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November 2023

Building Your Board

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Following last week’s post about the OpenAI board debacle, here are some additional ideas on how to build and use your board of directors. 

Its fundamentally important to build the right relationship between you as founder or CEO and the board. While technically, a board holds the formal power, in that they can hire and fire the CEO, boards generally don’t want to deal with that kind of mess. If there is a need for a C-level executive change it should be orderly and well planned. 

While the CEO job can seem like the pinnacle of a career, it’s a job that comes with a lot of stress and requires focus on a broad range of areas including finance, operations, sales and HR which are often new to founders. Understandably, not everyone loves managing people or working on the quarterly budget, but these and other tasks need to be done and done well. This is where your board can help.

Build On Trust 

The best way to think of your board is in the context of a long-term relationship. It’s not quite a marriage, but it’s close. The board is there to help ensure a good company gets built. And you in turn must build that company. There will be many ups and downs along the way, but the board will be there the whole time. As such, you should pick your board wisely and make sure you get along.

The board relationship must be based on trust and honesty. Since you want to get input and guidance from the board, the only way to do this is to be 100% candid in all situations. There can be no secrets from the board and ideally, few surprises. If you find yourself in choppy waters and wondering if you should share bad news with the board, the answer is almost always yes. 

The board is there to help you, to be a sounding board and give input. However, it is up to the CEO to make the decisions. As CEO you are responsible for all decisions, even if they came from a board suggestion. Another way to think about this is, the board will have input, but you will live with decisions more than they will. Keep this in mind if you ever feel pressure from the board around hiring or other issues.

Always Have A Plan

When you do face a problem you want to share with the board, always bring forward a default plan for how you will proceed. I have found it quite helpful in these situations to write things down to diagnose the situation, identify possible next steps, alternatives, pros and cons etc. Writing things out is a great way to develop a deep understanding of a problem and a good test of your logic and conviction. 

Your default plan may be naive or incomplete, but there is at least something to build on. Whereas if you show up with nothing, the board may interpret this as a sign that you’re not taking action because you’re in over your head. 

The Role of Independent Board Members

Typically, your series A and B investors will have board seats as will the founders. As your company grows, you will want to consider adding independent board members. They are independent in that they are not employees nor are they major investors, though they still have a fiduciary responsibility to shareholders. 

Ideally the independent board members provide complimentary skills to what you get from your investors. I have found that VCs are extremely helpful in developing the overall business strategy and have uniquely valuable skills when it comes to strategic partnerships and fundraising. VCs also have good networks for recruiting executive talent. 

However, most VCs are generalists and do not have in-depth operating experience when it comes to go-to-market functions, enterprise selling, product strategy or engineering. As you build out your board, consider what challenges you will face in the coming years so that you can add domain expertise to help you scale the company to its full potential. Ideally your independent board members have gone through similar growth in a related space. They should be several years ahead of you in terms of the stage of company they have run, but not so far ahead that they can’t scale down to your current situation. You don’t need a public company board when you’re still in the single-digit millions of ARR.

It can be very helpful to speak to an experienced executive when you are wrestling with practical issues whether it’s around pipeline management, pricing, positioning, building a customer success function, etc. You can reduce your execution risk considerably by tapping into people who’ve done it before and learned hard lessons along the way. 

Who You Gonna Call?

When something goes really wrong, as happens time to time in startups, that’s when you independent board members can add tremendous value. A lot of the calls I take from founders are around people management issues, what to look for in executive hires, dealing with performance issues, building bridges between teams that are not collaborating, and in recent years, planning for layoffs.

And every now and then a major crisis arises, such as the departure of a key employee, a lawsuit, an acquisition of a core technology or competitor, a world-wide pandemic, a change in funding climate, etc. In such cases, it can be helpful to be able to reach out to someone who’s gone through similar difficulties and get a perspective and ideas. For sensitive topics, founders often prefer speaking to someone who is not an investor.

You’re not looking for a hard and fast “playbook” as much as a best practices and a sounding board to help you to consider the right issues and build the right processes for your company given it’s stage and focus. Don’t create a big company bureaucracy in an early stage company where speed and agility are among your strongest competitive advantages. 

As valuable as it can be to tap into the expertise of a diverse board of directors, be careful that you don’t end up using it as a crutch, seeking a third, fourth or fifth opinion in order to delay difficult decisions.

Sometimes you just need to make the call. 

For another perspective, Mike Olson (Founding CEO of CloudEra) presented an excellent talk at Monktoberfest this year in which he discusses the purpose and strategy behind building a board of directors. For those not familiar with it, Monktoberfest is the best, most creative conference in the tech industry. 


What Went Wrong with the OpenAI Board?

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This weekend’s drama at OpenAI raises a lot of questions about what makes an effective board. While we don’t know all the details behind Sam Altman’s ouster, the poor communications, board wavering and disastrous outcome indicate a high degree of dysfunction. There have been a few excellent posts by investor Chris Yeh and Hubspot founder Brian Halligan on the specifics of OpenAI so I’ll focus on the lessons for startup founders and CEOs on how to build an effective board.

First of all, it’s worth spending a moment to reflect on  the primary purpose of the board of directors. A board does not run the organization; that’s the CEO’s job. Nonetheless, the CEO has a boss and that’s the board of directors. The board’s role is to ensure the proper governance of the organization and is responsible for hiring and firing of the CEO. That’s it.  

In the case of a typical venture-backed startup, the board has a fiduciary responsibility to shareholders. This was not the case for OpenAI, which had an unorthodox structure as a non-profit with a for-profit division. Surprisingly, OpenAI’s board had no representation from its outside investors Microsoft, Sequoia and Thrive Capital and seemingly no obligation toward them. 

Building A Balanced Board

In a typical for-profit startup, the board consists of the founders and some of the investors. Usually, early stage seed investors don’t take board seats and if they do, they don’t keep them for long. That makes sense given the large number of investments they undertake. Generally early Series A and B venture investors take board seats in order to provide guidance to the founders and keep a watchful eye on things. Later stage investors may or may not get board seats or observer (non-voting) seats. 

I have been on boards with investors like Bill Gurley and Peter Fenton from Benchmark, and there is no doubt that top-notch VCs provide tremendous strategic value to the companies they invest in. That said, VCs with operational experience are fairly thin on the ground. 

If you’re the CEO of a startup, while you work for the board, you’re also responsible for the composition of the board. Venture investors (as opposed to seed investors) won’t usually abdicate a board seat and often their investment agreement may preclude such a change. 

There is usually a provision for the CEO or founders to add one or two independent board members, unaffiliated with the investors. Ideally, independent board members add experience and skills that complement the founders and investors. 

Typically you are looking for people with operational expertise that is relevant to your business and the challenges you’re facing. Unlike investors, independent board members usually have a four-year agreement, though that’s not a hard cutoff date. 

A Board Must Be Helpful

I first decided to become a board member after participating in board meetings at MySQL. The MySQL board was a good one, and had a mix of investors Kevin Harvey (Benchmark), Danny Rimer (Index) and operational executives Bernard Liautaud (BusinessObjects), John Wattin (TietoEnator), Dana Evan (Verisign) and Tim O’Reilly (O'Reilly Media) as well as the founders.

My inspiration came from one particularly complex discussion around our technology strategy where it seemed the input was all over the place. I thought to myself: in this kind of situation, I would like to be the helpful board member.

I have always believed that the board is there to support the CEO. The CEO has a difficult job and the issues that are brought to the board are inherently difficult. A good board can provide help when navigating choppy waters.  

In the case of the OpenAI board, there had been three resignations in 2023 (Reid Hoffman, Will Hird, Shivon Zilis) over the last year leaving the board unbalanced.

The board had also clearly not thought through the implications of firing Altman. They waffled over the weekend and the result has left the company in a vastly weakened state. They jeopardized an active funding round, angered their largest investor and technology partner, alienated employees and showed an extreme level of incompetence. 

Big Moves Should Be Carefully Deliberated

When a founder or C-level executive is moved out of a key role in a company, this is not to be taken lightly. In a good board, such a move would be the subject of weeks if not months of discussion and planning. This includes succession planning, contingency plans, internal and external communications plans and more. It doesn’t appear that the OpenAI board did any of this. 

In extreme cases where criminal behavior or workplace misconduct is suspected, there may be a need for an emergency removal, but even in such a case there must be careful consideration to operational details to ensure they don’t lose the trust of employees.

The OpenAI board indicated that they “lost confidence” in Altman. Further there were rumors of rifts between co-founder Ilya Sutskever and Altman around a reduction in Sutskever’s responsibilities and Altman’s focus on rapid commercialization over safety. 

It’s not the board’s role to resolve management squabbles. That’s the CEO’s job. I may be reading too much into the reporting but it does appear Altman’s rift with Sutskever became a board level issue. Since Sutskever was a co-founder with a board seat, perhaps it was inevitable. Still, I have seen rifts between founders and CEOs get resolved with a lot less drama than what we saw this week.

When a shit show like this emerges, there’s enough blame to go around for everyone. While I would largely fault the OpenAI board, Altman has admitted he should have done a better job managing the board.  

Final Thoughts for Founders and CEOs

When there is a fundamental disagreement on strategy or direction, whether at the board or management level, it is up to the CEO to get everyone on the same page. Neither the board nor the executives should ever be confused about who is running the show. That is the CEO’s job. The board provides input, but it is the CEO who steers the ship.  

So if you’re a founder or CEO of a startup, what lessons should you take from this train wreck? 

  • In the unlikely event that you have an unorthodox board structure serving multiple masters, you’ve got to make sure all constituencies are represented. Similarly, you must create mechanisms for resolving conflicts that will likely arise, whether the issue is balancing commercialization and security, openness and censorship, content moderation etc. 

  • You should strive for a balanced board with diverse views. If your board consists exclusively of investors, consider adding an independent board member with operational experience that can provide guidance as you scale.

  • Don’t leave board seats empty for too long. Not because you might need the votes, but because you’re missing out on potentially valuable input.

  • Resolve operational issues and management rifts before they become board-level problems. With co-founders this is sometimes easier said than done. If executives cannot work together, they must be removed. 

  • Keep your board apprised of what you’re doing and what you’re thinking. A board relationship must be high trust. There should be no surprises. Whether it’s good news or bad news, share it. 

  • If there is conflict, get it out into the open. You must be able to discuss complex strategic issues with the board and get to a shared understanding of the best way to proceed.  

I have found it useful to schedule regular communications with board members in order to stay in sync. I provided updates at least every six weeks (mid-quarter, end of quarter) in addition to the regular board meeting. For sensitive issues, I would reach out to them as soon as I was aware of a problem, let them know my plan and ask for additional input. 

No doubt we’ll learn more in the days and weeks ahead about the fate of OpenAI, Sam Altman and Microsoft. Few companies go through this level of public drama. And perhaps with more thought to board composition we can avoid similar blow ups in the future. What lessons do you take from this? Post a comment below.


Disruption Is An Ugly Duckling

While many successful businesses have been built that are not disruptive, the disruption model lends itself well to the technology industry where new innovations are able to change the market. This gets at the heart of how disruption works. Disruption occurs when an inferior solution for an unattractive market changes the rules of the game. Following on from the prior post on disruption, here are some practical tips on navigating the choppy waters of competing against much larger incumbents.

Disruption often emerges as the ugly duckling, overlooked and then scorned by bigger companies that know better. When you are building a business that is disruptive, it is helpful to keep in mind that the larger incumbent vendors will act rationally to serve their largest, most profitable customers. The disruptor is better served by focusing on use cases and customers that are below the incumbent’s radar. In other words, don’t moon the giant.

You don’t have to be better than the incumbents. You have to be different. Generally speaking, disruptive products are worse than the incumbents when evaluated using conventional criteria. However, there must be one key way in which the disruptor is better for the underserved market.

Avoid Head-on Competition

When I was at MySQL and Duo Security, two companies that were disruptive, I knew we had a limited amount of time to build our business before the incumbents caught on. In both cases, we focused on fringe customers (mid-market companies, startups, web companies, universities and the like) avoiding direct competition with the big guys. We were grateful that the incumbents weren’t paying much attention. But it made sense. They were focused on large customers in traditional markets: Fortune 1000, financial services, healthcare, government, and so on.

In the case of both MySQL and Duo Security, the disruptive solutions were much less sophisticated than the incumbent’s offerings. We were feature poor in comparison, but much easier to use. MySQL was famous for its “fifteen minute rule” meaning a novice could download and start running MySQL in fifteen minutes, compared to the weeks of training required for Oracle. In the case of Duo Security, customers could sign up for a free trial and the majority were up and running with a cloud-based solution in under 48 hours, something almost unheard of in the world of cyber security at that time.

The ease of use of our products was in stark contrast to the incumbents. Oracle and RSA were all about meeting the needs of the most demanding experts in the most demanding companies in the most demanding industries. Easy just wasn’t in their vocabulary. The concept likely confused them.

For us, making a product that was limited but easy to use, was key to getting new users. Our customers weren’t sophisticated Enterprise DBAs and security experts. They were network engineers tasked with implementing security, or developers looking for a web database. They weren’t experts by any means. Often they didn’t how to begin evaluating potential solutions. So if we could help them get results quickly and give them confidence, there’d be no reason for them to evaluate more complex solutions. That turned out to be a great strategy.

In the case of Duo Security, we were able to show that users not only liked our product, they loved it. That was completely unheard of in the world of cyber security. Duo provided an easy, fun mobile experience that was vastly simpler than what people experienced with other security products. We routinely achieved an NPS (Net Promoter Score) in the 70s, higher than well-regarded consumer companies like Apple. This became a powerful part of our marketing as the best loved security company.

Incumbents Are Predictable And Rational

If you find yourself operating as a disruptor in the market, keep in mind that the incumbents will act rationally to serve their best, largest customers. If you can build your business by catering to customers in segments they don’t care about, you’ll avoid direct competition, at least for a while. And remember, making something better does not necessarily make it disruptive. It’s only disruptive if it opens up a new market that uses a different buying criteria. Your goal is to build a product that is “good enough” to get the underserved to buy from you.

You’ll likely find yourself in meetings with larger companies who will tell you they can’t buy from you until you have certain key features. And once you’ve implemented those, they’ll have another even longer set of additional required features. Don’t worry about that. It’s better to focus more on the the kinds of customers who actually do buy, rather than prospects who tell you why they cannot. Look for new use cases in neglected markets. Target customers who understand the disruptive model and are unlikely to buy from the incumbents.

Stay True To What Makes You Disruptive

Most importantly, avoid the pitfalls of the disruptive model. Don’t try to compete with the incumbents on their turf. That’s a loosing game. Duo Security never had all the features that RSA offered. We never tried to build on an-premise version. We stayed true to our cloud strategy and sought customers who were open to that approach. After all, we’d seen customers embrace the cloud for their applications and customer data. It was only a matter of time before they adopted it for security.

In fact, that became an important buying pattern for us. If a customer hadn’t already adopted several cloud applications, we knew they would stall out in the purchase cycle. It’s difficult to change customer behavior. Instead, focus on prospects who are already moving in the right direction.

As I mentioned in the prior post about disruption, at MySQL we had a great respect for Oracle, not only their technology, but also their people. But we still sometimes poked fun at them. The photo at the top of this post is MySQL co-founder David Axmark piloting his boat in front of Larry Ellison’s yacht in the Stockholm harbor.

We worked closely with Ken Jacobs, known to many as “Dr DBA.” Ken was Oracle’s second-longest running employee after Larry Ellison. Officially, Ken was our ambassador / handler inside of Oracle. But he was much more than that and became a friend to all of us.

The photo above is from the MySQL conference in 2006 where we named Oracle “partner of the year” following their acquisition of the InnoDB storage engine upon which we relied. Ken, recognizing the humor, was unfailingly gracious. Following Oracle’s acquisition of Sun, Ken retired from Oracle in 2010 after 30 years of service. It is with great sadness I learned that Ken Jacobs passed away in 2021.


The Power of Disruption

Over the years, I’ve been asked many times about the common elements across the companies I’ve worked in. Borland, Active Software, MySQL, Zendesk, Duo Security, were all quite different. However there were several factors they had in common which might be helpful for those thinking of joining or creating a new startup company.

Each of these companies helped usher in a new technology wave that enabled growth across the industry. Borland was part of the first stage of the PC software industry and later helped usher in the Windows era as well as Client/Server computing. MySQL helped drive the acceptance of open source software for the web. Zendesk was one of the early SaaS cloud vendors. Duo security fueled the growth of B2B smartphone applications to make the internet more secure. 

At the time, these bets were not at all obvious. There had been open source products before MySQL and SaaS companies before Zendesk. But these were by no means proven business models. Still, if you squinted right, you could see a future that would continue to grow. Nonetheless, there was considerable risk, and many peer companies fell by the wayside. 

Part of what made the future interesting for these companies was the size of the total available market (TAM). In the early 2000s, the database industry was a stable and mature business, generating around $9 billion in revenue for Oracle, IBM, Microsoft, Sybase and a handful of others. I joined MySQL when the company was doing about $5m in ARR and there had been no new breakout database business in the prior ten years. As I did my research on MySQL it became clear that there was a large market, and that customers were deliriously happy. The same pattern held true at Zendesk and Duo Security. The final piece of the puzzle that made these companies successful was that the strategy was disruptive. 

The term disruption, gets thrown around a lot by founders and investors to the point of it becoming synonymous with “new, cool stuff.” But when I speak of disruption, I am holding to the definition by Clayton Christensen in his book The Innovator’s Dilemma

Many successful businesses have been built without fitting in to Christensen’s theory of disruption. But if you are able to tap into its power, disruption is like having the wind at your back in a marathon. It’s still a marathon, but you’ve got some staying power.

Christensen distinguishes between sustaining innovation and disruptive innovation. Sustaining innovation (such as incremental improvements in a product’s performance or price) favors the incumbent catering to their existing customers. Startups generally should avoid pursuing sustaining innovation as these improvements are easy for incumbents to adopt, even if it takes them some time. 

If your new, cool, VC-backed company creates a product that is twenty or even thirty percent better (faster, cheaper, easier) than the big guys, it’s going to be extremely difficult to lure customers to a new, unproven startup. Customers who buy from large vendors often think: “we’ll just wait a year or two, and we’ll get those features, too.”

The Rules of Disruption

Christensen defines disruptive innovation as a radical change in the market that targets a new audience with different buying criteria. They aren’t seeking something “just a little better.” They are representative of a new emerging market. There are four key elements of disruption: 

1. There must be a large existing market

2. There are existing incumbent vendors  

3. A new entrant plays by different rules to serve an underserved market

4. The incumbents are unable or unwilling to adopt the disruptive strategy

The third item is really the trickiest. But let’s examine this further using MySQL as an example. 

1. $30b market… check!

2. Large incumbents included Oracle, IBM, MSFT… check!

3. New entrant with different rules… MySQL is open source… check!

4. The incumbents won’t open source their products or offer them free… check!

Let’s drill further into MySQL’s strategy and what was going on at that time. During the so-called “database wars” of the late 1980s and early 1990s vendors like Oracle, Informix, Sybase, IBM were all focused on TPC-C benchmark performance. Each was trying to outdo the other with new features, faster disk drives, bigger processors. This was truly an era of sustaining innovation with vendors launching advanced features, more tuning options and faster benchmark scores. The result of many years of sustained improvement was that databases had become increasingly complex. Specialist DBAs were required to tune databases in order to ensure fast performance. 

Finding the Underserved Market

MySQL was not the first open source database, but it was the first one that catered to web developers. In this early period of web development, the dominant tools were HTML editors and scripting languages such as PhP, Perl and Python. As web developers sought to create more dynamic sites, they looked to use a database. MySQL became the default database for web development by virtue of three factors:

  • It was easy to learn

  • It integrated well with popular web development languages 

  • It was free when used under an open source license

So while the incumbents were fighting over a massive Enterprise market that focused on advanced features and performance, MySQL was being used by people who would never have bought Oracle, SQL Server or IBM DB2. To web developers, the existing database products were:

  • Too complex

  • Too hard to learn

  • Prohibitively expensive

  • Required management approval

The very features that made Oracle and others attractive to Enterprise customers made them overkill for newcomers. Web developers were seeking a “good enough” solution for building dynamic web sites and applications. They didn’t need or understand most of Oracle’s features. 

In effect, MySQL snuck in the side door by focusing on an under-the-radar market. The big vendors targeted major enterprise applications in finance, manufacturing, retail and ERP systems. They didn’t care about web developers. That market barely existed and certainly wasn’t large enough to attract their high-priced sales teams. 

When the incumbents looked at MySQL, they dismissed it as a toy. It was a primitive database with just a fraction of the features of their products. Worse yet, MySQL users were webmasters and web developers who worked for, ugh, startups whose budgets were a fraction of those found in the Fortune 1000.  

The Growth of a New Market

Over a few years, that tiny, underserved market grew by leaps and bounds, bringing a far bigger opportunity for MySQL and other web technology vendors. MySQL was part of the LAMP stack (Linux, Apache, MySQL, PhP/Perl/Python) an alternative to traditional development stacks offered by Microsoft and others. The LAMP stack became the default development approach for the Web 2.0 era.

To be clear, the LAMP stack was a marriage of convenience, more of a clever acronym than an actual software architecture. The pieces worked together, but it took more work than Microsoft’s fully integrated tools. Nonetheless, the LAMP stack provided freedom to developers that wanted to avoid vendor lock-in. With Microsoft, Oracle and others, the more technology you used, the more you had to pay in annual server license and maintenance fees. The LAMP stack enabled companies to develop a scaling strategy that eliminated the “success tax” as they grew. 

Google, Facebook, Wordpress, YouTube, Wikipedia, all were built on the LAMP stack, as were thousands of startups over the next 15 years. The LAMP stack became the de facto standard for building web sites and we-based companies.

Imitation Is The Most Sincere Form of Plagiarism

Part of the reason MySQL had such unprecedented growth was that the business model was hard for the incumbent leaders to replicate. We routinely promoted MySQL’s Enterprise commercial offering as being 90% cheaper than Oracle. Not surprisingly, that wasn’t a price Oracle could match, lest it decimate its growth. MySQL’s open source business model was part and parcel of its disruptive strategy. 

Oracle argued that its products were more sophisticated and more fully-featured,  which was absolutely true. MySQL wasn’t trying to match Oracle features pound-for-pound. MySQL was targeting users whose needs were more modest. In that regard, both products were a good fit for their respective audiences.

As often happens with disruptive innovation, at some point, the incumbents imitate the disruptor. Oracle announced a stripped-down free product called Oracle Express, which had a subset of features and limited storage capacity. Most users looked at Oracle Express and realized that because of its limitations, it was effectively “cripple-ware” and they’d have to upgrade to the regular commercial product as their data sets grew. For developers this was a non-starter. After all, who wants to swap out databases as you grow?

Microsoft, IBM, Sybase all embarked on similar strategies announcing their own creatively named free products: SQL Server Express, DB2 Express, Sybase Express. All failed to make any mark in the industry and MySQL’s growth was unimpeded. Nonetheless, the moved helped validate the market by showing that what MySQL was doing was worth copying. 

The Billion Dollar Question

MySQL continued to embrace the disruptive strategy, adopting a subscription model and integrating with new emerging programming languages and tools. While there was often discussion about limiting the features of the open source product, we knew that we could not walk away from the open source model without losing our disruptive mojo. There were still plenty of challenges, but the open source approach made us unique.

We grew the company to around $100m in recurring revenue before we were approached by Sun Microsystems with a billion dollar acquisition offer. Oracle also made overtures including an 11th hour bid to match Sun’s offer. 

Working at Sun provided me further insights into the power of disruption. I got an inside view of how an early innovator like Sun could be devastated by disruptive technology, in this case the commoditization of the server industry through a combination of Windows, Linux and Intel processors. Sun, like most companies facing disruption, predictably and rationally focused on their biggest and most valuable Enterprise customers, rather than embracing new emerging technology markets. Less than two years after MySQL was acquired, Sun was acquired by Oracle. 

While MySQL had a somewhat contentious relationship with Oracle, we always respected them and felt that they understood the power of disruption. Oracle has remained a remarkably good steward of MySQL.

So what can you take from all of this? 

Silicon Valley founders and investors are great at hyping technologies. But it is still fairly rare for a company to fit Christensen’s definition of disruption. Nonetheless, the theory of disruption is a useful model for evaluating new technologies and understanding whether they are truly disruptive or simply “new and cool.” If you can find a technology that is opening up new markets, the disruption model can be a guide for making decisions to keep you on the right path. But be careful of falling into the trap of thinking that making something slightly better, faster, cheaper is necessarily disruptive.

I hope this post provided some clarity around how to think about disruption. In a follow-up post, I provide practical information on how maximize the impact of a disruptive strategy.