Well, it all sounded like a good idea … the folly of an unsustainable business model

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Based in New York and founded by technology and entertainment entrepreneurs Stacy Spikes and Hamet Watt in 2011, MoviePass allows users to purchase access to a movie a day for a single monthly subscription fee. It was originally funded by major investors including True Ventures, AOL Ventures, Lambert Media, and Moxie Pictures. In June of 2016, the company named Mitch Lowe, a former executive of Netflix and Redbox as its CEO. In short, it has had significant heavy hitters creating, backing and running the company.[1]

Further, it seemed to understand an important segment of its market – movie loyalists who frequently go to the movies. As a result, the MoviePass subscriber base grew quickly (to more than 2 million in February of 2018) as its $9.95 per month fee for one movie a day (as of August 2017) was a great deal.[2]

However, since its launch, MoviePass has faced objections from major cinema chains. AMC Theaters has been one of the more vocal critics, saying that MoviePass “would not be welcome” at its theaters in late 2017 (AMC has recently launched a subscription service at its own, one valid at only AMC Theaters). Many of the objections relate to concerns about the sustainability of the MoviePass business model. There is merit in these concerns: in July 2018 Helios and Matheson Analytics (who purchased a majority stake in 2017) filed to raise $1.2 billion just to keep MoviePass solvent, while auditors doubted its ability to sustain operations.[3]Its viability as on ongoing enterprise remains uncertain.

On the face of it, the objections seem odd since the theaters get revenue from filling their seats (seats are perishable after all – a seat that goes unsold for a movie showing is revenue lost forever) and higher occupancy means additional concession revenue as well. Further, the movie theater gets full price for the ticket from MoviePass. Again, on the face of it, one wonders why there is resistance from the theaters; filling seats that might otherwise go unsold is, surely, a good thing.

The Folly: A Startup’s Scale must supportthe business model – in this case, scale actually hurts the business, leading to an unsustainable business model.

Since MoviePass pays theaters full price for tickets, here are two possible effects on theater pricing, neither good for the theaters or the sustainability of MoviePass:

  • Upward pricing pressure due to demand effects. Any startup knows that “speed to scale” is important – scale usually brings lower costs and potentially “network” effects that make rival entry more difficult. This is the ironic twist that leads to sheer folly in this case: here, such scale actually hurts the viability of the business. As the number of MoviePass subscribers increase, the demand for tickets increases.[4]This increase in demand exerts upward pressure on ticket prices. Further, theater owners know they have a base (now over 2 million strong) of MoviePass subscribers who are entirely price insensitive (MoviePass pays full price while demand is generated by their subscribers who have an incremental ticket cost of $0). Thus, while most startups are able to reducecostsas scale grows, MoviePass is likely to experience significantincreasesin costs as scale grows. In a world characterized by seating scarcity in theaters (e.g., during an economic growth period, in select geographic markets, for high demand movies, etc.), the effect will be even more pronounced.
  • Perceived value of theater tickets erodes. For MoviePass, as the number of subscribers grow, the perceived value of a theater ticket is likely to decline since more and more people are paying significantly less than full price for each movie they attend (why pay over $10 for a single ticket when my neighbor or person sitting next to me is paying $9.95 for the entire month?!). This would naturally face resistance from the theaters (no firm ever wants the perceived value of their market offering to decline; this is almost invariably fiercely protected), likely resulting in reactions from outright bans (as by AMC and Landmark) to competitive launches aimed at MoviePass (as occurred in August of 2018).

In building a strategy, we try to build strategies that are robust to future states of the world, i.e., strategies that do not depend upon our forecast of the future being correct. We also try to build business models that are self-reinforcing (e.g., Amazon’s “Flywheel of Growth”).[5]

Unfortunately for MoviePass, this was turned on its head. Every possible scenario leads to its demise. As their subscriber base grows, MoviePass costs are likely to increase, while understandably facing fierce resistance from theaters.

This is sheer folly: a classic example of an unsustainable business model at work.

How the investors could not see this is the biggest – and most vexing – question!

 

 

Notes:

[1]Key sources: https://en.wikipedia.org/wiki/MoviePass, https://www.slashfilm.com/amc-theatres-banning-moviepass-probably-not-possible/

[2]Operationally, the company signed a deal with MasterCard that provides users with a special credit card linked to an app that allows people to check in to a movie and pay for the ticket using either the app or the card.

[3]https://www.nytimes.com/2018/07/29/business/moviepass-service-outage-finances.html

[4]This increase in demand happens in two different ways: via existing individual subscribers (movie-goers are paying substantially below market prices) and via the new subscribers that are added.

[5]See, for example, https://www.inc.com/jeff-haden/the-1-principle-jeff-bezos-and-amazon-follow-to-fuel-incredible-growth.html

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Those who cannot remember the past are condemned to repeat it …

The quote, most likely due to writer and philosopher George Santayana, plays out in many markets today. In an earlier post, I discussed how Vanderbilt exerted a point of strategic control in railroads during the Industrial Revolution and asked the question will history repeat? Well, a recent example may inform this debate.

After a recent talk at the Yale CEO LATAM Forum Miami, the CEO of one of the largest insurance companies in Latin America came up to me right before lunch and said, “I hate Google.” I responded by saying “that sounded pretty harsh” and asked why he felt so strongly. His response was both simple and telling. He said that Google was “extorting much of my profits.” He claimed that, via our cell phones, in his home country, Google has the ability to show that Guillermo has a heavy foot on the gas, Luis doesn’t leave enough space between his car and the one in front, while Carlos respects all traffic rules—including speed limits. Therefore, armed with such data from Google, insurance companies can now better match the risk-rate profiles of their customers and charge premiums for drivers who are higher-risk.

However, as you can imagine, Google wants a significant “cut” of the resulting profits. In fact, he claimed that if he didn’t “pay up,” Google threatened to sell similar information to competitors; thus, he would be at a significant disadvantage vis-à-vis their rivals. In sum, Google owns a key strategic control point (SCP) in this industry—data on drivers’ locations and speeds—and is demanding a cut of insurer’s margin as a result.

There are many things that Google’s parent Alphabet must have in place in order to exert such margin pressure. Primarily, of course, they need to be able to access the data. In the example above, Google is accessing data via operating systems (i.e., the Android OS) and a location-based app (i.e., Google Maps). According to the insurance executive, over 90 percent of the phones in his home market use one and/or the other, which, combined, give Google access to movement data for over 90 percent of drivers on the road. So, Google has slowly been building the infrastructure to gather and own the data that they need to extract margins from this insurance executive’s company.

This begs a number of questions, not the least of which are the following:

  • Given recent global debates on privacy ranging from Facebook’s Cambridge Analytica scandal to the European Union’s recent GDPR (General Data Protection Regulation) initiative, is Google’s parent Alphabet merely repeating the history of Vanderbilt’s Hudson Avenue Bridge?
  • Will data and privacy law parallel the development of US Antitrust legislation passed 100 years ago?

See https://www.linkedin.com/feed/update/urn:li:activity:6437667028089217024 for a discussion …

The First Day of ‘T-Ball and Management 101: The Atlanta Hartsfield-Jackson Airport Shutdown tells us how little we’ve learned since 9/11

Anyone who has ever played baseball as a child or coached as an adult understands the meaning of “T-Ball,” where a baseball is placed on a stationary stand (a “T”) for the hitter to hit before learning how to hit a pitched baseball. The first day of “T-Ball” also typically comes with basic lessons that remain for life such as keep your glove on the ground when fielding a ground ball – the worst mistake any player can make is to allow a ball that is hit on the ground to go under their glove.

Management – particularly for public institutions such as Atlanta’s Hartsfield-Jackson Airport, the world’s busiest airport – has similar principles that you would learn early in a “Management 101” course, be it in a business school or in the school of hard knocks. Analogous to keeping your glove on the ground when fielding a ground ball in baseball, managers of public institutions need to be prepared and practice for various events that are foreseeable if not likely.

I was stuck for almost 6 hours on the tarmac in Atlanta last Sunday, 12/17/17. The passengers and Delta flight crew dealt with our 6 hours on the tarmac with smiles and good humor. What was utterly shocking, however, was the complete lack of preparedness once everyone deplaned. While there have been reports of announcements earlier in the day, from the minute passengers walked off the jet bridge at approximately 7:45 pm to the time we found – eventually – a way out of the airport via MARTA (Atlanta’s subway system), there was not a single person, not one, directing passengers. No information, no officials directing people where to go, no one with placards or vests explaining where the exits were, nothing. Elderly passengers in canes were slowly walking up multiple flights of non-working escalators without direction, not knowing what the top would bring. This was a full 7 hours after the event that took out the world’s busiest airport’s power. In 7 hours, the airport and the city had not mobilized to direct passengers and ease the confusion and stress.

This was shocking.

The following video was taken outside of the secure area and it depicts passengers walking aimlessly and with no order in the darkness:

 

While no one could have predicted that a fire would take out the electricity at the airport, it is not out of the realm of possibilities that a terrorist attack – be it a direct attack or an electromagnetic pulse – could take out the main power supply of any municipality.

What was absolutely egregious was that there was no plan in place for something like this.

Any airport or municipality should practice frequently for a potential terrorist event and know like clockwork what to do were something like this to happen, regardless of the cause. Workers should know where to go, areas should be pre-designated to direct passengers and explain what to do. This should be practiced and practiced and practiced for any event, be it a terrorist attack or a fire taking out the power supply. While most municipalities are resource constrained, often starved, this is not an overly expensive endeavor – it involves planning and practice.

This is Management 101. Be prepared. Just like first day of T-Ball. Keep your glove to the ground.

A few years ago, I had the privilege of sitting at a dinner next to Jim Goodwin, the CEO of United Airlines on 9/11. I asked him about what it was like being CEO on that nightmare of a day and what would he have done differently. He said that he was extraordinarily proud of his people on that day, that they had a plan in place were something like 9/11 to happen, one that they practiced over and over at least once a month. He said that priority number one was getting all of the planes on the ground to keep the passengers safe and that his United employees executed the plan flawlessly, just like they had practiced over and over. However, the one part of the plan that they never thought about was what to do once the hundreds of planes and thousands of people were on the ground. This was his one regret: that so many people suffered from being on the tarmac for so long without a plan in place.

We clearly have learned little in the 16 years since 9/11.

The City of Atlanta and the officials of Atlanta Hartsfield Airport should be ashamed.

Management 101. The first day of T-Ball.

 

My Father’s beloved Indian motorcycle and the Queen of England – from “Old School” to “It changes Everything” in just 50 years

My father was “old school. ” He grew up in the Bronx, NY, joined the Navy at the age of 17 to serve in WWII and became a NYPD police officer when he returned from service. He proceeded to walk a “street beat” in the toughest neighborhoods of NY back when cops walked patrol by themselves. He eventually worked his way to be a motorcycle cop chasing speeders in the Bronx.

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

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

One day, while chasing a speeder at over 90 miles per hour on his beloved Indian, his bike went one way and he the other. Not a good thing to do while traveling at 90+ miles an hour on a motorcycle. I am telling this story in good humor since not only did he live to tell about it, surviving a broken neck, he lived a mostly healthful life until he passed away, still ornery, at the age of 80.

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Jay Rogers is also an interesting guy. His grandfather OWNED the Indian Motorcycle Company. He went from Princeton University to a startup in China and then to the US Marine Corps, where he served for 9 years. In the middle of these 9 years, he did something very few do – applied to Stanford, got accepted at Stanford and then proceeded to turn them down. He turned them down since he felt he had more service to give to his country, a duty that he felt was more important than his business degree, a decision I greatly admire. He eventually finished his tour and “settled” on that “other” business school, the Harvard Business School (as Yale faculty, Harvard will always be the “other school”) where he earned his MBA. His time at Harvard was often spent working on his dream, a dream to not just start his own automobile company, but to revolutionize the entire automobile industry, a lofty goal to be sure.

Turns out that this goal was even loftier than you might think – he has done something else that no one else has done before – his company, Local Motors, has “3D printed” a car. Yes, you read that right. The key to this story, however, rests not with the impact of “additive manufacturing” (“3D printing”) on automobile manufacturers, but rather with reverberations throughout every aspect of manufacturing:

“Think of walking into a store, the likes of which you have never seen before, order a car of which there are 5 new models every month, and you can order it and take delivery that afternoon … Then, if you get into a crash and the materials for that car only costs $2,000, so you take the components that work off it – there are, after all only 50 parts – and print a new car. You had 4 seats to begin with, what about 5 seats this time?”

Local Motors was founded in 2007 with the vision of designing, building and delivering vehicles differently. The concept is relatively simple: uses the collective brainpower of the crowd by having innovative people from all over the world design the car. Then, use this design – which can easily be modified by any buyer for uniqueness – to produce it in local “micro factories” that produce vehicles locally faster with far fewer parts (50 versus a traditional 25,000+ utilizing between 500 and 1,500 suppliers). For example, they brought their Strati vehicle to production in ¼ of the time it took Tesla to bring its first model to production and used 1/100th of the capital that Chevrolet used to develop its Volt electric vehicle. They can do this in part because they “crowd source” both interior and exterior design from community users. For the Strati, the global crowd source contest winner was an Italian, Michele Anoe, who came to the US from Italy with tears in his eyes saying “This is a country that put a man on the moon and now I’m helping in this country 3D print a car.” He didn’t even have a passport and Local Motors had to move mountains to get him over to the U.S quickly. It truly is a different world in which we live today.

Perhaps most importantly, under traditional automobile manufacturing, with its 25,000 parts and 500 to 1,500 suppliers delivering parts, you can’t change quickly. In just 4 weeks, Local Motors used crowdsourcing and designed a car, the Strati, designed by someone in Italy, with just 50 parts. Because of this, they are able to control all aspects of the production, back to front in the value chain. Much like Amazon, they can control – and earn margin on – every step. Much like Tesla, they have learned that owning the chain right down to the retail level enables them to leverage their platform and community of engineers and designers in ways that few others can imitate. It’s something Amazon learned a long time ago. According to Jay Rogers:

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

Illustrating one of the key principles of Strategic Control, the ability to leverage strength in one market space and from one value chain to another, Local Motors has taken its ability to design, build and deliver vehicles and expanded to work with GE on microwave ovens and rapid design testing, with Dominos Pizza and BMW on parts, and with Airbus in 2016 on drones. Own the value chain back to front in one industry and then leverage this to other industries and value chains, much as Amazon has done.

 

Satellites, Supply Chain and Speed: How seemingly unrelated events are setting the stage for transformation and disruption

Two articles on the front page of the Business and Technology section of the Wall Street Journal on April 19th are, at first glance, entirely unrelated: one about the earthquakes in Japan and the other about Airbus’ satellite production announcement.

The first article (“Earthquakes Expose Supply-Chain Frailty”, Wall Street Journal, 4/19/16, print edition page B1) discusses how the once envy of the world, Japan’s “Just in Time” (JIT) production has made it such that any disruption at all – let alone one as large as the series of earthquakes recently to hit Japan – often leads to disastrous production delays (in this case, Toyota temporarily shutting down 26 car assembly lines in Japan). Lean assembly without disruption can be incredibly efficient, but 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, http://www.wsj.com/articles/airbus-joint-venture-aims-to-churn-out-satellites-1461011968) discusses Airbus’ joint venture to produce small (around 300 pounds) advanced satellites at a rate never before even remotely achieved – as much as 15 satellites per week. The facility is slated to be located, interestingly, at a site located at the Kennedy Space Center next to Jeff Bezos’ Blue Origin LLC.

The old model of production efficiency is rapidly – with light speed – giving way to IoT (Internet of Things) cloud-based interconnectivity led by automated robotics, Artificial Intelligence (AI), additive manufacturing (3D printing) and interconnected devises 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 may think, estimates that the “Industrial Internet” will dwarf the “Consume Internet,” generating a staggering $37 trillion in revenue by 2025, just 9 years away.

So, we read about supply chain disruptions in Japan due to a series of earthquakes and we realize quickly that the JIT production that made Japan great in the 1970’s and 1980’s is rapidly giving way to IoT interconnected devises so that the supply chain – now interconnected through the cloud and guided by AI optimization algorithms – adjusts to any supply chain disruption automatically.

How are all of these processes connected globally? Through the IoT interoperability provided by the satellite communications that Airbus, Boeing, Google, Facebook, Amazon and others are frantically fighting for as you read this. The winners in this battle will be the backbone of future production just like Japan’s Lean Six Sigma and JIT production efficiency transformed factories worldwide back in the 1980s.

The pace of change we see today, however, won’t take decades; rather it will take a short number of years … and supply chain disruptions like we see in Toyota’s supply chain today will be a thing of the past.

The winner? Global growth. Hold your hats. You think the Internet, as we know it, has transformed out lives? We are about to witness an explosion in growth unlike we have ever seen. Get ready for the ride!

Why the NY Times is “Broken” about Google Glass Being “Broke”

Many have pointed to the decision by Google to pull the plug on the Explorer program for Google Glass as evidence that the “experiment” in the Google Glass program has failed. No other article has been more prominent than the recent piece in the NY Times “Why Google Glass Broke” (http://www.nytimes.com/2015/02/05/style/why-google-glass-broke.html?_r=0). Catchy title. Unfortunately, the article is all downhill from there. It completely misses the point. All of it.

OK, before I explain why all of this completely misses the point, I have a confession. I don’t want to be accused of being “Brian Williams” these days after all! OK, I admit it. I own Google Glass – complete with designer frame. I know personally that all that you read about the product itself is true (I’ve even personally seen Sergey Brin in a NY restaurant sans glasses!). It is not ready for primetime. All of the concerns about battery life, limited capabilities and not feeling safe in public (I have not dared to wear it in public) are spot on correct. But this isn’t the point.

It’s like saying that the first portable computer, the Osborne 1 (introduced in April of 1981 at a price of $1,795), had limited capabilities and battery life and so portable computers were a failure. Google’s Glass in it’s current form would never be a hit, much like the Osborne 1 couldn’t have been. However, and this is a big however, unlike the small startup Osborne, what Google, with its vast resources, has learned from Glass is all about strategic control, all about what is the key to its success: ubiquitous interconnectivity. And that is all that matters. And for this, Glass has been a huge success.

I wrote earlier (see https://competesmarternotharder.wordpress.com/googles-project-glass/) about wearables and how companies will, sooner that we think, make smartphones as we know it obsolete. After all of the hype around Google Glass and the Apple iWatch, see the following for two other executions:

https://www.youtube.com/embed/9J7GpVQCfms or http://www.cnet.com/news/after-google-glass-google-developing-contact-lens-camera/

The point has ALWAYS been about the interconnectivity. Whether it be Glass, contact lenses, a bracelet, a watch, a piece of clothing or something not yet imagined, isn’t the point. Whatever the delivery mechanism, the company that wins will be able to do this:

https://www.youtube.com/watch?v=9c6W4CCU9M4

And Google above all other companies – be it through Project Loon, Project Fiber, its satellite foray with Elon Musk and Space-X, knows that what it has learned with Google Glass along with the ubiquitous interconnectivity, will be the company to do what the last video shows.

If only the NY Times got it, Google might not be in “stealth” mode anymore and competition might be for real. For Google, competitive ignorance is bliss. Sergey couldn’t have written the NY Times piece any better!

The Story of Ubuntu, Sapphire Glass and “Best laid plans …”

I often write about how companies can gain dominate markets by leveraging points of strategic control. Apple’s control of sapphire glass (see my earlier post below) was one classic example that has seemingly gone awry not for strategic, but for operational reasons. Recent developments demonstrate the appropriateness of the age-old question “Which tire on the car is most important?”

Indeed, Apple may have to delay the launch of its steel and gold Apple Watches due to quality issues of the new furnaces at its supplier’s Mesa Arizona plant. Apple’s chief supplier of sapphire crystal, GT Advanced Technologies (GTAT), according to court papers, finds the terms of its contract with Apple “oppressive and burdensome”.  The short version of a long story (http://fortune.com/2014/10/11/apples-got-a-mess-on-its-hands-in-mesa-arizona/ ) is that GTAT committed to building larger furnaces to meet Apple’s scale requirements only to find out that the quality of the sapphire produced by the furnaces didn’t meet Apple’s quality requirements. The end result may be Apple spending as much as $1billion to upgrade the furnaces at GTAT’s Mesa facilities in order to get production of its higher-end Apple Watches out reasonably close to on time.

What started out as a brilliant way to secure unrivaled volume and quality in sapphire glass may have ended up as a huge headache and investment for Apple. It goes to show that you are only as good as your weakest link … get the strategy right and if your operations and production goes awry, the strategy won’t matter …

Even with points of Strategic Control, the “best laid plans of mice and men often go awry” … is no less true for Apple and sapphire glass!

Post note: Thanks to Jason Lambert for pointing this out!

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.