Many times, we see many people comparing the business strategies employed by successful companies to tactics used in warfare. Recently, there has been a lot of debate over the blitzscaling tactics used in Silicon Valley over this tumultuous period in the history of entrepreneurship. We have seen the fall from grace of various highly-priced startups including WeWork, Uber, and Lyft. And yet, the same blitzscaling tactics have also built the technology giants around the world, including Facebook, Microsoft, LinkedIn, PayPal and SEA Ltd. This essay aims to discuss the usage of the blitzscaling tactics in business and aims to provide a clear view for entrepreneurs in terms of whether it would be the right strategy for them in business.
Brief Background on the Blitzkrieg
The blitzkrieg [German for lightning (blitz) war (krieg)] was a strategy popularized by the German general Heinz Wilhelm Guderian (also known as the Father of the Blitzkrieg) in his book “Achtung! Panzer!”. It involves the deployment of concentrated forces led by tanks, followed by motorized infantry and supported by heavy artillery fire and air raids on the enemy. It has seen its success during World War II in the invasion of Belgium, the Netherlands, and France (falling in 46 days). The whole concept behind the blitzkrieg tactic was to prioritize speed and the element of surprise to catch the enemy off-guard, and then surround them and hit them hard before they can regroup and retaliate. As with many military strategies, this has developed into a business strategy for the growth of companies and businesses.
Using Blitzkrieg Tactics in Business
The popular book “Blitzscaling – The Lightning-Fast Path to Building Massively Valuable Companies” by Reid Hoffman and Chris Yeh has mentioned the success of many technology companies today can be advocated to blitzscaling, where the company takes their competitors by surprise through the push for increase in market share, prioritizing speed over efficiency and profitability (essentially employing the blitzkrieg tactics used by the Germans in World War II). The major thesis behind the use of such tactics was the leverage the network effects could bring to the company, eventually making them very sticky for their customers. This allows them to increase prices without losing too much market share, making them hugely profitable in the long term.
Essentially, the strategy involves burning more cash at the start to dominate markets before trying to turn a profit. The eventual goal for these companies may just be an exit to a competitor who wants the market share for themselves and find it too expensive to do it on their own, leading to a buyout. Alternatively, they may be looking at a strong IPO as an exit strategy as they have the networks.
There are certain requirements for this tactic to work for any company though. Firstly, the total addressable and serviceable addressable market sizes for this business must be large enough. This allows you to be able to capture a significant market size before your competitors catch up with you. Your target is to be the market leader at lightning speed and take them by surprise repeatedly. The whole idea is just like the lightning war fought by the Germans in World War II. Once the desired scale is achieved, processes to improve the company’s efficiency in terms of processes are then thought through, while not compromising growth too much. Some people call it being fast to market, while others call it uncontrolled growth. At the end of the day, it is, like any other tactic, a double-edged sword.
The Argument Against Blitzscaling
Those who oppose the concept of blitzscaling usually cover the sustainability of the tactic used. The blitzkrieg was never meant to be a sustainable tactic. It was a tactic to take the enemy by surprise and surround them before they have any time to react. The same goes for blitzscaling. You would want to capture as much market share as possible before competitors come in to try to get a slice of the pie. It was never meant to be sustainable. Comparing blitzscaling to growing companies for sustainability no matter the scale is like comparing the blitzkrieg to trench warfare.
Many investors “dedicate” WeWork’s fall from grace to the blitzscale strategy. The company decided that it was supposed to be working as a technology company with strong network effects. This has led to high levels of sales but also a very high burn rate. However, when you look into the company’s business model, it is a very asset-heavy business, with the need to rent or buy large amounts of real estate to function with sufficient economies of scale. This leads to high levels of capital expenditure, and hence the high costs involved. The cash flow from operations generated will not be enough to cover the capital expenditure, requiring the company to keep raising funds from investors without the actual ability to turn profitable after the lightning war.
The changes in attitude away from the blitzscaling can be seen by the most recent changes in Silicon Valley, who have turned against the priced unicorn game to a search for profitability even with low levels of scale. They are now turning towards the trench warfare in terms of the strategy used, whereby the startup uses a more defensive play to take profitability against size and scale. It may seem like the era of the blitzscale is over, but I feel that it is not the case, at least not in entirety.
At the end of the day, there is no right or wrong tactic in business. Ultimately, the sustainability of the startup venture will point towards profitability. How a startup achieves profitability is a question of the business model. As we have seen in World War II, the blitzkrieg is used as a measure to counter trench warfare and is in turn countered by the usage of strong mobile reserves for reinforcement.
If the company requires significant economies of scale to turn profitable and is characteristically asset-light, I would recommend that the blitzscale strategy be employed upon finding product-market fit is still crucial for the company’s success. However, in other cases, it would be best to keep the company from making the wrong decision and go for a more defensive play. More importantly, always remember that there is no perfect product and the key to success in business is to capture enough market share. This can only be done if you listen to your customers on what they need and want, rather than what you need and want. I always recommend doing pre-sales if possible (especially consumer software/technology products) to test out the market demand.
If you would like to know where I got the information for this review, please check out the two books embedded in this post.