[U16] Beachhead: focus resources on a strategic target to build a sustainable advantage
Amazon. Facebook. Tesla. Square. Palantir. Spotify. Arcimoto. Apple
Dear Reader,
I’m writing this update in Product | Strategy | Innovation on a military strategy that helps inform business tactics to secure a beachhead market. This focus of resources on early adopters can produce quick wins to iterate product development towards a defined problem. I was actually preparing a profile on another disruptive company when I realized how common this strategy is among the leading disruptive innovation companies I have written profiles on this year. This is likely a result of disruptive innovation targeting under-served markets in many cases due to inferior technology that improves over time to address the needs of more demanding customers.
The Normandy Landings of June 6, 1944 were the largest seaborne invasion in history. Five beachheads (Utah, Omaha, Gold, Juno Sword) spanning 50 miles of Normandy coastline were used to invade France by Allied forces in World War II against German forces.
By the 6th day of the Normandy Landings all 5 beachheads were secured and connected to gain a foothold on the Normandy coast for sustained operations.
The Allies failed to achieve any of their objectives on the first day, but did achieve linking the Gold and Juno beachheads within the first 24 hours. By June 12th all 5 beachheads were connected to gain a foothold on the Normandy coast for sustained operations. Normandy was chosen over 3 other targets by Allied forces due to its advantages to support military expansion across France and Europe later even thought it provided a number of challenges with access due to lack of facilities and high cliffs.
Amazon used books to leverage what e-commerce provides.
One of the best examples of creating a beachhead in business would be Jeff Bezos understanding the growth potential of the internet prior to founding Amazon. He then identified books as the target beachhead market for e-commerce. The large supply of books provided the most selection online using centralized inventory and direct shipping to the consumer. Best-selling books could be easily found at a neighborhood bookstore, but the long tail of books on niche topics sold in lower volumes provided a competitive advantage for e-commerce. Amazon used books to build out its systems and reputation providing outstanding customer experiences. Amazon then moved into adjacent markets so satisfied customers could buy more than books online.
Just as the Allied forces down-selected multiple options to invade Europe, Jeff Bezos down-selected multiple options to launch an e-commerce website. Books by Amazon did not provide the largest market opportunity, but hard-to-find books highlighted Amazon’s competitive advantage against retail bookstores to recruit early adopters. Word of mouth among loyal customers reduced customer acquisition cost to grow that initial beachhead market when funds were limited. Amazon made its first $1 billion in just 5 years starting with books as their beachhead. Amazon then implemented their market demand flywheel to accelerate revenue growth and three pillars to focus on what mattered most across retail Marketplaces, Amazon Prime and Amazon Web Services.
One way to better understand a beachhead market is through the lens of market analysis. In update [U12], we reviewed 3 of the largest total addressable markets (TAM) to produce the next company to rival the FAANGs. In the Normandy Landings example, the TAM would be Europe. A serviceable available market (SAM) would be France and the serviceable obtainable market (SOM) would be the 50 miles of Normandy coastline with 5 beachhead locations. In many cases there is only one beachhead.
Facebook built social media one college campus at a time starting with Harvard University. Mark Zuckerberg choose colleges that already had social media tools in use to validate Facebook was building a superior customer experience against the best alternatives. Harvard launched on February 4, 2004. Columbia launched less than 2 weeks later on February 25th and Stanford on February 26th. Yale launched on March 1st. Cornell, Dartmouth, University of Pennsylvania, MIT and Boston University were next. NYU, Princeton and Brown followed. By the end of April 2004, Facebook had close to 30 college campuses on their platform with 100,000 student users. Those 30 college campuses and their students validated Facebook had a viable platform. Those beachheads led to 3.45 billion people using at least one Facebook product including Facebook, Whatsapp, Instagram or Messenger every month in Q1 2021.
A key feature for a viable beachhead market and SOM is easier access to those customers, but also a market that is large enough to build a viable and sustainable business to support operations. Tesla [E6] established a beachhead market for electric vehicles using superior acceleration and sales direct to consumer without a dealership. Although Tesla generated over $250 million in sales with their original Roadster, the vehicle was not sustainable commercially because of high costs using Lotus Elise chassis and body technology, Lotus engineering and Lotus manufacturing. Tesla ended the original Roadster production at around 2,400 units to pivot resources to a Tesla original design from the ground up for a luxury four-door sedan with similar performance to the Roadster. Tesla also acquired it Fremont factory to manufacture future vehicles in its own facility.
Tesla established a beachhead in the luxury sedan market with the Model S electric vehicle.
So the Model S and luxury sedan market was Tesla’s true beachhead with sales continuing today nine years later. A recent refresh with the Model S Plaid re-establishes the Model S as the flagship Tesla product with the Model 3 mid-size sedan and Model Y mid-size SUV scaling deliveries worldwide to drive revenue. The original Roadster was more of a proof of concept to demonstrate a production electric vehicle could achieve superior performance and safety.
The luxury sedan market established Tesla’s SOM and the more affordable Model 3 expanded the sedan market for Tesla to realize its SAM. Adding SUVs and other vehicles just expands that SAM with additional sales towards the TAM. Tesla focuses on what defines success with consumers for each market it pursues. It then designs a superior product to exceed consumer expectations. A recent example is the Model S Plaid with third parties validating it is the quickest production vehicle ever made, but as a luxury sedan just over 1,000 hp.
Square established a beachhead with a Seller Ecosystem for Small and Medium-sized Businesses.
Square [E5] was founded with the intention to make it easy for small businesses to accept credit cards in a mobile first, digital world. That founding vision evolved into building a Seller Ecosystem for Small and Medium-sized Businesses (SMBs) as a beachhead market. Those services initially were limited to a small, square device used with smart phones, tablet computers and an app to accept credit cards, but evolved into Point of Service (POS) systems, payroll solutions and capital to grow viable businesses. But Square stayed focused on the needs of SMBs to build a sustainable business.
Cash App came later to expand services with consumers. The combined Seller and Cash App Ecosystems each stand alone but offer many synergies in the future for Square to use direct deposit for consumers into a digital wallet to spend at SMBs with incentives to build customer loyalty. Square can also move upmarket to larger enterprises that provide key services to consumers or employ large groups of entry-level employees who are unbanked, but need the services that Cash App can provide with direct deposit and other services.
Palantir established a beachhead with government agencies focused on intelligence.
Palantir [E7] identified government agencies in the intelligence field like the CIA as its beachhead market and SOM to build enterprise software to aggregate massive data across many sources and use artificial intelligence/machine learning to generate meaningful innovation and insights. But Palantir also used this beachhead as a tech startup to pursue audacious problems to recruit top talent that would otherwise work for Google or Facebook instead of a government agency. Palantir then expanded with government agencies, but outside of intelligence into projects with the CDC, HHS and other government agencies to realize its SAM with a broader scope of government contracts. Recently, Palantir has expanded on its success within government agencies into early adoption with corporate enterprises like Airbus to realize more of its TAM.
Spotify established a beachhead market in Europe around music subscriptions with consumers for creators and music rights holders to monetize their assets and so consumers could access more music on demand.
Spotify [E4] identified an open digital services platform with subscribed users to generate revenue for music rights holders as its beachhead market in Europe. Using a mobile app, consumers could access any available music with a monthly subscription unlike buying individual songs or albums through the iTunes store. As Spotify added more music content just like Amazon adding more books to its e-commerce platform, the Spotify subscription added more value to more consumers. This subscription service to access music with a mobile app in Europe was Spotify’s SOM. They then expanded into other markets like the US once they built out the core platform.
Spotify monetized the free service with third party ads and offered a paid subscription to eliminate ads. Artificial intelligence/machine learning recommended music based on preferences and listening habits. Playlists allowed users to share music with friends to drive customer acquisition. Spotify eventually expanded out of its beachhead market with music into more audio content with Podcasts for its SAM. Spotify is now a digital platform for creators to reach their fans and to monetize their work. Advertisers are attracted to the growing consumer base with over 300 million monthly active users. Spotify’s TAM is defined more around these creators and their needs to connect with fans to further expand services beyond audio-only content and consumers using the platform with their own needs.
Arcimoto aims to establish multiple beachhead markets using a core tandem 2-seater on a 3-wheel EV chassis plus multiple business models and final solutions for consumers and businesses.
Arcimoto [E2] iterated on multiple electric vehicle concepts over a 13-year period until it landed on an 8th generation tandem 2-seater on a 3-wheel, plug-in battery, all-electric chassis. Arcimoto was able to manage cash burn by keeping operations lean while it iterated on the design. Arcimoto’s beachhead strategy is different than the previous examples in that it is using a common platform to then create multiple beachhead markets with different business models and some additional body work to realize different end-user solutions.
The consumer focused products include the Fun Utility Vehicle (FUV) and Roadster. The business model is to manufacture the product to a customer order with direct to consumer sales like Tesla. But to build awareness and provide opportunities for consumers to experience an Arcimoto vehicle, the company is franchising rental businesses at popular destinations like Key West, Florida with Arcimoto Key West Electric Vehicles. Consumers who rent an FUV or Roadster can then order a vehicle based on that customer experience direct with Arcimoto versus test drives through dealerships selling the vehicles.
The business-to-business sales model is primarily focused on last mile delivery with the Deliverator. These are more like fleet sales with a custom-branded product. Door Dash, Uber Eats, Postmates and other delivery services can build local fleets in key markets to rent vehicles to drivers. Arcimoto also has a first responder vehicle called the Rapid Responder, but these would be single vehicle sales or small fleets mostly to ambulance and fire departments.
Steve Jobs and Apple created a beachhead around iTunes and digital music that led to the iPod, iPhone and iPad.
Although establishing a beachhead is usually associated with new ventures, large corporations can also enter new markets with a beachhead acquisition or a new strategic initiative. When Steve Jobs returned to Apple after leaving the company he co-founded as Apple Computer many years before his return, he cancelled many projects to focus resources on products that would make a difference in the world. The iMac was the initial product launched after his return, but iTunes helped to create a beachhead for Apple beyond computers with a focus on consumer electronics for both Mac and Windows platforms. Success with iTunes monetizing music for recording labels and providing songs to consumers for $0.99 each led to the iPod to store 1,000 songs in your pocket linked to iTunes on a Mac or Windows computer. Success with the iPod led to the iPhone and iPad. The majority of Apple’s revenue today is generated out of that beachhead that Steve Jobs created with a focus on digital music.
Conclusion
A Beachhead market seems like an oversimplification of a strategy that worked in World War II to defeat the German forces over time. But just as seen in business, the Allied forces failed to achieve any of their objectives on the first day of the Normandy Landing. But with persistence and holding on to the original strategy of securing 5 beachheads across 50 miles of Normandy coastline, all 5 beachheads were secured and connected by day 6 of the landing. The Normandy Landing was also a key turning point in World War II for the Allies. So don’t dismiss the merit of a good beachhead market.
What is striking after identifying multiple disruptive innovation companies worthy of deep dives with profiles here is the common trait of a beachhead market to their success. I did not select examples of beachhead markets to write this update in advance. I’m looking back on Arcimoto, Spotify, Square, Tesla and Palantir as well as preparing my next profile and realized how important a beachhead market was for their success. Arcimoto is still developing their beachhead markets, but Square, Tesla, Spotify and Palantir were clearly started with establishing a beachhead in mind. And this was likely the result of capital efficiency. Another striking feature are the roots of 2 of these 5 companies back to PayPal that had its own beachhead market focused on e-commerce, sellers, consumers and online payments for EBay transactions. That was PayPal’s SOM that expanded with those sellers and consumers using PayPal to email funds for other use cases to realize a larger SAM until EBay acquired PayPal altogether for $1.5 billion. Elon Musk and Peter Thiel were CEOs for PayPal at different times and then went on to co-found Tesla (Musk) and found Palantir (Thiel).
What are the key features for these beachhead markets since there are multiple companies pursuing the same objective?
The beachhead market is a subset of a long-term vision and huge TAM that is large enough to interest investors, capital markets and attract top talent. This is a striking feature among all these companies. The beachhead was not the first step to win a $10 billion TAM. Most are pursuing multi-trillion dollar TAMs at scale.
Reduce the burden to acquire new customers seems to be the primary feature for each of the beachhead markets. The problem needs to be significant and the solution needs to be 10x better than alternatives according to Peter Thiel.
Identify SOM that provides adequate revenue to build, raise capital and sustain a viable business.
Expand into adjacent markets over time to realize a larger SAM.
And looking back 10 years from now which company will make the most of this SOM, SAM and TAM progression that started with securing a beachhead market? Tesla and Square are best positioned due to ultimate size of their TAMs if they can build a sustained competitive advantage. Square has significant competition from other fintechs like Stripe and PayPal, but collectively the fintechs are competing to take market share in such a large TAM that each can scale at the expense of the big banks.
Square co-founder and CEO Jack Dorsey is rumored to be the anonymous individual in California who provided Bitcoin to non-profits in El Zonte, El Salvador to seed the use of Bitcoin where the majority of residents remain unbanked. This led to Bitcoin Beach and El Salvador adopting Bitcoin as legal tender last month. That is the move of a fintech entrepreneur to advance the potential of open technology, not the CEO of JP Morgan or Bank of America. That is why Square and the fintechs will keep disrupting the big banks to take more and more market share across the majority of financial services.
Tesla has such a competitive advantage in the sustainable energy market, they are the favorite over the next 10 years if they can scale lithium ion battery production to meet the demand as they scale vehicle and battery storage production across 3 or more continents. Tesla has the luxury of selling as many vehicles as they can produce even while raising prices. Tesla just released their Q2 2021 vehicle deliveries with 201,250 units delivered to customers. This is a 122% increase over Q2 2020 when 90,650 vehicles were delivered. As Tesla brings on production at Giga Berlin and Giga Texas later this year and early next year, Tesla will exceed an annual run rate for 1 million vehicles delivered a year for the first time. Tesla is also leading computer vision with Tesla Vision. The beachhead for that technology is autonomous navigation for Tesla vehicles, but can then be used across more commercial robotics and drone use cases. Tesla Energy also provides substantial upside with commercial battery storage for home owners, utilities and corporations and is not as dependent on nickel like the vehicles where energy density is a key requirement.
Best,
Stephen
Nothing in this post is intended to serve as financial advice. Do your own research. I’m long AMZN, FUV, PLTR, SPOT, SQ and TSLA mentioned in this update.