The Strategy Behind $1+ Trillion Companies
Turns out there is a strategy for becoming a trillion-dollar company.
In his book, The Four: The Hidden DNA of Amazon, Apple, Facebook, Google, NYU professor and entrepreneur Scott Galloway presents the T-Algorithm (Trillion Algorithm), a strategic framework based on commonalities across four technological unicorns: Apple, Amazon, Alphabet (Google) and Facebook (Microsoft joined the trillion-dollar valuation club after the release of the book). The framework aims to explain why these companies are worth over $1 Trillion and give the tools necessary for one to identify potential future unicorns.
In this analysis, we aim to understand what makes a company worth $1+ Trillion. To do so, we will base our analysis and explain, in detail, Scott Galloway’s T-algorithm.
Table of Contents:
1. Product Differentiation
he first factor of the T-Algorithm is product differentiation (Galloway, p. 183). In today’s world, customers have access to a nearly-unlimited array of different products (technological or otherwise). In addition, customers can easily compare products, reducing the need for brand power or reputation. As such, product differentiation has gone at the forefront of product strategy: consumers must know exactly what a product does, and where it fits within the spectrum of competitors.
To explain this phenomenon, let us turn to a thought-experiment. Think of a social media company. You most likely thought of Facebook and Twitter, among other choices. Now think about how you use Twitter and Facebook. Perhaps you do not use both — think about why that is the case.
Although only Facebook is a trillion-dollar company, both companies have strong product differentiation. When you thought of Facebook, you likely thought of photos of friends and relatives. On the other hand, Twitter likely spawned thoughts of a feed of quick, bite-sized epiphanies and digestible news snippets from friends and/or random people.
Nearly every product in the world, irregardless of how commoditized it may appear to be, has forged new dimensions of customer value through sensors, networks, search, display, etc. (Galloway, p. 184). Product differentiation can even come from the most mundane part of a company such as its supply chain. Just think about Amazon. Prior to Amazon, one had to pay an extra fee to get products delivered within a week. Then came Amazon, which innovated on its supply chain and differentiated itself from the competition by offering free, two-day shipping. Now, just about every website offers free shipping.
Thus, product differentiation has become a requirement. Without it a product that is truly differentiated, you’re going to have to rely on the nuisance that is advertising.
2. Visionary Capital
The second competitive factor in the T-Algorithm as defined by Galloway is the ability to attract cheap capital, i.e. visionary capital (p.188). According to Galloway, the ability to attract cheap capital is achieved by a simple and bold vision that is easy to understand.
Visionary capital allows companies to more patiently nurture assets and enables it to place more bets on innovation (Galloway, p.188). That is, the company can try more things under the auspices of a bold vision. Naturally, shareholders will eventually ask to see tangible progress against the company’s vision, however, if a company can market itself as “the innovator”, it will be rewarded with an inflated valuation, cheap capital and the self- fulfilling prophecy of being market leader that comes with large amounts of cheap capital.
A simple and bold vision and a charismatic CEO begets cheap capital, giving room for a company to innovate and receive an inflated valuation.
3. Global Reach
In order to reach a valuation of $1 Trillion, companies have to go beyond national borders (Galloway, p.190). They need to go international.
In order to expand internationally however, one needs a product that appeals to people on a global scale, crosses cultural boundaries and can be distributed easily across the world.
Apple has achieved this tremendously well: as of Q2 ’21, 67% of its revenue came from outside of the U.S.. The company has been accepted in virtually every sovereign nation without harm, and its products can easily be translated into a variety of languages.
According to Galloway, the fourth component behind trillion dollar companies is likability (p.191). That is, being a likable company (by the government, independent watchdog groups, the media and the public) plays a crucial role in the determination of outcomes when it faces regulatory pushbacks. Being perceived as a good company to which something bad has happened is far better than the opposite.
For example, Apple is the largest tax avoider in history (Galloway, p193) but because Apple is perceived as a cool, hip and tremendously successful U.S. company, it faces very little backlash from the government and the public on these concerns.
On the other hand, one simply needs to look at Facebook. Prior to the fake news debacle, Facebook was well-liked. Every company had a Facebook presence and the public loved the product. Over the last few years however, Facebook and Zuckerberg have gone from well-loved to much-hated. Following this shift, Facebook has seen internal whistleblowers denounce SEC violations and the company was fined by the SEC for misleading investors. Similarly, both the Federal Trade Commission and attorney generals from 48 states and territories filed twin lawsuits against Facebook.
In short, being a likable company means a company is more likely to get away from difficult situations without damage. In route to a $1T+ valuation, difficult situations are almost certain to arise.
5. Vertical Integration
Vertical integration has become a requirement with today’s highly-demanding consumers. Integrated vertically allows companies to control every component of the consumer experience (Galloway, p.194). Consequently, companies have complete control over the distribution of their products and how consumers interact with their brand.
Let us take Apple as an example. Apple controls every single own of its stores and thus has complete control over the distribution of its products and how its brand is marketed across the globe. That means that wherever you go in the world, an Apple store will always be clean, beautiful and thoughtfully-designed — a reminder to you that Apple products are much of the same.
Even Facebook and Amazon, who don’t produce their own products, are vertically integrated. Indeed, both companies are vertical in the sense that they control the entire user experience of their consumers: they own and design their own apps and consequently control exactly how a consumer interacts with the brand and site (Galloway, p.195).
In sum, vertical integration is about controlling how consumers interact and perceive your brand. By vertically integrating, a company is able to ensure satisfied consumers across the entire distribution network.
6. Artificial Intelligence
Having worked in business intelligence where I handled million of rows of data daily, I can tell you that every company, let alone a trillion-dollar company, needs to have a good handle of their data.
Artificial intelligence (AI) has gone a long way since its first uses in business. These days, D2C companies rely on behavioral targeting to sell products. Behavioral targeting works by learning from your behavior online and recommends you products and services it thinks you may be interested in.
Amazon is undoubtedly the king of behavioral targeting. Based on your history, how long you spend looking at specific products, what you watch, etc., it is able to recommend products it knows you will love. In fact, Amazon's recommendation engine is so precise that it was reported that more than a third of Amazon's revenue comes from its recommendation engine.
To become a trillion-dollar company, one needs to get a handle of the astronomical amount of data users produce. Leverage the data to further monetize your product.
7. Career Accelerant
It is undoubtedly true that people are one of a company's most valuable assets. As such, attracting the very best talent is a crucial component of a company's ability to pass the $1 Trillion mark. In order to attract top talent however, a company needs to be perceived by job candidates as a career accelerant (Galloway, p.201).
Last but not least, geography matters. Very few firms that aren't a bike ride away from a world-class technical or engineering university have added tens of billions of dollars in value in the last decade (Galloway, p.202). As for the trillion-dollar club, all five of them are within a 10mile bike ride of a world-class engineering university.
Microsoft and Amazon are less than 10miles away from the University of Washington. Facebook, Google and Apple are all close Stanford and a short drive from UC Berkeley.
Being physically close to world-class universities allows for deeper collaboration between companies and students, as well as some of the nation's smartest and brightest individuals every year.
As with all things, take the T-Algorithm with a grain of salt. Becoming a company with a $1T+ valuation is by no means formulaic. Claiming that there is a "formula" for success would be diminishing the incredible achievement these companies have reached. That being said, there are identifiable commonalities across the five, trillion-dollar companies that can be pursued by smaller companies for growth.
In next week's analysis we'll be analyzing future potential unicorns and will be implementing the T-algorithm in hopes of identifying what elements they need to improve on, as well as give recommendations, such that they can become unicorns. Make sure you are subscribed to my free, business & strategy newsletter to get the next article early.