The Carrot and the Stick: Leveraging Strategic Control for Growth

The Internet Connected Coke Machine (1982) – the Internet of Things and the Competitive Ecosystem Are Born

Michael Kazar, former Carnegie Mellon graduate student: There was a Coke machine on the third floor of this eight-story building, and people didn’t like the fact that they would go down all the way to the third floor and discover that the Coke machine was empty. Someone said, “Hey, why don’t we set it all up so the Coke machine was on the Internet.”

David Nichols, fellow graduate student: I was in my office one day and I was thinking I really want a Coke. I can wander all the way down, a five-minute walk, but it might be out. And I thought, I don’t need to do this.

Kazar: The way the thing was structured is you had the Coke machine and then a serial line connecting the Coke machine to some terminal concentrator that it just so happened we had control over the source code. It could check 10 times a second. No one really regarded it as the vanguard of things to come or anything. I remember people start talking about when your toaster was on the Internet – but it was always a joke thing and not anything serious.1

In many ways, this early “prototype” illustrates what the internet of things (IoT) is all about; in principle, the Coke machine could automatically reorder supply when stock was running low or dynamically change prices, depending upon stock or demand. Coke suppliers would know ahead of time that the syrup supply to the bottlers needed to be increased because the demand at vending machines was increasing. The interconnected vending machine had the potential to impact bottlers, distribution (for firms supplying vending machines), repair and maintenance companies that serviced the vending machines (who could now tell that a machine was out of order or out of stock), even the demand for coffee in the building’s cafeteria that might benefit from vending-machine stock-outs. And the list goes on.

One simple idea, connecting vending machines to the internet, had the potential to affect multiple industries. This type of interconnected ecosystem makes today’s economy unique. One action affects multiple value chains across multiple high- and low-tech industries alike.

In December 2017, I was at a gathering of about 200 of the world’s leading CEOs in New York. One of the people at the summit was Larry Page, the cofounder of Google and CEO of Google’s parent company, Alphabet. The moderator, Jeff Sonnenfeld of the Yale School of Management, was leading the discussion on the impact of the soon-to-be-passed Tax Cuts and Jobs Act of 2017. In front of this group, Larry Page was asked what he would do with the $86 billion in cash that Alphabet had at the time (mostly overseas) when tax policy changed so that he was able to bring that money back to the United States with more favorable tax treatment. One might think he would respond with “invest in artificial intelligence or blockchain or virtual reality” or some hot new technology. His answer: “traffic lights.” In fact, twice more in the next ten minutes, he was asked about topics that had absolutely nothing to do with traffic lights, and his answer each time was “traffic lights.” This answer was surprising yet telling. He went on to explain that he sits at his desk in Mountain View, California, most mornings and watches his employees sitting at a traffic light, waiting to come to work. Oftentimes no traffic is moving in any direction; his people are just sitting there waiting for the light to change. He sees this as a waste of time that reduces productivity and impacts the environment (from engines idling for minutes at a time).

However, when he answered “traffic lights,” he wasn’t talking about traffic lights. He was thinking many steps ahead. He looks into the future and sees that when cars are automated and start talking to each other, we won’t need traffic lights at all. Cars will slow, not stop, for other cars automatically, and thus accidents will be avoided and traffic flow will be smooth and unimpeded. In order for this to happen, however, an ecosystem must be built (e.g., cars need to be increasingly autonomous, and inter-vehicle communications must be predictable and secure). Thus, it’s not about the traffic lights; the elimination of traffic lights would be the result of successful interconnected vehicles, not the objective of interconnecting them. Furthermore, it’s about building all of the components of the ecosystem so that we won’t need traffic lights.

In order to fully understand the ramifications, think of the demands on our infrastructure. There are constant and never-ending calls for more roads to alleviate congestion in urban and suburban areas. However, in a world where most traffic is autonomous and interconnected, we would actually have an over-abundance of roads. We just use them inefficiently today. Hence, the impact of autonomous, interconnected vehicles extends well beyond automobile (and related) production to impact road construction-related firms and industries (from asphalt and paving companies to heavy equipment to laborers) as well as local municipal and federal highway budgets.

All of this requires thinking many steps ahead. Larry Page and Sergey Brin, the cofounders of Google, are the only two individuals I have ever heard publicly talk about strategic control points in interconnected markets. They clearly “get it.”

In previous chapters we addressed various notions of strategic control points within an industry. This chapter will expand this notion to include a key element that is unique about today’s interconnected world: the impact of a strategic control point in one industry on another industry. Indeed, this is how the interconnected nature of today’s markets makes the world truly different from that of Vanderbilt, Rockefeller, and Minnetonka.

Often, controlling one part of the market (e.g., a critical component or raw material) can reverberate across other parts of the industry (i.e., away from a core business) – and to other industries as well. Like a sound or light wave that expands once it passes through a small opening (a process called diffraction in physics), the impact of owning a strategic control point can expand across industry supply chains and multiple and disparate industries via a process we call “competitive diffraction” (from the term used in physics). The associated impact can be as close as the next step in the supply chain and as far away as an entirely different market.

DEFINITION: COMPETITIVE DIFFRACTION

In physics, “diffraction” is a term used to describe the spreading out of waves beyond small openings. After a wave passes through a small opening, it has the potential to spread out throughout a large area (e.g., small openings in speakers or a flashlight pointing through a pinhole can spread sound or light throughout an entire room).2

“Competitive diffraction” is the process by which one action – often vis-à-vis a point of strategic control – spreads out to and has influence on other industries, much in the way a beam of light spreads beyond an initial small opening.

Analogously, the domination of one small part of an industry vis-à-vis a strategic control point can have a significant impact throughout other markets as well. Thus, this chapter addresses the crucial building blocks for competing in the right space today: we should choose market opportunities that can be easily and effectively leveraged into other adjacent markets. In short, before we can decide how to compete, we need to decide where to compete. Good companies today choose to compete in areas where competencies in areas of strategic control in one market can be leveraged into other adjacent market opportunities.3

In reality, competition happens not only at each stage of the industry’s value chain but also across multiple layers of an entire ecosystem of connected market opportunities via a competitive game being played across markets. While the concept of a value chain is often inward looking based on processes, the concept of a competitive ecosystem is market facing, including both internal processes and market-based effects – most notably competitive interactions across markets. The basic premise is that good companies today are able to leverage competitive strengths in one market for strategic advantage and margin extraction in another. Some examples include the following:

• Apple’s strength across its core products enables it to extract greater margins on associated products (e.g., accessories).

• Amazon has leveraged its publishing and supply chain strengths to extract margins for unrelated categories in its marketplace – often to the tune of 20 percent.

• Google leverages strength via its core sponsored search and advertising businesses to support a bevy of other seemingly unrelated businesses (e.g., insurance).

• The sheer scope and volume of Walmart’s core business enables it to leverage strength throughout its supply chain.

Thus, an understanding of the notion of a complete market “ecosystem” requires an understanding of the competitive game being played across firms (i.e., at every stage and across stages) and of the chain reaction of competitive interactions that occurs. Think of a dynamic “competitive ecosystem” where one part of the ecosystem can have a substantial impact on another part.

A classic example of the need to anticipate the impact on other parts of an ecosystem is that of the plant kudzu. If you have ever driven in the eastern portion of the United States (particularly in the south), you have seen it. Kudzu has taken over. This plant grows so voraciously that it quickly takes over trees and other plants (choking off their roots). It has become such a problem that study after study and proposal after proposal have been undertaken with the objective of finding a solution to keep its growth and expansion in check; still, it continues to expand and thrive – leaving plant and tree devastation in its wake.

Ironically, kudzu was introduced to the United States intentionally. In 1876, at the Centennial Exposition in Philadelphia, countries were invited to build exhibits to celebrate the 100th birthday of the United States. The Japanese government constructed a beautiful garden filled with plants from their country. Kudzu’s large leaves and sweet-smelling blooms captured the imagination of U.S. gardeners, who began to use the plant for ornamental purposes. During the Great Depression, the Soil Conservation Service then promoted kudzu for erosion control. Hundreds of young men were hired to plant kudzu via the Civilian Conservation Corps. Farmers were paid as much as $8 an acre as an incentive to plant fields of the vines in the 1940s.

“In Georgia, the legend says ... that you must close your windows at night to keep it out of the house.”

While the devastation that kudzu has left in its wake is the subject of much debate,5 this story illustrates a principle that we see in markets all the time today; had at least some of the consequences of kudzu’s devastation been anticipated, it seems unlikely that it would have been allowed to be imported into the United States in the first place. In business, the same principles apply. All too often, we think we’re being “sophisticated” by concentrating on supply chain efficiencies – or even thinking about competition inside the supply chain – and finding solutions that work in this narrow frame. Unfortunately, this is often analogous to importing kudzu. Unless we think about all of the unanticipated effects from outside this supply chain – or worse yet, fail to consider an effect that one of our competitors does anticipate – we run the risk of being the metaphorical plant or tree (depending upon the size of the firm) and being suffocated by kudzu.

In short, the importers of kudzu concentrated only on the reason that it was being imported and ignored the consequences for the associated ecosystem. Similarly, in business, we need to recognize that our core business exists inside of an entire ecosystem; however, ignoring the rest of the ecosystem is what most firms do. This is as bad as ignoring the consequences for the eastern U.S. horticultural ecosystem of importing kudzu.

For the business implications, we need look no further than to Samuel Brannon, one of the few to consistently make money from the “Gold Rush” in California in the 1840s, becoming its first millionaire. Yet, Sam Brannon never panned for gold (most of those who went west in search of gold never found it and ended up penniless). Sam Brannon sold pickaxes, overpriced supplies, food, and beer to those who would eventually lose their shirts. In business today, it is rarely very different: the real business opportunities often lie in the wake of the technology.

Nowhere is this more evident than in manufacturing, where advanced robotics, artificial intelligence (AI), IoT interoperability, and integrated supply chains have had impacts far and wide across numerous industries. Indeed, a new generation of robotics (e.g., from companies such as Rethink Robotics of Boston, ABB of Switzerland, and Universal Robotics of Switzerland) costs less than $40,000 and operates for as little as $1 an hour – fully “loaded,” they cost approximately $2 an hour.6 In fact, they can do routinized inline assembly in complex settings better than humans – with more consistency, less downtime, and more reliability.

The implications of this development span multiple industries; indeed, any company that outsources production to another part of the world may now be operating at a disadvantage. I recently asked five CEOs of small to mid-size manufacturing firms ($2b to $4b US) the following question: “In the wake of advanced robotics, IoT interoperability efficiencies, additive manufacturing, and the like, have you thought about bringing production back to the United States?” Every single one interrupted me before I finished and said, “We have already started to.” In fact, the impact of advanced robotics reverberates across multiple industries, will impact global trade and manufacturing, and will affect industries ranging from automobile manufacturing to electronics to farming. For an interesting study, look no further than the automated farm equipment produced by the Dutch company Lely (www.lely.com). They automate dairy farming in a way that it has been suggested will help the family dairy farm. However, the impact of the capital required to automate to scale will likely put local family farms – those that are still around – out of business entirely. The “action” often happens behind (“in the wake of”) the technology itself.

Similarly, manufacturing operations that are linked to customers “upstream” and suppliers “downstream” through “smart” manufacturing devices will be more efficient than those that are not; indeed, as with the aforementioned Coke vending machine, they can connect to the internet and communicate when additional supply needs to be ordered, thereby helping customers predict demand. Firms that have figured out how to do this efficiently can compete effectively across multiple and diverse industries; for instance, Local Motors has figured this out via crowdsourcing and additive manufacturing (e.g., in vehicles, drones, and microwave ovens), and Amazon has figured this out across a bevy of industries. It is truly a new world.

The consistent utilization of these concepts – in concert – can generate competitive advantages that only a handful of leading companies utilize today. We sometimes refer to this as a “holistic” approach; when we consider a complete view of a market, a holistic approach is the contemplation of every facet of the market affecting the net response of the market to a company’s offering before the company makes any strategic move. This includes looking at things like:

• vertical (up and down the supply chain) and horizontal (across firms selling similar, substitute goods) competition;

• “coopetition”7 and competition, throughout the scope of a firm’s operations; and

• demand response net of competitive response (i.e., “residual” demand in the academic literature), which is discussed later in this book.

Assessing, measuring, identifying, and, most importantly, influencing all of these factors is an important part of gaining a competitive advantage today.

Conceptualizing an industry’s value chain as we’ve discussed thus far is inherently incomplete. Competitive interaction across stages of a single industry’s value chain, as well as competition across markets, will be crucial to the success or failure of any firm operating today. Fortunately, we can use prior work in economics and empirical analyses of competitive interactions to provide a more functionally useful map of the market. Specifically, research in the field of “empirical industrial organization” provides some direction, suggesting that we need to look at this across multiple dimensions – beyond a traditional single-industry value chain.8 Competition can reverberate throughout a single value chain in at least a couple of ways: 1) within-stage (or silo), or 2) cross-stage. We begin by exploring each in turn. Building on this, we then detail how to build in and anticipate cross-market competitive effects in order to find adjacent market opportunities, the primary objective of this chapter.

Some recent work in the academic literature has focused on the nature and importance of competition across firms. Firms seeking to incorporate some of these best practices should first examine the competitive interactions between firms at each stage within their supply chains (e.g., the cost structures, competitive structures, and how firms interact and/or compete within each stage of the industry value chain). Imagine producing asphalt shingles for roofs (which fuse raw materials – such as asphalt and granulized glass – with fiberglass mats) and then packaging and shipping. A simple “level one” value chain might look like this (figure 3.1):

The arrows represent competitive analyses and the nature of competitive interactions (e.g., intensity of competition and level of cooperation) at each stage of the value chain. In its simplest form, competition takes place only within each stage (e.g., raw material producers compete with other raw material producers; 3D-printer manufacturers compete with each other, etc.); however, within each stage, we know that the form, structure, and intensity of competitive interaction can vary widely from category to category.9

So, while you may be a tough competitor in phase 3 above (combining the fused raw materials to the mat forming the base of the shingle), if someone else owns a unique competency in an area of strategic control (e.g., asphalt production) and exerts that control competitively upstream by squeezing the margins of the mat manufacturers, then it really doesn’t matter how well you compete in phase 3 of the “mat” business (and how efficiently you run your supply chain) – all, or nearly all, potential margins will be squeezed by the asphalt manufacturer, who exerts leverage via any associated strategic control points upstream. The notion of “competitive diffraction” suggests that a small opening can create a much bigger wave, such as a reverberation of competitive control throughout the supply chain.

Indeed, we know that each stage does not exist in isolation; the Softsoap® story is just one example of this. In fact, a firm’s ability to extract margins throughout the supply chain is correlated with its ability to utilize the power of one stage to extract (sometimes extort) value from another stage. For instance, the power of Apple or Amazon, at various stages of this process, enables them to extract superior margins throughout; Walmart’s power, as a retailer, enables them to extract value in even early stages of the supply chain; Intel’s power, on the input side, enables it to extract value through to the retail level.

Individuals who are concerned with only a traditional, single-industry value chain are playing the metaphorical equivalent of checkers when a version of three-dimensional chess is the actual game being played.

In short, a simple look at the traditional industry value chain (as presented earlier) is naive at best. The game being played is multidimensional: within stages, across stages, and over time. Further, it may be a competitive game in one part and a cooperative game (as in Brandenburger and Nalebuff’s Co-opetition) in another. Competitive advantage today can be gained up, down, forward, and backward. Recognizing this can be the source of sustainable competitive advantage in a market and hence is a central theme throughout this book.

In the value chain illustrated in figure 3.2, the horizontal arrows represent the transmission of power via competitive interaction across stages within the industry’s value chain.

The winners in today’s networked and information-empowered world will be those that recognize and take advantage of the multidimensional nature of competition – at every stage of what would be thought of as a competitive ecosystem. Today, successful companies (e.g., Google, Walmart, P&G, Apple, Amazon) recognize that transmissions of power – and the ability to extract margins across these stages – ultimately determine success in their businesses.

Building In and Anticipating Cross-Market Competitive Effects in Order to Find Adjacent Market Opportunities in the Competitive Ecosystem

Let’s begin by considering the Competitive and Capabilities Map from the previous chapter; this time, let’s imagine a series of them – each representing the key factors that influence success or failure in one part of the market. Imagine that we’ve completed a Competitive and Capabilities Map exercise not just for our core market but also for a number of connected markets – perhaps those at each stage of our core market’s value chain as well as other potential adjacent market opportunities. Imagine further that we’ve printed each Competitive and Capabilities Map on paper and taped them all to a large whiteboard (think of the “Buy a Whiteboard” advice given by Jay Parkinson discussed earlier in the book). Armed with this, we can begin to think about and visualize how a competency in an area of strategic control in our core market may – or may not – translate to other market opportunities.

As an example, think of Apple and several of its core product lines (e.g., computers, iPhones, iPads, and accessories); we can draw a Competitive and Capabilities Map for each of them. Now think about the Competitive and Capabilities Map for televisions – a seemingly unrelated space. The key is finding competitive connections across these disparate industries (e.g., are there ways that Apple can leverage strength in one of its core businesses to exert influence and extract superior margins in the television market)?

We can illustrate this via the diagram capturing each respective Competitive and Capabilities Map (see figure 3.3).

In this final step, firms should examine how cross-market influence may be exerted (think back to the kudzu story from earlier). Indeed, capabilities in one market can often be leveraged into adjacent (or even unrelated) markets. For example, Amazon has taken its supply-chain expertise into multiple markets, and Local Motors is producing 3D-printed microwave ovens for GE and helping Airbus create revolutionary local parts-supply networks. The identification of these opportunities is the key to success in the interconnected environment of today and represents the difference between success and failure, disintermediation and dominance.

To illustrate, for Apple, in figure 3.3, the four core products may or may not give it a key advantage in an “unrelated” market (e.g., one that focuses on the manufacturing of televisions). The competitive advantage in iPhones and what this does to help Apple’s position in the iPad value chain may be obvious; however, the interactions across each of the four product value chains and televisions may be less so. The key to success, in this example, isn’t how well Apple can compete in the television business in its own right; the key will be how well it is able to leverage the strengths in a core business (e.g., iPhones and iPads) for strategic advantage and superior margins in this new market (televisions). Indeed, for years now, Apple has been leveraging these types of relationships within disparate industry value chains and thus creating and building a competitive ecosystem. More generally, the key in today’s markets is how you can use these interconnected value chains to find competencies in areas of strategic control in one market and leverage them into other value chains.

As an illustration based on a recent consulting project, imagine that you have unique and proprietary intellectual property (IP) in your core market that is in a key area of strategic control (the “core market” value chain in figure 3.4). This IP enables you to collect data (labeled “Collection” in the value chains in figure 3.4) in a unique way that no other competitor can. Imagine further that you are considering entering one of two adjacent markets, let’s call them “Market A” and “Market B,” which have value chains as shown in figure 3.4 (recall that a full “Harvey Ball” denotes an area of the market that is a strategic control point while, on the other end of the spectrum, an empty Harvey Ball means that there is no strategic control point).

In this hypothetical example, data collection is a key strategic control point in market A, whereas distribution is the key strategic control point in market B.

The clear choice is market A. The unique and proprietary IP that enables your firm to collect data more efficiently than all of your competitors gives you unique competencies in an area that is a strategic control point in market A but buys you nothing in market B (where distribution is a strategic control point).

This is what we look for in the interconnected world of today – a direct connection between unique capabilities that we have – a strategic control point – in one market (here, in our core market) and a critical strategic control point in another (here in Market “A”). Doing detailed analysis like this enables us to see connections across value chains that can drive long-term success.

In today’s interconnected environment, we look for a series of interconnected value chains that enable us to leverage strength from one market to another. The reason for this is simple. What would you rather have – a unique capability in an area of strategic control in one part of a market that ends there or a unique capability that can be leveraged into strategic advantage (vis-à-vis a single strategic control point) across multiple markets? This is a lesson that the CEOs of good companies today recognize, from Elon Musk (Tesla) to Jack Ma (Alibaba) to Tim Cook (Apple) and Larry Page and Sergey Brin (Alphabet).

A “platform” is any offering that enables you to connect a competency in one market to multiple value chains. This platform doesn’t have to be physical; it is any offering that enables us to leverage our strengths into multiple opportunities. For example, Amazon’s cloud service (AWS) and Marketplace enable them to leverage these offerings into multiple markets; Google’s Maps app and Android OS enable them to leverage this into numerous markets. An “ecosystem” comprises all of the interconnected value chains. Think of Apple’s Mac OS and iOS as the platforms that allow all of the devices to interconnect. The individual devices (iPhone, iPad, Apple TV, Mac computers, etc.), together with the Mac OX and iOS, make up the ecosystem. It’s that simple.

To illustrate, we build on the hypothetical market diagram in figure 3.4 presented earlier.

In this example, the proprietary IP that enabled us to own a strategic control point in our core market also gives us unique capabilities in key points of strategic control in adjacent markets (see figure 3.5). This is precisely what we look for in trying to spot new market opportunities.

DEFINITIONS: PLATFORMS AND ECOSYSTEMS

The “platform” is the offering in our core market that can be connected or leveraged to other markets. The “ecosystem” consists of all the interconnected markets linked by market-based strategic control points.

Recognizing this often enables you to find multiple opportunities that can take a single competency to a whole set of markets and is a key to competing effectively today in our interconnected world. Once we have identified the core competencies that we can leverage across one or more adjacent value chains vis-à-vis points of strategic control, we can begin to set our strategy. As you begin to do this, consider whether there are any rivalrous sources of strategic control and how you plan to acquire or own them. If not, should we be in this market at all? Are there areas of sustainable and high margins (e.g., due to entry barriers and cost advantages)? If not, perhaps you should consider doing something else, such as competing in another market space.

Lincoln Industries is not typically a household name, but we all have seen their work. They are the largest privately held finishing company in the United States, based in, you guessed it, Lincoln, Nebraska. They are known for their world-class fabricating and plating, doing finishing for companies like Harley-Davidson and Peterbilt Trucks. Those shiny chrome exhausts on a Peterbilt truck or a Harley motorcycle are uniquely Lincoln, as they provide world-class finishes that shine for effect and don’t pit. The shiny chrome is important to both Harley and Peterbilt customers, providing Lincoln with a unique capability in an area that is pivotal to these key customers. Further, they have been astute enough to move up Harley’s value chain to manage their supply chain, something that provides superior margins.

However, in 2017, Lincoln Industries faced growth challenges and looked to leverage existing strategic control points to new adjacent markets. How could they find the “right” industries to expand to, those industries that would enable them to have unique competitive advantages that would afford them superior margins?

Wisely, they looked to the type of analysis addressed here – they developed Competitive and Capabilities Maps for each of their core lines of business, identifying key capabilities in areas of strategic control (e.g., high-end fabricating and finishing that were not easily imitated). From this, they developed a list of adjacent market opportunities that they thought these might fit well with and provide sustainable competitive advantages.

Using this list of potential opportunities, they produced a series of Competitive and Capabilities Maps (see figure 3.6), each concentrating on areas of potential expansion. In figure 3.6 (where the details are concealed to protect confidentiality), imagine that this was your industry and try to use this example to bring it back to your particular situation (circles and arrows depict the parts of the industry value chains that are connected by the firm’s core capabilities):

Industry 2: Potential market opportunity in an unrelated one-step adjacent market

Industry 3: Potential market opportunity in an unrelated one-step adjacent market

Industry 4: Potential market opportunity in an unrelated two-step adjacent market

Industry 5: Potential market opportunity in an unrelated two-step adjacent market

For industry 1, they developed a detailed Competitive and Capabilities Map for motorcycles, focusing on what they do for Harley-Davidson in terms of chrome plating, precision fabrication, and supply chain. Industries 2 and 3 were entirely different markets into which they had been contemplating expanding for years. The analysis revealed that while, on face value, industry 2 seemed like a logical adjacent market extension, their capabilities in their core market afforded them no unique capabilities in areas of strategic control in this market. Further, there were no unique capabilities in industry 2 that could be expanded upon further. By contrast, industry 1 not only gave them a unique capability in industry 3 in a potential area of strategic control (two circles in industry 3 above) but also gave them unique capabilities in markets adjacent to industry 3, namely industries 4 and 5. In figure 3.6, the circles in industries 4 and 5 indicate the capabilities in industry 3 that could be leveraged to provide a competitive advantage in industries 4 and 5.

That’s what we look for today: an ecosystem of competitive advantage and avenues for growth into adjacent markets that take advantage of key core competencies. In figure 3.6, industries 1, 3, 4, and 5 would constitute an ecosystem in that an advantage in industry 1 provides leveraged advantages in industries 3, 4, and 5. By contrast, industry 2 is a separate, stand-alone industry. While you may or may not have sustainable competitive advantages in industry 2, they do not constitute an ecosystem in that they do not build on and complement each other (since the industry two’s competitive advantages provide no unique advantages in another market opportunity).

We can begin extending the single-industry context to the world of Local Motors, the company mentioned earlier that additively manufactures (i.e., 3D prints) automobiles. We do this by sketching out a visual map (i.e., an illustration) of the major players in the immediate ecosystem; this way, you can begin to see what a “Visual Value Map” might look like. We begin with this example.

In order to additively manufacture something (i.e., via 3D printing), we need a number of tools. Of course, we need a “printer,” which adds successive layers, cumulatively, to create a 3D version of an object, which is designed via computer source code; thus, we need to develop the source code and the material (e.g., plastics and composites) that will be used to manufacture our product and the printer itself. We might often also need to finish, assemble, pack, ship, and distribute the final printed product. Hence, we can outline a simple level-one industry value chain roughly as follows: (1) develop code (open or closed source, proprietary, or “crowd sourced”); (2) input code to the algorithm and printer; (3) distribute raw materials to the printing site; (4) develop and deliver the printer to the manufacturing site; (5) prepare tooling and set up; (6) process code (“printing process”); (7) implement tooling and final assembly; (8) complete final finishing; (9) carry out distribution; and (10) provide for sales, service, and support. Additionally, each of these stages has its own respective industry value chain. Thus, imagine the aforementioned set of hypothetical individual industry value chains, which all lead, in this case, to the focal industry in this example: Local Motors (and the 3D printing of automobiles). We can think of the whole set of interconnecting industry value chains as follows:

• Source code and design can be “open sourced” (i.e., anyone has access to it); this whole process of crowd-sourcing (and institutionalizing the process) has its own value chain.

• Source code can be “closed sourced” (i.e., proprietary); the development of the design (and putting it to code) has its own development and value chain.

• The generation of materials utilized in the process (i.e., from simple composites to advanced metal) is associated with its own set of industries, research, and value chains.

• The final assembly and tooling consist of multiple industries and multiple value chains (often borrowing and adapting processes and tools from traditional manufacturing).

• Distribution has its own value chain, which is potentially quite different from traditional distribution. In this context, we can produce locally, so the physical product may need to travel considerably shorter distances; however, the material input will need to be distributed locally, which involves a set of different issues.

And the list goes on. A 3D printing “platform” involves a whole set of interconnected value chains and interconnected industries. For our purposes, strategic control in one part of this platform can reverberate across other parts. For example, if you own a key patent on a more efficient and reliable nozzle (used in the printers), you can extract a disproportionate share of the margins in each of the aforementioned individual industry value chains.

If Local Motors has a strategic advantage in the community that designs and builds code, they can extend this (e.g., from vehicles to motorcycles to bicycles to drones and even to microwave ovens). Thus, in many markets today, the capabilities in one market or platform (e.g., designing, building, and selling automobiles) can be leveraged into almost countless manufacturing applications, industries, and industry value chains. The competitive ecosystem around additive manufacturing is limited only by the technological limitations of the material being used in the manufacturing. The “Visual Value Map” (figure 3.7) is a way of capturing the relationships in the industry:

The diagram in figure 3.7 expands the linear “level one” industry value chain to include the notion that each part of the level one value chain has multiple parts.

Note that the “standard” level one industry value chain presented earlier is represented here (on the left side) via the value chain running from top to bottom. (It could also run from left to right [on top] – simply reversing the axis.) For each component, you can “sketch” out the relevant parts and present this visually. For any one component, you can explore further, now that you can visualize how the parts interconnect. For example, we can divide and explore the three circled parts, one by one:

1 Open Source Code – There is a community of code writers in this space; indeed, Local Motors has generated significant loyalty in this area by providing not just financial success but also prestige to those who help them design (i.e., code) their new vehicles. To the extent that any one company, such as Local Motors, can have such a strategic advantage (e.g., attracting the best coders and designers), they will have a significant strategic advantage throughout this map.

2 Parts – This may be one of the more interesting and complex “sub-ecosystems” in the entire Visual Value Map; not only are parts (exactly forty-nine in the case of the Local Motors Strati vehicle) needed to manufacturer the vehicle, but the associated advantages, in this one area, also have the potential to reverberate through myriad sub-value chains, including (i) parts manufacturing (e.g., original equipment manufacturers [OEM], OEM suppliers, and replacement part manufacturers); (ii) parts distribution (traditional distribution will change, as the manufacturing of parts is now done locally and the number of parts to be distributed shrinks considerably); and (iii) auto parts retailing (e.g., stores will change from stocking inventory to printing parts – or shut down entirely).

3 Distribution – The process of distribution is now very different from that in earlier eras. Now, automobiles can be printed on-site – even in the back of an eighteen-wheeler. The sales process can be done via the internet, in a mobile “factory” – or just about anywhere.

Key Takeaway: Considering the “big picture” Visual Value Map (figure 3.7) makes it much easier to see how the parts interconnect and how an advantage in one section (e.g., parts manufacturing, 3D printing, or code sourcing) can reverberate through other, interconnected parts. Indeed, you can take any of the boxes above and dig down much deeper to acquire additional insights. So, try drawing one for your market. What do you learn from it?

Let’s think back to a couple of examples already discussed. We initially explored how Google – which controls the information coming off its platforms – is profiting from the ability to extract margins from this activity by sharing some of this information with disparate industries, from insurance to advertising. Similarly, Amazon is able to extract a margin (approximately 20 percent) on every item sold in its Marketplace by virtue of the platform it has in place. Local Motors also has the potential to do this via the process technology it is building. If it can do this, the potential is limitless; however, if it can’t, there may be little reason to be in the industry at all. Hence, the key to succeeding in today’s interconnected world is understanding where the key strategic control points are inside an ecosystem – and how to leverage these across various parts of the ecosystem.

Companies can sometimes be part of multiple value chains across multiple markets; for example, as noted earlier, Apple controls its entire “ecosystem,” from design and R&D to manufacturing to the requirements of apps to the retail sales in its Apple stores. When you purchase an iPad, you are actually purchasing a bundle of Apple offerings. As Walter Isaacson, the Steve Jobs biographer, stated in a 60 Minutes interview, “Only a complete control freak like Steve Jobs could control all aspects of its business like this.”10 Amazon is developing very similar capabilities, from one-click ordering to control of the retail interface online to the storage capabilities in the “cloud” to controlling the publisher’s offering and terms – all to its strategic advantage. So, the notion that you need to own or control one key strategic control point is clearly too myopic.

Today, Google’s has the ability to access and potentially control all aspects of internet and content delivery. Indeed, Google is trying to dominate the “hub” (i.e., ubiquitous high-speed internet access) – which will be a key strategic control point in the future – for the next generation of communication devices (beyond the smartphone). Google recognizes that every piece of information generally goes through one hub; if they were able to develop and run the ultra-high-speed broadband service in addition to the aforementioned “nodes” of content delivery, they could take margins from virtually any industry that needs information they have unique access to. The key is in owning the internet connection; indeed, they own that – and they own you.

Key Takeaway: Google has mastered the concept of the competitive ecosystem like no other company. Amazon and Apple come close; Jeff Bezos at Amazon and Steve Jobs (at Apple before him) both realized the importance of leveraging strength across multiple markets. This is the lesson for today’s business environment – a lesson above all else.

Fans of Star Trek will recall that, in a number of episodes, Captain Kirk and Spock would be playing a three-dimensional variant of chess; on a par with this concept,11 it is immediately apparent that the map in figure 3.7 is complicated. However, the complicated map (like three-dimensional chess) can be broken down into individual components in order to see the big picture.

Ultimately, strategically successful firms are not only able to do well at competing on these different levels; they are also able to compete successfully in multiple, interconnected areas – while also recognizing (and taking advantage of) how these parts interconnect.

This is important for your business, since building a Visual Value Map (e.g., as in the battle for internet provision) must anticipate the market impact. Never let the impact of interconnected markets catch you by surprise. The likely outcome of such a surprise is the business equivalent of “checkmate” on a three-dimensional chessboard.

In order to illustrate the interconnected nature of the world in which we live, let’s now consider two articles published on the front page of the “Business and Technology” section of the Wall Street Journal on the same day back in April 2016.12 At first glance, they are entirely unrelated: one is about earthquakes in Japan, and the other is about Airbus’s satellite production.

The first article (“Japan Earthquakes Rattle Toyota’s Vulnerable Supply Chain”) discusses how the one-time envy of the world, Japan’s “just in time” (JIT) production, has often led to disastrous production delays. In this case, Toyota temporarily shut down twenty-six car assembly lines in Japan. Lean assembly without disruption can be incredibly efficient; however, disruption in one part of the chain can reverberate throughout the entire chain and lead to costly delays.

The second article (“Airbus Joint Venture Aims to Churn out Satellites”) discusses Airbus’s joint venture to produce small, approximately 300-pound, advanced satellites at a rate never before achieved, even remotely (e.g., as many as fifteen satellites per week). Interestingly, the facility is slated to be located on-site at the Kennedy Space Center – next to Jeff Bezos’s Blue Origin LLC.

So, what do supply-chain disruptions in Japan caused by a series of earthquakes have to do with satellites being produced in Florida? Well, the JIT production that made Japan great in the 1970s and 1980s is rapidly giving way to IoT, interconnected devices so that the supply chain – now interconnected through the cloud and guided by AI optimization algorithms – adjusts to any disruption automatically. These processes are connected globally through the internet, provided by satellite communications that Airbus, Boeing, Google, Facebook, Amazon, and others are frantically fighting over as you read this. Thus, information will reverberate to the cloud and then throughout the supply chain in a matter of seconds. As a result, supply-chain disruptions, like that mentioned in the article about Toyota’s supply chain, will mostly be a thing of the past.

The winners in this battle will be the backbone of future production and remind us of how Japan’s Lean Six Sigma and JIT production efficiency transformed factories worldwide back in the 1980s. The winner? Global growth. So, hold onto your hats; you may think the internet, as we now know it, has transformed our lives. However, we’re about to witness unprecedented growth.

The old model of production efficiency is rapidly giving way to IoT (internet of things) cloud-based interconnectivity, led by automated robotics, artificial intelligence, additive manufacturing (3D printing), and interconnected devices, resulting in supply-chain efficiencies and factory automation in ways we have never seen before. Gartner group (in numbers that are likely inflated but not by as much as you might think) estimates that by 2025 the “Industrial Internet” will dwarf the “Consumer Internet,” generating a staggering $32 trillion in revenue.13

For those of us running a business today, it is extraordinarily difficult to see – let alone correctly act on – all of the interconnected parts of the markets in examples like this. Often, the secondary effects reverberating across markets are not easily seen or anticipated – hence the importance of building the Visual Value Map, a tool to help us visualize the frequently disparate but connected parts.

The general concept of the Visual Value Map, as illustrated earlier (see figure 3.7), can be extended to other industries as well. Here, we can think about earlier discussions around internet provision and see that:

• Google’s ability to provide the full range of services gives them a huge advantage over rivals; let’s think of this in the context of a “Google ecosystem” consisting of a full range of disparate parts – on a par with Apple’s “ecosystem,” which allows it to sell small adapters for exorbitant prices.

• The key, however, is the provision of ultra-high-speed, ubiquitous, broadband internet connections. This strategic control point, if it were in place, would mean that Google could potentially be the only company in the market to be able to simultaneously provide all three key components: (i) the ubiquitous internet connection, (ii) all of the associated desired components, and (iii) a device that interconnects with the system (e.g., Google Glass or an Android-run smartphone).

• Once this “ecosystem” is put into place, the marginal related incentives of any potential rival (i.e., to introduce the ubiquitous internet connection, all of the nodes, and even the glasses themselves) are reduced substantially; indeed, what would be left for this new entrant is leftovers after Google’s entry. In short, order matters.

Further, there are numerous ways to enhance profitability by strategically using the concept of a competitive ecosystem:

1 Margin extraction due to advantageous competitive structure and competitive advantage. This is the “classic” view of being able to extract profit by offering superior products in a market with a limited number of competitors and monopoly rents.

2 Use of a key strategic control point. Again, this is primarily about leveraging, owning, or controlling a strategic control point to extract greater margins in the competitive ecosystem.

3 First-mover advantages related to strategic control points (versus imitable attributes). The lesson from the literature (i.e., on advantages and disadvantages for early movers) suggests that when firms move early and gain control of strategic control points, they have sustainable competitive advantages over time.

4 Owning back to front in a competitive ecosystem (e.g., Apple and Amazon). If you don’t own an important strategic control point in the competitive ecosystem that you can leverage, can you provide all aspects of the competitive ecosystem and combine them in a way that no one can match? Both Apple and Amazon have done a great job of utilizing this principle to attain strategic success.

5 Leveraging the principle of asset specificity. A recent area of research focuses on the utilization of “asset specificity” for aligning incentives across two parties. A small investment in assets specific to a relationship may align the incentives of the parties in a market. We discussed this in great detail earlier and suggest that a horizontal and vertical incentive alignment is a crucial part of any strategy within any business-to-business (B2B) and/or business-to-consumer (B2C) market today.

What do you learn from this? The tools can be incredibly powerful, enabling you to spot opportunities that you might never have seen otherwise – or leading you to conclude that divestiture is the best option.

• Strategic control points exist in contexts where access to (and control of) a certain part of the competitive ecosystem can result in substantial advantages throughout an industry’s value chain – and in other markets more broadly.

• Developing Competitive and Capabilities Maps can help you understand gaps that may exist in your current capabilities.

• Visual Value Map analysis begins with the industry supply chain but then traces competition both horizontally and vertically.

• The business objective of Visual Value Map analysis is often to detect areas where advantageous margin opportunities exist and strategic leverage may be exerted.

• The process of expanding along the competitive ecosystem follows a classic sequence:

○ Determine the long-term strategic vision and work backwards to your current core – a step at a time.

○ Identify key strategic control points and areas for potential value extraction.

○ Map out core competencies across all players in the market and across all areas of the competitive ecosystem.

○ For the areas where competencies are lacking (i.e., in key strategic control points), assess organic versus inorganic competency acquisition.

○ An exit or a “no entry” decision may be warranted in markets where (i) core competencies in areas of strategic control and/or margin extraction are weak (relative to key competitors) and (ii) organic and inorganic competency acquisition is not feasible or financially realistic. Make the tough decision.

• Matching areas of competency in key areas of the competitive ecosystem can help guide strategic investment – particularly in areas where gaps may exist.

2 The same phenomenon that causes waves to bend around obstacles causes them to spread out past small openings. This aspect of diffraction has many implications – for example, this has consequences when you are trying to soundproof a room. Good soundproofing requires that a room be sealed, because any openings will allow sound from the outside to spread out in the room.

3 Indeed, too many companies focus on how well they are competing in their existing markets when this may not even be relevant – such as when firms compete in a part of the market where margins are low or someone else has ownership of critical strategic control points. Doing a great job in a bad market is still bad business and will always be a bad business proposition.

6 Source: Vivek Wadhwa, “Trump’s Demand That Apple Must Make iPhones in the U.S. Isn’t Actually That Crazy”: http://wadhwa.com/articles/; accessed on 18 March 2019, and used by permission of Vivek Wadhwa.

7 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).

8 There has been much work in economics on the issue of measuring and assessing vertical versus horizontal competitive interactions. See, e.g., R. Tyagi, “A Characterization of Retailer Response to Manufacturer Trade Deals,” Journal of Marketing Research, 36 (4) (November 1999): 510–16; K. Sudhir, “Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer,” Marketing Science, 20 (3) (August 2001): 244–64; D. Besanko, J-P Dubé, and S. Gupta, “Own-brand and Cross-brand Retail Pass-through,” Marketing Science, 24 (1), (2005): 123–37; Ronald W. Cotterill and William P. Putsis, Jr, “Do Models of Vertical Strategic Interaction for National and Store Brands Meet the Market Test?” Journal of Retailing, 77 (1) (Spring 2001): 83–109. As a result of this body of work, the ideas set out here are not just conceptual but can be assessed empirically.

9 See, for example, Cotterill and Putsis, “Do Models of Vertical Strategic Interaction Meet the Market Test?”; and Jan-Benedict Steenkamp, E.M. Vincent, R. Nijs, Dominique Hanssens, and Marnik Dekimpe, “Competitive Reactions to Advertising and Promotion Attacks,” Marketing Science, 24 (1) (Winter 2005): 35–54.

10 Walter Isaacson noted that Steve Jobs had created a walled garden: if you wanted to use any of his products, it was easier to buy into the whole Apple ecosystem. It was something “only a complete control freak” could have pulled off. Source: CBS, 60 Minutes, “Revelations from a Tech Giant,” interview with Walter Isaacson, original air date 23 October 2011. To illustrate how this is true even today (and perhaps the reason why Tim Cook was tapped to be the successor to Steve Jobs), in 2015 the supply chain for Apple’s products consisted of 198 global companies with 759 subsidiaries. Seamus Grimes of National University of Ireland and Yutao Sun of Dalian University of China studied each of the 759 subsidiaries and categorized the electronics components into core, non-core, and assembly-related, with the high-cost, intellectual property-dependent technologies being designated as core. They found that 336, or 44.2 percent, of these subsidiaries were manufacturing in China; 115 were in Taiwan; and 84 in Europe or the United States. When they looked into the ownership of subsidiaries that were manufacturing in China, they found that only 3.95 percent were Chinese and only 2.2 percent of the core component suppliers were Chinese. The largest proportion – 32.7 percent – were Japanese; 28.5 percent were American; 19.0 percent were Taiwanese; and 6.5 percent were European. Thus, more than half of the components of Apple’s products are imported into China, and Chinese companies make practically none of the important core technologies. Despite much of the production for Apple being conducted in China, Apple still controls virtually all of the core technology and intellectual property. Source: Vivek Wadhwa, “Trump’s Demand That Apple Must Make iPhones in the U.S. Isn’t Actually That Crazy”: http://wadhwa.com/articles/. Accessed on 18 March 2019, and used by permission of Vivek Wadhwa.

11 Interestingly, while it had the appearance of being more complex, the board consisted of three 4 x 4 layers and four more 2 x 2 areas for a total of 64 squares – the same number as there are in chess.

13 As noted earlier, we are expected to have more than 50 billion connected devices by 2020 that will generate $11 trillion a year by 2025 and cumulatively $32 trillion by 2025. Source: McKinsey & Company, McKinsey Global Institute, “Digital America: Tale of the Haves and Have-Mores,” December 2015.