The Story of Ubuntu and Sapphire Glass

Canonical Limited is a UK-based software company founded in 2004 and still privately held by South African entrepreneur Mark Shuttleworth. It has over 500 employees and $30 million in revenues in more than 30 countries, focusing on open source software across a variety of applications.[1] Ubuntu is a leading Linux-based operating system produced by Canonical and is named after the Southern African philosophy of ubuntu, which is often translated as “humanity towards others”.

One of Canonical’s recent areas of focus has been on mobile operating systems (OS), first announcing plans for an Ubuntu mobile OS at the beginning of 2013, with aspirations to become the third leading mobile platform in the industry, behind Apple iOS and Google’s Android. Even more ambitious, Chinese phone makers BQ and Meizu, anxious to differentiate themselves in the market, announced in early 2014 plans to manufacture smartphones based in the Ubuntu Linux-based operating system, potentially a huge coup for Canonical given the size of the Chinese market and the power of BQ and Meizu.

The “human-ness” of Ubuntu as “open-source” and free (ubuntu literally means “human-ness”) has taken on a somewhat ironic twist in the market as it faces the “stick” strategy of strategic control exerted by one of its most powerful competitors – one that illustrates the potential power of strategic control to keep new entrants and rivals at bay.

It turns out that in today’s smartphone manufacturing, sapphire glass is a critical component due to its super-tough, scratch resistant properties – how many of us have dropped our iPhones and marveled at how – somehow – they didn’t break or scratch? In fact, they are an important component in the fingerprint scanners on Apple’s iPhone 5S.

In an absolutely classic application of the concept of a strategic control point, Apple has recently bought up enough sapphire glass to supply other companies for years, effectively buying up the world’s supply of sapphire glass for the next three years!

It’s all about strategic control.

Imagine Canonical’s frustration. They’ve seemingly done everything right. They have developed a well-supported, open source, free operating system that is highly rated, sourced key manufacturers in a critical region of the world to manufacturer new smartphones based on its mobile operating system, only to find that a supply of a critical ingredient in the production of just the phones it wants to produced is owned for three years by a key rival: Apple. In a brilliant move akin to Minnetonka’s buying up the world supply of pumps when it introduced SoftSoap®, Apple can now focus on what matters most to their success in mobile phones – competing with Google’s Android platform with all other competitors safely at bay. Brilliant.

The Convergence Revolution

Use a “carrot” and a “stick” to succeed in today’s hyper competitive, interconnected and convergent environment.

We are experiencing a sea change that impacts businesses today in ways unlike any we have ever seen before. The speed and magnitude of change is unprecedented. Information and the Internet – ubiquitous, always on, always interconnected, converging information – have fundamentally changed the way firms compete and win, providing a once in a lifetime opportunity – one that requires a very different strategic approach in the hyper competitive marketplace of today.

The leading business thinkers of the past few decades have taught us to “Co-Operate” with suppliers to our mutual best interest (e.g., Brandenberger and Nalebuff 1996), to provide value to our customers so that we can share value creation (e.g., Porter and Kramer, HBR, 2011), and to partner and team to fill gaps in our current capabilities in order to increase our strategic market position. While there is merit in each of these concepts, today’s world of ubiquitous, interconnected and always on information, cooperation no longer dominates; value sharing has given way to margin squeeze, partnering and teaming have given way to capability acquisition. Those that win today leverage points of strategic control both within and across markets and they do so with light speed. Just ask Blackberry how fast their market evaporated at the hands of Apple, Samsung and Google through its Android operating system. If you want to cooperate and expand the market, just ask Borders how well welcoming the Internet worked for them.

In research on over 70 companies across 25 industries, ranging from technology to retail to business-to-business and old-line industries, we have examined strategies that are most effective in today’s environment.[1] In an environment characterized by ubiquitous, always on and interconnected information, our research suggests that a very specific “carrot and stick” approach utilizing the concepts of vertical incentive alignment (the carrot) and strategic control points (the stick) leads to substantive and lasting strategic advantage.

Amazon, for example, has recognized that strategic control throughout the value chain and owning the value chain from back to front can be a dominant strategic advantage that others cannot match (just ask now defunct online retailer Geeks.com). On the other hand, Walmart has learned from P&G’s initiative in the 1990’s and it now aligns incentives throughout its supply chain through inventory management processes, “scanbacks,” etc.

Based on detailed research into each of 72 firms across 25 industries, we rated each in terms of level of incentive alignment throughout the value chain (both upstream and downstream) and in terms of the firm’s ability to capture point(s) of strategic control in that value chain. We then divided the companies into 4 quadrants:

1. Update the Resume. 26% of the sample rated low on both incentive alignment and on their ability to form points of strategic control. These firms were least successful in terms of share price return, market share and in terms of long run prospects for growth.

2. Don’t Quit your Day Job. 12% were high on 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. It’s not surprising since aligned incentives and control of key points of strategic control (e.g., Amazon’s obsessive control of the value chain, Apple’s control of the “Apple ecosystem”) make it nearly impossible to a rival to displace this execution.

3. It’s Fixable. 20% of the firms studied had reasonably high points of strategic control (e.g., Microsoft’s Office, Facebook’s social network), but were relatively weak on incentive alignment outside of the organization (just examine Surface sales or Microsoft mobile OS). These companies have performed nearly as well as the previous group in terms of short run market performance, but will be continually under pressure unless they can solve the incentive alignment issue; their success is tenuous moving forward, but fixable.

4. It’s a Matter of Time. The largest percentage of firms (42%) had low points of strategic control, but reasonably well-aligned vertical incentives (e.g., Time Warner Cable’s control of geographies, apartment complexes, etc. and/or Netflix’s current distribution alignment). 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. A current example of this is Netflix’s attempt to use original programming to create a point of strategic control; indeed their future success hinges critically upon their ability to succeed at both this and their customer analytics through the use of advanced “big data” techniques.

The table below depicts the continuum that exists across points of strategic control (from low to high) and across degree of vertical incentive alignment (from weak to strong), in addition to some of the companies that fit into each quadrant.

Use this – develop strategic control points. Align incentives. Work smarter, not harder!

Quadrants


[1] William Putsis, Compete Smarter, Not Harder: A Process for Developing the Right Priorities Through Strategic Thinking, Wiley, 2013 and William Putsis, The Convergence Revolution: Staying One Step Ahead in Today’s Era of Hypercompetition, manuscript, Kenan-Flagler Business School, University of North Carolina at Chapel Hill.

Nicola Tesla, Thomas Edison and Rockefeller’s Standard Oil

Parts of the following has been taken from Compete Smarter, Not Harder, John Wiley & Sons, Dr. William Putsis, release date November 4, 2013.

“The art of the wise is knowing what to overlook …”

William Blake

I know you recognize the following story. The names and situation may be different, but the story is the same, for it plays out all the time inside of companies around the globe:

Scene: A conference room with managers sitting around an oval conference table.

Issue: Deciding on future strategic direction and customer base.

Manager 1: We have a great offering and it would fit perfectly with segment X, where market is growing with off the charts growth rates.

Manager 2: No, we need to go after market Y, the margins with this group are incredible.

Manager 3: You’re both wrong, we can’t alienate our core – the largest market by far is X and our focus should be here, with the largest market.

Manager 4: Our budget allocation for next year is constrained – how are we going to fund this expansion. Perhaps we should reorganize?

We’ve all lived these conversations. Who wins? Usually the one who has the highest position on the org chart, the one who controls the budget or the person who talks the loudest. Who should win? The one that is right. Today more than ever, choices need to be made allocating scarce resources to decide on the right part of the market to compete, with the right tactics for the right segments. We need to decide not only where to compete, but where not to compete. We need to work smarter, not harder.

To illustrate …

Back when Tesla and Edison were warring with each other to determine if AC or DC would win out to become the dominant form of electricity, John D. Rockefeller was desperately trying to stop electricity from ever becoming mainstream. The reason? Widespread use of electricity had the potential to destroy Rockefeller’s Standard Oil’s stranglehold on the kerosene market, as it ultimately did.

It didn’t matter how efficient or dominant Standard Oil was in kerosene – or how well Rockefeller competed in the kerosene market. It was just a matter of time before electricity would eliminate the need for kerosene to light homes.

We often do similar things in business today – compete hard and often quite well in markets, only for these efforts to be in vain. If another firm owns a key strategic control point, or has a significant advantage in key customer segments or is competing in a higher margin part of the market, it may not matter how hard you compete, just like it didn’t matter how hard Rockefeller tried to stop electricity from lighting homes.

Compete Smarter, Not Harder is about deciding – at every step of the way – where to compete and with what priorities.  Knowing which part of the market, which market to compete in is often much more important than how hard or how well you compete.

Compete Smarter, Not Harder.

The Story of Vanderbilt’s Hudson River Bridge

At the start of the Civil War, Cornelius Vanderbilt realized that the transcontinental railroad would slash travel time from coast-to-coast by months (compare that to Elon Musk’s ambition to transport people from LA to NY in 45 minutes via “vacuum tube”, see http://www.cnn.com/2013/07/16/tech/innovation/elon-musk-tube-transport). Jack Welch once said about Vanderbilt and all great executives: “They have the ability to see around corners.” As a result of his vision of what the railroad would mean to the post-Civil War US, he sold virtually all of his shipping interests to invest in railroads. The end result was a railroad empire that was worth the equivalent of $75 billion in today’s dollars by war’s end.

After the war, when pushed by rival rail companies in tough negotiations, Vanderbilt was challenged for being soft. As a result, Vanderbilt fought back, looking for a key strategic control point to leverage against his rivals. Owning the only rail bridge in and out of New York City, the Hudson River Bridge, he owned the gateway to the country’s largest port. So, he decided to cut off the bridge to rival traffic. Without the bridge, every other railroad was shut out of NYC, essentially single-handedly creating a blockade between the nation’s busiest port and the rest of the country (long before many of today’s antitrust laws were created of course).

albbrdgVanderbilt, like many after him, realized that he owned a crucial Strategic Control Point, a point where all rail traffic flows between the crucial port of NY and the rest of the country.[1] The Hudson River Bridge was that Strategic Control Point. “We’re going to watch them bleed …” he was known to have said as he cut off rival traffic.

Brilliant. Absolutely brilliant.

But it didn’t end there … when the rival railroad, New York Central, started to “bleed” and shares fell precipitously on the New York Stock Exchange, Vanderbilt bought up every share he could and in just a few days, he took control of the rival railroad. He eventually went on to own 40% of the nation’s rail lines and built Grand Central Depot (then the largest building in NY, now known as Grand Central Station) in New York to bring together his three new lines, the Harlem, the Hudson and the NY Central and the rest, as they say, was history.

Contrast this with the strategic maneuvers of John D. Rockefeller a few decades later. Faced with a coordinated effort to raise passage rates for shipping oil out of Standard Oil refineries in and around Cleveland, Rockefeller knew that he needed leverage – the railroad companies owned the lines he needed to transport his oil, a classic strategic control point. Consequently, he decided he needed an alternative – and built a network of oil pipelines to circumvent the need to transport via rail. Rockefeller knew that he would be squeezed for higher rates by the railroads that owned the only viable way to transport oil – unless he could break the control point. The pipeline was just that device. Once again, this was absolutely brilliant.


[1] Taken from Episode #1 of the History Channel’s The Men Who Built America. Picture source: http://www.catskillarchive.com/rrextra/albbrdg.Html (public domain).

William Sheppard, Minnetonka, Crème Soap on Tap and the Story of the Pumps

4886333_f260

William Sheppard of New York was granted a patent of “Improved Liquid Soap” in 1865. His invention was a good one, one that had many practical uses, but like many inventions, it did not make its way into people’s homes until much later. In 1980, the Minnetonka Corporation started offering “Crème Soap on Tap” through boutique distributors. The product was a success, and the corporation decided to follow up with a similar product for mass retail sale.[1] One of the decisions made during the launch was to package the product in a distinctive looking pump bottle. The problem, however, for a relative small producer of consumer goods, is that retailing is intensely competitive with requirements to get on the shelves (“slotting allowance”) and performance guarantees (”failure fees”) once on the shelves, both tough barriers to overcome for a small manufacturer potentially faced with overwhelming competition were the giants such as P&G, Johnson and Johnson and Unilever to attempt to imitate its success. In short, the best Minnetonka could hope for was to be a huge success on the shelves, but this would invite swift and formidable, perhaps even insurmountable, competition. On the other hand, Minnetonka believed that if it had about a 6-month lead on potential competitors, it could build up enough of a brand presence and shelf space allocation that it would be able to maintain at least a one third market share even after the “big boys” entered. So, how does one gain a 6-month lead over potential entrants, that is, how can they forestall entry? The answer lies with the notion of Strategic Control Points.

In this instance, Minnetonka decided to buy up the world’s supply of plastic pumps! By doing this, if any of the major manufacturers wanted to enter the liquid soap market, they would have to wait until the supply builds up again or build their own factories to make the pumps. This process would take at least 6 -8 months, precisely the amount of time Minnetonka needed to build distribution, shelf allocation and a brand presence! In this instance, pump manufacturing was a classic Strategic Control Point – a part of the supply chain that, if controlled, enabled Softsoap® to gain a differential competitive advantage in the key part of the market that they were after, specifically retail. Note that there may or may not be a potentially profitable business in pump manufacturing, but controlling that part of the process was a critical part of making the profitable part (Softsoap® at retail) happen. And, as they say, the rest is history.


[1] Dougherty, Philip H. (1980-02-05). “$6 Million to Back Minnetonka’s Softsoap”. The New York Times: pp. D15. Retrieved 3 October 2012.

Follow

Get every new post delivered to your Inbox.