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.

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