Not all companies can make this leap, but all those that have succeeded have done so by employing this strategy, which gives priority to speed over efficiency.
To make blitzscaling, a startup must have a powerful product, a robust distribution channel, a clear and good-sized market, and must act within an ecosystem that allows for an impressive capital raising.
Not only can high tech companies successfully use blitzscaling, as evidenced by Barak Obama’s presidential campaign.
What Blitzscaling is and how it works: Two very concrete examples
In 2011, Wimdu, a creature founded by Rocket Internet and Kinnevik (i.e. by the Samwer brothers and a Swedish investment company), challenges Airbnb. According to their usual tactics, the Samwer propose to the Airbnb co-founder, Brian Chesky, to buy Wimdu – which has the same business model and competes in its same market segment – in exchange for 25% of Airbnb.
Faced with this move, Chesky decides to listen to Mark Zuckerberg’s advice: “Fight, he will win the best product” choosing as a weapon for this blitzscaling battle, a very aggressive set of strategies and tactics that leads towards lightning growth, favoring speed over efficiency.
Blitzscaling derives from the use of the word blitz to mean something rapid, lightning-fast, meaning that was used for the first time in the twentieth century, in the word blitzkrieg: lightning war.
The year before, in China, another CEO had faced a very difficult situation. Tencent owned the QQ messaging system, 650 million active users per month, and was one of the most important Chinese internet companies, with revenues of 2 billion.
QQ, however, is a desktop product, and you need to move on to developing something for mobile. An opportunity that also constitutes a great risk, since it threatens Tencet’s relations with telephone operators such as China Mobile, which receives 40% of the economic value of the text messages that QQ users exchange.
In secret, a small team receives the go-ahead and in two months develops the Weixin service, a word that in Mandarin means micro message. Outside of China, the service becomes known as WeChat. Sixteen months after launch, it boasts 100 million users, which six months later grew to 200 million and, just four months later, reached 300 million.
At the end of 2016, Tencent’s earnings rose to $ 22 billion, an increase of 48% over the previous year and 700% over 2010. Tencent CEO Pony Ma defined the decision he made in 2010. and the following two months “question of life or death”.
A startup has a powerful product, a robust distribution channel, a clear and good-sized market. And now?
This startup has before it the chance to become a company that changes the world and touches billions of lives with its work.
To do so, it must take advantage of the aggressive growth strategy called blitzscaling , which despite appearing to be a crazy way of operating and requiring a truly impressive capital raising, is a very powerful tool. The prize, in competitions such as those that put our world in front of us, is only one and goes entirely to the winner: finishing second is useless.
Airbnb offers more than 3 million places in 65,000 cities worldwide. Think of the difficulty for a newcomer to position themselves in that same market.
“Software is eating the world” means that every type of company has intrinsic links with programming, because physical products are now integrated with software.
Think of the Tesla: it is an automobile, but it is the renewal of its software that can give an acceleration such as to lead it to have an autopilot in the space of one night.
For this reason, blitzscaling is an accelerator suitable for any type of company. Applying it requires more than courage and competence on the part of an entrepreneur: we need an ecosystem capable of financing risk from a financial and human capital point of view.
Dropbox founder Drew Houston describes his experience as follows: “Using blitzscaling is like harpooning a whale, the good news is wow, you’ve harpooned a whale! The bad guy is oops, you harpooned a whale! “
“You succeed or die”: a growth strategy very far from the traditional one
Blitzscaling plans to prioritize speed over efficiency when faced with uncertainty.
This is the opposite of what normally happens in the growth of a startup. Try to visualize it like this: launching a startup is like jumping off a cliff and, while rushing, assembling an airplane.
The traditional strategy involves slowing down the descent while building it: it is the precision with which you work, check and correct that allows you to control the fall and get to the result before touching the ground.
Applying blitzscaling, on the other hand, means making a “succeed or die” choice, it is like turning on the engines of a jet while the wings are still being built.
Blitzscaling requires you to move at a pace that is not comfortable for any team, and this will lead to making mistakes. The skill lies in being able to quickly learn from these mistakes, correct yourself and move forward without losing the rhythm.
It is not a speed that can be sustained forever, it corresponds to the central part of an “S” growth curve.
To understand this concept, let’s look at Google and Facebook: they both applied a 3-step sequence.
They started with traditional growth while developing the product so that it was suitable for the market, they applied blitzscaling to reach the critical mass needed to dominate the market, then they went back to a conventional growth model suitable for the role now achieved of affirmed company, drawing overall an “S” growth curve.
3 key features
1. It is both an offensive and defensive strategy
From an offensive point of view, it allows you to take the market by surprise, to take advantage of opportunities created by the fact that competitors are unaware of what is going on. This is the case with Slack, which has grown rapidly since its launch, surpassing well-established competitors of the caliber of Microsoft and Salesforce.com.
The speed gained and the detachment that follows create an important competitive advantage: competitors will need time to organize and respond. In addition, this situation opens up privileged accesses to capital, because investors generally prefer to support market leaders
On the defensive level, blitzscaling allows you to establish a rhythm that leaves your opponents breathless with little room to fight back. Since they will be focused on responding to your moves, they will often be forced to play recovery.
2. The first that climbs wins
According to a 2014 McKinsey & Company report, “Grow fast or die slowly”.
When a company climbs first, it occupies a space in the ecosystem that guarantees it a competitive advantage, in terms of recognition of market leadership and therefore of raising capital, but also in terms of raising talent: employees are often paid with wages of market, but in addition they have access to equity, a real opportunity to get rich.
Think of Silicon Valley and China: the world believes that startups that climb in these countries are destined for success more than others, and thus raise human and financial capital from all over the world.
3. It offers incredible benefits, but also huge risks.
The scientific term for out of control growth in the human body is not pleasant: cancer. The same is true of business.
Growth must be managed, so as to maintain control over things strictly necessary to quickly correct what stops working.
Until recently, the motto of the developers at Facebook was “move fast and break everything”, but there was a time – to solve the bugs produced and the problems that had been created – it took longer than necessary to proceed in development. Not surprisingly, the error of a simple intern was able to knock down the entire service for 30 minutes.
From the family to the nation, the 5 stages of blitzscaling
We use, among the various possible, a subdivision of the phases of the blitzscaling process based on the growth in the number of people employed in society.
- Phase 1: Family 1-9 employees
- Phase 2: Tribe 10 employees
- Phase 3: Village 100 employees
- Phase 4: City 1000 employees
- Phase 5: Nation 10 thousand employees
As you can see, growth is not linear, but geometric: the explosion caused by blitzscaling has its evident reflection also on the number of people needed for the business, hence the problem of knowing how to hire and know how to manage human capital. We will talk about it later.
The type of growth expected from blitzscaling requires managerial innovation
Triple the number of employees year on year is common for a blitzscaling company . This requires a completely different approach to personnel management and a real obsession with creating corporate culture.
Blitzscaling also exposes management to risk, because it is not certain that the right people for a certain phase of a company’s life will remain the right ones during this particular “experience”. During the early stages of blitzscaling you will need people who know how to adapt to doing more things, who are able to respond quickly to changes.
But as the company grows, specialists in key roles are needed. It is essential to act promptly, the principle is to hire the “Signor Giusto Ora”, not the “Signor Giusto”: the people who do well in the first phase, may not be those suitable for the second.
Tolerating “bad” management is another commandment: when you are growing 300% in a year, it is inevitable.
Executives have a specific role, and come onto the pitch when it’s time to play it.
They become necessary when it comes to the Village dimension, it is simply impossible to manage a company made up of hundreds of people without someone who leads at a high level, giving focus and strategy, while managers play a frontline role, managing day-to-day activities.
From founder to leader: they too must change, learning to delegate, but also to amplify their work thanks to an assistant or staff who facilitates and spreads their potential and their energy.
Strategy innovation is the key technique used by entrepreneurs and investors to build dominant companies
Blitzscaling involves the search for extreme growth, and to achieve this it must be planned through an appropriate strategy. A 20% annual growth makes Wall Street analysts happy, but it doesn’t allow a startup to turn into a multibillion-dollar company.
Venture capitalists operating in Silicon Valley want entrepreneurs seeking exponential growth, even if it costs more money and increases the chances of bankruptcy.
Blitzscaling is the typical game in which the winner takes everything, the big risk is being too slow and allowing competitors to gain market leadership. Nokia is a great example of how expensive caution can cost.
In 2007, when Apple and Samsung hit the market, it is the world’s largest and most successful mobile phone maker. Initially Nokia continues to grow, and in 2010 reaches the peak of sales with 104 million pieces, but in 2011 comes the overtaking by Android and the following year that by iPhone. In 2016, Nokia’s business had gone from $ 99 billion to $ 350 million, a 99% decline in less than ten years.
The competitive advantage of blitzscaling is clearly expressed by Uber: its expansion strategy aimed to allow its customers to find a race in the shortest time possible.
Many drivers, many possibilities to find one’s own in no time, have attracted many customers, who in turn have created an attractive market for drivers and so on, in a virtuous circle.
Bringing innovation in the business model allows small startups to undermine established competitors
The biggest mistake that startuppers can make is to underestimate the importance of the business model and to focus on technology, software and the product.
The geniuses who have launched successful companies are “tech nerds” (nerds passionate about technology), but at the same time they are also “business nerds” (nerds passionate about business).
Larry Page and Sergey Brin have built great algorithms, but it was the innovation of the business model in the field of search engines that decreed their victory: in making the search results appear, they chose to consider the relevance and performance as a priority. to payment. User satisfaction has led Google to its success.
As the world becomes digital, the business model as a differentiating and decisive element in competition becomes more and more important: real value is created when technology enables products and services with innovative business models.
Netscape went bankrupt because Yahoo and Google sensed that the real business was not in navigation, but in research. Walmart could dominate the online retail market if Amazon had not actually written the ecommerce bible by introducing user reviews, the electronic cart and free shipping.
Innovating a business model: Growth factors and limiters
Meanwhile, let’s understand what it is. Among the many definitions, the most linear is this: “A company’s business model describes how it generates financial returns by producing, selling and supporting its products.
Clay Christensen’s definition is less aseptic, and says that we must focus on the job to be done, the “job that needs to be done”: a customer buys your product because he finds his way of doing a certain task efficient for him .
Just as there is no perfect definition, there is no perfect business model, looking for it is a waste of time. What is true, however, is that most large business models have common characteristics.
The thing to do, therefore, is to be inspired by them by drawing one that maximizes the four growth factors and minimizes the two growth limitation factors.
The four growth factors are:
1. Market size:
remove everything needed for a too small market from the list of possibilities.
the second growth factor is a distribution defined by Steve Jobs as ” insanely great “. Dropbox is a great product, but success is due to its great distribution. An even more important factor in the mobile first era (i.e. in the time in which the experience of the user on the move is at the center), which can take advantage of two possibilities:
a) leveraging an existing network, PayPal used eBay, which in early 2000 it had 10 million registered users. It was made very simple, on the software side, to add “Pay with PayPal” and the game was done.
b) virality effect like LinkedIn made it easy to connect Outlook, or Dropbox contacts, using the extra storage referral, a program that guaranteed free space to users who involved others.
3. High gross margin:
gross margin is sales less cost of the goods sold, and is probably the best measure for long-term economic value. The higher the gross margin , the more valuable each sales dollar made. This is all the easier for companies like software, where the sale of a copy of the product obviously has a high gross margin .
4. Network effect:
there are products that benefit a lot thanks to this effect: the more users who use a product, the more it is enhanced. The growth of users is equivalent to the growth of the value of the product itself for other users.
The two growth limiting factors are:
1. Lack of adequacy: it
is necessary to be on a good market with a product capable of satisfying it. It is not easy to verify the relationship between product and market before building a company, the right way is to experiment and verify continuously, as Eric Ries’ Lean startup method suggests .
2. Scalability of operations:
a) human limitation to scalability of operations:
a small team manages itself simply, as people are added, the problems grow to the point that increasing a team by 50% means introducing complexity of 150 %;
b) infrastructure limits:
if the structure is unable to withstand the impact of growth, the product cannot survive. An example is represented by Friendster, a social network which, launched in March 2003, had a viral growth that led it to have millions of users in a few months. The servers were unable to withstand the crash and the outages were continuous. The arrival of MySpace in early 2005 brought about its definitive end.
Blitzscaling is very applied in high tech, but it also works elsewhere …
Zara, a Spanish clothing retail company, has built its growth using this technique and has achieved 1.4 trillion dollars in sales in 2016, with its fast a portèr, i.e. giving customers what they want and giving it to him quickly.
A possible result thanks to the ability to keep the development time for a new product at 2 weeks, against an average of 6 months, thus producing ten thousand new products a year. The rule created by the founder of the company, Ortega, in the 70s provided that warehouses supplied the stores in less than 48 hours, and this rule is followed even now that it has gone from a local company to a world empire, with stores in Africa and Asia
In 2008, Barack Obama’s presidential campaign used the power of blitzscaling to catapult a little-known Illinois senator into the White House.
The first lever was the innovation of the “business model”: the unprecedented use of connectivity to coordinate a decentralized movement. Obama announced his candidacy on February 10, 2007, and in one year his campaign employees went from zero to seven thousand, while the volunteers climbed a further order of magnitude.
A result made possible by the use of technology to connect and coordinate existing networks, exploiting their very powerful distribution capacity.