👋 Hi! I’m Tao. As I learn about building products & startups, I collected some of the best content on these topics shared by successful Chinese entrepreneurs. I translate and share them in this newsletter. If you like more of this, please subscribe and help spread the word!
Primer
I don't know when it started, but since some point in time, Meituan is regarded by the industry to be strong in strategy. People have always been asking me to talk about strategy. Indeed, strategy is an important topic, given that Meituan is a multi-business company.
There are many books on strategy, but there is no consensus on what it means.
(Note: He goes on remarking a lack of clarity in literature about strategy, Strategy (macro) vs. strategy (micro), the evolution of the definitions of strategy landmarked by Henry Mintzberg's 5P's of strategy, and the difference in thinking between the Chinese and the Westerners - Chinese prefer using analogies and Westerners prefer using definitions and deductive reasoning. So he will try to give a definition to strategy. Edited for brevity.)
The definition that I give is rather abstract and broad:Strategy is the insight that drives our decision making plus the action plans matching that insight to help the business to achieve the highest ROI in different times and spaces. Spaces can be defined in multiple senses - geographic areas, business lines, etc. Note that what we refer to here is geared towards tactics.
The complexity lies in that in a different time or space a strategy that worked before may not work anymore. In Three Strategies of Huang Shigong1, one of the teachings is that "losing what is strong becomes weak". It means that for some strategies, if you used them first, then the strategies become useless to others, and you have an advantage. For some strategies, if your competitors adopt the same strategies or if they have counter-strategies, you lose your advantage and you need new strategies. As such, at different times and spaces, strategy needs to evolve.
Going back to our definition, we may choose to be a multi-business-lines company, and for different business lines, we may yet face many decisions - whether to go into business line A or B. Choosing which business line is an allocation problem of capital resources, top management attention and manpower. As such, we need to consider the return on investment. Although it's not easy to quantify this ROI, but it objectively exists, and we should aim to optimize for it.
Porter’s Three Generic Strategies
Porter's three generic strategies - cost leadership, differentiation, or focus, describe how a company pursues competitive advantage across its chosen market scope. A company chooses to pursue one of two types of competitive advantage, either via lower costs than its competiton or by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope, either focus (offering its products to selected segments of the market) or industry-wide, offering its product across many market segments. - Wikipedia
Michael Porter’s Three Generic Strategies (Image: created by Denis Fadeev for Wikipedia)
Caution! Although Porter's Three Generic Strategies is a classic, it only pertains to competition. Competition is only a part of business and it's not even a big part.
Cost Leadership
Porter's Three Generic Strategies is proposed in 1980. At that time, the Internet industry hasn't yet been formed, so his understanding of cost leadership largely reflects the characteristics of traditional businesses.
In traditional businesses, goods or services of the same quality can be manufactured by different companies, and it's only a matter of cost structure. However, in the Internet age, if you don't have WeChat's scale, you can never offer the same kind of user experience as they do, as the experience stem from the network itself. If we were to redefine cost leadership in today's context, it should be Experience Leadership powered by Network Effects.
Differentiation
In addition, due to the many peculiarities of the Internet, the effectiveness of the other two strategies are diminished. For differentiation, in the merchandise age of the past, BMW and Volkswagen can be differentiated by their high-end vs. mass-market market segments. For Internet platforms, the high degree of personalization means that each person gets his own product. We can't exactly call an Internet platform high-end or mass-market, so the room for differentiation is greatly compressed.
It is also easier for an Internet company to operate multiple differentiated products than a traditional company. For example, QQ and WeChat are differentiated but both of them are run by Tencent. Dingtalk is also differentiated from WeChat, but I believe that as long as the WeCom (WeChat for work) team continues to push forward, WeCom can surpass DingTalk. Therefore, to differentiate in the Internet industry, most likely it has to be predicated on that you don't face strong competitors in your category.
Focus
The focus strategy faces similar problems. For Internet businesses, whether they adopt focus or differentiation strategy, a way to amplify the effectiveness of the strategy is to leverage on organisational competence that are hard to build for their competitors. For exmaple, the organisational competence of JD's self-operated e-commerce operation can't be replicated by Alibaba, despite their trying. Meituan's competitiors also tried to use the focus strategy to compete with Meituan. But what they didn't realize is that we have very similar organizational abilities.
Standard Strategy vs. Effective Strategy
This is a concept that I came up myself. There are various theories and schools of thoughts when it comes to strategy, each has its own usefulness and its own set of problems. Mintzberg talked about 10 schools of thoughts for strategy, and consulting companies like MBB (Mckinsey, BCG, Bain) also have many methodologies for strategy, such as Porter's Five Forces and Porter’s Three Generic Strategies. But even as a strategy expert, Michael Porter's own consulting firm (Monitor Group) failed.
The strategic theories widely circulated on the market are often ineffective when they are applied to a specific company. The strategies that actually work often are not widely circulated.
To use an analogy, strategy is like a doctor treating a malaise. The doctor makes a diagnosis based on your symptoms and then proposes a treatment method. If the treatment works, it means the diagnosis is correct. Otherwise, the diagnosis is wrong and he switches to another treatment method. Even if the symptoms are the same, the treatment methods can differ because of different causes or different body conditions (e.g. drug allergies).
Strategy for businesses is similar, there is a diagnosis, hypothesis and testing process. The difference is that the feedback cycle for treatment of humans is short, but for businesses it's long. From planning to implementation, a strategy can easily take up to two years. A company can't afford more than a few failed strategies.
The standard strategies are popular because they can be replicated at scale. (the business model of MBB). In reality, a strategy working for a company is a result of multiple factors combined together.
This begs the question of what's behind an effective strategy. If I were to teach strategy as a complete course, the syllabus may look like this:
Strategy for Selection of Business Line
Strategy for Resource Allocation
Strategy for Business Model
Strategy for Product Development
Strategy for Branding and Marketing
Strategy for Operations
Strategy for Organisational Culture
Strategy for Technology Stack
and more.
(Note: He will cover Product, Operations, Marketing for the rest of the course)
Strategy should be a combination of many underlying factors. If a simple one or two strategies can move the needle for you, that means your business operations, organizational structure, and industry conditions have not yet reached the "deep water zone".
Whether it's the popular books on the market or the managers in companies, they usually have two fallacies - determinism or futilism. A determinist believes his role determines the outcome. If the company is doing badly, it's because his department is doing a bad job or his department is not given enough resources. If the company is doing well, it's because of his department. A futilist believes he has nothing to do with the outcome and his role is pretty useless.
Meituan has dozens of departments and these two types of fallacies are not uncommon. The books on the market, in order to promote themselves, would also promote determinism - do what they say and you will succeed. It's never that easy. The success or failure of everything is a result of many different factors at play.
Meituan’s Strategy
Finally, let's talk about Meituan’s Strategy. Meituan have two main apps - Meituan and Dianping. There are many overlapping features offered on these two apps such as hotel booking, movies, food delivery, F&B group buy, and other local services.
Aren't there anti-Scale Effects in managing so many businesses? Of course there are, and they're significant. If a manager can manage any of the above businesses, why not start a startup on his own, especially given that Wang Xing and I like to scold people a lot and there is excess capital in the capital markets in China?
Since there are anti-Scale Effects in management, we must make sure that the business itself has stronger Scale Effects. This leads us to Meituan's core strategy - the platform strategy, which we used from 2013 to 2018.
Why this strategy works?
First of all, when your app offers more services, the average customer acquisition costs (CAC) per service go down, and CAC is the most important cost for Internet businesses.
One of the main ways to promote apps today is to pre-install the apps in new phones, and pay the phone manufacturers for each pre-installation. If the user never uses the pre-installed app, then that money goes to waste. If an app only has one feature, the average CAC can be very high and vice versa. More services offered also can lead to higher usage frequency.Higher usage frequency result in higher retention, which in turn leads to higher life time value (LTV).
The higher LTV means that the acceptable user acquisition cost has also increased. Suppose originally the LTV was $100 and the user acquisition cost was $10, now the LTV has increased to $500, the acceptable user acquisition cost would have also increased. (A positive feedback loop is formed. It also allows us to use the higher frequency to beat down low frequency apps).
Meituan’s Platform Strategy
This is the logic behind Meituan’s acquisition of Mobike. The bike sharing business does not make much money, and the operating cost is quite high. But for Meituan, it is a business to acquire users, so the acquisition of Mobike is to acquire their customers. When a customer's LTV is high enough, Meituan is already bold enough to buy a business to acquire customers. Similarly, our ride hailing business is also a customer acquisition play.
When an entire industry (bike sharing) may become a means of acquiring users for another industry (local services), can you still expect this industry to be profitable?
A very important scale effect is that Internet has network effects among users. In today's age of personalization and big data, when your user base is large enough, users themselves become assets and renewable resources that can be tapped on repeatedly.
The mainstream business philosophy in the last generation (1990s) was that every company should focus and avoid over-diversification. None of the tech gaints today need to worry about over-diversification because there are too many strong scale/network effects in the Internet industry. It doesn't matter if you are not focused.
Dubbed the premier book on strategy, it’s a 1336 words book that covers values, governance, military theory and more. After testing his virtues several times, a mythic old man gave this book to Zhang Liang, who become a prominent general and strategist, and helped to establish the Han dynasty. (2200+ years ago). Worried that the book may fall into the wrong hands, Zhang Liang ordered that the book be entombed with him upon his death and it’s only unearthed 500 years later.
a wonderful overview. thank you! sharing in yen.fm newsletter.
This is unreal!