Creative Destruction Lab (Strategy) Class 3

1. Pivots and Beyond
Joshua Gans
Creative Destruction Lab (Strategy), 2014

2. ?

3. Control
Execution
Compete Cooperate

4. How do you choose?
Control
Execution
Compete Cooperate
INTELLECTUAL
PROPERTY
ARCHITECTURE
DISRUPTION VALUE CHAIN

5. Nymi Heartbeat Lock
• launched in 2013
• license model
• no interest
• launched on product
Chose to cooperate
and pivoted to
compete

6. Lytro Light Field Camera
• launched in 2011
• large VC interest
• Jobs approach
• $90m funding
Moves from compete
to cooperate

7. 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

8. Better place
• Swapable car
batteries
• $760m in funding
• integrated into
existing cars
Chose to cooperate
with car
manufacturers

9. Compete Cooperate
Lytro Nymi
Siri Better
Place
Initial Strategy
Control
Execution

10. Compete Cooperate
Lytro Nymi
Siri Better
Place
Later Strategy
Control
Execution

11. 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.

12. 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.

13. What happens when
you disclose an idea?

14. Added
value of
idea to
entrepreneur
Disclosure

15. 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.

16. What to do with an idea?
?

17. Keep or sell it?
Keep
Compete (Invest)
Keep it to yourself
Sell
Cooperate (Save)
Disclose

18. 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

19. Increased patent rights led to greater licensing

20. Gans, Hsu & Stern (2002)

21. Gans, Hsu & Stern (2008)

22. 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”

24. http://wevebeenacquired.tumblr.com/

25. 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?

26. Resolving the disclosure problem
Use secrecy
Use competition
Hold something back
Use intellectual property protection
Use a buyer’s reputation

27. 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

28. 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)

29. What do you choose first?
Experiment to sort out uncertainty.
What will you do if the outcome is successful?
What will you do if the outcome is a failure?

30. Twitter
• Open platform
• Open APIs for
developers
• Acquired Tweetie
and Tweetdeck
• Moved to limit APIs
Initially focussed on
execution but moved
to control.

32. 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?)

33. What can you learn from
experiments?
Have you measured the right
things?
Correlation versus causation
Interaction with other (competing)
experiments

34. Goal
Formulate …
a value creation
hypothesis
a value capture
hypothesis

37. INTELLECTUAL PROPERTY
Orientation towards
collaboration &
investment in control
Defined value
creation for existing
end users
Innovate
generalizable,
transferable
technology
An ideas factory
Specialized innovation
clusters with deal-making
expertise
A transferable
innovation for
defined end users
Able to maintain
bargaining power
alongside
commercialization
An integrated
team of
innovators &
IP managers
Arms-length
supplier of
complementary
innovations

38. 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

39. PUTTING IP STRATEGY
TO THE TEST TO WORK
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 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?
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?
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.
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.
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.

40. 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
Synergy
Leverage access to
value chain players
Strong bargaining
power and
exclusivity
Scarce talent
& capabilities
Unique core
competency

41. 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

42. PUTTING VALUE CHAIN STRATEGY
TO THE TEST TO WORK
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 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.
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?)

43. 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
Zero to One
Leading & shaping
the ecosystem
Control over
the core innovation
underlying the
ecosystem
Insight into
different
stakeholders
A “hub”
in the market

44. 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

45. PUTTING ARCHITECTURE STRATEGY
TO THE TEST TO WORK
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 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 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).

46. 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
Creative Destruction
Leverage local talent
and local users
Incumbent
firms will not
respond
Lean
experimentation &
hustle
Rapid product
development &
Time to market

47. 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
DISRUPTION
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

48. PUTTING DISRUPTION STRATEGY
TO THE TEST TO WORK
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.