After a recent talk at the Yale CEO LATAM Forum in Miami, the CEO of one of the largest insurance companies in Latin America came up to me and said, “I hate Google.” I responded by saying, “That sounds pretty harsh,” and asked why he felt so strongly. His response was both simple and telling. He said that Google was “extorting much of my profits.” He said that in his home country, via mobile phones, Google now has the ability to show that Driver A has a heavy foot on the gas, Driver B doesn’t leave enough space between his car and the one in front, while Driver C respects all traffic rules – including speed limits. Therefore, armed with such data from Google, insurance companies can now better match risk-rate profiles of their customers and charge premiums for drivers who are high risk. However, according to this insurance executive, Google wants a significant “cut” of the resulting profits.1 Indeed, according to this CEO, if he didn’t “pay up,” Google threatened to sell similar information to his competitors; thus, nonpayers are at a significant disadvantage vis-à-vis their rivals. In sum, Google owns a key strategic control point in this industry – data on drivers’ locations and speeds – and is demanding a cut of the insurer’s margin as a result.
There are many things that Google must have in place in order to exert such margin pressure. Primarily, of course, they need to be able to access the data. In the example above, Google is accessing data via its Android operating system and a location-based app (Google Maps). According to the insurance executive, over 90 percent of the phones in his home market use one or the other. This gives Google access to movement data for over 90 percent of drivers on the road. In addition, Google needs digital mapping and navigation software (Google Maps, Waze). So, Google has slowly been building the infrastructure to gather and own the data that they need to extract margins from this insurance executive’s company.2
Perhaps even more importantly, through various internet transmission methods (Fiber, balloons, and satellites) as well as Google Nest Hub (formerly Home Hub), Google Wifi (formerly OnHub), and Nest thermostats, Google may know not only our driving habits but also a myriad of other details about us: what we buy, whether we’re home, how often we move, how many steps we take, what size clothing we wear, and where we shop. Furthermore, they can leverage such information well beyond insurance and into stores, health care, and advertising. Google can do this because they are building an infrastructure around information vis-à-vis internet access that can be leveraged not just to insurance but also across an entire ecosystem of industries. This is what good companies do today: they find and access points of strategic control in one industry (e.g., access to data via the Android operating system or via internet provision) that can be leveraged across multiple, interconnected value chains – something we will refer to as an ecosystem.
The basic premise of this book is that today’s successful companies are those that are able to exert strategic control (i.e., “the Stick”) and align incentives (i.e., “the Carrot”):
1 The “Stick” (strategic control points): A strategic control point is a part of a market that, if controlled by one party, can be leveraged for superior margins; this can be in the supply chain, a related business, or even an unrelated market, such as patented intellectual property (IP) or the supply of critical inputs for production. By controlling a critical input, for example, a firm can often leverage this to earn superior margins throughout its value chain.
Many successful companies find points of strategic control and develop unique capabilities in core markets; however, companies that have long-term success in today’s business environment are those that are able to leverage strengths across multiple (versus singular) markets – something that will be referred to throughout this book as the “competitive ecosystem.” No longer will successful businesses be able to focus solely on their primary industries: for instance, (i) Google’s entry into internet provision (i.e., via its Fiber, Loon, and other related projects) will enable it to succeed via diverse offerings (e.g., mobile phones, searches, maps, insurance, and the provision of television content);3 (ii) Amazon now leverages an online platform – Amazon Marketplace – to take a cut of transactions in just about every legal industry in North America; (iii) Amazon’s Blue Origin, Airbus’s Zephyr and OneWeb constellation of satellites, and Elon Musk’s SpaceX threaten Boeing’s satellite and space business; (iv) smaller, nimbler cyber security firms threaten Lockheed Martin’s defense business; (v) mobile payments (e.g., Apple Pay, Samsung Pay, Google Pay, Venmo) threaten to undermine traditional players. And the list goes on.
Business success will always be about “competing in the right space.” If you compete well but in the “wrong” part of a market (e.g., where the margins are thin or where you are squeezed by someone else who exerts power on your core market), you will not be successful – regardless of how well or vigorously you compete. This book suggests that today’s markets are different and that the competitive game can reverberate not only throughout an industry’s value chain but also across markets.
One of the central tenets of this book is that the competitive game being played across firms and across markets plays a crucial role in the success of any organization. We’ve learned a great deal from the game theory4 literature over the past decade; for example, while the competitive interactions across firms in one part of a market are important, competition and the game being played in other markets (or other parts of a firm’s supply chain) can exert influence and have a significant impact on a firm’s core business. Thus, today’s competitive environment is no longer about simply being successful in an isolated part of the market – the new game is one of competition across different markets.
The primary objective of this book is to present a process that enables firms to (i) locate key areas of strategic control, (ii) obtain capabilities in these areas, and (iii) utilize competitive tactics to not only extract margins in this part of the market but also leverage this through to other markets.
2 The “Carrot” (vertical incentive alignment): Contrasting with the “Stick” of strategic control is the “Carrot” of incentive alignment. Vertical incentive alignment refers to the concept of aligning upstream and downstream incentives (i.e., those of suppliers and customers) to be compatible with your own: setting up your entire value chain and customer-incentive structure so that it is in suppliers’ and customers’ best interests to do what’s in your best interest.
Often, the key for aligning incentives is joint investments. We will refer to this as “asset specificity,” assets specific to the relationship that align the incentives of all parties involved – something like a joint investment. However, “asset specificity” is just one tool that is now being utilized to align incentives both internally and externally. The overarching lesson is that the control and influence of incentives are essential to managing and running businesses today.
The utilization of a “Carrot” and a “Stick” together is central to successful, modern-day strategy. Later in the book, we show why this matters: the use of strategic control and vertically aligned incentives together is material to the financial performance of firms. For example, a detailed statistical analysis of the financial performance of firms in the S&P 500 over an eight-year period revealed that when firms did an exceptional job of utilizing strategic control points and aligning vertical incentives, their earnings before interest, taxes, and amortization (EBITA) more than doubled during that period (with almost 70 percent share price appreciation). Conversely, those that performed poorly on both the “Carrot” and the “Stick” actually had EBITA decline over this period – and appreciably worse share price performance.
Thus, this book argues that the key strategic principles necessary for winning in today’s hypercompetitive business environment are strategic control points (i.e., the “Stick”) and vertical incentive alignment (i.e., the “Carrot”). The utilization of these concepts – in concert – can provide unique competitive advantages for you and your organization. Furthermore, we will utilize market-wide perspectives to focus on the net response of the market to a company’s offering – incorporating both “coopetition” (cooperating with suppliers and competitors alike) and competition throughout the scope of a firm’s operations.5 In fact, this is a competitive advantage that this book can provide – a way of approaching markets that is practical, feasible, and groundbreaking in modern-day managerial strategic thinking.
The book is divided into three parts. Part I addresses strategic control (the “Stick”) in a single-industry setting with the primary objective of detailing the fundamental principles of strategic control. In addition to explaining the concept of strategic control points, it presents a process for spotting strategic control points in your markets. Part II extends strategic control to multiple industries, noting that the internet and associated platforms now enable dominant firms in one industry to extend this dominance to multiple industries. In addition, we discuss what to do when someone else owns a point of strategic control and what can go wrong if you own one. Finally, Part III discusses how to combine strategic control with the concept of vertical incentive alignment (the “Carrot”) to develop a strategic approach and thereby attain competitive advantages in today’s markets. We show that, financially, firms that utilize these two key principles outperform firms that do not. We also discuss the role that game theory plays in helping firms stay one step ahead of the competition when utilizing the tools and approaches presented in this book.
Finally, it is important to note that many of the concepts, tools, and methodologies discussed in this book have only been developed in the academic literature in the last ten years or so and have only been integrated on a piecemeal basis in business books and in the business press over the last few years. Hence, this book provides new insights, tools, methodologies, and strategic thinking to enable firms to uniquely compete (via strategic advantages) in today’s market environments. Its main and most important benefit, however, is in integrating these concepts and extending them from products to ecosystems.
Use it to your advantage.
1 In the United States, companies like Progressive are trying to do this in the automobile insurance market with products like Snapshot® (see https://blog.joemanna.com/progressive-snapshot-review/). However, these can be implemented only via a limited set of customers (i.e., only Progressive’s customers) and only for a subset of these customers who are willing to put a device in their cars; indeed, fewer than 25 percent of their customers have agreed to install it. In fact, it is ironic that only a small subset of Progressive’s customers opt in to allow Snapshot® to track their driving habits when Google and others are already doing it.
2 Worldwide, the Android OS commands approximately 88 percent of the smartphone installed base. Source: Gartner, “Global Mobile OS Market Share in Sales to End Users from 1st Quarter 2009 to 2nd Quarter 2018.” Statista - The Statistics Portal, Statista: www.statista.com/statistics/266136/global-market-share-held-by-smartphone-operating-systems/, accessed 6 March 2019.
3 In August 2015, Google, headquartered in Mountain View, California, reorganized under the parent Alphabet, trading under the symbols GOOG and GOOGL. Alphabet was created as the parent of Google (and several other companies previously owned by Google). Subsidiaries include Google, Calico, Verily, GV, Google Capital, X, and Google Fiber. For ease of exposition, we will refer to Alphabet as “Google” throughout, fully recognizing the set of companies under the parent, Alphabet.
4 Game theory, originally developed by John von Neumann in the 1940s, utilizes mathematical models of conflict and cooperation to address interactions across agents (e.g., across firms). Over the past two decades, a new branch of empirical game theory has been developed that helps provide intuition and prescriptive guidelines on how to compete effectively against rivals – intuition that is incorporated throughout this book.
5 Adam M. Brandenburger and Barry J. Nalebuff, Co-Opetition: A Revolution Mindset That Combines Competition and Cooperation: The Game Theory Strategy That’s Changing the Game of Business (New York: Doubleday Business, 1996).