Strategic Flexibility by Any Other Name July 2013
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In recent years, pivot has become a buzzword in Silicon Valley, California. Pivot refers to the action of adjusting quickly to market situations and new information by changing products—in many cases, changing entire business models—fundamentally. An entrepreneur's initial market target and strategy are only starting points for further development and refinement.
Companies' having the flexibility, adaptability, and willingness to question existing business models is now a competitive necessity, not just a competitive advantage.
Groupon (Chicago, Illinois) started out as The Point, which provided a platform for online activism; however, a lack of success led the company's founders to offer a promotion for another business in the same building. The promising response to the promotion convinced The Point's founders to focus on regional promotional services, and Groupon was born. Twitter (San Francisco, California) emerged as an idea-generation workshop at a podcasting-platform provider, and Instagram (San Francisco, California) began as Burbn, a provider of a social check-in service. Pivots happen when entrepreneurs redirect energy and resources toward a new model by adapting to customer needs uncovered by previous market approaches that were unsuccessful.
Pivoting can also occur when innovative ideas surface from an entrepreneur's intended customer base. For example, when Twitter founder Jack Dorsey found that his customers had little need for a podcast-organizing service, he discovered a way to change the concept of podcasting fundamentally to address their needs. Users wanted brief, shareable bits of information and self-expression, and that need gave birth to the idea of the tweet—a short message (no more than 140 characters) that users post on Twitter's social network. For entrepreneurs with an existing innovation or idea, pivoting affords business-model flexibility. Often, pivoting simply relates to targeting a new customer base. Meraki (San Francisco, California), a provider of cloud-controlled networking solutions, pivoted from targeting consumers to targeting enterprises before Cisco (San Jose, California) acquired the company for $1.2 billion in November 2012.
Analysts are growing concerned about years of pivoting and the perception that companies will eventually find a place in the market by adjusting their business models. A shift in the marketplace seems to be occurring. After disappointing initial public offerings by Facebook (Menlo Park, California) and Zynga (San Francisco, California), venture capitalists are becoming slightly more resistant to adopting risks. Many analysts refer to the large number of funded start-ups that are looking for market reception as a "Series A Crunch," and they caution that as many as 1000 newly funded start-ups will not survive 2013.
Regional differences seem to exist. Tariq Krim is the cofounder and CEO of cloud-computing-platform provider Jolicloud (Paris, France). In response to criticism of his company's repeated shift in direction, Krim claimed that start-ups and entrepreneurs in Europe lack the time to pivot that US companies have because of the relative ease of securing ongoing funding in the United States. "In Europe you survive by improving, killing and then relaunching better features until you find your sweet spot. In short we don't pivot, we do Yoga" ("Startups Don't Pivot—We Do Yoga," TechCrunch, 11 November 2012; online).
But in a business environment marked by complexity and unpredictability, pivoting is becoming a necessary adaptive strategy in many industries. Analysts now assert that businesses need to accept that cannibalizing existing product lines will become an important strategic element. Observers have wondered why incumbents such as Eastman Kodak Company (Rochester, New York), which had a lead in the photography marketplace, could not develop and market the applications that Instagram (San Francisco, California) introduced. Inertia and fear of endangering product lines that provide the majority of the company's revenue were at play. Kodak board member Michael Hawley compared his company's situation to that of companies in other industries, referring to differences between board-game company Hasbro (Pawtucket, Rhode Island) and online-game developer Zynga and between fast-food chain McDonald's (Rochester Hills, Michigan) and natural-foods-focused supermarket chain Whole Foods Market (Austin, Texas). "It's a little like asking why Hasbro didn't do [Zynga's online game] Farmville, or why McDonald's didn't start Whole Foods.... Cultural patterns are pretty hard to escape once you get sucked into them" ("Disruptions: Innovation Isn't Easy, Especially Midstream," Bits [blog], New York Times, 15 April 2012; online). In contrast, Apple (Cupertino, California) did not hesitate to introduce the iPhone (smartphone) and later the iPad (tablet computer) despite those devices' potential to cut into iPod (portable media player) sales. Institutionalized pivoting can provide a solution to the strategic problem Clayton Christensen outlines in The Innovator's Dilemma. The book highlights successful companies' tendency to focus on the current needs of customers, thereby leaving competitors—often start-ups—to develop new products, services, and business models that address customers' future and unstated needs. Companies' having the flexibility, adaptability, and willingness to question existing business models is now a competitive necessity, not just a competitive advantage. Steve Blank, an entrepreneur and commentator on start-up cultures, alleges that "no plan survives first contact with customers" (steveblank.com).
Some commentators wonder whether pivoting is just an extreme form of making iterative business-model adjustments. Moray Dewhurst, vice chairman and CFO of electrical-utility company NextEra Energy (Juno Beach, Florida), explains that in today's chaotic business environment, executives "have to build an organization that is comfortable being schizophrenic.... I have a healthy lack of respect for formal strategic planning processes" ("How Top Execs Pivot When Facing Uncertainty," CNBC, 15 November 2012; online). And Fast Company editor Robert Safian coined the term Generation Flux to describe a set of entrepreneurs and employees who are comfortable operating under conditions of uncertainty. "What defines GenFlux is a mind-set that embraces instability, that tolerates—and even enjoys—recalibrating careers, business models, and assumptions" ("This Is Generation Flux: Meet The Pioneers Of The New [And Chaotic] Frontier Of Business," Fast Company, 9 January 2012; online).
Although pivoting is possible within individual business units and incubators inside of large enterprises, the scale of big business complicates leveraging the pivot. Institutionalizing pivoting as an adaptive strategy requires leaders who constantly question the existing model and maintain flexibility at a fundamental level. Investor and Netscape (Now AOL; New York, New York) cofounder Marc Andreessen cautions that "you want to preserve the good of the idea when it comes to pivoting, but you don't want people to be intentionally encouraged to fail." ("Marc Andreessen: Not every startup should be a Lean Startup or embrace the pivot," GigaOm [blog], 3 December 2012; online).