Book Summary: Blitzscaling

An insightful reading on the strategy and tactics of scaling-up your business. The following are my favorite passages from the book Blitzscaling by Reid Hoffman and Chris Yeh.

I. What is Blitzscaling

“Prioritizing speed over efficiency—even in the face of uncertainty.”

DISRUPTION AND THE NEED FOR SPEED

  • Not only is the world moving faster, but the speed at which major new technology platforms are being created is reducing the downtime between the arrivals of each wave of innovation.
  • When a market is up for grabs, the risk isn’t inefficiency—the risk is playing it too safe. If you win, efficiency isn’t that important; if you lose, efficiency is completely irrelevant.

BASICS OF BLITZSCALING

  • Take the market by surprise, bypassing heavily defended niches to exploit breakout opportunities.
  • Leverage your lead to build long-term competitive advantages before other players are able to respond.
  • Open up access to capital, because investors generally prefer to back market leaders.
  • Thrive on positive feedback loops. Growth yields greater returns. By attracting the best people, scale-ups increase their ability to build and bring to market great products, which in turn increases their ability to rapidly scale.
  • Scale up your organization; in terms of your staff, financial, product, and technology strategy; to grow in lockstep with your revenues and customer base.

5 STAGES OF BLITZSCALING

  • In relative terms of # employees, the stages are:

Book - Blitzscaling Stages

OPERATIONAL SCALABILITY

  • Operational scalability is one of the primary growth limiters that scale-ups need to address. When a business can grow users, customers, and revenues faster than the number of employees without collapsing under the weight of its own growth, the business can achieve greater profitability and keep growing without being as tightly constrained by the need for financial or human capital. In contrast, when the number of employees grows faster than users, customers, and revenues, it’s a major red flag that could indicate issues with the fundamental business model.

3 KEY TECHNIQUES OF BLITZSCALING

  • Business Model Innovation
    • Combine new technologies with effective distribution to potential customers, a scalable and high-margin revenue model, and an approach that allows you to serve those customers given your probable resource constraints.
  • Strategy Innovation
    • Build a competitive advantage through growth factors built into the business model, such as network effects, whereby the first company to achieve critical scale triggers a feedback loop that allows it to dominate a winner-take-all or winner-take-most market and achieve a lasting first-scaler advantage.
  • Management Innovation
    • Rapidly navigate a set of key transitions as organizations grow, and embrace counterintuitive rules like hiring “good enough” people, launching flawed and imperfect products, letting fires burn, and ignoring angry customers.

II. Business Model Innovation

A company’s business model describes how it generates financial returns by producing, selling, and supporting its products.

GROWTH FACTORS

  • Market Size
    • A big market has both a large number of potential customers and a variety of efficient channels for reaching those customers. Ideally, the market itself is also growing quickly, which can make a smaller market attractive and a large market irresistible.
  • Distribution
    • You have to be good at getting customers and users. Leveraging an existing network, build organic or incentivized viral distribution loops, and focus on customer retention.
  • High Gross Margins
    • Gross Margins, sales minus the cost of goods sold, are probably the best measure of long-term unit economics. The higher the gross margin, the more valuable each dollar of sales is to the company because it means that for each dollar of sales, the company has more cash available to fund growth and expansion.
  • Network Effects
    • Network effects occur when increased usage by any user increases the value of the product or service for other users. They generate a positive feedback loop that results in superlinear growth and value creation.
      • Direct Network Effects: Increase in usage leads to increases in value.
      • Indirect Network Effects: Increase in usage encourages consumption of complementary goods.
      • Two-Sided Network Effects: Increase in usage by one set of users increases the value to a different set of complementary users.
      • Local Network Effects: Increases in usage by a small subset of users increases the value for a connected user.
      • Compatibility and Standards: The use of one technology product encourages the use of compatible products.

GROWTH LIMITERS

  • Lack of Product-Market Fit
    • The key question you need to answer is whether you have discovered a non-obvious market opportunity where you have a unique advantage or approach, and one that competing players won’t see until you’ve had a chance to build a healthy lead.
  • Operational Scalability
    • Design a business model that requires as few human beings as possible and an infrastructure that is flexible and adaptable to growing needs.

PROVEN BUSINESS MODEL PATTERNS

  • Bits rather than Hardware Atoms
  • Being the chosen Platform on which businesses were built
  • Free or Freemium to achieve a critical mass
  • Marketplaces that connect buyers and suppliers
  • Subscriptions as a scalable sales, delivery and self-service support model
  • Digital Goods solds online
  • Feeds and their ability to drive user engagement

UNDERLYING PRINCIPLES

  • Moore’s Law: exponential increases in computing and processing power
  • Automation: the ability increase productivity and capabilities in faster and cheaper and more reliable ways
  • Adaptation: practices that emphasize continuous experimentation, learning and improvement
  • Contrarianism: the ability to ignore conventional wisdom, pattern-match, and identify opportunities to pursue and disrupt the status quo

III. Strategy Innovation

Blitzscale if SPEED into the market is the critical strategy to achieve massive outcomes.

WHEN SHOULD I START TO BLITZSCALE?

  • A big new opportunity — one where the market size and gross margins intersect to create enormous potential value, and there isn’t a dominant market leader or oligopoly
  • The ability to achieve a critical mass that confers a lasting competitive advantage,  network effects or customer lock-in.
  • Compounding effects on overcoming a steep learning curve.
  • The more intense the competition, the faster you should try to move.
  • Access to large amounts of capital at accessible interest rates.

WHEN SHOULD I STOP BLITZSCALING?

  • Declining rate of growth (relative to the market and competition)
  • Worsening unit economics ($ / unit of growth)
  • Decreasing per-employee productivity
  • Increasing management overhead

HOW THE ROLE OF THE FOUNDER CHANGES IN EACH STAGE

Blitzscaling - Role of Founders

IV. Management Innovation

Every aspect of people management, from recruiting to coaching to communications, has to adapt to the different stages of blitzscaling.

8 KEY TRANSITIONS

  • From Small teams to Large Teams.
    • Coordinating the efforts of tens or hundreds of individuals—and ensuring alignment with the goals of the entire organization as a whole—requires planning and formal processes,
    • As you blitzscale, you may need to find new beaches for your marines to take rather than ask them to help patrol the existing ones.
    • Most people have skills and experiences that optimize them for a particular stage, and not every person can effectively grow in lockstep with the company.
    • Set correct expectations up front. Be clear that employees will get opportunities to grow and advance their careers
    • Encourage employees to focus less on their job titles and more on how each tour of duty’s activities and experiences prepare them for greater responsibilities in the future.
  • From Generalists to Specialists.
    • Demands for functional expertise often outstrip early employees’ abilities to keep up through organic learning.
    • Work to retain your generalists, both for their cultural and institutional knowledge, and for their ability to tackle new problems.
  • Contributors to Managers to Executives
    • Managers are frontline leaders who focus day-to-day tactics: they create, implement, and execute detailed plans that allow the organization to either do new things or do existing things more efficiently.
    • Executives lead managers and focus on vision and strategy. They are also responsible for the “fighting spirit” of their organizations; they need to be role models who help people persist through inevitable adversity.
    • Blitzscaling organizations need organization, not just to coordinate their many resources and activities, but in order to maximize speed. The organization’s collective learning rate — especially within its leadership team — determines its ability to anticipate future trends, while the strength of its internal structure — especially in terms of its frontline teams — determines its ability to act quickly on those key insights and seize the competitive advantage.
  • Dialogue to Broadcasting
    • As the company grows, you have to shift from informal, in-person, individual conversations to formal, electronic, “push” broadcasting and online “pull” resources. You also have to shift from sharing all information by default to deciding on what is secret and what is shareable.
    • Electronic communications are great for establishing regular contact, but face-to-face interaction is still important for establishing a deeper, more emotionally resonant relationship.
  • Inspiration to Data-Driven Decision Making
    • As firms grow they need a framework of plans and goals to guide them. That way they can keep trying new things and reacting to dynamic markets, but with an eye toward larger objectives and sustaining the business.
    • Start with the basics. Track a few key stats. Whatever metric(s) you select, that information must be easy to access and provide clear context. Evolve your  key stats as your company grows.
  • Single Focus to Multithreading
    • To keep the company growing in the later stages, scale-ups need to manage multiple product lines or even business units.
    • Mature business lines focus on incremental innovations that help them exploit a well-known market, whereas new threads focus on more radical innovations and exploring a new market opportunity.
    • Think of each thread as a different company. For each thread, you’ll need to identify a leadership team (“cofounders”) and create an incentive structure that allows it to operate with a great deal of independence and reap the benefits of success.
    • The incentives of multithreading have to reflect the success of each thread, while still keeping the leadership of each thread invested in the success of all the rest.
  • From Pirate to Navy
    • Piracy
      • Flexibility and rule-breaking that allows for innovation, nimbleness, focus, and outcomes > process.
    • Navy
      • a decentralized command structure that allows the individual “captains” of the ships in the fleet to operate with entrepreneurial vigor.
      • a centralized staff that can help the “admiral” coordinate the actions of the fleet for maximum impact.
  • From Founder to Leader
    • Delegation
      • Can you find, hire, and manage good people, then transfer work over to them so you can tackle the challenges you’re uniquely suited to tackle?
    • Amplification
      • Can you hire people who amplify the work you do? to make the things you do much more impactful.
    • Learning
      • Become a learning machine. Be systematic. Learn from others. Leave time and space for reflection and feedback.

9 COUNTERINTUITIVE RULES

  • Embrace Chaos. 
    • Make smart decisions based on your estimate of the probabilities, even without certainty.
  • Hire Mr Right NOW.
    • Hire people who excel at your current phase and may stretch to cover the next phase as well.
  • Tolerate BAD Management.
    • Provide people an opportunity to win, to make up for a lack of experience and detailed blueprints on how to operate.
  • Launch a Product That Embarrases You
    • The point of launching your product early is to learn as quickly as possible. Make sure you know what you’re trying to learn, and how much risk you can take without endangering your customers or your reputation.
  • Let Fires Burn
    • There are always far more problems and issues than you have the resources to address. Prioritize you fires based on urgency, efficacy, and dependancy.
  • Throwaway Work
    • The code or process that scales during one stage of blitzscaling may break down at the very next stage, and whatever you replace it with might not scale at first either.
  • Ignore Some Customers
    • Ignoring customers is a temporary solution. Customers like to feel heard, and ignoring them will eventually deplete your company’s supply of goodwill.
  • Raise Too Much Money
    • Having “extra” capital gives you a cushion for when outcomes do not in fact follow your plan. Moreover, it increases your optionality—if you need to invest in growth, you can do much more without having to go through the time-consuming process of raising another round.
    • Only spend money to fix things that are on the critical path to reach the next phase of scale; everything else can wait.
  • Evolve & Embed Your Culture
    • Culture is central to the story that we tell ourselves and others about who we are and our place in the world.
    • Culture acts as a substitute for bureaucracy and rules. Culture influences how people act in the absence of specific directives and rules, or when those rules reach their breaking point.
    • Clearly define the way an organization does things matters.
      • What is your organization trying to do?
      • How are you trying to achieve those goals?
      • What acceptable risks are you incurring to achieve those goals more quickly?
      • When you have to trade off certain values, which ones take priority?
      • What kind of behaviour do you hire, promote, or fire for?

V. Conclusion

Progress occurs when new ideas emerge and spread.

  • Speed and uncertainty are the new stability. The only way to thrive in this fast-changing world is to accept the inevitability of change. Use it to your advantage, whether you’re focused on your individual life or the fate of a nation.
  • Be an Infinite Learner.
    • If you’re able to climb the learning curve faster than others, you have the opportunity to create massive value from it. The landscape is always changing, and learning is how you adapt.
  • Be a First Responder.
    • Those who are willing to act—and act quickly—despite the uncertainty will have a disproportionate advantage.
  • Be a Source of Stability.
    • People will need reassurance and support. Offering stability and calm in the middle of the storm while others are caught in the tumult will make you a natural leader.

Reid’s Final Words

The companies that choose to blitzscale will soon set the pace of progress in every industry. It’s up to you to lead this change—for yourself, for your company, and for society as a whole. Race you to the future.

This was a great read. The authors provide a framework, full of strategies and tactics to helps us navigate and dominate the speed and risk required to scale-up a business and survive in an ever-rapid world.

All content credit goes to the authors. I’ve simply shared the bits I’ve enjoyed the most and found most useful.

Cheers ’till next time!

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