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Reid Hoffman

Blitzscaling or how to lightning scale your business

by Lloyd MelnickMarch 5, 2019January 10, 2019

Reid Hoffman’s and Chris Yeh’s recent book (Hoffman was the founder of LinkedIn), Blitzscaling, provides great analysis on how companies like Google, Uber, Amazon have scaled so massively. As Hoffman wrote, “when you scale at speed, you can capture the market quickly and also outmaneuver potentially global competition. Given the parallels with military and sports strategies, we can call this blitzscaling. Literally: lightning scaling.”

Hoffman explains the key principles, which he refers to as Blitzscaling, in companies going from scrappy start up to corporate giants. These principles are critical if you are building a business that you plan to grow significantly or if you are an investor. It is also valuable to understand the concept of blitzscaling to understand the tech ecosystem.

The key difference between blitzscaling and traditionally business building is how quickly and large it becomes: blitz from the German WW2 phrase Blitzkrieg (lightning warfare) and scaling, which means growth. The principles below show how the Amazons and Googles grew into the biggest companies in the world (keep in mind not everyone is going to enjoy success and it is a very risky course). The principles, however, are important to understand not only if you are trying to blitzscale but also if you are in a market where a competitor is taking this approach.

Proportional growth

The first key to blitzscaling is proportional growth. Not only is blitzscaling focused on very rapid growth but also proportional, and therefore sustainable. By proportional, Hoffman means that you are expanding across your business, not just one element. For example, a lemonade stand that increases the quantity of lemonade it has available to sell 100X is not blitzscaling but if it gets more cups as well as lemonade and sets up 100 locations across the city it is. Amazon blitzscaled when it went from $5.1MM in rev and 151 people in 1996 to revenue of $1.64 BN and 7,600 people in 1999.

Be Aggressive and Fast

The second key is that you need to be aggressive and fast. Blitzscaling involves throwing caution to the wind; embracing risk is a defining component. While a traditional company would grow, secure its position, then grow further, consolidate again, then commit to growing again, etc., blitzscaling companies act differently. Growth is the only priority, logistics and securing the growth they have achieved are not important. Profitability is not critical or even relevant.

Blitzscaling companies focus on speed over efficiency. Blitzscaling is why taxi companies tremble when a peer to peer ridesharing company like Uber rolls into town. The blitzscaling company does not care about short term profitability, it is focused entirely on growth. The logic is that first scaler advantage goes to the company that is first to scale up and dominate its business ecosystem. Once a company scales, it is much more difficult for competitors to then enter the space or raise money to compete. Traditional competitors might refer to this tactic as dumb money, since the blitzscaler is not focusing on growth, it is a logical strategy for building a dominant, huge player.

Focus on growth factors

The next key to blitzscaling is focusing on four growth factors, all blitzscaling companies seek to maximize: network effects, market size, distribution and high gross margins. Network effects make first mover advantage much more important. If you look at Facebook or Uber, the network effect creates huge barriers to entry once an entrant has grown very large. In Facebook’s case, no consumer would want to be part of a different social network that did not have their friends and family. In Uber’s case, the number of riders generates many drivers (because of the revenue opportunity for drivers), which generates more riders because of the availability of Uber rides. A late entrant cannot come into a space with high network effects because they will not have enough liquidity to compete.

The second growth factor critical to blitzscaling is market size. A company’s market needs to be sizable, otherwise there just will not be enough investment money to fuel growth. Nobody will fund a blitzscaling company in a market where they cannot scale (eg. toys for pet lions).

The third growth factor is distribution. You may have a great product and large well-defined market but getting it to customers on a massive scale is not trivial. Distributing a product on such a scale can happen in two ways. First, you can use a distribution network that already exists, from UPS to Apple’s AppStore. The second way is viral distribution. You infect one customer, they infect more customers, and so forth and so on.

Gross margins are the final key growth factor. Gross margins are the money you take in once costs are covered, revenue minus the costs of the actual goods (COGs). The find the percentage, Gross margin/COGS=%, and a high percentage makes it easier to attract the investment needed to scale. Investors want to put money into opportunities where they can enjoy huge returns, and if the margins are high then potential returns are huge at scale. The importance of gross margin is why tech companies, who enjoy a very high gross margin since the marginal cost of a digital product is often negligible, dominate the list of firms who have blitzscaled.

Product/market fit and operational scalability

The greater the product fits with the market need, the higher opportunity for blitzscaling. Immediately achieving perfect product/market fit is not likely. To improve the fit and allow for blitzscaling, most companies must adjust their product to make it better suit the market’s needs. This is another area that benefits tech companies. It is easier for a tech company to be nimble regarding product/market fit; fiddling by bringing out a new version of software or testing out a new app feature requires less infrastructure than redoing a physical commodity. You need to edit code, you do not need to buy new machinery.

Operational scalability, or lack thereof, can facilitate or halt scaling. As you grow, you need to deliver more of your product. If you cannot, you are missing out on potential sales and allowing a competitor to fulfil this demand. While less of an issue for tech and mobile companies, going from having 100,000 daily unique users to 10,000,000 still has crashed many a product. Sometimes it is impossible to recover from those crashes, as customers have already abandoned your company.

Manage the growth

The challenges of scaling are complex – and they become increasingly complex as a company grows. You need a plan, operational control and a business plan for long term growth. Growing a business also increases its complexity, which can create issues with management philosophy, organizational hierarchy and company culture. These questions are especially challenging for a blitzscaling company, since it has to answer them continually (and re-evaluate) in the midst of rapid, massive growth.

Leverage existing Blitzscaling patterns

Companies are much likely to blitzscale successfully if they follow the patterns set by other companies that have already blitzscaled. Hoffman identifies seven such patterns:

  1. Sell a product that is purely digital. For example, consider an extra, purchasable outfit, or skin, for a character in a video game. Since it only exists virtually, a skin costs practically nothing to make and sell. This means gross margins of nearly 100 percent. Purely digital are a very lucrative line of business for many tech companies, especially in the mobile game industry.
  2. Go digital even with a physical product. Amazon invested in physical products but created a powerful digital-management system.
  3. The SaaS (software as a service) model, selling software using a subscription model.
  4. Leveraging the power of platforms. If you can establish your product or service as the standard platform for buying and selling products, you stand to capture a large share of total revenue (for example, Amazon makes more revenue from commissions and fees on its marketplace than the physical goods it sells as a retailer).
  5. Take advantage of online marketplaces. These are a specific type of platform – platforms that not only bring buyers and sellers together, but also let them set their own prices through the market forces of supply and demand, ie. AirBnb and eBay.
  6. The sixth pattern involves tapping into the eyeball capturing power of online content-sharing feeds, like Twitter or Facebooks’ timelines. As feeds are effective at captivating people’s attention, they are thus very attractive to advertisers, who will pay premium prices to insert their ads and sponsored content into addictive streams of information and entertainment.
  7. Advertising is the final pattern, which is to offer your product or service for free and try to make money in some other way.

These seven patterns represent how the most successful blitzscaling companies built their empires.

Becoming the next blitzscaling company

To become the next Amazon and Google, you need an outsized ambition and tolerance for taking big risks in the hope of a big payoff. The patterns above can help you achieve this ambitious goal.. Embracing uncertainty and risk while prioritizing speed over efficiency, taking advantage of four growth factors and navigating growth limiters can all set a company up for rapid and massive expansion that will be sustainable in the future. With a clear vision, blitzscaling can help a business dominate an ecosystem.

Key takeaways

  • Blitzscaling is how companies like Google, Amazon and Uber have grown massive incredibly fast. When you scale at speed, you can capture the market quickly and outmaneuver potentially global competition. Given the parallels with military and sports strategies, this process is called blitzscaling: lightning scaling.”
  • Blitzscaling involves throwing caution to the wind; blitzscaling companies focus on speed over efficiency.
  • Blitzscaling companies focus on optimizing four growth factors: network effects, market size, distribution and high gross margins.

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What it really means to be a thought leader

by Lloyd MelnickDecember 9, 2014January 2, 2015

Although many refer to themselves as industry thought leaders, few understand what a thought leader represents. By leading, true thought leaders initiate new ideas and strategies that others follow and eventually becomes the new normal.

True thought leadership

There is a lot of value in disseminating best practices and strategies, it is what 90 percent of my blog posts do, but that does not constitute though leadership. Leadership is introducing new ways of looking at problems or executing. Reid Hoffman’s ideas on building an alliance between employees and employers instead of the traditional model of long-term employment is thought leadership. Google’s implementation of a multi-armed bandit approach to replace AB testing is thought leadership. Reed Hastings’ decision to rent DVDs by mail subscription instead of through stores was thought leadership. Continue reading “What it really means to be a thought leader” →

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Define your own tour of duty

by Lloyd MelnickNovember 13, 2014December 1, 2014

A few weeks ago, I wrote about Reid Hoffman’s book Alliance and his innovative ideas on how to structure the employee company relationship. One issue that some people raised to me was it sounded great, but if your company does not believe in creating tours of duty, it was not very useful. I am not much for giving non-actionable advice (hence why I am not a consultant ☺), so I wanted to address the situation by discussing what you can do to leverage this powerful concept even if your company does not.

The Alliance by Reid Hoffman

What is a tour of duty

I do not want to go into too much detail since you may have read my post in October, but to recap: A tour of duty occurs when the employer and employee mutually agree on a finite project, with goals for the employees contribution. It also includes how the tour of duty will benefit the employee. To create a fictitious example, say Uber wants to open the Las Vegas market to its service. When recruiting a VP, rather than pitching them on working for Uber for life, the hiring manager specifically lays out that the task will be a two-year project to penetrate Las Vegas. The employee will need to work with the legal team to counteract the local taxi companies and then recruit drivers. The candidate would learn how to lobby local governments and launch a location-based tech product. Both agree that at the end of the two-year tour of duty, there may be another tour of duty at Uber that is mutually beneficial or the employee might use the skills he learned to help another company. Continue reading “Define your own tour of duty” →

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Using tours of duty to have a better company employee relationship

by Lloyd MelnickOctober 23, 2014November 4, 2014

One of the best books I read this year is The Alliance: Managing Talent in the Networked Age by Reid Hoffman. The core concept in the book is that there is no longer employment for life but there is still a way to build a win-win relationship between employers and employees. Hoffman and his co-authors suggest a tour-of-duty type relationship, where employer and employee agree to a short or medium term engagement with a defined goal.

The Alliance by Reid Hoffman

The current reality

Hoffman begins by pointing out that in the at-will era (when employers can and do fire employees at their discretion), employees thus think of themselves as “free agents,” seeking out the best opportunities for growth and changing jobs whenever they get a better offers. He points to a 2012 study that found even though about half of employees wanted to stay with their current employer, most of them felt that they would have to take a job at a different company to advance their careers. Hoffman writes, “loyalty is scarce, long-term ties are scarcer, but there’s plenty of disillusionment to go around.”

Related to this point, employees’ trust of management is at an all-time low. One reason employees do not trust their employer is that the foundation of the relationship is built on dishonesty. When employees are courted, they are told about the fantastic long-term opportunities. When they answer interview question, they comment on how there goal is to spend their life contributing to the company. Both parties know this is nonsense but feel they must utter these phrases. It creates a relationship built on lies and a relationship without trust is a relationship without loyalty. A business without loyalty is a business without long-term thinking. A business without long-term thinking is a business that’s unable to invest in the future and thus one doomed to fail.

Tour of duty concept

A tour of duty is when the employer and employee mutually agree on a finite project, with goals for the employee’s contribution. It also includes how the tour of duty will benefit the employee. To create a fictitious example, say Uber wants to open the Las Vegas market to its service. When recruiting a VP, rather than pitching them on working for Uber for life, the hiring manager specifically lays out that the task will be a two-year project to penetrate Las Vegas. The employee will need to work with the legal team to counteract the local taxi companies and then recruit drivers. The candidate would learn how to lobby local governments and launch a location based tech product. Both agree that at the end of the two-year tour of duty, there may be another tour of duty at Uber that is mutually beneficial or the employee might use the skills he learned to help another company. For example, he may go over to Peapod to open the Austin market with the skills he learned at Uber. Uber benefits by having a successful launch in Las Vegas, and the employee is more valuable and has a great new opportunity. The important thing is both parties are honest with each other and they have built a mutually beneficial relationship. Continue reading “Using tours of duty to have a better company employee relationship” →

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This is Lloyd Melnick’s personal blog.  All views and opinions expressed on this website are mine alone and do not represent those of people, institutions or organizations that I may or may not be associated with in professional or personal capacity.

I am a serial builder of businesses (senior leadership on three exits worth over $700 million), successful in big (Disney, Stars Group/PokerStars, Zynga) and small companies (Merscom, Spooky Cool Labs) with over 20 years experience in the gaming and casino space.  Currently, I am the GM of VGW’s Chumba Casino and on the Board of Directors of Murka Games and Luckbox.

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