Saturday, July 30, 2016

The Problem with the "Pivot"

Hang out some time at the cafeteria of the Stanford Business School and listen for the number of times you hear the word “pivot.” The word is said too offhandedly, and with great effect – evidenced by the ripple of nods among listeners: “this person knows the way.”

In case you have been locked up for the past decade, “pivot” means to change direction as you discover your market, often following some instructive missteps. The term has become standard jargon in the startup world since the explosive success of Eric Ries’ “lean startup” approach to creating a company. Many say that the pivot is how you get to success.

The iconic example of an effective pivot is Intel’s move into microprocessors. You may be surprised to find that this company was not always a microprocessor producer. Intel made other things, like dynamic random access memory, but the accounting numbers were showing that their small microprocessor business was taking off. Since Intel’s budgets were set up to follow trends in accounting returns, the company pivoted toward this new market opportunity; explosive growth followed and soon Intel re-defined itself as a microprocessor firm. Like so many firms, Intel became great not by planning, but through a process of discovery.

Stories like this one circulate in our business schools like tales of clutch hits around a sports bar. To hear them, you would think we were all batting .500. After all, we forget the pivots gone awry. And since our collective memory selectively retains the success stories, the pivot seems like a sure bet. To aspiring business school students, how seductive to think that there is a sure road to success – if only we keep our eyes open and remember to pivot.

It turns out that if you look at all the evidence, failures and successes alike, the picture is very different. The bottom line of the research is that pivots work smoothly only when incremental change brings positive returns. Then we see gradual shifts, with each small step along the way yielding some slightly encouraging results. But only some journeys entail a smooth upward path. For many changes, especially the disruptive ones, pivoting makes things worse before they get better. Bad news in the wake of a change makes it seem that you can’t get there from here.  Hence the “J curve” often talked about by pundits searching for disruptive change.

Take, for example, Hewlett Packard’s move into digital communications systems in the 1990s. With network technologies taking off globally, the world’s big tech companies were vying to be the center of the new “platforms” for digital transmission. HP made its move in this space by transforming its old microwave division to be its digital communications business. The company assembled a team under Jim Olson, who ran the division like a startup. Informal hall-talk pushed aside scheduled meetings and formal reports, and HP’s flat, engineering culture accelerated the division’s innovativeness. The technical results were encouraging: a new broadband server, a broadcast server, and other technologies that would allow for such futuristic functions as video on demand – just as soon as the networks of the world would allow. And therein was the problem. Technology advances alone are not a business, and the company’s visionary pivot into the digital communications age far outpaced the ability of the world’s networks to use these technologies. Now, with 20/20 hindsight, we of course know that these developments would turn out to be worthwhile. But Jim Olson had to go to annual budget planning meetings without the benefit of hindsight, where his anemic returns were literally invisible when graphed next to those of, say, the company’s exploding printer division. Year after year, Olson evangelized his vision of a digital future, but the numbers told a different story.

The lesson: Big changes, the breakthroughs that transform industries, make things worse before they make things better. In hindsight, we dismiss those troubles as “short run”. But when you are living through them, when you are leading a team charged with getting to success, you face what seems to be an unsolvable problem. Quality research shows that firms commonly fail to make these transitions. These are not fast, cheap failures, but disastrous ones that render cynical those who put their faith in the promise of a smooth pivot.

So it is that To lead others through change requires a steadfast vision, one that holds even after the cynics have moved on in search of an easy pivot.

For academic research on  the problem of getting from here to there, read my paper with Elizabeth Pontikes.