ballooning into the big, world-conquering giants they are today. Apple, Google, Facebook, Amazon, Microsoft, and about 150 more tech companies of the Silicon Valley, today dominate the world economy. Adding to that list, Uber, Snapchat, Twitter, LinkedIn, and many others have replaced the earlier industrial age giants such as Coca-Cola, Royal Dutch Shell, General Electric, ExxonMobil, etc.
Blitzscaling (2018) by Reid Hoffman and Chris Yeh discusses the new and revolutionary model of growth that has taken the business world by storm.
What Is Blitzscaling?
The word ‘Blitzscaling’ was recently conjoined from the two words, ‘blitz’ meaning lightning, and ‘scaling’ which simply means ‘scaling up’.
The German word ‘blitz’ has been long used in English to describe anything with lighting speed. Thus, if we apply the word to any company’s full-throttle advertising campaign, it would be called ‘marketing blitz’. The word ‘scaling’ in the business sense refers to two things –
- Proportionate growth of all parts of a company, and
- Operation on a massive scale.
To understand these two clearly, let’s take an example of a kid selling lemonade on the street. If the child wants to sell more and expand the sales of lemonade, considering the word scaling ‘up’ would mean that the child will have to have more lemonade booths. In order to do this, the child will have to scale up raw material (lemon, sugar, water, cups, etc.), increase production (get a few friends or family to help out), and increase advertising (put up pamphlets in the neighbourhood). Expanding, or scaling up just one of these won’t work. All the parts of the business will have to grow simultaneously.
The second meaning of scaling up is then covered when growth in all aspects, leads to operation on a massive scale.
Hence, to sum it up, blitzscaling means rapidly growing a business, albeit proportionately, to sustain it over a period of time. However, there is a caveat in this definition. Considering the aim of all businesses is to grow and seek success, and blitzscaling means growing rapidly with sustainability, then there wouldn’t be more to it than a new word for impressive business success. However, there is much more to blitzscaling than just fast, sustainable growth.
Embracing Uncertainty And Risk
The word ‘blitz’ comes from the German ‘blitzkrieg’, the ‘lightning war’ tactic the Germans used in WWII. The strategy completely shifted the tactics in warfare, which was later applied by the British and the other Allied militaries as well. Considering the speed of the strategy in warfare, ‘blitzkrieg’ involved risks. Yet the successes of the strategy often outweighed these risks.
Similarly, ‘blitzscaling’ too, involves taking risks and embracing uncertainty by throwing caution to the winds. Thus embracing risks and uncertainty is the third defining component of the word blitzscaling.
In traditional warfare, prior to the blitzkrieg strategy of the Germans, militaries would advance slowly into enemy territory, strong holding their positions, and securing safe retreat passages before attacking. Similarly, traditional business tactics too involved securing business positions before advancing or expanding. For example, an American company that wanted to expand overseas would first establish and successfully run an overseas branch in another country before expanding to another.
Blitzscaling works the other way. Companies charge ahead with all guns blazing. For example, Airbnb increased its international offices from 0 to 9 between 2011 and 2012. While it was a risky move for the company, a traditional approach was out of the question. Airbnb, had a German company called Wimdu, at their heels, copying their business model. Had Airbnb waited to establish offices internationally one-by-one, Wimdu would have conquered the international market before Airbnb.
Airbnb took the risk and nipped Wimdu in the bud. Their risk paid off as a ten-fold increase in their booking globally!
Prioritizing Speed Over Efficiency, Getting First-Scaler Advantage
In the blitzscaling strategy, businesses prioritize speed over efficiency, as opposed to the traditional methods of efficiently using capital. Let’s consider Uber as an example.
With its peer-to-peer, ridesharing plan, Uber rolled into the market with rock-bottom prices. They didn’t even cover costs.
Traditionally, any company looking at grabbing a share of a competitors market share, would reduce prices to an extent, and balance it by lowering production costs. While this strategy has proved itself time and again, it takes time and allows for a negligible price drop.
How did Uber manage it then?
Uber had its reserves in investment capitals, and used this capital to lose money at the start, simply to conquer the market with speed. Though a risk, the strategy paid off in the form of a first-scaler advantage. The first-scaler advantage is the advantage a company gets by being the first company in the business ecosystem to scale up and dominate, making it tough for others to compete against it. Uber’s aggressive expansion and its preference for speed over efficiency got it dominance in the market.
Similarly, if we look at MySpace, Friendster and Facebook, we all know which of these accounts we are still using!
When a company is pursuing a first-scaler advantage in the blitzscaling strategy, there are four growth factors that need to be maximized – networks, market size, distribution, and high gross margins. Let us look at these in detail.
Growth Factors: Networks Give Access To Sizable Markets
‘Network Effects’ take place when the network’s value increases for users as more people use it. For Airbnb, network effects work when more people offer their properties, more people flock to the website to book homestays. And as more people use Airbnb to book homestays, more people put up property listing on it. It works like a loop giving positive feedback.
This feedback loop is what gives a company with a first-scaler advantage the insurmountable head start in making it to the top of the market, and simultaneously, makes it that much tougher for another competitor.
Wherever there is a network, there is potential for network effects to take place. Moreover, in today’s world, networks are everywhere! Amazon, Uber, eBay, Airbnb, are all networks connecting sellers and buyers, Facebook and Instagram are multibillion networks of connected users. And finally, there is the Internet, the grandmaster network of all! With more than 2 billion smartphone users worldwide, this massive network is available at a tap of a finger!
For many companies, especially tech companies, the internet is a 24×7 open and available marketplace, without the expense of a brick-and-mortar shop. Converting the potential customers on the internet into a sizable market is an important growth factor in the blitzscaling strategy.
Growth Factors: The Simple Concept Of High Growth Margins
Gross margins in a business are a measure of the money the business makes after costs are covered. While it is different from profits (since it can be used for other overheads like paying taxes, etc.), it is still an important component as it is a ready source of funding for any other business initiative, like developing a new product line, or expansion, the company might want to take up.
For example, a product costs a company $0.50 to produce and sell, that is its cost of goods sold (COGs). The product is then sold at $0.75 per unit. That becomes the company’s revenue. When the COGS is subtracted from the revenue, one gets the gross margin, in this case, $0,75 – $0.50 = $0.25.
This amount, available to the company after each sale, is usually represented in percentage, by dividing by the revenue. Hence, $0.25 divided by the revenue of $0.75 gives a gross margin of 33%.
For a company that wants to use the blitzscaling strategy and grow the company on a massive scale, it is crucial to have a high gross margin. For example, Google’s gross margin is at 61%, whereas, Facebook is at 87%. In fact, most tech giants have gross margins ranging between 60 to 90 per cent!
The higher the gross margins of a company, the more funds are available for expansion, and more investors take notice of the company. Similarly, if the company has more investment capital to spend, its ability to expand increases, thus making this another positive feedback loop.
Simply put, Company A with a 66% gross margin versus Company B with a 33% gross margin, will attract more investors.
Because Company B brings in half the money that Company A brings in will have to generate twice the amount in sales to break even with Company A. To do that, they will need more resources, more infrastructure than Company A will need. Company A will grow faster, more easily, which is exactly what investors look for.
Thus high gross margins allow for massive accumulation of capital, which enables equally massive growth and expansion, and thus a massive scale of blitzscaling.
Growth Factors: The Advantage Of Distribution In Growth
It might not matter if a company’s product is great and has a good market if the company doesn’t have a sound distribution plan. In fact, according to the blitzscaling strategy, distribution is another vital component for growth.
Distribution, as per the blitzscaling strategy, can take place in 2 ways.
- Using an existing distribution network – An already existing, well-defined distribution network allows a company that is trying to scale-up reach out to their customer base faster.
For example, when Netflix launched its rent-a-DVD-by-mail service, it collaborated with the USPS – US Postal Service – to reach customers. Similarly, Amazon too, struck a deal with the USPS, allowing shipping of small packages for a low price of $1.
- Viral Distribution – Viral distribution uses the concept of the spread of a viral infection. One customer infects a few, each of those few infect a few more, and so on. There are further, two types of viral distribution.
- Organic Viral Distribution
- Incentivized Viral Distribution
For example, in the early days of PayPal, the company used both organic and incentivized distribution methods. The results were astonishing. For example, every time a person wanted to send a payment via PayPal, the seller would have to set up a PayPal account in order to receive the money. Such organic distribution resulted in wide use of the service.
Additionally, PayPal also incentivized its distribution by offering a referrer and a referral of $10. With both these methods of distribution in play, the company saw a daily growth rate of 7-10 per cent.
The positives of not having to set up any distribution infrastructure, and still be able to reach customers in bulk, happens when the entire set-up is digital – the main reason why most tech companies benefit from blitzscaling, and why there are so many examples of tech companies being successful at blitzscaling.
The cost of doubling sales to meet doubled demands cost virtually nothing for a company that manages its business digitally. Products on a digital are easily scalable, as well as eligible for high gross margins. Such companies also have the Internet at their disposal, getting network effects and access to large markets within reach.
Thus the advantages of all the four growth factors of blitzscaling are within reach if a product or a service is digital.
Growth Limiters: Product-Market Fit And Operational Scalability
Everything has its pros and cons. While blitzscaling has growth factors that can help boost scalability, it also has growth limiters.
The first is being able to achieve a product-market fit within a short period of time which isn’t as easy as it seems. Often, companies have to adjust their product according to the demands of the market to achieve that fit. Making these quick adjustments becomes easier for tech companies when the product is digital. Introducing the new version of the software, or testing new app features will need lesser infrastructure than a physical non-tech product will need.
Additionally, it’s easier for tech companies to pivot, while trying to get one product or market to fit another. If we look at PayPal, it started out under the name Confinity, and pivoted 4 times, moving from cell phone encryption to cell phone payments to PalmPilot payment, to email payments, until it finally settled down to eBay transactions.
The second growth limiter of blitzscaling is operational scalability.
For example, if a company has a perfect product-market fit, and has generated a high demand in the market, without having the capability of mass-producing to fulfil the demand, it will not be able to achieve blitzscaling. Hence, to achieve the required levels of mass production, the company will have to scale up operations too.
While operational scalability can actually make or break companies, it isn’t as daunting for tech companies that do not rely as much on physical infrastructure. Nevertheless, whatever little bit of infrastructure that is there too has to be scaled up proportionately, or the company will still fail.
For example, in 2003, Friendster started its race for the social media network crown by gaining a million users in a matter of months. However, the load soon rendered the website slow, leaving users waiting for it to load for over 40 seconds. The computer servers just couldn’t keep up with the demand. Over the next 2 years, MySpace left Friendster eating dust!
Management Strategy And A Long-Term Growth Plan
As a company grows with the blitzscaling strategy, the challenges get complex.
A company that is run by three people is one where relationships are pretty informal. Including the relationship each person has with the organization itself, there are a total of 6 pairs of unique relationships. If just 2 more people are added to the company, the number of relationships goes up to 15. Adding 20 gives 325 one to one relationships. Now imagine a company like Facebook that has 25,000 employees. With 312 million relationships, the need and the challenges of a more formal organization increase.
Such growth then brings the question of needing more managers, submanagers, management philosophy, company culture, hierarchy, and so on. What makes it challenging is that in the midst of rapid growth, these questions become pressing and need immediate answering. Hence, having a management strategy in place during blitzscaling is vital.
These were some of the problems that hit Uber in 2016/2017, from which they are still recovering. A horde of management issues, turmoil, sexual harassment allegations, resignations of about 8 department heads and VP’s, in addition to exposing of fake accounts creating scheme with Lyft, just to name a few.
In addition to having a management strategy in place, a blitzscaling company will also need a secure long-term business plan.
While blitzscaling can afford a company to lose money for rapid growth, it can afford it only for a little while. Once the company has achieved dominance in the market, the profits need to start pouring in. Without this shift, the company stands to risk losing the investors backing that allows for those temporary losses.
This becomes a major challenge for companies with digital services and products. For instance, if users were charged a quarter every time they logged into Facebook, would they be checking their feeds every fifteen minutes?
A blitzscaled company with all growth factors maximized will reach for the stars in the initial days, but will still require a good business plan for long-term profits. Craigslist is a good example here. While it blitzscaled by optimizing growth factors of network effects and product-market fit, they don’t earn much.
How can companies then make money?
Patterns That Were Proven Successful
Blitzscaling doesn’t have a one-size-fits-all solution that converts a business plan into massive growth and success. Nevertheless, there are seven patterns that companies have followed and proved that they successfully work. Of these seven, three are directly advantageous for digital business. Let us understand these first.
- A Purely Digital Product – A purely digital product that uses virtually no infrastructure to produce and sell has the ability to get a company almost 100% gross margins. Tech companies, especially those in the video game industry have benefitted from this lucrative advantage. For example, a gaming company that sells a purchasable ‘skin’ for a character, will have virtually no cost for upgrading and modifications.
- Harnessing The Power Of Digital – The first is difficult for a physical product. However, there are ways to go digital and harness the advantages, even for physical products. For example, Amazon works with millions of physical products that can be purchased online. However, Amazon has cleverly and most efficiently used digital management systems to manage their inventory. Additionally, it has heavily invested in its software-as-a-service (SaaS) division Amazon Web Services that in 2016, it helped generate 150% of Amazon’s operational profit, enough to cover the losses in retail business.
- SaaS – SaaS is the third pattern. It involves selling software on a subscription model rather than licensing or one-time-purchase models. Initially, software were sold using the licensing model, and was meant for organizations. It’s expensive nature meant that small and medium businesses couldn’t afford it, reducing the market size for software products.
The introduction of the SaaS model enabled companies like Salesforce to sell their software products at a lower cost to a wider market.
The potential of any business for outsized profits increases when they can conduct their business digitally. Moreover for digital companies, it is far more lucrative to facilitate the digital endeavours of other companies.
The Next Four Patterns: Leveraging Digital Advantages
Most companies in today’s age know and use digital platforms to conduct their businesses. This leveraging these digital advantages in the blitzscaling strategy comprise the next four of the seven tried-and-tested patterns for success.
- The Power Of Platforms – Companies that leverage the power of digital platforms by establishing their service or product as the standard platform for any revenue-generating digital activity needed to run a business, can manage to capture a large share of that revenue itself. For example, Apple takes a 30% from products that are sold on iTunes.
- Tapping The Potential Of Online Marketplaces – Online marketplaces have a massive growth potential. These platforms are not limited to just buying and selling, but also allow them to set their own prices depending on the supple and demand forces, and take a cut from those transactions. Airbnb and eBay have seen success by tapping into these.
- Capturing Attention With Content Sharing Feeds – Facebook, Instagram and Twitter are content-sharing platforms that have the power to capture attention of users. These are used by advertisers to insert their sponsored content and ads into information and entertainment streams, at a premium price.
- Advertising, Free Upgrades – Apart from the above six, many companies offer free services or products, free trials, and other forms of advertising, wherein users can upgrade to a premium service after availing the free one. DropBox, for instance, offers 2 gigabytes of free cloud-based storage. If users want more, they have to pay for it.
These seven patterns have been used by many successful companies in their blitzscaling strategy. They have led these companies to massive profits and growth, and outrageous success.
Blitzscaling the new business mantra. It is an ambitious strategy that involves speed over efficiency and taking big risks for a massive pay-off. Any company that looks at up-scaling with the blitzscaling strategy should use the four growth factors and navigate around the growth limiters.
Finding a veritable mix of patterns to apply to their blitzscaling, one can steer their company towards sustainability, growth and success.