Box's CEO on Pivoting to the Enterprise Market – Harvard Business Review

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Aaron Levie, the CEO of Box, reflects on the cloud storage company’s entry into the enterprise market. He was skeptical about pivoting away from consumers, and it was challenging. But by staying disciplined with the product and deeply understanding market trends, they’ve made the strategic shift from B2C to B2B work.

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SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast, from Harvard Business Review. I’m Sarah Green Carmichael.

In the early 2000s, long before Aaron Levie became the CEO of Box, he was a teenager developing internet products with his friends.

AARON LEVIE: We had this search engine in high school that was vastly slower than Google, so that didn’t really go anywhere.

SARAH GREEN CARMICHAEL: When he went to college, he found himself carrying around USB drives and emailing files to himself. Moving data was necessary, but also really annoying.

AARON LEVIE: And right around then, there was this confluence of technology trends. Web browser innovation was starting to spike again with Firefox just emerging. You had the cost of storage was dropping pretty precipitously. And you had internet speeds starting to finally get faster and faster.

SARAH GREEN CARMICHAEL: Levie and his founding team saw the trends and built Box—one application that let consumers put all their data in one place to access from anywhere.

Well, those consumers started using the application not just at home but at work, in place of traditional enterprise software. And that’s when Box pivoted from the consumer market to the enterprise. Joining us now to talk about leading that kind of change is CEO Aaron Levie.

Aaron, thank you so much for talking to us.

AARON LEVIE: Sure, yeah, thank you so much.

SARAH GREEN CARMICHAEL: At what point did you realize that, although you had kind of started with the idea this would be a consumer-facing thing, that actually it might have more use as an enterprise thing?

AARON LEVIE: Yeah, I mean, surprisingly it took us longer than it really should have. We had this sort of view in our head, which was, we are a consumer company; and we sort of resisted pivoting to the enterprise for the first kind of year or two, even though there were very obvious signals that the consumer business was going to be extremely difficult because of competitors like Google and Apple and Facebook and others coming into the market.

What eventually happened was, we realized that we could actually use our consumer DNA and the consumer sort of ethos of the company—we were very small the time, about 15 people—but we could use those ethos to attack the enterprise market and actually be very disruptive to traditional enterprise storage technology, document management, software collaboration tools, and we didn’t have to change the fundamentals of our product or our consumer orientation.

So, in a roundabout way, we ended up building a consumer company but that sells exclusively to the enterprise. So, the way that we innovate, the way that we build our products, the way that we design our user experience—all of those things are retained from our consumer in a sort of origin. But we’ve been able to bring that to the enterprise market, which has been massively lacking in innovation and consumer experiences really since the start of the enterprise software industry. And so that is what has made us so disruptive. So, we kind of had to pivot because of the economics in the consumer market, but eventually we got so excited about the enterprise space that we kind of went and fully attacked that, and that was now about a decade ago.

SARAH GREEN CARMICHAEL: Yeah. So, when you make a pivot like that, it sounds so clean. And in real life it probably isn’t quite like that.

AARON LEVIE: So, you make a lot of stumbles. For us, it took probably about three or six months of really testing the new business model, doing a lot of customer development—so, that’s working with a lot of early customers and trying to understand, why would we even have a right to be an enterprise software company? Why would they trust us? And eventually, we kind of had to design an entirely different business model, and that business model was way more attractive. And that’s obviously why we pivoted, but it took us a while to kind of figure out, like, what kind of people do we need to hire in this new world? How are we going to sell to customers? What kind of infrastructure are we going to need to build? What new capabilities do we have to create into the product?

And that was a very long list and a pretty tedious exercise. There were lots of late-night brainstorms, lots of fighting. At first, I actually resisted the pivot, and my co-founder sort of almost forced me to do it, and then eventually I recognized all of the kind of exciting potential if we could retain, again, that consumer ethos and bring that into the enterprise. And then I got on board, and the sort of rest is history.

SARAH GREEN CARMICHAEL: Given that you were a skeptic, how did you really know when you had to do it?

AARON LEVIE: It was just the fundamental economics of the consumer business. We were making too little money off too few users, which just was not going to portend good long-term business model. So, it was pretty obvious in our case. As we pivoted, and dealing with that change management—fortunately, we were at subscale, so, you know, 15, 20 people that we had to communicate with, so, that wasn’t that difficult—but what we had to do is get really clear in our principles and ethos were going to be as a company, even though we were going after a slightly different market and with a different approach. Now we’re at 6,500 people, and so we do deal with change a little bit more at a larger scale on a more global basis. What we tend to find is you have to have a very, very strong consistent North Star.

So, you want to deeply understand where you’re trying to go, what are you trying to do for customers. You really don’t want that to change in any meaningful way. What you’re just going to be doing is you’re going to change how you’re delivering that value proposition to customers. So, you know, if you take a company like Ford, they’re still going to be the company that helps you get around. But the way they deliver that might move from selling you something through a dealer to delivering something as a service that they’re going to own and control. If you’re a General Electric, instead of selling you a jet engine, they might sell you things like energy efficiency in transportation. So, you might ultimately get to the ultimate value proposition that that organization is delivering.

And so, in our case, any time we’re dealing with significant change, you have to sort of zoom out, look at the long run, what does that North Star that we’re trying to lead to, point the organization to that North Star, and ensure that the near-term change that we have to work on is going to actually help us down this path to what we’re ultimately building as a mission.

SARAH GREEN CARMICHAEL: How do you get that disciplined though?

AARON LEVIE: You start by being 5, 10, 20, 50 people and then every day changing your business model, changing your strategy and then realizing the thrash that you’re creating in your company, and then you have this aha moment: oh, actually I have to do, like, good management. And you actually have to institute systems and processes and alignment and a vision and a coherent strategy. And then that discipline begins to sort of bake in. And then you have to be very, very judicious on when you do things like pivots, right? Because if you come in every week or every month or every quarter where you’re pivoting the company, you’re not going to be able to maintain an aligned, high-executing, high-functioning workforce and organization, and so you do have to be thoughtful about those big moments.

We’re actually having a moment right now, not so much a pivot but as on a strategy evolution, which is AI and its relationship to our technology. And, you know, for the past 12 years, we really haven’t had to think about AI much, but over the past six or 12 months, this has emerged as potentially the most defining characteristic of our technology over the next decade. So, that’s taking an entire amount of change management and driving our organization and our technology through what we need to do and what we need to bake into our product.

The North Star of the company remains the same. How we get there and how AI will influence that and how it’s going to influence what our customers do with our product, that’s going to evolve, and that’s going to have to be changed as we as we enter this sort of new era of technology.

SARAH GREEN CARMICHAEL: Yeah, so, tell me about that. When you think about AI, how do you see it affecting your business, and how are you going to kind of marshal the troops to make sure that you’re part of that story?

AARON LEVIE: Yeah. So, it started out for us internally a couple of years ago, as just sort of e-mail threads and late-night conversations on imagining, you know, what is the impact of machine learning and AI on our technology and our product? And then all of a sudden, maybe about a year ago, we said, OK, this is very real. We have people building experimental projects and ideas around the space. We have hackathon at Box, so, every six months, some set of engineers would build some machine learning or AI capability that would that would show us something pretty cool about what would be possible with Box. So, we sort of democratized the innovation and got some good ideas.

And then we said about a year ago, let’s actually put a team together, a working group, that was going to be pulling together resources from across the engineering team. And every week we’re going to meet, and we’re going to track the progress on what machine learning and AI is going to be able to do for our product. And at first, we kind of stumbled; we went in different directions; we had some bad ideas; we had stuff that didn’t end up sort of bearing fruit from a user experience standpoint. And then around sort of four to six months ago, momentum started building. We actually moved people on a full-time basis into this team. Even more momentum started happening.

And then you build this sort of core knowledge bank of people and talent that knows exactly what we need to build and where we need to go. And then you go educate the rest of the organization on how we’re going to be integrating and infusing these capabilities into our product. So, it’s been about a year-long process, and we’re still in the midst of all of the change management and evolution that we need. And we are certainly before the moment that we’re unveiling a lot of this technology to customers. But we’ve been going through the change management exercise to ensure that we can bake in these capabilities and evolve the product in a way that makes us very, very competitive and very, very advanced for our customers.

SARAH GREEN CARMICHAEL: So, you started this company in 2005, and it seems like it’s sort of a combination of amazing, like, foresight, strategy execution, and also a certain degree of luck and timing. And I’m just wondering, like, in general, when you think about startup success, how much do you think is sort of timing, luck, and other sort of factors you can’t control, and how much is factors within your control?

AARON LEVIE: Well, yeah, I mean, so, there’s many ways of obviously breaking down even things like luck. So, you know, there’s a lot of serendipity in the founding team. As an example, I benefitted from, you know, where I was raised and how I grew up and the friends that I had that were all interested in technology and business, and so already that’s pretty lucky. So, you kind of remove that for a second, and you look at more of your decisions in your control.

At the base level in technology, you want to always ensure that you’re thinking sort of 2, 3, 5 years out and deeply—I mean this at the deepest level—understanding the underlying technology trends that are happening in your industry or in the market generally because technology trends are almost inescapable. And so, you never want to be fighting a major technology headwind or a tailwind. You always want to put yourself in a position that you’re going to benefit from these major technology trends.

And so, at a minimum, what you want to do is you want to make sure your strategy, again, three or five years out, is going to be propelled by the momentum of whatever the technology sort of curve is looking like and whatever your market is, and you never want to be fighting that at a basic level.

And then as technology evolves, you also want to make sure that you have a business model that can adapt to that as well. And disruption is influenced by a technology trend or technology change, but it really is a business model and business decisions fundamentally that get companies to both be disruptive or be disrupted. And so, any industry that you want to be disruptive to, or any industry that you are trying to avoid disruption within, you have to be cognizant of those kinds of trends. And so, in our case, every single moment that there was a new technology that came out that we felt we could be a first mover on, that we felt very confident was going to have a large amount of momentum and tailwind, we instantly adapted our strategy to support that new technology.

So, when the iPhone came out, we instantly started building applications. When the iPad came out, we instantly started building applications. When it became very apparent that there were going to be major cloud infrastructure providers and we didn’t need to be as focused on building our own data centers, we instantly—I mean, it took a couple years—but we instantly adapted our strategy to be able to build on top of the public cloud. So, we wanted to ensure that there is no architectural, there’s no technology trend that is going to be a headwind that is a major macro trend.

And I see a lot of companies that they get disrupted, they somehow think they’re going to escape major technology trends. You know, it’s very, very hard to control timing. It’s very, very hard to control all of the people and all the different sort of ways that ideas are going to come together. But you can control the decisions you make about the market and the decisions you make around technology; and by thinking three and five years out on what side of the technology curve and history you’re going to be on, you at least want to make sure you’re on the right side of that.

SARAH GREEN CARMICHAEL: How do you figure out if something is an underlying technology trend or something that’s not going to pan out? You mentioned the iPhone in your response just now. And I remember when the iPhone came out people were like, a touch screen? No likes touch screens. That’s never going to work.

AARON LEVIE: Right.

SARAH GREEN CARMICHAEL: So how do you sort of see past that and think, oh, no this is big?

AARON LEVIE: Well, fundamentally, you need to have good judgment. Being able to predict technology trends, you have to be able to have some amount of judgment as to where the world is going, and you have to then have pretty good sense of the user experience, of breakthrough innovation. You have to build off of the patterns of companies and their operating model.

So, you know, if I look at the iPhone—I think this is where a lot of people make mistakes, is they kind of looked at this device in isolation and maybe were like, Oh, I like my keyboard on my BlackBerry or whatever, but when you sort of added up the whole experience, you look at it with the internet, you look at it with browsers, you look at where the internet’s going, the kind of much more interactive experiences people are going to want on mobile. And then you layer in that it’s coming from Apple, and Apple knows how to build devices, and they know how to get to consumer scale, and they’re betting their company on this, it becomes really, really easy to just say, you know what, we’re just going to trust this trend for now. And then as soon as you buy the device, and you’re like, this is the future, then it really becomes simple.

And the same thing happened for the iPad. And if was kind of funny because, when the iPad was launched, so we had a team within a couple of hours building an iPad app for customers; and even internally, we said, listen nobody’s bought the iPad; it just was launched a couple of hours ago. Do we really know that people are going to use this in a business environment? Do people really want a tablet experience? And honestly, when it came down to it, we literally just said, Listen, Steve Jobs just got onstage and he unveiled this as, like, the most breakthrough product that Apple’s ever built. Do you want to bet against Steve Jobs? Or do you want to just trust at some point that, like, he and Apple are building products that we tend to really love. And do we want to be on the right side of that trend, or do we want to be a laggard and kind of catch up to it once the market is telling us that, you know, that it’s too late? And so, a lot of times you can just sort of use other proxies as a way of making decisions.

And it’s one thing in 2006 to say, hey, you know, Amazon just came out with cloud computing. It’s this new technology; we don’t know how it’s going to scale. And it’s another thing to be in 2015, which a lot of companies were still in, and saying, hey, you know, we don’t know if we can move our workloads to Amazon. This whole cloud thing is, you know, can we trust it?

And so, a lot of companies wait way too long to see underlying technology trends that are just so obviously things that they have to respond to.

SARAH GREEN CARMICHAEL: Was there ever a time when you jumped on something really fast, and then you thought, oh, that was a flash in the pan; that was a misfire?

AARON LEVIE: There’s things where we’ve jumped on quickly and then realized that the market wasn’t going to move as quickly as we had anticipated. I would absolutely always be rather making mistakes on that dimension as opposed to being caught by surprise. So, for us, I see it as a win when we make those kinds of decisions. I’ll give you one small example. We’ve been doing a little bit of work within the 3D space because, you know, we’re very excited about the potential of augmented and virtual reality in the enterprise. We think customers are going to have a lot of three-dimensional content they’re going to want to work with. You know, think about industrial use cases, healthcare use cases, life sciences, et cetera. And so, we started investing in this market about two or three years ago, and, you know, we’re probably off by a few years in terms of the maturity of the market.

But what has happened is we’ve built DNA internally: we have talent internally that deeply understands this space, so, as it continues to grow—and when you think of the AR kit from Apple—this puts us in a position where we now know how to invest in this market and in this technology. So, again, I’d always rather be too early and understand the market and then be ready to pounce once that market exists than too late where you’ve missed the entire opportunity, and I think companies get this wrong a lot, is they end up being too early in a market that is actually the right market to be in. But they give up on the market prematurely. The market happens, and then you read these stories about, oh, Kodak understood digital before digital happened, and, oh, Microsoft understood tablets before the iPad happened. Well, guess what? They weren’t there the week after that market finally got mature; and that is what puts them back by many, many years—you know, in some cases, disastrously so, in the case of Kodak, and in some cases, recoverability, in the case of Microsoft.

So, I think that it’s better to be too early than too late to a market as long as you have the sort of stamina and energy to keep coming back into the market once the product and the technology is mature enough and the market is ready for that innovation.

SARAH GREEN CARMICHAEL: How do you at this point stay disciplined and not sort of become the incumbent that has too many eccentric features that people aren’t using?

AARON LEVIE: Well, I have an annual tradition of rereading Innovator’s Dilemma. That sort of helps things. Each time that I read it, I more viscerally and deeply feel the challenge that an incumbent feels because we do now have these very complex customers. We do now have customers paying us millions and millions of dollars. And I can see how the morass and the complexity of very large customers can sort of slow down an organization of our scale. We’re a little over half a billion in revenue this year. And that comes with challenges because naturally we want to move up market. We want to continue to serve more and more complex use cases. This is where the vast majority of our revenue comes from. And you always have to make sure that you’re always focused on the thing that made you truly disruptive in the first place, which was never compromising on the user experience. Because the moment that we miss that, the moment that we stop doing that, we get confused that that our buyer is the user, which the buyer is only one of the potential users within an organization—that’s the moment that you leave yourself open to disruption.

SARAH GREEN CARMICHAEL: Aaron, thanks so much for being on the show today.

AARON LEVIE: Thank you.

SARAH GREEN CARMICHAEL: That’s Aaron Levie. He’s the CEO and co-founder of Box.

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Thanks for listening to the HBR IdeaCast. I’m Sarah Green Carmichael.