Pivot or Divot? The Decisive Difference between Strategic Pivots and Frustrating Flails
October 22, 2016
The concept of a strategic pivot was first popularized five years or so ago in Eric Ries’s book The Lean Startup and subsequently by Steve Blank and other entrepreneurs and academics.
Since then, it’s become another abused term for entrepreneurs, management teams, and VCs to use when announcing a dramatic change of strategy in their business or portfolio company.
Instead of executing legitimate pivots based on solid ground, many companies get sucked into a pattern of flailing wildly – making deep divots in the fairway rather than hitting a successful shot, to borrow the golf analogy.(*)
Getting this distinction right matters: it can be the difference between success and failure – whether a young startup digs a hole in the fairway or a more mature company whiffs at the ball when they try to increase customer adoption and revenues. I’ll review examples of successes and failures and provide rules of thumb to help you tell the difference.
It shouldn’t be too controversial to assert that “pivot” has become a wildly over-used term when it comes to describing a strategic shift that contrasts sharply with a prior strategy, when teams conclude that what they’re doing today just isn’t working. More importantly, mis-applying the term can be wildly misleading, causing management teams to waste precious time and resources chasing rainbows, and can even cause the failure of the entire business. I was reminded of my growing aversion to this buzzword by reading a trenchant (self) critique of such a move in “Chaos Monkeys”, a picaresque autobiography of Silicon Valley adventures by Antonio Garcia Martinez, a startup entrepreneur. Martinez, formerly a product manager at Facebook and earlier on a co-founder of Adgrok, an angel-backed startup acquired by Twitter, refers to pivots in withering terms:
“… That classic startup move: a pivot. .. This is absolutely canonical startupese, and worth exploring for a second. You can’t read an article in Wired or Fast Company, some fawning fiction about a startup’s inexorable and well-deserved charge to world domination, without reading this word at least once. .. A pivot is supposed to recall a ballerina’s demi-détourné, a delicate change of course as graceful as it (hopefully) seems intentional. In reality, a startup’s pivot is a panicked sprint comparable to that of a Titanic passenger who’s spotted the last open life raft. It wasn’t even a onetime thing: our final product would be informally titles “Plan J”, given the number of turns we had taken since “Plan A”. But there you have it, dear reader: we made a pivot. Plié!”
A number of other definitions of the strategic pivot have been bandied about in recent years. There’s the FT’s Lexicon definition: “…the tortured path that most start-ups go through to find the right customer, value proposition, and positioning”. In a 2011 HBR article authors Carolyn O’Connor and Perry Klebahn of Stanford’s d.school talked about a strategic pivot as “a sudden shift in strategy that turns a mediocre idea into a billion-dollar company.” As examples, they cite Groupon’s pivot from being a platform for collective action to a local coupon business; Paypal’s start in 1999 as a way to beam funds between different types of mobile devices before it became a dominant internet payment system; and Twitter’s pivot from being a stalled podcasting startup to becoming the global forum for live political, sporting, showbiz and other events.
Steve Blank, a prominent former tech entrepreneur (E.piphany being what he regards as his home run) and teacher of entrepreneurism at Stanford, Berkeley and elsewhere, wrote a cover article for the May 2013 edition of the Harvard Business Review titled “Why the Lean Startup Changes Everything”. In a later HBR article published in January, 2014, titled “Do Pivots Matter? Yes, in Almost Every case”, Blank added a helpful contribution to defining what’s required for a well-thought-out strategic pivot by linking the pivot idea to Alexander Osterwalder’s very helpful model, the Business Model Canvas, which describes a company’s business model in nine building blocks. Blank’s implication is that you need to test your ideas in relation to all nine blocks – value proposition, customer relationships, customer segments, channels, key activities, key resources, key partners, cost structure, and revenue streams – in order to ensure that your thinking is solid.
To accentuate Blank’s advice, I argue that in order to have a chance of identifying an effective strategic pivot, entrepreneurs and executives need to start by answer three questions: first, “What business are we (really) in – has anything changed since our last strategic review?”; second, “What are we really world-class at – i.e., what assets or capabilities really distinguish us from our best (would-be) competitors, and that we can leverage differently than we have to date?”; and third, “What creative insight can we come up with to make our differentiation count?” Question 1 gets at the fundamental value proposition issue that Osterwalder and Blank draw attention to: i.e., what (critical) problems does your company help customers to solve differently and better than your closest competitors could conceivably do – not just in the product or service sense, but in terms of your company’s mission in life…? Unless you are crystal-clear on this point, your “pivot” may turn out either to be a net-neutral move or an embarrassingly costly divot. Furthermore, if you are tempted to stray too far from your area of differentiating competence (as opposed to your historical “core competence” that might by now have been neutralized by your competitors), you could be setting your company up for a spectacular failure.
Although the idea of the strategic pivot was first applied to startups faced with a need to make a swift change of direction when their initial product iterations or market development attempts flopped, I believe pivots apply equally to larger companies that find it necessary or desirable to undertake bold transformational moves. My long-time colleague Geoffrey Moore tells how when working to help John Chen, former CEO of Sybase (and now of Blackberry) turn the company around back in 2007-8, “the idea was to pivot the company onto a new trajectory in line with the current megatrends. The idea was that the thing you pivot around, like the pivot foot in basketball, is the thing you keep constant.” In Sybase’s case, the team identified three ‘pivot points’: 1) management, 2) product, and 3) customer Base. As Moore says: “As it turns out, we chose customer base, and focused on Sybase’s Wall Street customers (where the company held a dominant but stagnant share of trading desk database management business), repositioning the product as a risk management platform (it was 2008, after all), and putting the New York sales guy in charge of the entire segment worldwide.”. Moore goes on to illustrate the product pivot that the management team undertook: “In parallel, we started a longer term pivot around product, focusing on repositioning all the mobile assets for an iPhone BYOD world. The first pivot worked like a charm and got them back to some organic growth. The second pivot was just getting under way when SAP’s CEO, Bill McDermott, saw the demo of Sybase on iOS and bought the company for over 4.5 times sales revenues ($5.8m. on sales revenues of $1.22bn.).” Sybase’s pivot was therefore a clear success, since the company’s valuation three years before hovered around $2bn.
Take the Pivot/Divot Test
To help you determine the difference between a likely Pivot versus a possible Divot, here is a definition of five different types of strategic pivot. Further on we’ll contrast legitimate pivots with ‘false pivots’ or what you might call ‘strategic flails’.
Product Category pivot: Switch your focus from one type of product or service to another. Often occurs because of new technology “waves” (i.e, on-premise to cloud, desktop to mobile, etc.). Examples include Intel’s celebrated bet-the-company pivot back in the seventies and eighties from being primarily a major DRAM manufacturer to leading the move to microprocessors that resulted, among other things, in the dominant Wintel franchise shared with Microsoft. BEA, a middleware vendor which in 1998 acquired the San Francisco startup WebLogic which had built the first standards-based Java application server made a major pivot that enabled it to transform itself from a marginal player into a market leader. WebLogic’s application server became the impetus for Sun Microsystems’ J2EE specification and formed the basis of BEA’s WebLogic application server still successfully sold and implemented today by its Oracle sales force and PS organization. This counts as a hugely successful pivot, perhaps the most significant factor being the way in which BEA reversed its strategy to make WebLogic its primary offering and then built a powerful leadership position as the app server leader. The Java-based app server category became a standard in the enterprise IT market and BEA was later acquired by Oracle at a significant premium for $8.5bn. in April 2008. Another successful pivot was the acquisition by EMC of VMware when EMC’s core data storage business began to wane in 2003. The main success of this move was to revitalize EMC’s enterprise business to the extent that VMware, acquired for $635m. and kept as a separate operating division, was responsible for the largest share of EMC’s market cap – often as much as 70% – throughout most of the next twelve years until Dell’s recent acquisition of EMC.
Business Model pivot: The trickiest pivot to pull off because the inertia around your business model is usually built into your organizational design, resources, domain expertise, metrics, and core competencies. Earlier examples include IBM’s 90s pivot from a hardware sales to a services-led differentiation against the likes of HP, Dell, and Sun. Former CEO Lou Gerstner led the initiative to double-down on the differentiation of IBM’s professional services capability vs. their closest global systems competitors by hiring thousands of seasoned IT consultants; later on Sam Palmisano took this pivot a stage further by acquiring the IT and business consulting operations of PWC for $3.5bn, which added considerable project management domain expertise to IBM’s Global Services unit. More recently, Facebook’s successful switch from focusing on accumulating new users to monetizing its growing smartphone user base through mobile advertising surprised many who had begun to think that the company was addressing the mobile advertising monetization challenge too late. As a result, today Facebook’s revenues have accelerated to the lofty run-rate of $24bn or more, continuing to grow at a 65% annual growth clip, and not surprisingly the company’s valuation has increased almost fourfold since its $100bn. IPO four and half years ago. GE’s move to become largely a software-centric business across all of its light and heavy manufacturing divisions represents an ambitious large-company pivot. Early results indicate that the company is experiencing some success though this multi-year transformation – initiated five years or so ago – is far from complete. Perhaps the most spectacular strategic pivot of the last decade or so has been Amazon.com’s pivot from being “just” an e-commerce retailer to becoming the fastest-growing large tech business ever through its growth of the AWS cloud infrastructure services unit, now running at somewhere in the vicinity of $12bn. annually in revenues and still growing at a 60% clip. Let’s not forget that the hair-raising pivot that has been forced on virtually every on-premise software or systems business, to execute a dramatic shift from generating their revenues and profits primarily from perpetual one-time license fees with annual maintenance/upgrade contracts to a building new revenue and earnings engine based on one-to-three year term contracts for subscription and/or usage fees is still a major struggle for most companies. Just look at the contortions that IBM and HP have been going through, and still they are losing value every day. Oracle itself has been struggling to make the change despite tremendous PR to trumpet how well it is cloudifying its product portfolio, and in late July the company practically gave up pretending and decided to acquire Netsuite for $9.3bn. This on-prem to cloud transition is causing huge divots to be carved in the “fairway” on a daily and quarterly basis. HP will surely be taken private by a PE consortium within the next twelve months or so, and I would not be surprised if the same destiny is in store for IBM, where Watson and its other CAMSS initiatives are yet to become material businesses or generate any dividends (literally, in the case of the dividend/buyback-obsessed executive team at IBM).
Market pivot: Switching from a focus on, say, SMB to enterprise (something that many B2B Saas companies are trying to pull off today, in light of the fact that enterprise customers are finally migrating to cloud-based infrastructure for most or all of their new business applications), or from financial services to telco, government, or retail customer segments. Salesforce is still struggling to organize itself to focus on serving major enterprise customers effectively while still serving its SMB customers, while AWS appears to have pivoted quite effectively by organizing itself in a separate business unit to serve enterprise and government customers versus its initial SMB customer base. As for pivoting between vertical markets, companies regularly switch their focus depending where the most enticing opportunities come from, and this often results in sub-optimal outcomes. AS the Sybase example cited above shows, where vertical market segments are concerned, the best advice for many companies is generally to go deep(er), build a loyal customer base, and make your living in the selected segments for years; thus pivoting between vertical markets needs to be extremely well thought out in order to ensure that the effort to penetrate the segment becomes a profitable undertaking.
Offer pivot: Pivoting from one type of solution to another. Offer pivots are first cousins to Product pivots, the difference being that companies may provide various offers under the same product category, such as ERP solutions tailored for different enterprise customers vs. more standardized ERP packages sold to smaller businesses. Examples of offer pivots include Salesforce.com pivoting from selling only its Sales Cloud for at least its first decade to marketing its Service Cloud then its Marketing Cloud offerings, emphasizing its value proposition as the overall Saas Gorilla that major customers can depend on for most of their Saas requirements. Another example is Rackspace, which in the past year switched from providing cloud infrastructure services requiring it to continue building its own datacenters, to providing its industry-leading Fanatical Support services on top of Microsoft’s Azure and AWS’s cloud compute, storage, database, analytics, application, and deployment services offerings. This attempted pivot appears to have come too late, resulting in the company being taken private for $4.5bn after its valuation began to melt away as an independent hosting provider. Hence, probably more divot than pivot. One company that has unfortunately turned into quite the piñata is Theranos, the previously hyped blood-testing Unicorn that recently announced a pivot from its lab operations and wellness centers to providing miniaturized medical testing machines for use in doctor’s offices. Time will tell whether this move, which involved laying off 40% of its workforce (340 people) has been a successful pivot or an unfortunate divot. In light of the company’s recent struggles, it’s hard to be optimistic, but one never knows.
Culture pivot: Swiveling the collective philosophy, mindset, and behavior of an organization onto a different axis. Two recent and ongoing examples are the radical change that Satya Nadella has initiated at Microsoft’s, that company’s most dramatic pivot since the move by former CEO Bill Gates to focus the company on the Internet in 1995, which resulted among other tactics in the launch of Internet Explorer and Microsoft’s aggressive move to co-opt the browser and put an abrupt end to Netscape’s early momentum within a couple of years. Nadella’s pivot strategy has in some respects being quite simple: taking Microsoft from being a closed, proprietary product company with a hyper-competitive culture to being an open, partner-first, collaborative organization. For sure, there are other elements to Nadella’s strategy, including a pivot towards cloud, mobility, big data, analytics, and AI, but I consider the cultural shift to be the most significant – and still riskiest – decision. In a 2014 article on the impact of Nadella’s early decisions as CEO, I pointed out the quick impact that Nadella had managed to have on the company’s valuation, which had jumped 50% or so from its depressed state under Steve Ballmer’s deflating leadership to $370bn. It now stands at approximately double its Ballmer-era levels in large part to not only the new openness, but the results that this openness is producing – from Microsoft becoming a convincing number two to AWS in public cloud IaaS, to the growing adoption of the cloud-enabled Office 365, to its attention-getting entry into professional social networking two months ago with the $26.5bn acquisition of LinkedIn after a competitive auction against Salesforce and other suitors. Furthermore, the company just announced a stronger quarterly earnings report than analysts expected based largely on increased penetration and margins of its cloud business.
It is important to understand that companies sometimes try to execute free pivots, i.e. a pivot based on an aspiration not sufficiently based in reality. My colleague Michael Eckhardt describes free pivots as “the sin of delusional thinking, whereby the company seeking to pivot, having gotten the compelling-reason-for-customers-to-buy wrong in their first iteration, pivots / shifts to a seemingly more attractive market or product opportunity, but is still sadly focused on their own navel – i.e. their compelling-reason-to-sell – rather than customers’ compelling-reason-to-buy.” As Eckhardt goes on to state, “This is a widespread disease that has pervaded software, server, storage, and IT services sectors during the past decade. Examples of this problem are everywhere.” Another Chasm Group colleague, Andrew Salzman, emphasizes the “fallacy and allure of TAM-based thinking. Many chase the dollars without having the strengths to capture a market. Others chase a growth market where the leaders have entrenched themselves. I’ve seen this with a recent client in its ineffective push toward SaaS revenue management for SMB from its legacy in on-premise revenue compliance systems. Pivots must hold the promise of potential market leadership. Divots hold the promise of dreams unfulfilled.”
Other pivots that are currently in motion, and which might turn out to be major divots, include Blackberry’s attempt to pivot away from hardware and instead focus on building a larger franchise in providing secure email services to enterprise and government customers; or IBM’s ongoing pivot from its traditional mainframe and client-server hardware/software/services mix to making Watson’s cognitive analytics its new growth engine in addition to other cloud and analytics-based initiatives. Unfortunately, progress has been agonizingly slow in this attempted pivot. Among the most successful pivots in recent tech history, Apple’s dramatic moves from the Mac to the iPod, and to the iPhone and iPad, are legendary product and business model pivots because in each case they involved revolutionizing an industry in which Apple had never played before (music, mobile telephony, movies and TV – where Apple signed commercial agreements with movie and TV studios to stream their programming). That said, you could argue that Apple’s essential business model hasn’t changed, because the company still makes enormous revenues from device sales. But the contribution of the Appstore and iTunes, two innovations that Jobs had major reservations about initially, cannot be under-estimated – these moves were business model migrations, perhaps more than pivots, but they nonetheless required significant strategic leaps to become reality. Apple’s successful negotiations with the music industry alone are testament to a massive and risky bet that turned out to be golden. Another highly successful pivot in the B2C world was Google’s pivot to an open-source operating system for mobile phones following Apple’s massively successful launch of the iPhone in 2007-2008. For a secretive and proprietary company like Google to embrace an open-source initiative and all of the creative alliance-making involved was a major pivot, not away from its search franchise but toward achieving huge power with its Android OS, which dominates the mobile world today in terms of smartphone unit sales worldwide.
If you’re curious to know how investors, customers, or observers can tell when a company might be hitting a big fat divot instead of pulling off a successful pivot, here is a light-hearted look at rules of the road for detecting divots, hopefully before they become actual disasters. Excuse my corruption of comedian Jeff Foxworthy’s well-known shtick, “You might be a redneck if…”:
You might hit a big fat divot if you fake a category or business model pivot, as when companies “cloud-wash” their on-premise or hosted products without delivering the actual benefits of a true cloud architecture or Xaas business model.
You might hit a big fat divot if you invest in a market strategy based on core competencies that are not differentiating or that customers don’t care about. One example might be providing personalized cloud services provisioning that has been neutralized by automation provided by a competing vendor.
You might hit a big fat divot if you target an ill-defined target market segment without specifying the business problem that you intend to help customers solve, or specifying how you can solve the problem differently and better than your reference competition. One example might be a decision to target the “Top 500” financial services, healthcare, or retail organizations in a number of geographical regions, without also defining a specific painful broken process that you know they have been unable to solve to date, instead emphasizing the virtues of your product or platform.
You might hit a big fat divot if you rely on alliance or channel partners to sell your offering before you have obtained a critical mass of end-customers through your own marketing and sales efforts. Startups and other young companies fall victim to this fundamental mistake every day of the week. Unfortunately, even the smartest of partners can’t divine what your product can do for their customers until your positioning is clearly differentiated against your competitors, and you provide a proven sales and implementation playbook as well as training and certification – all of which you develop and refine during the process of serving a set of your own customers first.
You might hit a big fat divot if you market your product as a “platform” before customers have adopted your offering or acknowledged that it has become an important element in their IT infrastructure. The number of young and established companies that make this mistake these days is too great to count.
Successful pivots can arise from one or more deep and unique insights into a market opportunity that others have not perceived or been able to take advantage of, or a differentiating problem-solving capability in your products or services. Such was the case with Apple’s bold and surprisingly successful pivot from laptops into MP3 music players – one deep insight being that if Apple could apply its differentiated device design expertise to dramatically improve the form factor of an MP3 to fit in your pocket. In this case a critical complementary insight was that Apple could see a chance of rescuing the MP3 category from legal oblivion (remember the Napster lawsuits?) and the music industry from widespread piracy by negotiate a ground-breaking revenue-sharing agreement with major record labels whereby they would get paid a significant portion of the 99c that Apple would charge for each song purchased on its new iTunes store. One example to the contrary was HTC’s attempted pivot from being an outsourced design manufacturer (ODM) to become a major smartphone brand (unfortunately for HTC, this pivot has failed after a promising start six or seven years ago). Blackberry’s recently announced business model pivot from being a mobile email/smartphone device maker to becoming an email software services provider is an example of an attempted pivot based on a strong fulcrum (i.e., its enterprise-grade email service and security expertise) but undertaken too late, when others such as Android and iOS have largely caught up. Thus the jury is still out as to whether this will prove to be a pivot or a divot.
Literally speaking, a pivot is a swivel move around a fulcrum, or base. For your attempted pivot to be successful, your fulcrum should ideally be a key differentiating capability such as your business model, or product features, service deliverables, domain expertise, management knowhow, or customer base. The BEA/WebLogic and Google/Android examples cited above are examples of an acquired differentiator that became the basis of two highly successful pivots. The reason Blackberry’s pivot might still work out is that the fulcrum is Blackberry’s deep expertise in providing enterprise-grade email scalability and security.
What doesn’t qualify as a sound base for a successful pivot when you’re under pressure to produce results, is – for example – pivoting to a new vertical or geographical market just because it is large and attractive. Unless you are certain that you possess unique and relevant value-add, and a means of accessing the new market on the right terms, you are almost certainly in for major disappointment. For example, CEOs, heads of sales, and front-line sales reps must watch out for the risk of getting seduced by the attractiveness of apparently massive opportunities that arrive on their doorstep in the form of an RFI (Request for Information) or RFP (Request for Proposal). Before you rush to prise some of your key people away from other important activities in order to beef up your pursuit of the big deal, you owe it to them to start with a rational assessment of the ins and outs of the new opportunity before labeling it “strategic” (which more often than not is an executive euphemism for “yuge”). The risk here is that you pivot reactively, without sufficient time to think things through. It’s essential above all to make sure that you have some invaluable insight, expertise, capability, or other uniquely valuable asset(s) to demonstrate that your organization’s deep understanding of the business problem that is jeopardizing your prospect’s revenues or profitability. In addition, you must be able to present a coherent and feasible approach to solving the problem (most probably in a series of logical steps), and thus give your company a real chance of winning the business. Otherwise, you could find yourself wasting precious resources, missing out on other more suitable sales opportunities, or worse.
(*) ‘Divot’: For non-golfers, according to the Merriam-Webster dictionary, a divot is “a loose piece of turf (as one dug from a golf fairway in making a shot)”. For the purposes of this article, a “fat divot” is when you catch too much turf during your swing and the ball either doesn’t move very far, or skews away from the target. This can be both embarrassing and costly – the opposite of an elegantly executed pivot.