Marc Andreessen’s Latest Lesson in Strategy
European Straits #81
One of the most shared stories on my Twitter timeline these days is Elad Gil’s interview of Marc Andreessen on what it takes to grow a startup from 1 to 10,000. It’s an extract from Gil’s The High Growth Handbook, which was just released by Stripe’s new publishing arm.
The interview is well worth your time (as is probably the book, although I haven’t read it yet). Its content will sound familiar to those who are used to hearing Andreessen discussing entrepreneurship. But I find this particular interview to be a very interesting distillation of strategic wisdom.
The deepening of strategic thinking is always a sign of the maturity of a techno-economic paradigm. In his masterful The Lords of Strategy, Walter Kiechel tells the story of the big thinkers who revealed the complex secrets behind corporate success in the 20th century. But there are striking differences between the past age of the automobile and mass production and the current Entrepreneurial Age when it comes to strategy. Many of those can be found in the discipline itself, which has been radically reshuffled. Some differences also exist in the speed and ways strategic thinking is reaching maturity.
In the past, we had to wait for consultants such as the Boston Consulting Group’s Bruce Henderson and university professors such as Michael E. Porter to emerge and provide a clearer retrospective and predictive view of corporate strategy. By contrast, today’s strategic thinking has literally happened in real time, articulated by those who are building companies or investing in them. We do have pure strategists who are dissecting the new art of positioning, including Stratechery’s Ben Thompson, the BCG’s Philip Evans, Erik Brynjolfsson & Andrew McAfee, Sangeet Paul Choudary, and of course . But entrepreneurs and investors didn’t wait for these Hendersons and Porters of our time to understand what was going on—and to act on it.
This is why the new “Lords of Strategy” are not found in the consulting and academic worlds, but are instead active players in today’s economy, with their hands on the wheel and skin in the game. Among the best are (in my view) Paul Graham, Jeff Bezos, Naval Ravikant & Babak Nivi, Bill Gurley, Eugene Wei, Balaji S. Srinivasan, Andrew Chen, Chris Dixon, and Marc Andreessen. (I didn’t include others who are more specialized in management and culture, such as Ben Horowitz.)
Now back to this Andreessen interview. Three ideas stood out to me, namely because they reinforce views I’ve previously written about. The first is the importance of distribution to build competitive advantage. As explained by Andreessen, “contrary to myth and legend, [large tech companies] become distribution-centric rather than product-centric. They become a distribution channel, so they can get to the world. And then they put many new products through that distribution channel”.
In a , I explained that traditional media companies in the newspaper, radio, and television industries had historically built their dominance not thanks to having the best content but by their controlling distribution channels. Similar dynamics were in play for dominant players in other industries such as and car manufacturers. And now we can see that the same is happening in the Entrepreneurial Age.
Distribution is never about a single channel. Rather it’s about a system, and . Brands still matter, as do retail stores. But direct marketing has risen in importance as it’s been made so easy by technology: thanks to ubiquitous computing and networks you can practice a regular and systematic monitoring of your users’ activity. It is no coincidence that the companies who dominate the new paradigm are those who have built a direct relationship with literally billions of customers through a direct distribution system powered by technology.
The second idea that struck me in Andreessen’s interview is the discussion of a moat. I think the term ‘moat’ has been popularized by Warren Buffett. But it’s really synonymous with ‘competitive advantage’, which is the core concept in Porterian strategic positioning. Put simply, a moat is what enables a company to raise prices (and margins) without losing market share.
A moat is never a magic bullet. Rather, it’s a complex, distinctive value chain in which all components perfectly fit together. There’s an ongoing discussion about moats in the Entrepreneurial Age, with some saying it’s all about built-in network effects. But as Andreessen puts it, those effects can quickly reverse (“Go ask the MySpace guys how their network effect is going”).
The fact is a moat is not easily built in today’s economy, where there’s always a startup striving to do better at a cheaper price. This is why large tech companies have diversified beyond technology on what I call their ‘Northern Side’—that part of the company where you find all the employees, physical assets, and regulatory compliance. If you want to know why all tech companies, although they’re ‘tech’ enough to generate increasing returns, have non-tech components (Amazon’s warehouses, Google’s salesforce, Apple’s stores, Netflix’s original content), it’s simply because it’s the only way to build that moat.
Finally, I was very interested in Andreessen’s discussion about M&A, a topic I covered in . To keep it short, his prediction is that there will be a huge boost in M&A over the next five years, because large tech companies have slept on their cash for too long. What we at The Family expect is that US tech companies will realize how important Europe is in their global positioning and they’ll consider acquiring more European startups. (By the way, M&A is a fantastic way to build a moat on the ‘Northern Side’: think about Amazon acquiring Whole Foods or, very recently, real estate startup Zillow acquiring Mortgage Lenders of America.)
Here are a few articles to go further (several mine, and all of them containing more references):
Competition and Business Strategy in Historical Perspective (Pankaj Ghemawat, Spring 2002)
No Tradeoff Between Quality and Scale (Babak Nivi, February 2013)
Seven Chapters of Strategic Wisdom (Walter Kiechel III, February 2010)
Borges Map: Navigating a World of Digital Disruption (Philip Evans & Patrick Forth, April 2015)
11 Notes on Amazon (January 2016)
The Five Stages of Denial (May 2016)
The Berkshire Hathaway You Haven’t Noticed (Yet) (my partner Oussama Ammar and me, July 2016)
In Search of Scalability (August 2016)
A Stout Porter: Business Strategy in the 21st Century (October 2016)
11 Notes on Goldman Sachs (May 2017)
And a quick travel note: I’ll be in the Bay Area at the end of this week to attend O’Reilly’s FOO Camp. I have some time in the morning on Friday, August 10, so if you’re around and want to meet up, send me a message.
Warm regards (from Schleswig-Holstein, Germany),