The tribes leading organizations differently in 2017 (#3) — The Fast Growth Companies

A short series on today’s influential management and talent ideas and the tribes using them to drive their business in new directions

Tribe #3: The fast growth companies — ‘Winner Takes most’ cultures

Ambition has a bigger platform and opportunity than ever in recent years. In spite of overall rising inequality in American and European societies, there has been an explosion in wealth creation for individuals able to bring a customer need together with a software solution that can be scaled.

The cycle of innovation is moving fast enough, the cost of capital is low enough (thank you Federal Reserve) and the cost of the tools of production is dropping so fast that there is an unprecedentedly short distance to travel if you want to be a successful entrepreneur.

Recent history shows that what it seems you need is a fantastic idea, a will to win that includes a willingness to selectively break the rules and an ability to codify what you do as a playbook.

Just be careful not to let it overcook.

To be successful, these entrepreneurs have ‘broken the rules’ in a variety of ways — culturally, sometimes legally and in their business models - to build a dominant business.

Why do they act this way?

They believe they are in a ‘red ocean’ — a winner takes most environment. This is not only about disruption — their competitors are also trying to do the same. Its a race to market domination.

What are the features that drive a ‘winner takes most’ strategy and how do these entrepreneurs respond?

In a ‘winner takes most’ strategy, growing at speed is key to achieving break even and profitability that fuels further growth.

“Economists developed the theory of network effects in the 1970s and burnished it in the 1990s, and business gurus, entrepreneurs, and the tech media enshrined it as one of the guiding lights of the new economy. It works like this: a company quickly enters a new market and attracts customers, and those customers attract more customers, and so on. In turn, the first mover experiences explosive growth and assumes a dominant market position while earning wonderful profits. End of story.”(3)

Entrepreneurs are building organizations geared to this strategy in 4 ways;

  1. “We have identified a solution that is a customer champion in a local market but it may or may not be currently legal solution”

2. “Talent needs to be highly entrepreneurial and ready to win above all else”

3. “Growth should be a local problem but replicated on a global scale with strong management discipline”

and in some cases…

4. “‘The growth of this company cannot be constrained by salary costs so the workforce has to be a two tier system where the delivery workforce is contingent, providing key assets but not participating in ownership in anyway”

The key capabilities involved

Capability 1. A new organization model to support a new business model

Arun Sundararajan, Professor at NYU Stern, describes this new model neatly when discussing the poster children for this organization. “Airbnb and Uber are together inventing a new organizational form: platforms that are firm-market hybrids, supplying branded service offerings without actually employing the providers or owning the assets used in provision.(1)”

he elaborates that “these are early examples of a new kind of digital institution, quite different from eBay and Craigslist, the hands-off online matching markets of the past. Their internal operations may include control over pricing (Uber), a neighbor support hotline (Airbnb), supplier financing (Uber), and a dedicated Trust and Safety team on-call 24 hours a day (Airbnb).

Offering these organization-like capabilities matters because both businesses rely on a high-quality, customer-facing, branded service experience. However, neither platform owns or even leases the assets (eg, the apartments and the cars) used to accommodate their guests or transport their passengers. Neither platform employs any of its providers (the drivers or the hosts). The business model is almost like a digital franchise, though one involving far greater delegation of ownership and control to providers.(1)”

Capability 2. Entrepreneurial culture focused on growth

The management culture of these companies also stand apart from the big beasts of the last 30 years.

The polite tone of leadership competencies does not exist in the same way it does in most long standing fortune 100 companies. In fact, politeness is often explicitly rejected!

Given the scale of the opportunity and the amount of competition, a traditional management culture is felt to not be adequate to the task of winning, which is the market imperative.

There is a ‘no prizes for coming second’ mentality to the management culture that drives a ‘do or die’ mentality to the approach to the competitive market place.

A ferocious drive for results and opportunity for significant growth and reward is offered to the talent and this attracts only the most ambitious and tough minded.

Uber is probably the most obvious example of this tilting of focus with it’s ‘super pumped’ management values.

Add to that the fact there is a fundamental divide between the workforce and management driven by a business model that depends on the gig economy. This creates an elitist approach that has an almost aristocratic class divide and you have additional fuel to the elitist culture within management.

Netflix’s famous statement on how to do HR also shares some values here with Uber in its focus on outsized rewards for the top performers and a regular culling of ‘adequate performance.’

This focus on winning is a shift in tone from even the recent innovators in management culture such as the ‘academic hot house’ approach of Google with its business model driven desire for a company full of ’smart creatives’. These new aggressive management groups are probably finding inspiration from another of their internet predecessors in the culture of the original ‘fast growth uber alles’ internet company Amazon.

Capability 3. Scale faster and better than anyone else — reliably

To be a winner in a competitive market, being able to move fast and systematize growth playbooks is a critical capability.

This is something that traditional companies do not do at the level of risk tolerance or speed that these privately held, leveraged companies are capable of doing — maybe with the exception of former start ups like Google, Amazon and other tech companies.

This capability for repeated, modular and transformative growth has a name in Silicon Valley now and even has a course taught about it at Stanford. It is sometimes called “Blitzscaling.” Leaving aside the uncomfortable allusion to WWII military tactics, Reid Hoffman has attempted to describe the process of moving at speed from the size of a ‘village’ to a ‘city’ to a ‘nation’ as your company grows.

Blitzscaling is “ is what you do when you need to grow really, really quickly. It’s the science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale.
This is high-impact entrepreneurship. These kinds of companies always create a lot of the jobs and industries of the future. For example, Amazon essentially invented e-commerce. Today, it has over 150,000 employees and has created countless jobs at Amazon sellers and partners. Google revolutionized how we find information — it has over 60,000 employees and has created many more jobs at its AdWords and AdSense partners.” (2)

Each Uber business was built as a city -sized operation. Uber won the market in San Francisco long before coming to New York and built its business in a modular fashion, each city having its own GM with a large amount of autonomy. Much like our ‘Whale Hunting’ VCs, they depend on hiring a key entrepreneurial individual in each city to build out their business.

This General Manager is relying on the capabilities of the tech platform and a demand in the market place to work to build scale as fast as possible, pressing past legal and governmental inertia or laws in place to get to a scale large enough that the politicians and competition cannot successfully challenge the existence of the market place.

AirBnB also has a similar approach due to the variety of legal challenges it has to contend with as an alternative to hotels.

Building a local group of contingent employees willing to make their time and assets (a car/a house/a room) available takes time and is a process of local engagement and management. Management of local law and regulation is inherently local. Addressing competition is largely a local issue. What makes the winning companies successful is the ability to codify winning practices and transfer these insights to the next city’s team.

Capability 4. Create and engage a world beating contingent workforce

A subset of these businesses have invented the ‘gig’ or ‘sharing’ economy. From an owner’s perspective, this is a very clever solution to;

  • reduce fixed costs across a number of categories,
  • create flexibility to scale up or down to the size of demand at low cost
  • avoid a massive set of employment related regulations and expenses.

On the face of it, it is a win/win voluntary employment arrangement that releases entrepreneurship and maximizes the productivity of assets held by individuals in the communities in which the companies operate.

Airbnb ‘hosts’ get to make money on their terms from a spare room or a vacant apartment when on the road with work. Uber drivers in this commercial are ‘hustling’ some extra cash on a flexible schedule whenever suits them. Overall their is a feeling of empowerment and mutual benefit.

The dynamic of this relationship between macro and micro entrepreneur is not always a sustainable one. The tone of the relationship between Uber and its drivers has soured dramatically as Uber has achieved a dominant share in local markets and reduced the number of options for drivers in the employment market. The reaction of regulators and activist drivers has been to press for a more traditional working relationship with Uber providing benefits as an employer and gig economy’ employees acquiring legal rights to those benefits. This landscape will continue to shift and affect the profitability of these business models as they mature and scale.

Gig Economy workers have begun to organize in some European Countries to push for employment rights (4)

Airbnb have had to take on liabilities on behalf of their ‘hosts’ in order to keep their service providers engaged. It also adopts an apparently more inclusive culture to its relationship with the suppliers of its key experience, taking more of a partnership approach.

So what can learn from the example of these “winner take most” management cultures?

For those working in traditional companies, what is there to take away?

Some questions;

  • Do you measure your agility as an organization?
  • Management thinkers have been encouraging CEOs to focus on the ‘core competency’ of their business for years — leading to widespread outsourcing intiatives for efficiency. How does this emerging competency of driving exponential and not incremental growth fit with your organization capabilities?
  • While clearly there is evidence of cultural challenges and downsides to tilting your management group so aggressively towards outcomes, is there something to learn here from the management culture being built across these organizations when assessing talent?
  • Do the playbooks and good practices emerging here apply directly to any entry into new markets or business models for your organization? While the mainstream business may not be about to ‘blitzscale’ anything, is this new approach to growth the first signs of a transplantable roadmap for traditional companies to begin to grow new software enabled business models at a speed and scale that could justify the investment and drag on earnings per share from not choosing to grow the core business?

References

(1) HBR — What Airbnb Gets About Culture that Uber Doesn’tLast week, as Uber battled a media firestorm after a senior executive talked of investigating unfriendly journalists…hbr.org

(2) HBR — https://hbr.org/2016/04/blitzscaling

(3) HBR — https://hbr.org/2016/05/why-winner-takes-all-thinking-doesnt-apply-to-silicon-valley

(4) http://www.connessioniprecarie.org/2016/11/11/deliveroo-and-ubereats-organising-in-the-gig-economy-in-the-uk/

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