The Carrot and the Stick: Leveraging Strategic Control for Growth

As Walter Isaacson, the biographer of Steve Jobs, commented in a CBS Sixty Minutes interview, “Only a complete control freak like Steve Jobs could obsessively control the value chain from back to front like Apple has.”1 Like Vanderbilt, who recognized that the railroads would dominate after shipping and knew that oil would be next; or like Rockefeller, who knew that oil distribution was the key to dominating the U.S. market for kerosene; or like Carnegie, who knew that dominating steel production would be the key to future infrastructure growth, great leaders can “see around corners,” as Jack Welch once said.2 Good leaders today – as Steve Jobs was in his day – see where those corners are. However, not everyone can instinctively “see around corners.” So, this chapter works through a process for identifying strategic control points – how to find them, how to leverage them, what to do once you own one, and what to do in the event that they simply don’t exist in the market where you are competing.

Before we do this, however, it may be helpful to learn from Jay Parkinson, co-founder of a company called Sherpaa. In making a compelling case for change in health care, he notes that:

• In the United States, 75 percent of all doctors are now specialists, with an average age of fifty-six.

• Our projected health insurance premiums this year, in 2020, will be $29,000 (split with our employers).

• The mean wait time to see a primary care physician (PCP) in the United States is more than twenty days.

Jay founded Sherpaa as a medical intermediary – a sort of telemedicine/concierge service that lets you talk to a doctor in fifteen minutes or less to see if you need further help.3 Over 80 percent of PCP visits are unnecessary; we often go to our doctors to see if we need to go to the doctor.4

I asked Jay to share some advice with other new start-ups. His answer? Sketch it out; buy a whiteboard. For Sherpaa, he and his partners sketched out the flow of money in the industry and simply “followed the money.” In this value chain, they found that the real money was with employers, since they typically pay the bulk of the premiums for employees. So, Jay and his team simply “followed the money” and approached the employers with information on how to save money on their health insurance – and help them have more productive, healthier employees.

We will follow this approach (i.e., “sketch it out”) throughout the book by drawing the relevant value chains – something that we will refer to as a “Visual Value Map” – because perhaps the best advice anyone can give you is to buy a whiteboard and “sketch” out any industry you are working in!

My Father’s Beloved Indian Motorcycle and the Queen of England – from “Old School” to “It Changes Everything” in Just Fifty Years

My father was “old school.” He grew up in the Bronx, New York, joined the Navy at the age of seventeen, served in World War II, and joined the New York Police Department when he returned from service. He proceeded to walk a “street beat” in the toughest neighborhoods of New York, back when cops walked patrol by themselves. He eventually worked his way up to become a motorcycle cop and would chase speeders in the Bronx.

He was also an interesting character (to say the least), complete with handlebar mustache and New York attitude. He often spoke fondly of his old “Indian,” the brand of motorcycle (figure 2.1) he rode on the streets of New York and while escorting such dignitaries as President Kennedy, President Truman, Fidel Castro, and the Queen of England.

Stories. He never lacked for stories. My dad had “escorted” (the police term for the motorcycle riders or “escorts” in a motorcade) President Truman, for example, on multiple occasions. On one occasion, he stood at President Truman’s side after the President had left office and asked him, “Mr. President, now that you are out of office, how should I address you?” President Truman characteristically responded, “Just call me Harry.” My dad also “escorted” the Queen of England when she was in New York; while visiting Buckingham Palace many years later, he struck up a conversation with one of the palace guards, mentioning to him that he had “once escorted the queen.” He didn’t realize that the comment probably was ill-advised until later when he saw two guards pointing at him and snickering. It turns out that “escorting” the Queen means something very different in England – they thought he was claiming to have escorted her to a ball or palace event! Of course, they didn’t know that snickering at a rough-and-tumble ex-New York cop might also have been ill-advised!

One day, while chasing a speeder at more than ninety miles per hour on his beloved Indian, his bike went one way and he the other. Not a good thing to do while traveling at ninety-plus miles an hour on a motorcycle. Fortunately, he survived a broken neck and lived a mostly healthy life until he passed away – still ornery – at eighty years of age.

Jay Rogers is also an interesting guy. His grandfather owned the Indian Motorcycle Company. Jay eventually went from Princeton University to a start-up in China and then to the U.S. Marine Corps. During his nine years of service in the U.S. Marine Corps, he applied to Stanford University, got accepted, and did something very few do – he turned Stanford down. Indeed, he felt that he had more service to give to his country and that to do so was more important than getting his business degree. However, he eventually finished his tour and “settled” on that “other” business school, the Harvard Business School (as Yale faculty, to me Harvard will always be the “other school”), where he earned his MBA. His time at Harvard was often spent working on his dream, which was not only to start his own automobile company but also to revolutionize the entire automobile industry, a lofty goal to be sure.

DEFINITION: ADDITIVE MANUFACTURING (AM), ALSO KNOWN AS 3D PRINTING

“3D printing,” also known as “additive manufacturing,” or just AM for short, refers to the process of creating objects via software-controlled industrial robots or “printers,” by forming successive layers (with various types of material) to create a desired shape or object. Although early applications were limited to thermoplastics, they have advanced considerably and now involve metals, edible materials, rubbers, modeling clay, metal alloy, powdered polymers, and plaster at near production speed; they have even been used to produce human organs.5

It turns out that this goal was even loftier than you might think. Jay has already done something else that no one else had done before; his company, Local Motors, has “3D-printed” a car. The important point of this story, however, is not the impact of “additive manufacturing” (3D printing) on the automobile industry, but rather the reverberations throughout every aspect of manufacturing.

Think of walking into a store, the likes of which you have never seen before, order a car of which there are five new models every month, and you can order it and take delivery that afternoon ... Then, if you get into a crash and the materials for that car only cost $2,000, you take the components that work off it – there are, after all only fifty parts – and print a new car. You had four seats to begin with, what about five seats this time?6

Local Motors was founded in 2007 with the vision of designing, building, and delivering vehicles differently. The concept is relatively simple: use the collective brainpower of the crowd by having innovative people from all over the world design the car, a process known as “crowdsourcing.” Then, use this design – which can easily be modified by any buyer for uniqueness – to build it in local “micro factories” that produce vehicles locally, faster, with far fewer parts (50 versus 25,000-plus parts in a traditional mass-produced automobile). For example, Local Motors brought their Strati vehicle to production in a quarter of the time it took Tesla to bring its first model to production and used one one-hundredth of the capital that Chevrolet used to develop its Volt electric vehicle. They can do this in part because they “crowdsource” both interior and exterior design from community users. For the Strati, the global crowdsource contest winner was an Italian, Michele Anoe, who came to the United States from Italy with tears in his eyes saying, “This is a country that put a man on the moon and now I’m helping in this country 3D print a car.” He didn’t even have a passport, and Local Motors had to move mountains to get him over to the United States quickly. It truly is a different world in which we live today.

Local Motors have plans to build 100 “micro factories” over the next ten years with initial locations in Phoenix, Arizona; Knoxville, Tennessee; and National Harbor, Maryland, just outside of Washington, D.C.

Perhaps most importantly, under traditional automobile manufacturing (with 500 to 1,500 suppliers delivering 25,000 parts), you can’t change quickly. However, in just four weeks, Local Motors used crowdsourcing to design a car, the Strati, with fewer than 50 parts. They are thus able to control all aspects of production (i.e., back to front in the value chain); they can control and earn margins every step of the way and have learned that owning the chain – right down to the retail level – enables them to leverage their platform and community of engineers and designers in ways that few others can imitate. According to Jay,

Car companies have killed each other on the retail end because they sell the same product to a ton of different retailers – dealers – and then they all compete for the razor-thin margin of price. We won’t do that in our business because we control the chain. And you’ve heard of Tesla fighting to distribute products differently to the world, and they are being fought tooth and nail by the dealers of the world, and we have to stop that because it’s stifling innovation.7

Indeed, via its ability to leverage strength in one industry to another (i.e., one of the key principles of this book), Local Motors has expanded beyond its ability to design, build, and deliver vehicles to work with GE’s microwaves (before the business line was acquired by Haier) on microwave ovens and rapid design testing, Domino’s Pizza and BMW on parts, and Airbus on crowdsourcing the design of its drones. Thus, Local Motors has taken ownership of the value chain back to front in one industry and leveraged it to other industries – much as Amazon has done.

Contrast this with the strategy of Hewlett-Packard (HP). Back in early 2016, HP introduced a line of 3D printers (used now by BMW, Nike, and Johnson & Johnson) that cost between $130,000 and $155,000 and can print at high speeds. BMW plans to integrate HP’s printing system into the future production of parts and personal customization, according to Jens Ertel, head of BMW Group Additive Manufacturing Center. Nike has been using 3D printing for what it calls “performance innovations” in footwear for several years, according to Tom Clarke, president of innovation at Nike.8 HP could come to own a disproportionate share of the value chain across all industries utilizing additive manufacturing in a number of ways: it could design and build high-speed printers in a way that few (or no) others can (and thus stay ahead of the hardware arms race); it could lock up top design and/or coding talent; or it could patent a key part of this technology. However, these alternatives are expensive and would be exceedingly difficult to control. Alternatively, HP could own the value chain in a portion of an industry, like Local Motors, and then expand to other industries. Thus, companies are confronting these kinds of strategic choices today in ways that we have not seen before, and these choices are often key to their successes or failures in the rapidly changing markets of today.

A basic foundational concept for today’s markets is the notion of an industry’s value chain. The concept of an industry value chain was developed decades ago; indeed, its origins go all the way back to Wassily Leontief’s input-output tables from the 1950s (for which, in part, the Nobel Prize in Economics was awarded to Leontief in 1973). In its simplest form, the industry value chain is a physical representation of the flow of various processes that are involved in producing goods and services. As such, it is a representation of the process flow from raw materials on through to delivery, service, and support of the final offering in the market; each, in turn, adds value that is ultimately captured by sales in the market.

While inherently “silo” in design, as well as process-oriented, a value chain can provide a very useful sense of where value is created within the supply chain in a given industry; this understanding can help a firm see where additional gains may be achieved in terms of efficiency or margin extraction. For example, if a firm is selling a physical product with merely decent margins and sees that there is little competition in distribution (or for a key raw material input), it may decide that it makes sense to move into distribution or acquire raw material production capabilities in order to extract the additional margins available in that part of the industry.

However, such a view of a firm’s activities overlooks much of what is interesting about today’s interconnected, fast-paced markets: since so many parts of multiple industries are “interconnected,” industry-level views of value chains can be misleading in terms of future opportunities for the associated firms. Consequently, we will make important distinctions between what happens at the (i) firm level (and firm-level competencies inside the relevant value chain), (ii) industry or market level (e.g., the market for smartphones), (iii) platform level (e.g., Apple’s iOS), (iv) “ecosystem” level (e.g., within and across all the interconnected parts of an industry), and (v) “cross-ecosystem” level (e.g., the potential for interconnected parts within one industry or “ecosystem” to be leveraged to other, entirely different industry ecosystems). For now, as a building block, we will begin with the most basic “industry value chain” and then build to a more complicated “ecosystem” later in the book.

While all of this may be interesting, fully understanding and utilizing value chains and the concept of strategic control points requires a bit of homework. Fortunately, such analysis for any market opportunity isn’t that difficult if you build it one step at a time:

Step 1: Map out the value chain in your industry: Let’s begin with an example. Imagine drawing a high-level “industry” value chain for electronic maps, such as Google Maps, Apple Maps (in the mobile environment), or MapQuest (online). Imagine you were trying to do this in the early days (i.e., before Google Maps or Apple Maps). What process would an organization, operating in this space, need to follow? What are each of the steps? How do they fit together in a way that ultimately creates value for the end user?

First, (1) raw data would need to be collected (e.g., on streets, towns, and locations of buildings). Google collected this by sending cameras, affixed to cars, around every street in the country and throughout the world; indeed, there have even been pictures posted from Google cameras atop camels in the Middle East. Future data may be collected automatically via satellite, drones, and/or advanced balloons in low-earth orbit. Next, (2) the data collected by cameras must be digitized (and put into electronic form); (3) the digital maps themselves must be created; (4) a graphical user interface (GUI) must be created; (5) the data must be fused into the interface (an app) so that customers can access the maps in user-friendly fashion and interact with them (e.g., to find things, map out locations, and get directions) and distributed to end users (e.g., via iPhones, internet web pages, automobile navigation systems, handheld GPS devices, or Android devices). After the offering has been launched, (6) the physical infrastructure to maintain the maps must be established. Then, (7) the data, interface, and software must be updated/maintained, and (8) customer service and support needs to be put in place (e.g., for technical issues, billing questions, and other customer-related issues). Each stage of the process requires labor and/or capital, returning profits in some fashion. This value chain is depicted diagrammatically in figure 2.2.

For your industry, the steps will of course be different – you will need to customize the steps in your industry’s value chain to the unique ways in which value is created as you bring an offering to market. Often, the best way to do this is to imagine you were starting from scratch – what steps would you need to take in order to create an offering and bring it to market?

Step 2: Identify potential areas for strategic control in your industry’s value chain. Are there areas that, if controlled, would enable someone to extract higher margins?: Once a high-level “map” (something we refer to as a “level one” value chain) like the one just described is created, it is important to note that each stage of the level one value chain is likely to have its own respective value chain. Thus, we could drill down deeper into any of the “level one” steps in order to create a “level two” value chain. For example, one step in the level one value chain presented above, collecting data, may involve its own steps: obtaining a camera and car equipment, hiring drivers, contracting for labor, purchasing fuel and computer equipment to record the data, and so on. These days, this might even entail launching a drone or utilizing autonomous vehicles to collect data more efficiently.

As we explore the level two value chains, we again look for areas that may be in short supply or controlled (e.g., the pumps in the Softsoap® example). For example, if we can control access to autonomous vehicles or a network of drones – or simply collect data in a way that is much more efficient and cost-effective than before – then we could control a key input associated with delivering these maps to the market. Within both the “level one” and “level two” value chains, if we can find any area in short supply or where competition is low or barriers to entry are high, we may be able to exploit these for superior margins. A strategic control point provides leverage to extract greater margins in any portion of either a level one or a level two value chain (as with Vanderbilt’s Hudson River Bridge, Minnetonka’s pumps, and sensors on windmills).

As discussed earlier, there can be many sources of strategic control. Sometimes customer relationships, feature advantages, and/or customer-offering advantages are discussed as sources of strategic control; however, it will be argued throughout this book that these should be viewed only as advantages that are temporary in nature, as they are usually not enduring points of strategic control. By contrast, patents can be. For example, Amazon’s patent on its “Buy now with 1-click” button on Amazon.com, a method known as the “method and system for placing a purchase order via a communications network,” a patent issued to Amazon in 1999, has withstood both U.S. and international court challenges.9 Although this feature alone does not give Amazon strict strategic control, it does give Amazon a strategic advantage and allows them not only to gain licensing revenue from others that use a “one-click” system but also fits in with their overall strategic control of the value chain, back to front.

Now, think back to the value chain for digital maps. Are there areas which, if exclusively owned/controlled, would give someone an important source of strategic control (e.g., the sensors on windmills)? The way we often capture this is through the use of “Harvey Balls,” as shown in figure 2.3:

For example, collecting data may be difficult and capital intensive. It requires fixing cameras on top of cars, driving them across every road, compiling and storing the images, and so on. Once one firm has collected the data, it may be less attractive or even impossible for another firm to also collect such data; for example, there have been various patents issued for Google Maps. Thus, data collection might be a three-quarter or full Harvey Ball (represented as a full Harvey Ball in figure 2.3) since it appears to be a relatively strong point of strategic control. Conversely, armed with the data, many firms may be able to digitize the video footage, and so stage 2, digitizing the data, might be represented by an empty Harvey Ball – there is nothing proprietary about digitizing video footage. Similarly, given access to the maps, anyone can provide service and support and so this would again be represented by an empty Harvey Ball. Alternatively, building the physical infrastructure to transmit those maps may be more difficult to do; therefore, this stage might be a three-quarters or a full Harvey Ball (represented as a full Harvey Ball in figure 2.3) since it too may be an important source of strategic control.

As you may have noted from this example, it is important that we take the stages independently, one at a time. So, if stage 2 is digitizing the data, we take stage 1 (collecting the data via cameras mounted on cars for example) as given and ask the question, “If many firms had access to the data, is there any reason why any one of these firms might have unique capabilities for digitizing the data that was collected?” Perhaps one firm had a patent on digitization of image data collected from cameras or had a near monopoly on computer scientists who could write the appropriate computer code. Note that having a competitive advantage in this stage (i.e., one firm can do this stage better than rivals) is not enough; there needs to be something that prevents others from doing so (see the concept of “rivalry” discussed below). While there is an element of subjectivity here, you can always research the key components further once you have identified where they may be in a value chain.

As you draw your Harvey Balls, contemplate two questions: If you had capabilities in this area, would it prevent someone else from doing it? Also, if someone else had capabilities in this area, would it stop you from competing effectively in this market? If the answer to one or both of these questions is no, it probably is not a strong point of strategic control. Once again, think of the Softsoap® example – the key to the company’s success was buying up the world’s supply of pumps. If they had simply secured pump-manufacturing capacity but competitors could also make pumps inside the aforementioned critical ten-to-twelve-month time horizon, then it wouldn’t have been an effective strategic control point. Thus, we look for situations where when one firm controls certain capabilities, it prevents others from competing (or makes it difficult for them to do so). Ideally, buyers should have no other effective option; this enables the procurement of higher margins. An example noted earlier was Amazon’s network; indeed, by establishing their distribution network (along with features like Amazon Prime and “one-click” shopping), they can extract margins throughout the value chain in ways that others cannot match.

Note that strategic control points are not “binary”; there is a continuum of degrees of control. On a scale of one to ten wherein one is no control and ten is complete control (i.e., the equivalent of Vanderbilt’s Hudson River Bridge), various industries fall along the continuum, as originally noted in Slywotzky and Morrison’s The Profit Zone.10 For example, a firm that owns a key, unbreakable patent in an industry (e.g., a pharmaceutical or biotechnology firm) may be a ten. Some examples of firms along this continuum include the following:

10 Owns the patent (e.g., a patent-protected pharmaceutical); thus, entry is restricted

7 Leads the standard (e.g., Google in search and Amazon in books) or dominates market position (e.g., Coke and Intel)

6 Has significant and material brand, distribution, and/or product differentiation

1 Has a commodity or contestable market, no source of strategic control (numerous)

In economics, a distinction is sometimes made between rivalrous and non-rivalrous goods. The example often given of a non-rivalrous good is national defense or even a streetlamp: my standing under a streetlamp doesn’t preclude you from standing under it as well and also enjoying the light. Alternatively, a steak is “rivalrous”: my consumption of a particular steak means that you can’t consume the same steak; you may be able to consume a different steak, but not the same steak I just ate.

For a part of the value chain to be a strong point of strategic control, it must be rivalrous in nature; that is, if one entity owns it, this prevents others from doing the same in a certain time horizon (much like the Softsoap® and Hudson River Bridge examples).

Step 3: Identify strategic control points where your firm has unique capabilities. In your industry, where would your firm be positioned on the chart above? Is there a point of strategic control where only your firm possesses the requisite capabilities?: Let’s take the example above and extend it to an analogous market. For example, imagine trying to build a business that consists of digitally mapping the world’s ports for large commercial shippers (e.g., Maersk, Exxon-Mobil) and interconnecting these digital charts with route-optimization software to save fuel on shipping routes (e.g., as the company Jeppesen has done). Let’s also examine a few distinct phases across the larger value chain in this opportunity space. In order to put together such a business, you would need to (1) access data across all of the world’s ports and oceans, (2) digitize the data (and fuse it into a single data set) and create the software to make it useful to users on board the ship (including the graphical user interface), and (3) distribute your electronic maps onto the bridge of a ship.

These three distinct phases can be utilized to illustrate the concept of rivalry in strategic control (using digital charting in the marine industry as an example):

1 Data access may be rivalrous. If your vision of the crew on the bridge of a ship is of a “salty sea captain” complete with captain’s hat, your vision isn’t that far off reality; interestingly, much of the navigation on large ships is still primarily done via paper charts. Unlike in aviation, where there is an international agreement across nations to share public runway approach data, maritime charts and data on ports and approaches to harbors are owned by individual country “hydrographic” offices (HO) and are tightly held (territorial waters are often fiercely protected in the interest of national security). However, the U.K. Hydrographic Office (UKHO) has compiled over 80 percent of the world’s marine data (the Brits have been sailing the high seas almost forever after all). If, in an attempt to move paper maps to the digital age, a company could secure the exclusive rights to the UKHO data, they would own a key rivalrous strategic control point. The key would be the exclusivity (i.e., exclusive access to the UKHO data would preclude another firm from creating maps with the same data, since the UKHO owns the data). If you could secure exclusive access to the UKHO data, any future competitor would need to go to each individual country’s hydrographic office and, one by one, obtain access to the individual country’s port and approach data, and then compile a database that the UKHO has amassed over centuries (a near impossibility). Even if competitors were able to do this, the time it would take to secure consent from even most of the hydrographic offices in the world would give the first entrant (i.e., the one with the UKHO data) a tremendous first-mover advantage and a huge head start. Thus, access to the UKHO data could be rivalrous if data access were exclusive – and non-rivalrous if it were not.

2 Software, graphical user interfaces (GUI), and data fusion are non-rivalrous. My writing software code and creating a digital navigation program doesn’t preclude you from doing the same – as long as we both have access to the data. A company may or may not be relatively good at producing software and graphical user interfaces, but in principle, any company that has access to the data can do so; hence, this isn’t a strategic control point. It also highlights the difference between a competitive advantage and a point of strategic control: data access can be rivalrous and hence can be a strong point of strategic control; however, programming (and the utilization of that data) is non-rivalrous and hence not a point of strategic control. It may be a competitive advantage for you because you do it better than others, but it is not a point of strategic control.

3 Access to the bridge of the ship is rivalrous. Once a firm has compiled the data and written the code, gaining access to the bridge of the ship can be rivalrous. Since data and programs would need to be embedded into the onboard systems of large ships to impact navigation, it would be impractical (if not impossible) to have more than one software charting program on board and integrated into the ship’s systems. Thus, the “real estate” on board large ships is rivalrous in nature: one program’s presence on board the bridge would essentially preclude another from being on board as well.

Note that the application of these concepts is very much contextual. Indeed, while it may be impractical to have more than one charting software program integrated into the bridge of a ship, it is not impractical to have more than one mapping program on an iPhone – hence, many of us will have Google Maps and Apple Maps on our phones. Thus, in this example, the real estate on a smartphone (versus the bridge of a large ship) is non-rivalrous (e.g., my putting my map on your phone doesn’t preclude someone else from also putting their map on your phone).

In short, a non-rivalrous part of the value chain can generate strategic advantages if customers value what you bring to the table and if you have a competitive advantage in its delivery; however, it can’t be a strategic control point. Conversely, a rivalrous part of the value chain can be a source of strategic control and represent a huge strategic advantage in the market. This distinction is crucial: competitive advantages often result in an “arms race” where you need to continuously work to stay one step ahead of the competition, whereas a point of strategic control is often enduring and hence considerably more powerful than a non-rivalrous advantage.

There are innumerable examples of rivalrous strategic control points; the obvious, aforementioned ones include Minnetonka’s pumps and Vanderbilt’s Hudson River Bridge. Other examples include pharmaceuticals with patents (e.g., Viagra when it first came to market, which provided a huge financial windfall to Pfizer). Even social networking sites can produce rivalrous control points (e.g., once Facebook or LinkedIn gains critical mass, there is little or no room for another, similar offering). Note that while the mere existence of Facebook and LinkedIn doesn’t preclude other firms from developing similar apps, the sheer scale of the existing networks makes it practically impossible to do so effectively and makes the networks rivalrous in nature.

Now, try this for your firm and your industry, building on the value chain you created earlier. Is there a point of strategic control where only your firm possesses the requisite capabilities?

Step 4: Draw out a “Competitive and Capabilities Map” in order to identify rivalrous strategic control points where your firm may have unique capabilities. In your answer to the questions for Step 3 above, what are the rivalrous sources of strategic control? What are your capabilities in these areas relative to competition?: In answering the questions above, be sure not to define your competition too narrowly. Often, this is an opportunity to spot potential future competitors. Furthermore, the examination of rivalrous strategic control points can provide opportunities for companies within disparate industries; indeed, the concept of rivalry in capabilities can be a key to determining cross- market opportunities.

A “Competitive and Capabilities Map” entails an honest, candid comparison of the capabilities across all relevant firms (e.g., competitors and suppliers) in this area. Building on the preceding example of electronic maps, we can add an objective assessment of each firm’s capabilities across all areas of the value chain (denoted by capabilities in capital or lower case letters in figure 2.4):

In figure 2.4, imagine, in this hypothetical example, that there are three firms (A, B, and C) in this industry. Imagine that you are firm A. Further, imagine that CAPITAL LETTERS mean that the firm has world-class capabilities in that part of the value chain and lower case letters mean that they have no capabilities. In the simple made-up example represented in figure 2.4, it highlights some serious areas of concern: in the two areas of high-strategic control in the market, data and infrastructure, you have no capabilities. Worse yet, there is at least one competitor in each of these two areas that possesses significant capabilities (firms B and C have world-class capabilities in both data and infrastructure). This suggests that you have three choices: (1) develop these capabilities in-house organically, (2) acquire them inorganically through an acquisition or joint venture, or (3) decide not to compete in this market at all (the market position of such a company is simply not sustainable). Analysis of this sort is pivotal at the strategic end of mergers and acquisitions (M&A) decisions.

In principle, you would like to compete in the areas that have the greatest potential for capturing margin – and stay away from areas that are commodities in nature, with little potential margin capture. More generally, the objective is to find areas in the Competitive and Capabilities Map where there are areas of high strategic control and only one firm possesses capabilities in this area. If the one firm is yours, great; if not, acquisition, partnering, or even exiting the industry should all be considered.

While the process is relatively simple, it can require a fair amount of work (often done in teams over a number of weeks or months) to actually plot it out in detail and dive deep into each area within the Competitive and Capabilities Map. The result can be a fairly complete picture of the value flows in an industry and, accordingly, can provide a useful diagnostic tool to address whether or not a firm is competing in the right part of the market space and/or if an acquisition is needed to compete in the “right” parts of what we call the Competitive and Capabilities Map.

Figure 2.5 is a complete yet simple example of what a Competitive and Capabilities Map in the provision of marine charts might look like.

1 Value Chain. As discussed above, the first row(s) are the high “level one” or more detailed “level two” value chain (from left to right).

2 Strategic Control. The next main row is the level of strategic control for that part of the value chain. You can use the aforementioned “Harvey Balls,” “stoplight” (red/yellow/green) color codes, or some other visual that you may prefer.

3 Capabilities Required. A list of the key capabilities required for each part (or column) of the value chain.

4 List of Competitors and Competencies. The remainder of the first column should contain a list of all of the key current and potential competitors (e.g., UKHO to Seven Cs in the table) and/or relevant suppliers across the value chain – followed by an objective measure of their competencies and capabilities in each area of the value chain. For example, in the table, Seven Cs has high capabilities on the application side (Fusion/Software Code), weak or inconsistent capabilities in network distribution, and no access to the data at current. As with the Strategic Control portion above, you can use the aforementioned “Harvey Balls,” the “stoplight” (red/yellow/green) color codes, or some other visual that you may prefer.

The table should be created using today’s capabilities. In some applications, you may want to create a map of where you are today versus where you want to be in the future (i.e., current versus goal), which can help you think carefully about how you plan to obtain the necessary competencies to get from where you are today to your end-goal. You can acquire the competencies organically (if there is time) or via a merger or joint venture (inorganically).

As a general rule, an M&A is preferred if a competitor/supplier listed on the Competitive and Capabilities Map has ownership of a key capability in an area of strategic control but you have few competencies to add to their capabilities in other potential areas of strategic control. Conversely, a joint venture (JV) or partnership is generally preferred when each firm can offer something (i.e., key points of strategic control) to the other firm in the value chain. Think of it this way: when both parties are filling critical needs for one another (i.e., in areas that cannot generally be obtained elsewhere), there is little incentive for the parties to deviate from the partnership. In short, they have a need for each other – an important ingredient in sustainable joint ventures.

The single most common mistake firms make when applying these concepts – and the one point that seems to be the most difficult to grasp – is that the presence (or absence) of a strategic control point is industry-based, whereas capabilities are firm-based. A “dream” scenario is when there are points along the value chain that are rivalrous in nature and are significant strategic control points while your firm is the only one with capabilities in this area and your capabilities would be exceedingly difficult (or impossible) to imitate. Conversely, the “nightmare” scenario could occur when strategic control points exist in the value chain and competitors have capabilities in this area that you do not.

Resist the urge to say “our points of strategic control” since it is not possible for you to own them. Instead, they exist (or do not exist) in the market. You may own competencies in key areas of strategic control. This is not just a nuance; it is an important distinction.

Key Takeaway: Strategic control points are industry-based, whereas competencies are firm-based. We look to obtain difficult (or impossible to imitate) competencies in areas of strategic control that exist in our markets. Avoid confusing the two.

So, what should we do when we’ve completed all of these steps? Sometimes this is the hardest part:

Step 5: Plot out a course of action for your firm. As you answer the questions above, you should contemplate whether there are rivalrous sources of strategic control – and if there are, how you plan to acquire unique capabilities in these areas. If there are none, are there areas of sustainable, high margins due to entry barriers and cost advantages? If not, perhaps you should consider exiting, doing something else for a living, and competing in another market space: In my book Compete Smarter, Not Harder,11 I detailed the story of MP3.com, an early entrant in the market for digital music distribution, which was started by Thomas Robertson in the late 1990s. In response, the big record labels began suing digital startups like MP3.com and Napster. Obviously, suing each start-up that distributed music digitally in the year 2000 wasn’t going to stop the tide of digital distribution of music over the internet; it was inevitable. Like the Dutch boy putting his finger in the dike to stop water from flowing through the crumbling dam, they might have stopped one firm by suing but then another would pop up – like a game of whack-a-mole. Unless it’s done as part of a sand fence or roadblock strategy (see the definitions below), such a tactic is doomed to fail.

Even business geniuses and legends sometimes adopt futile strategies. Once upon a time, John D. Rockefeller desperately tried to stop Edison and Tesla’s electricity from becoming mainstream because it threatened Standard Oil Company, his kerosene business. Fortunately for Rockefeller, a man named Ford saved his refineries by creating an alternative need for crude oil: gasoline (which is a byproduct of kerosene production).

DEFINITIONS: SAND FENCE AND ROADBLOCK STRATEGIES

Firms can use legal maneuvers to slow (“sand fence”) or temporarily stop (“roadblock”) rival firms from entering their markets. For example, these techniques are often utilized when legal drugs or chemicals come off patent and generics work their way into the market at substantially reduced prices. Sand fence (slowing) or roadblock (trying to stop) strategies can be effective in slowing competitive entry (e.g., via lawsuits) while companies simultaneously build their own entries to beat potential rivals to market. Consider the old adage that “I’d rather cannibalize my own sales than have a competitor do it.” While such strategies may buy you time (i.e., to develop your own strategic response to a new entrant or technology), they never work indefinitely by themselves. For example, no one could have prevented the internet from pervading our lives by suing to stop it!

Recall the old George Santayana adage, “Those who cannot remember the past are condemned to repeat it.” Well, history is repeating itself again today.

There is a battle going on for the right to deliver content and entertainment directly into our homes. The old model (i.e., boxes atop our television sets, supplying content via a cable or satellite provider, and network broadcasters – such as CBS, NBC, ABC, and PBS – on fixed schedules) is dead. No matter how hard a network, cable, or satellite company might try to do so, it can’t stop the inevitable from happening. For example, a local internet provider in Kansas tried to prevent Google Fiber from extending its installation outside of Kansas City. Kansas Senate Bill 304 (SB 304), commonly known as the “Municipal Communications Network and Private Telecommunications Investments Safeguard Act,” proposed to restrict a firm’s ability to “provide one or more subscribers video, telecommunications or broadband service” “except with regard to un-served areas.” SB 304 died in committee on 4 May 2018. It’s amazing how little we learn from history.

The future of home entertainment is one of convergence; the delivery mechanism (e.g., fiber optic cable, satellites, drones, balloons, or terrestrial 5G) will be the key to enduring competitive advantage in the future. In order to envision this, think about one interface for all of your content (e.g., television shows, movies, news, and YouTube). You pick the shows that you want to watch (and when you want to watch them); however, you don’t stop watching your favorite episode of Game of Thrones when you leave the living room; you take it with you on your iPad, smartphone, or glasses. In this environment, the programming flows and follows you seamlessly. The interface and choices are the same no matter what device you are using.

Of course, such a world has already begun. Satellite providers (e.g., Dish) and cable companies (e.g., Comcast and Verizon) already offer the ability to watch content on the go; however, these “content providers” are already facing a different problem – namely, relevance. What if I don’t need my cable or satellite television at all anymore? What if I can get my connection from a satellite or UAV overhead? What if my choice of content is on Hulu.com (a content aggregator with shows available on the go) or on demand from Netflix or Amazon Prime (as opposed to on network television at the same time every week)?

In the past, the “big three” networks were a viewer’s gateway to content; however, in the future, access will be controlled by the company that can put it all together, offering both content and universal connectivity. In an increasingly streamed environment, the gateway between someone else’s content (e.g., movies and television shows) and the end user is most definitively non-rivalrous. Generally, content providers (e.g., Netflix) do not have exclusive distribution rights over the content that is developed by someone else. Indeed, the ability of Netflix to stream a new movie doesn’t prevent Amazon from doing the same; however, if they can create in-demand content that is unique, for instance, to Netflix (e.g., House of Cards or Black Mirror), this can indeed be a form of rivalrous content provision; specifically, when Netflix pays for rights to develop a show exclusive to and for Netflix, this means that you can only get it from Netflix. Indeed, like HBO, Netflix has decided that it can create its own control point: original content. To this end, Netflix and Amazon spent almost $11 billion on content in 2017 (only ESPN at $7 billion spent more than either company), ballooning to $13 billion for Netflix in 2018.12 Of course, the success of such a strategy will depend upon the demand that, for example, Netflix can create for its unique-to-Netflix content.

What may be most important to note is the difference between two very different strategies: (1) an “over the top” or OTT strategy (typified by Verizon and aggregators such as Hulu) versus (2) an “own the data” or OTD strategy (typified by Google and Facebook):

1 An OTT strategy involves content provision over someone else’s network. In the past, this meant that the major networks competed for the hit shows; today, it might be HBO competing with Showtime for the next Game of Thrones. While this can certainly be a profitable business model, long-term success requires staying one step ahead with the next hit show. However, this is both expensive and difficult to sustain over time.

2 An OTD strategy enables a Google or Facebook (or a Verizon or a Nokia, for that matter) to leverage the ownership of data not only on who is viewing what show but also on a myriad of other details (e.g., what they are doing, where they are, what they’re buying, and where they are going), across virtually every industry in existence.

Which would you rather have – a significant stake in one market that requires continuous and significant ongoing investment to stay one step ahead of rivals (i.e., an OTT strategy) or an investment (as in the OTD strategy) that you can leverage across many industries, taking a cut of each because you own the data critical to every company in that industry (e.g., as Google does in relation to certain insurers in Latin America)? The big picture is, of course, more complicated than this; however, where would you place your bets? Indeed, it is no wonder that the fight for internet provision and location access (i.e., from the “hub” in your house – Google Home Hub, for example – to Fiber on the ground to the satellite, balloon, or a mesh system of drones in the sky) has been intense and led by the companies with the greatest ability to do so.

Finally, it is worth noting that the strategy doesn’t have to be either/or. Companies such as Netflix and Amazon have been quite adept at attempting to do a bit of both. For example, while Netflix and Amazon are building their own content, Netflix has decided to pay Comcast for direct access to its network, and Amazon has explored every aspect of an OTD strategy (from Jeff Bezos’s Blue Origin venture to its cloud business).

One important final note relates to the concept of “Criticality,” a concept created by Terry Theodore.13 “Criticality” exists when the failure to perform can result in catastrophic consequences to the offering. An example might be a small seven-cent fastener used in traditional manufacturing. While the value of the part itself is quite small, a fastener that fails may result in significant liability and/or injury or death. Hence, the “criticality” of the fastener is high; however, its cost is quite low. Thus, if a firm producing a fastener has a new and improved process that dramatically reduces the probability of failure, it could potentially earn extraordinarily high margins if it owns the technology that can help reduce the probability of this type of catastrophic event. The key is that the firm must recognize that the part has “criticality” and also have a sustainable advantage in reducing the likelihood of failure.

○ Step 2: Identify potential areas for strategic control in your industry’s value chain.

○ Step 3: Identify strategic control points that may be controlled by your firm.

○ Draw out a “level one” value chain for your industry – expand each level by one box in order to build a “level two” value chain. Are there areas of potential strategic control?

○ Expand on the value chain (that you drew above) on a whiteboard. For each portion of the value chain, use your judgment as you add “Harvey Balls” to each step of the value chain.

○ Expand on the value chain you drew above on the whiteboard and create a Competitive and Capabilities Map (as described above). Be sure to include all key competitors (i.e., current and potential) as well as potential suppliers inside the value chain.

• Carefully consider the concept of “rivalry” (i.e., when one firm owns a point of strategic control, it prevents another firm from owning it).

7. Is there a supply constraint in this sector that you control (e.g., key inputs, capacity constraints on the finished product)?

8. Can these be leveraged to other value chains for other products, in other sectors, in other industries?

10. Are there advantages that you can leverage simultaneously across different value chains?

1 CBS 60 Minutes, “Revelations from a Tech Giant.” Interview with Walter Isaacson. Original air date 23 October 2011.

2 From the opening episode (1) of the History Channel’s The Men Who Built America.

4 Facts and figures are from a talk by Jay Parkinson to the UnleashWD conference, October 2014, and personal conversations.

5 For a comprehensive and detailed treatise on additive manufacturing and advanced manufacturing in general, a must read is Richard D’Aveni’s, The Pan-Industrial Revolution: How New Manufacturing Titans Will Transform the World (New York: Houghton Mifflin Harcourt, 2018).

6 Jay Rogers, Local Motors founder, talk to UnleashWD conference, October 2014. Details in this section come from his talk at this conference, personal conversations, and emails with him and Local Motors executives, as well as his talk at the Yale School of Management on 22 July 2017.

7 Jay Rogers, Local Motors founder, in a talk to UnleashWD conference, October 2014.

9 Fred Vogelstein, Dogfight: How Apple and Google Went to War and Started a Revolution (New York: Farrar, Straus and Giroux, 2013), 175–6.

10 Adrian J. Slywotzky and David J. Morrison, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits (New York: Crown Business Press, 1997).

11 William Putsis, Compete Smarter, Not Harder (Hoboken, NJ: John Wiley and Sons, 2014), pp. 48–9.

13 Credit goes to Terry Theodore, partner and executive vice-president at Center Rock Capital Partners, for this concept, something he termed “Elements of Strategic Gravity.” It is a principle he created and has extended to 42 measurables, employing it effectively as a tool to assess the franchise value of businesses across multiple industries. It can be another effective way of finding and exerting strategic control.