Pivots and Beyond

Joshua GansCreative Destruction Lab (Strategy), 2014

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Control

Execution

Compete Cooperate

Control

Execution

Compete Cooperate

INTELLECTUAL

PROPERTY

VALUE CHAINDISRUPTION

ARCHITECTURE

How do you choose?

Nymi Heartbeat Lock • launched in 2013 • license model • no interest • launched on product

Chose to cooperate and pivoted to

compete

Lytro Light Field Camera • launched in 2011 • large VC interest • Jobs approach • $90m funding

Moves from compete to cooperate

Siri personal assistant • launched as an app

in 2009 • acquired by Apple in

2010 for about $200 million

• integrated into iPhone 4S

Chose to compete and pivoted to

cooperate

Better place • Swapable car

batteries • $760m in funding • integrated into

existing cars

Chose to cooperate with car

manufacturers

Lytro Nymi

Siri Better Place

Compete Cooperate

Control

Execution

Initial Strategy

Lytro Nymi

Siri Better Place

Compete Cooperate

Control

Execution

Later Strategy

Easy choices …

What if control is impossible?

What if competing is too expensive?

What if you have no potential partners?

Then you do what is feasible.

If you keep an idea to yourself, does it have

value?

No, and nor can it have added value.

... but you need to disclose something in order to work with

others to give the idea value.

What happens when you disclose an idea?

Added value of idea to

entrepreneur

Disclosure

Paradox of entrepreneurship

To give an idea value you have to disclose it

... but disclosure risks being able to appropriate value from an idea.

Entrepreneurial strategy is about formulating a plan to capture value as

ideas transition to having no added value.

What to do with an idea?

?

Keep or sell it?

Keep Compete (Invest) Keep it to yourself

Sell Cooperate (Save)

Disclose

The Disclosure Problem

• If you are a buyer, how do you know what the ‘idea’ or ‘information’ is?

• Seller could show or tell you. But will the buyer pay?

• Either keep it to yourself or sell it for less.

• Fundamental paradox

Increased patent rights led to greater licensing

Gans, Hsu & Stern (2002)

Gans, Hsu & Stern (2008)

Reputation

• Throop Wilder: Boston-based serial entrepreneur

• First ventures involved exploiting the potential of the commercial Internet• Internet-in-a-Box

• American Internet Corporation (american.com) developed a general-purpose solution for IP addressing within networks ….leading to a significant internal debate about how to commercialise and capture value from their innovation

• Founded in 1995, acquired by Cisco in 1998

“There’s being bought, and there’s being bought by Cisco”

http://wevebeenacquired.tumblr.com/

A Follow-Up

• Greg Kinnear accuses ABC for taking the idea for “America’s Funniest Home Videos”

• Won the case on appeal

• Who is Greg Kinnear?

Resolving the disclosure problem

Use secrecy

Use competition

Hold something back

Use intellectual property protection

Use a buyer’s reputation

Secrecy

• Forceps delivery: invented by Chamberlen family in France (mid 1500s). Emigrated to England and kept method secret for a century.

• Coca Cola• Thomas Muffins• Isaac Newton

Competition

• Anton-Yao (1994): agent can threaten to give idea to rival

• Threat will damage the firm competitively

• The threat is credible because idea seller expects to be expropriated

• Threat inbuilt if you can enter production yourself

• How tough could someone be?

• Could they hold tacit knowledge back? (Arora)

Experiment to sort out uncertainty.

What will you do if the outcome is successful?

What will you do if the outcome is a failure?

What do you choose first?

Twitter • Open platform • Open APIs for

developers • Acquired Tweetie

and Tweetdeck • Moved to limit APIs

Initially focussed on execution but moved

to control.

Experiments are costly

They take time

They take resources

Choosing one business model may prevent you choosing another …

… it may not be possible to pivot from some business models.

(e.g., can you control after executing?)

What can you learn from experiments?

Have you measured the right things?

Correlation versus causation

Interaction with other (competing) experiments

Goal

Formulate …

a value creation hypothesis

a value capture hypothesis

INTELLECTUAL PROPERTY

Orientation towards collaboration & investment in control

Defined value creation for existing end users

Innovate generalizable, transferable technology

Specialized innovation clusters with deal-making

expertise

A transferable innovation fordefined end users

Able to maintain bargaining power alongside commercialization

An ideas factory

An integrated team of

innovators & IP managers

Arms-length supplier of

complementary innovations

INTELLECTUAL PROPERTY

Invest in control, orient to collaboration: Gain control through patents, trademarks, copyright or trade secrets of a novel invention.

Focus on existing customers: Enhance value in a known way for existing customers and their end users

Invent generalizable technology: Modular components that can be easily transferred and integrated into existing value chains

Build an ideas factory: Be the source of new inventions by building a team with talent in innovation, commercialization and IP management

Be the source of new innovations: Occupy a position on the technology frontier with opportunity for standard-setting; continual generation of inventions

Seek sources of smart, affordable talent: Choose an ecosystem where there is a supply of highly-skilled talent and an environment that can retain them

Transfer innovation into the existing value chain: Invent and refine new inventions for integration to enhance value for end users

Control a key valuable asset: Develop a reputation for enforcing control; ration access to secure bargaining power

TO THE TEST TO WORK

PUTTING IP STRATEGY

Test your value creation hypothesis: Develop and showcase a working prototype to the end user of your ideal potential partner. What is the willingness to pay by that end user for your prototype?

Validate your value capture hypothesis: Take advantage of pro-bono or low-fee initial calls with a local patent lawyer. Is this innovation something that can be patented? How defensible would your patent be?

Validate your buyer cares about the value: If you can confirm your innovation offers value to the end user of your buyers, make a cold call or emails to 1-2 buyers to evaluate the importance of your value proposition. Are they wiling to spend a few minutes to learn more? Are they willing to take a follow-up meeting or call?

Prepare to negotiate with the gorilla: For start-ups negotiating for their first licensee, they must de-risk the deal for the licensee; this includes providing evidence that end users will care, and that their product/service can be integrated with little to no extra investment.

Show the product but keep the secret sauce: With no track record, the entrepreneur must be able to allow prospective licensee’s to “peek” inside the black box by building a demo that shows the product functionality without revealing enough for it to be reverse-engineered.

Start to secure the intellectual property: Start-ups should prioritize their inventions and begin securing a patent, trademark or copyright for their most core invention. Though it is not necessary to have a patent to execute a license, being in the filing and review process helps detract from expropriation or imitation.

VALUE CHAIN

Orientation towards collaboration & investment in execution

Novel value for existing end customers

Integrate new and old technologies

Serve a unique, vital link in the value chain

Strong bargaining power and exclusivity

Leverage access to value chain players

Synergy

Scarce talent & capabilities

Unique core competency

VALUE CHAIN

Invest in execution, orient to collaboration: Bring to market the best solution for a link in an existing value chain

Help customers serve theirs: Enhance your customer’s value propositions and market power

Bridge new and old S-curves: Help the existing market leverage opportunities from the new technology S-curve

Build a team of scarce talents: Team needs talent in innovation and business development. To avoid vertical integration or imitation from customers, the team needs to possess unique capabilities.

Occupy a unique position: Choose a link in the value chain served by outdated technology and human capital, with no innovative competitors.

Find and follow your customers: Choose to an ecosystem where there is access to all stakeholders in value chain necessary for deployment and support of product.

Own a link in the value chain: Fulfill a key link with a level of service and frontier technology that is very costly to duplicate

Be an indispensable link: Increase the performance of customers to secure greater, sustained bargaining power

TO THE TEST TO WORK

PUTTING VALUE CHAIN STRATEGY

Validate your value creation hypothesis: Pitch for an introductory call with 3+ different potential buyer(s). This will help you understand how important your value proposition is, and get a sense of how long the sales cycle could be.

Validate your value capture potential: Research past and present companies that serve(d) your potential buyers to build a profile of who and how they work with third parties (e.g. do they work with multiple vendors before selecting? do they work only with local vendors?)

Validate your buyer will pay attention: Interview 10+ end users of your potential buyer(s) to understand what informs their purchasing decisions. For example retail bank customers may care most about convenience and security. Understand how your product can fit into helping your buyer win their customers.

ARCHITECTURE

Orientation towards competition & investment in control

Defined value for novel customer combinations

Build an ecosystem around a new technology

Coordinate and integrate entire value chain

Control over the core innovation underlying the ecosystem

Leading & shaping the ecosystem

Zero to One

Insight into different

stakeholders

A “hub” in the market

ARCHITECTURE

Invest in control, compete for the market: Control the linchpin that enables the market to work effectively

Connect stakeholders together: Understand how to match select stakeholders together to create and deliver value for all sides

Build a foundational technology: Develop either a platform upon which others can build products and services or a market intermediary

Build a dual-focus team: Team needs the capabilities to both grow the ecosystem and monetize the platform/product

Position as a hub in the market: Rather than competing directly in the market, it is a competition to secure the ecosystem, as the de facto hub of the market.

Seek out the influencers: Choose an ecosystem where there are key influencers to build relationships with, and thought leadership that generates imitation

Coordinate entire value chain: Broker interactions between different stakeholders reducing their search and transaction costs

Control the market: Controlling the dominant platform for the market opens channels for monetization

TO THE TEST TO WORK

PUTTING ARCHITECTURE STRATEGY

Validate your ability to be a “hub": Run a basic, low-tech experiment with a small sample population to pilot the idea. For example if the idea is to build a used car platform, test it by hand-matching 5 buyers with 5 sellers.

Validate your value creation hypothesis: Interview 5+ individuals from each stakeholder group you plan to connect on your platform. Understand the key unserved needs they face, and why existing solutions fail to satisfy.

Validate your ability to grow the market: Understand which of your stakeholder groups will be the scarce resource. For example if you are testing a used car marketplace is it sellers or buyers that are more difficult to secure? (e.g. a dating platform usually is skewed male).

DISRUPTION STRATEGY

Orientation towards competition & investment in execution

Novel value creation for novel customer combinations

Innovate along a new technology trajectory

Develop a novel, isolated value chain

Incumbent firms will not respond

Leverage local talent and local users

Creative Destruction

Lean experimentation &

hustle

Rapid product development & Time to market

Invest in execution, avoid competitive detection: Fast speed to market, imperfect product is tolerated by customer

Choose tails of market curve: Customer segments that are currently underserved due to size or niche demands

Choose new tech S-curve: Nascent technology that needs customer input and iterative improvement

Build capacity for rapid experimentation: Team needs sufficient talent to rapidly iterate product based on customer feedback

Target an unoccupied position: An isolated position on the technology frontier distinct from existing customer needs increases lead time on incumbents

Leverage ecosystem to exploit market inertia: Choose an ecosystem where there is easy access to underserved customers; build relationships with influencers in these niche customer segments

Develop a new value chain: Use new S-curve technology to create value for underserved customers; build out value chain

Secure leadership position: Enter a niche market with an innovative product that incumbents will not respond to;Continual innovation is required to sustain market leadership

DISRUPTION

TO THE TEST TO WORK

PUTTING DISRUPTION STRATEGY

Understand the unserved market: Interview 10+ unserved customers to understand their specific needs, and why existing services are currently not able to do so. This process will also help shape a basic idea of how to reach these unserved customers.

Validate your incumbents will not respond: Make 3+ calls to incumbents with requests for the particular features and gauge their response. Are they working on a solution? Do they rebuff you? This will help you understand if your target customers will continue to be unserved or if they are in the incumbents’ crosshairs.

Validate your value creation hypothesis: Explain the potential solution to 10+ additional unserved customers to test if your idea actually matches with their needs, and that it still resonates. Ideally find “cold” interviewees, rather than friends or family that may not be as honest.

Build a minimum viable product: Launch an unscalable prototype and iterate quickly to understand consumer experience.