The Carrot and the Stick: Leveraging Strategic Control for Growth

In an attempt to be provocative, I often tell audiences that if I was working for an organization needing to be more innovative, I would want to give my team two weeks’ vacation, all expenses paid, with just one stipulation: that they spend their time in the San Francisco Bay area doing nothing but going to parties. Indeed, it is truly a different world in the Bay area. Everyone is interested in starting a new business; in fact, it is not uncommon to go to a party and find that the majority of people you meet – each with a PhD from Caltech or Stanford – are working for startups at a small salary without benefits. They know that if they work for three-to-five start-ups, on average, one of the start-ups will get sold or do an IPO (initial public offering, i.e., go public), and they’ll be able to retire wealthy. I’ve even had a clerk at a local Safeway approach me to try out her new app!

After I delivered a presentation in Santa Clara, California, in the heart of Silicon Valley, about a year ago, someone came up to me and asked, “What is it that has differentiated the winners from the losers for all of the new start-ups in the San Francisco Bay area over the years?” Of course, there are innumerable answers to this question; however, after she left, I thought about the answer over and over. What I came up with was certainly true of the technology winners – within and outside the San Francisco Bay area:

1 They had built some form of strategic control (e.g., an operating system or scale that was difficult to replicate).

2 They found a way to align incentives across both buyers and sellers (e.g., Google’s decision to give a 30 percent cut of app store revenue back to the carriers).

3 They recognized that they needed to exert control and influence across a series of interconnected industry value chains (i.e., they recognized a broader “ecosystem”).

Based on these observations, I developed some working hypotheses. We then began compiling data from multiple sources to test whether strategic control and vertical incentive alignment were indeed key factors for succeeding in today’s environment. The first data set included data on the financial performance of publicly traded U.S. companies from the Wharton Research Data Services (WRDS) database on financial performance.1 Specifically, data on measures of financial performance – stock price; net income; return on net assets (RONA); earnings before interest, taxes, and depreciation (EBIT); and earnings before interest, taxes, depreciation, and amortization (EBITA) – was collected for every U.S. firm in the S&P 500 (the largest 500 publicly traded firms) from 2009 to 2016.2 For the second database, managers and industry analysts were interviewed in order to (subjectively) assess each firm’s ability to align incentives and exert strategic control. Specifically, we asked them to rate each firm within their domain of expertise in terms of (i) the level of incentive alignment throughout the value chain (both upstream and downstream) and (ii) the firm’s ability to capture point(s) of strategic control in the value chain – both measures on a scale of 1 to 10.3 The two data sources were combined into a large database that was analyzed in two ways:

1 through the use of statistics, specifically using multiple regression techniques; and

DEFINITION: MULTIPLE REGRESSION

Multiple regression is a statistical technique for examining the impact of one variable on another – in this case on stock price, income, or earnings – holding all other variables in the study constant; it gives us the ability to isolate the impact of one variable, such as strategic control or vertical alignment.

Our hypotheses were strongly confirmed by this analysis. Companies that are succeeding today utilize both a “stick” (strategic control) and a “carrot” (vertical incentive alignment); they find points of strategic control, leverage them in the market, and align external incentives effectively. The utilization of both strategic control and vertical incentive alignment has a profound impact on a firm’s success – particularly with respect to financial performance. Table 7.1 lists just a few of the companies that our research has identified as either a success or failure in the game of strategic control (SC) and vertical incentive alignment (VIA).

Table 7.1 Winners and losers based on strategic control (SC) and vertical incentive alignment (VIA)

Amazon, for example, has recognized that owning points of strategic control throughout the value chain (and owning the value chain from back to front) can provide a dominant strategic advantage that others cannot match. However, Walmart learned from P&G’s initiative in the 1990s and now aligns incentives throughout its supply chain (e.g., via inventory management processes and “scanbacks”).

To illustrate how important this can be, we conducted a detailed econometric analysis, employing advanced multiple regression techniques to ascertain the post-downturn (from 2009 forward) financial performance of the companies in our data set via Compustat and Wharton’s WRDS data. This detailed analysis revealed that:

• 23 percent of earnings growth (from 2009 to 2016) can be explained by strategic control alone;

• 34 percent of net income growth is explained by strategic control and vertical alignment;

• a full 41 percent of share price growth (from 2009 to 2016) is explained by just three factors: strategic control, vertical alignment, and net income.

That’s startling – to explain 41 percent of the (cross-sectional) variation in share price growth with just three factors is phenomenal. In order to put this in perspective, an increase in strategic control from a 3 to an 8 on a 10-point scale (from low to high, where a 3 might be a company like Hulu, whereas an 8 might be a company like Amazon) would increase share price growth by a startling 35 percent. This drives home how important strategic control is to financial performance.

In short, strategic control and vertical incentive alignment are material to a firm’s financial performance.

We then divided the companies into four quadrants and gave each quadrant a name: “Update the Résumé” (because you’ll be looking for a job soon); “Don’t Quit Your Day Job” (because the company will do well and you should stick with it); “It’s Fixable” (because it is); and “It’s a Matter of Time” (because it’s not fixable and it’s a matter of time before the company faces hard times).

Update the Résumé. Thirty-two percent of the S&P 500 rated low on both incentive alignment and the ability to form points of strategic control. These firms were the least successful in terms of share price return, market share, and long-term prospects for growth.

Don’t Quit Your Day Job. Nineteen percent were high on both strategic control and incentive alignment, and these firms outperformed the rest of the sample in every metric, from share price and market share appreciation to long-term success and growth rates. This is not surprising, since aligned incentives and control of key points of strategic control (e.g., Amazon’s obsessive control of the value chain and Apple’s control of the “Apple ecosystem”) make it nearly impossible for a rival to displace the company that executes on this well.

It’s Fixable. Nineteen percent of the firms in the S&P 500 had reasonably high points of strategic control (e.g., Microsoft’s Office and Facebook’s social network); however, they were relatively weak on incentive alignment outside the organization. For example, Surface sales or Microsoft mobile OS have performed nearly as well as the previous group in terms of short-term market performance; however, they will be under pressure unless they can solve the incentive alignment issue. Thus, their success is tenuous moving forward but fixable.

It’s a Matter of Time. Thirty percent of firms in the S&P 500 had low points of strategic control but reasonably well-aligned vertical incentives (e.g., Time Warner Cable’s control of geographies and apartment complexes). These firms have done well in the sales channels and/or with customer acquisition and retention strategies but will continue to be under the threat of competitive entry unless points of strategic control can be formed.

Figure 7.1 depicts the continuum that exists across points of strategic control (from low to high) and across degrees of vertical incentive alignment (from weak to strong), in addition to some of the companies that fit into each quadrant (note that the companies listed in Figure 7.1 are for illustration purposes only – not all of these companies are in the S&P 500). Some companies have moved significantly over time, and their position may differ from country to country. For example, Nokia earns more than 500 million Euros (i.e., approximately $700 million U.S.) in patent revenue annually but has essentially fallen out of the handset race in the United States despite a significant presence in other parts of the world. Hence, in the market for handsets in the United States, Nokia would fall into the “Update the Résumé” quadrant, but would fit in other quadrants for other lines of business and in other parts of the world.4

We provide further perspective on why this matters financially by examining financial performance across the four groups and reporting this in table 7.2 (all numbers represent percentage change from 2009 to 2016; the LL [Low/Low], LH [Low/High], HL [High/Low], and HH [High/High] designations refer to strategic control [Low or High] and vertical alignment [Low or High], respectively, and correspond to the four quadrants identified above).

Table 7.2 Financial performance across the “2x2” categories based on share price; return on net assets (RONA); earnings before interest and taxes (EBIT); and earnings before interest, taxes, and amortization (EBITA)

• Those in the “LL” category (low in both strategic control and vertical incentive alignment) had a 25.6 percent increase in share price from 2009 to 2016 (2009 as base); in contrast, companies that were high on both appreciated almost 70 percent over the same period.

• Return on net assets (RONA), earnings before interest and taxes (EBIT), and earnings before interest, taxes, and amortization (EBITA) were all negative for firms that were low on both strategic control and vertical incentive alignment; all these measures were positive and grew significantly for those companies in the “Don’t Quit Your Day Job” (HH) category.

• Whereas EBITA more than doubled for those in the HH (“Don’t Quit Your Day Job”) category, it was actually negative for those low on both (i.e., in the “Update the Résumé” category).

Conclusion: The “Carrot and Stick” approach of developing businesses around points of strategic control and vertical incentive alignment matters financially; firms that succeed in today’s markets have effectively developed points of strategic control and have aligned external incentives. You can utilize this analysis to help identify key strategic issues and invest in moving forward. Use it to your advantage by sketching it out for your business.

In this study, we address only U.S. data during a period of economic growth (i.e., coming out of the “Great Recession”). Furthermore, we focus only on larger firms (i.e., those inside the S&P 500). As such, we can at this time offer only anecdotal evidence as to how these results translate to economies outside the United States, and how they would play out in a downturn or recession and for smaller firms. We think it likely that this analysis would be relevant to other situations, countries, economies, and economic climates; however, this would be pure speculation without further, detailed study. That said, much of the logic of this book is about how points of strategic control and vertical alignment are utilized by small and large firms alike, in the United States and abroad (e.g., Alibaba and Tencent in China and Tata in India). So, although this chapter focuses only on how these concepts relate to the financial performance of U.S. firms during a period of economic growth, we still believe that the concepts do apply universally in today’s global markets.

Lessons for First Movers – Sources of Advantages and Disadvantages via Strategic Control

While much has been written about “first-mover advantages,” there is an important distinction to be made here. When first movers are in product areas where attributes and features can be easily imitated, this may actually lead to a strategic disadvantage, since rivals may subsequently enter the market with improved and/or lower-cost alternatives or imitated attributes. Conversely, when firms can move first and secure critical strategic control points (e.g., the pumps for Softsoap®), they can potentially attain long-term strategic gains, since these gains can be protected. Thus, first-mover advantages are generally considerably stronger with respect to strategic control points versus attributes.

Business Lesson: First-mover advantages involving product attributes are generally fleeting, since the attributes can often be replicated and imitated. On the other hand, a first-mover advantage that involves securing a point of strategic control is sustainable and often long-lasting by definition. Thus, always try to move first on points of strategic control, and be wary of any advantages gained on offering attributes alone.

There are exceptions, of course. Certain attributes can be protected and thus can potentially be a source of long-term and sustainable competitive advantage. For example, in order to achieve superior fuel efficiency, Boeing developed longer wings on its new plane (the “777-X”), which can’t fit between planes at gates at airports. Its solution? Folding wingtips, which make the planes 28 percent more fuel efficient than competitors’ planes (vis-à-vis the longer wings) while allowing the planes to fit in airport gates. It will take competitors from five to ten years to incorporate such a design into their products. In agrichemicals, one ingenious company had the idea to put green dye in the chemical used to treat lawns and golf courses – as a visible “sign” that the product was “working.” Customers loved it and perceived it to be better at controlling the weeds that made lawns unsightly (even though it made absolutely no difference to the efficacy of the product). It would take competitors from three to five years to develop competitive products (i.e., with a comparable green dye), since even inert ingredients require regulatory approval for “labeling.” Thus, the first mover had a sustainable advantage in the interim.

These are exceptions, however; most attribute-based advantages can be imitated, replicated, or even made better. Thus, you must determine what you can defend versus what are more typical attributes that competitors can copy. For example, the mapping industries (e.g., paper, digital, aviation, marine, land, online, and mobile) illustrate the fast-moving pace of today’s markets and how first-mover advantages that are created by owning points of strategic control work better than advantages based on product features or attributes. Although the battle for maps has been dramatic and far-reaching, and has involved a myriad of players (e.g., Rand McNally, Garmin, TomTom, NavTech, MapQuest, Google, and Apple), probably the most visible mapping battle has been between Apple Maps and Google Maps on the mobile platforms (Apple’s iOS in particular), so that is the focus of the present discussion.

Imagine the following: you are about to embark on a journey from your home address to a place you haven’t been before. How do you figure out how to get there? In the “old days” (i.e., before about 2005), you would consult your handy Rand McNally atlas, write down the preferred route on a piece of paper, and you were on your way.5 By July 2006, MapQuest (then a division of AOL, now a division of Verizon Media) had launched its beta version of an online tool that would allow you to “build your route,” so you could go online and plan each portion of your route, print it out, and then follow the printed page throughout your journey – hoping that traffic was clear during that time of day.

At around the same time that this service was being launched, Google was acquiring Where 2 Technologies, a small mapping- related start-up co-founded by two Danish brothers, Lars and Jens Rasmussen. Building on this acquisition, Google launched Google Maps in June 2005 with U.S. road maps and then followed with integrated Google Earth and Satellite imagery in January 2006. Google Traffic was integrated into the maps in February 2007, and “Street View” was added in May 2007. Much of this was happening behind the scenes with few of us really noticing.

The launch of the iPhone, the iPad, the Android operating system, and digital maps with turn-by-turn navigation integrated into other third-party apps began a heated rivalry for an entirely free mapping service. From the time of the launch of the first-generation iPhone (on 29 June 2007) until 18 September 2012, mobile applications, through both Apple’s iOS and Google’s Android operating systems, used Google Maps for turn-by-turn navigation by employing GPS location-based services. However, Apple replaced Google Maps with Apple Maps as the default mapping system integrated in Apple (iOS) devices on 19 September 2012. On 13 December 2012, Google Maps was re-launched inside the Apple platform as a standalone app, although Apple Maps remained the default application for all other key apps.

Concurrently, a small Israeli start-up, Waze Mobile, had introduced a free mobile map app that contained innovative, “community-driven” features. Originally launched as “FreeMap Israel” in 2006, it expanded to the United States and contained innovative features that allowed users to report accidents, traffic jams, and speed and police traps and identify the cheapest nearby fuel stations. In June 2013, Google purchased Waze for $1.1 billion, adding the crowdsourced, community-driven features of Waze to their existing maps.6 Thus, the “old” days (i.e., six to seven years ago) of paper maps are an ancient memory; now the “market” is focused on free maps with integrated navigation, directions, and local “crowdsourced” information, and the battle is now not just about travel routing but also about indoor mapping and promotional planning.

But, you may wonder, why would Apple spend so much development time competing with behemoth incumbents (e.g., Google and MapQuest)? Why are companies like Apple and Google so obsessed with winning the exceedingly expensive battle to give away free digital map applications?

Before 2010, Apple faced a difficult dilemma that had nothing to do with maps but had everything to do with maps. Specifically, the online environment was being driven more and more by location-based mobile advertising revenue (versus traditional desktop and search-based advertising). For example, Google has been increasingly pushing advertisements within all mobile apps in order to diversify its ad revenue stream, as traditional search and desktop advertising prices and revenue growth fall.7 Both Google and Apple knew that the future of revenue for mobile applications was correlated with location-based services that Yelp, OpenTable, and others need in order to bring their offerings to market. Furthermore, if you allow your map to access your locational “geo tag” (i.e., where you are), as the vast majority of us do, your map provider knows where you are and how fast you’re going. This type of information is often quite valuable, as noted by the aforementioned insurance executive from Latin America (see the introduction).

Apple, like Google, has recognized that the future is about (i) information (e.g., where you are, what you are doing, how fast you are going, and what you are buying) as the point of strategic control that can be used to acquire mobile-based advertising revenue, and (ii) aligning incentives with players in this space. So, the search for a local hardware store on an Apple iOS device (e.g., via an app like Yelp) will ultimately lead to an integrated iOS maps program (i.e., Apple or Google Maps). This map contains a myriad of advertising opportunities and locational information (e.g., subscriber movements and actions), which are huge revenue sources. Thus, if one firm can harness the power of any app using locational data by offering a popular mapping service, they have a huge strategic advantage in the battle for the information coming off your smartphone.

Utilization of principles in this chapter leads us to address the following two questions:

1 What is the strategic control point for mobile-based data? The valuable item is the data. When a firm owns access to such data, the revenue opportunities are almost limitless. Here, we suggest that there are two important points of data access control that we should focus on: the connection and the map. Currently, connection is fragmented. On your smartphone, you can connect in numerous ways (e.g., through various Wi-Fi hotspots and cellular carriers); however, only the map is common to every application on the planet. Own the map and you own access to virtually all of the data coming off the phone. This is why the battle for maps has been so fierce; this is reminiscent of when Rand McNally locked up the distribution of paper maps in gas stations, 7-Elevens, and Kmarts back in the day. Today, however, the control of “distribution” is very, very different. Good companies get this.

2 What is the point of aligned incentives? Note that if Apple Maps was the only integrated map in the apps on iOS devices, the incentives are aligned, since the objective is for the customer to use the app in a user-friendly, seamless fashion. This would be true regardless of the map (i.e., Apple or Google) that is integrated; however, the winner of the battle for default integration also wins the war. Hence, the strategic control point is key, and aligned incentives enable the point of strategic control to work effectively. By integrating Apple Maps, Apple tried to move its model into the “Don’t Quit Your Day Job” category (the bottom right in figure 7.1), which is an area rich in revenue opportunities that are growing exponentially. The problem, of course, is that Apple Maps doesn’t work well enough to be effective in this market. In any market, if your offering doesn’t work – or isn’t competitive – nothing else matters.

So, let’s now look back with “20/20 hindsight” and think of the choices that Apple had available to them during the latter portion of the last decade. We can represent these under the following two broad headings:

Choice A was for Apple to cede the “maps market” to Google and focus on revenue from hardware, software, and its apps store. Google, via various location-based services, would dominate the market for location-based advertising revenue. However, because of Google’s penchant for competing on hardware, software (Android OS and Google Play), and in the internet-provision space (through projects like Fiber, and more recently Loon), this could prove disastrous for Apple as Google developed the revenue to dominate across multiple markets (including Apple’s core).

Choice B was to compete directly with Google on maps in an attempt to gain a significant share in the mobile-based advertising space. Not only would this add to Apple’s ability to compete across multiple markets; it would cut into Google’s revenue base as well. This would also give Apple ownership of a key strategic control point (i.e., ownership of the maps that are integrated into the operating system and apps on Apple iOS devices), in the same way that Google owns the same point on Google’s Android-based platforms.

So, who is winning the revenue-rich, “free” maps, digital mapping market today? Well, let’s do the math. In the United States, Google has 185.2 million map users (154.4 for Google Maps, 25.6 million for Waze, and 5.2 million for Google Earth), whereas Apple has a total of 23.3 million map users. Allowing for rounding error, that gives Google approximately an 80 percent market share with Apple at 10 percent, MapQuest at 10 percent, and Yahoo! Maps at 1 percent.8 The evidence is clear that Google is winning this war across the board. This battle will continue, however, as its importance to information access is pivotal in multiple market opportunities.

The business lesson associated with key strategic control points in these examples is that the future of advertising-based revenue is in location-based mobile applications, which are rich in sponsored advertising and tracking data.9 The key strategic control point for this revenue source (which depends on location- and customer-based information) is the mapping application that is integrated into the operating system (as the default application), giving the map provider access to critical information coming off the phone. This also aligns the incentive structure of both end users and app developers. Missteps on attributes (e.g., Apple’s horrible reviews and the fiasco after its initial Maps launch) can be overcome as long as the strategic control points are in place and the incentives are aligned; conversely, you can have the best attributes in the world (e.g., Google Maps on iOS devices) and if someone else owns the point of strategic control, the attributes won’t matter.

Bottom Line: The battle for the maps is really about the battle for mobile, location-based advertising revenue (illustrating the key points raised earlier in this chapter).

This example translates to related industries as well. For example, Rand McNally faced a difficult choice when Patriarch Partners LLC acquired it in a distress sale in 2007. By 2007, the paper maps company had essentially missed the digital revolution in the consumer market (where Google and Apple have been fighting so vigorously). “You have to get one step ahead of everybody else, not redo Google Maps. You tear the company thread by thread and try to find the thread that allows you to leapfrog and innovate,” according to Lynn Tilton, head of Patriarch Partners, back in 2009.10

Let’s step back in time a bit and examine the choices faced by Rand McNally in 2009, shortly after the acquisition:

1 One option the company considered and dismissed was attacking Google Maps (and eventually Apple Maps), MapQuest, and others in the consumer mapping and mobile applications market head-on by building their own maps app. Why was this dismissed? Clearly, Rand McNally had a brand presence and, had they invested heavily in this option in the early 2000s, they might very well have been the winner in this market – one that we’ve already established was a key strategic control point in the market for mobile, location-based advertising spend – a key growth driver in 2014 and beyond. However, in 2009, they were in absolutely no position to compete (and spend) head-to-head against Google and Apple, both of which were flush with cash to defend their market position in maps; this was not a fight Rand McNally could win, no matter how hard they tried.

2 So, if they couldn’t realistically win this strategic control point, was there another attractive market wherein they already had a brand presence, expertise, a reasonable chance at succeeding, competencies, and a strategic control point?

Fortunately, for Rand McNally, there was. They have become the “go to” app for truckers. In the last decade, they have dramatically transformed their business model to focus on location-based information in trucking, fleet management, mileage, routing, and recreational vehicles (RVs). Because of their decision to refocus on fleet management and trucking (e.g., fleet location, mileage, and optimization services), they – in principle – have found a key point of control in these markets, albeit in a smaller niche. If you own the data, you are able to lead in routing and management in trucking and RVs; you can also lead in areas where Google and Apple have no real investment and no significant expertise.

Why is this so important to Apple, Google, Rand McNally, and others – and why isn’t it about the maps per se but about the data? For the truck driver, location, revenue-generating deals, ads, restaurants, truck stops, and other local information and opportunities pop up on the screen. By owning (or at least leading) in fleet, trucking, and RV opportunities, Rand McNally has put itself in a similar position to that of Google and Apple in iOS and Android platforms – albeit in a much smaller opportunity space.

One could argue that given the situation Rand McNally faced from 2007 to 2009, this was likely the only viable competitive play they could have made. The research discussed earlier in this chapter would suggest that a key to their success in this area will be how well they can align incentives (e.g., truckers, fleet managers, and local merchants catering to these segments). To the extent that they can align incentives, the strategy might actually pay off – and may have been the only smart move available to them. Time will tell if this will be successful; however, recognizing the points of strategic control and aligning incentives are key points to recognize above all else. After all, the battle for the maps isn’t about the maps.

In figure 7.2, the lower arrow represents what happened over time to Rand McNally as the market shifted to digital (moving from point 1 to point 2). The upper arrow (from point 2 to point 1) represents the direction that Rand McNally has been attempting to achieve today, albeit in a smaller part of the market (i.e., inside the transportation and travel sector). To date, they have been successful in being the “go to” app for truckers in the United States. Moving to dominate in a smaller, niche market is a strategic direction that makes sense for them today.

Based on this example, you can extend the framework to your firm and industry, building on earlier examples:

1 Using the scale presented earlier on strategic control (where 10 means you own the patent or standard [i.e., complete control] and 1 represents a commodity product), rate your current level of strategic control.

2 How aligned are your external partners? Use a 10-point scale where 10 means perfectly aligned (as in the P&G/Walmart example), 1 means “everyone is in it for himself or herself” (i.e., no alignment), and 5 is the midpoint (i.e., between the two extremes).

3 Plot your business on the four-quadrant diagram shown in figure 7.2, and then plot your major competitors on the same diagram. In an ideal world, your business is on the bottom right and your competitors are on the top left (or at least somewhere on the left). If so, you’re fine. If not, this can indicate what you need to focus on (as a business).

The pace of transformation cuts across multiple industries. For example, in aerospace, Jeppesen, the leading company in commercial aviation mapping, is replacing reams upon reams of paper (distributed within plane cockpits via pilots) with iPads.11 For decades, they printed key information (e.g., routes, warnings, and changes in the approach structure) out of their massive facility in Englewood, Colorado (just outside of Denver), and, via FedEx, sent the paper plans, routes, and information to pilots for their next route assignments. The sheer scale of this operation created a barrier to entry that made small-scale entry (i.e., competition) nearly impossible. In fact, at one point, they were the largest FedEx printing facility in the world.12 Jeppesen’s move to digital formats – both in aviation and in their marine division – presents both opportunities and dangers. On the one hand, their strategic control is weaker (because of the lack of physical printing scale and distribution); however, Jeppesen may be able to align incentives (e.g., with pilots and local merchants) in much the same way that Rand McNally is doing in the trucking industry (via links to other local businesses, information, and opportunities). In short, the digital revolution has moved them to a more vulnerable position, and unless they can maintain a point of strategic control, others will be lured into the market for revenue (from ancillary services and advertising) – eventually eroding Jeppesen’s enviable market share in the aviation market.

There are multiple examples across multiple industries where this process is replicated. Detailed examples include: (i) Amazon’s use of its clout (i.e., strategic control point) to launch Amazon Local (a local services version of Amazon.com), Amazon Go (if you’ve ever visited one of its pilot stores, you know how amazing it is), and Whole Foods; (ii) Google’s Project Loon (an attempt to secure a point of strategic control for internet provision via low-altitude balloons); (iii) the battle for home automation (e.g., Microsoft’s HomeOS versus Google), and the list goes on. Indeed, the convergence revolution has transformed entire industries by lowering the points of strategic control. For example, traditional hotels have lost a key point of strategic control because of the introduction of Airbnb (and similar sites), and taxi companies have lost their point of strategic control (the medallions) through apps such as Uber, among others.

• Successful companies today use both a “carrot” and a “stick” approach to compete effectively in a converging world of interconnected information.

• The “stick” is leveraging points of strategic control and the “carrot” is aligning incentives – both upstream and downstream.

• Understand and map out your “2 × 2” table of position (“Don’t Quit Your Day Job,” “It’s Fixable,” “It’s a Matter of Time” and “Update the Résumé”). Know where you are and where you need to be. These are key areas to consider, since they will affect the success of your business.

• It is possible to place firms along a continuum (i.e., between the carrot and stick); in fact, evidence from firms in the United States inside the S&P 500 indicates that:

○ 19 percent are high on both strategic control and vertical alignment (categorized as “Don’t Quit Your Day Job”), and these firms have the greatest chance of success;

○ 19 percent have high strategic control but relatively weakly aligned external incentives (“It’s Fixable”), and their focus should be on aligning vertical incentives to ensure success;

○ 30 percent have low levels of strategic control despite strongly aligned incentive structures (“It’s a Matter of Time”), and unless they can find points of strategic control, it’s a matter of time before their market position erodes;

○ 32 percent have low levels of strategic control and aligned incentives (“Update the Résumé”); these firms will fail unless both are remedied – and remedied quickly.

• Market advantages associated with strategic control can be sustainable and lasting; however, market advantages associated with product attributes are typically short-lived and fleeting.

• Both points of strategic control and vertically aligned incentives are required for sustainable success in today’s business environment.

1 Thanks to Chanil Boo, then a PhD candidate at University of North Carolina, Chapel Hill, and now an assistant professor at City University of New York, for much of this work.

2 We excluded data during the “Great Recession,” since this is an anomalous period in U.S. economic history, noting that this limits some of the interpretation of the results (as will be discussed later in the chapter).

3 To the extent that the “experts” were not able to do a good job of assessing the degree of strategic control and vertical incentive alignment (for example, if their assessments were random or subject to a significant degree of error), this would work against us – that is, make it substantially more difficult to find any result at all. Thus, the existence of any expert error actually makes these results stronger, since we would be finding these strong results in spite of error that would make it less likely to find any result at all.

4 See Renee Schultes, “Nokia Could Take Time to Mine Patents,” Wall Street Journal, 13 December 2013, B14.

5 These histories of MapQuest, Google Maps, and others were taken from the companies’ websites and supplemented by the author’s recollection (i.e., most of us remember driving with one hand and holding a MapQuest route path printed on a piece of paper in the other hand).

Winners (High SC and/or VIA)	Losers (Low SC and VIA)
Amazon	Borders, Geeks.com
Walmart	JC Penney, Sears, Toys-R-Us
Alphabet (Google)	Yahoo
Apple, Samsung	Canonical
Netflix	Blockbuster
LinkedIn	Groupon
Eastman Chemical	USPS
FedEx, Facebook	Zynga

	Share Price	RONA	EBIT	EBITA
“Update Résumé” (LL)	0.256	−2.19	−0.560	−0.261
“Matter of Time” (LH)	0.498	1.44	−0.035	0.0389
“It’s Fixable” (HL)	0.347	1.55	0.332	1.057
“Don’t Quit Day Job” (HH)	0.698	1.45	0.495	2.238