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Wednesday, September 23, 2020

CEO Insider

Use a “Carrot and a Stick” Approach to Leverage Business Across Multiple Markets

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Today’s competitive business environment is no longer about simply being successful in an isolated part of the market. Successful businesses will no longer be able to focus solely on their primary industries. The new game is one of competition across different markets.

What good companies do today is find and access points of strategic control in one industry that can be leveraged across multiple, interconnected value chains — or the “competitive ecosystem.” This important strategy utilizes a “Carrot and Stick” approach.

The “Carrot” refers to the concept of aligning upstream and downstream incentives — those of suppliers and customers — to be compatible with your own. It involves setting up your entire value chain and customer-incentive structure so that it’s in their best interests to do what’s in your best interest.

The “Stick” represents a strategic control point within a part of a market that, if controlled by one party, can be leveraged for greater margins. This can be in the supply chain, a related business, or even in an unrelated market.

An early example of a strategic control point was when, during the Industrial Revolution, Vanderbilt owned the only rail bridge in and out of New York City — the gateway to the country’s largest port. Without access to the bridge, every other railroad was effectively shut off from the port. Ownership of the bridge was a crucial strategic control point that allowed Vanderbilt to dominate the railroad market.

When firms do an exceptional job of aligning vertical incentives (the Carrot) and utilizing strategic control points (the Stick), they win in today’s hypercompetitive business market. Research shows that such companies’ Earnings Before Interest, Taxes and Amortization (EBITA) more than doubled from 2009 to 2016 (with almost 70 percent share price appreciation).

Utilize these Carrot and Stick concepts to provide unique competitive advantages for you and your organization:

  • Extend from industries to ecosystems. Today, industries are often interconnected in ways we’ve never before seen. It’s become an ecosystem that allows for competitive advantages and avenues for growth into adjacent markets. For example, Local Motors, a company that additively manufactures (3D prints) automobiles, has developed a 3d printing platform with a wide range of interconnecting value chains and interconnected industries. Local Motor’s capabilities in designing, building and selling 3D-printed automobiles can be leveraged into countless manufacturing applications, industries and industry value chains. Indeed, Local Motors is producing 3D-printed microwave ovens for GE, helping Airbus create revolutionary part supply networks, and more.
  • Find points of leverage in a value chain. Find an area in short supply, where competition is low, or where barriers to entry are high and you may be able to exploit these for superior margin. Look for situations where, if your firm controls certain capabilities, it prevents (or makes it difficult for) others to compete. Note that while competitive advantages often result in an arms race where you need to continuously work to stay one step ahead of the competition, a point of strategic control is often enduring and considerably more powerful. An example is a pharmaceutical with a patent, such as Pfizer’s patent on Viagra when it first came to market.
  • Align incentives among separate parties. When looking for a point of strategic control, the supply of critical input to another party can be a potential source. Today, information is a prevalent access point, thanks to Cloud-based interconnectivity (the Internet of Things). For example, in the wind-energy industry, a few ingenious companies are installing sensors in windmills to detect motor failure, allowing its partnering windmill manufacturing firms to dispatch repair teams before the motors fail. Those installing the sensors own exclusive access to the data generated, and they leverage it by selling maintenance contracts to the manufacturers or farm owners. Because the manufacturers can’t efficiently do this themselves, this is a win-win scenario that maximizes windmill up time and provides peak efficiency, while ensuring success for all partners.
  • Decide where to compete before deciding how to compete. Good companies today are able to leverage strength in one market to their competitive advantage in another. The key is finding a direct connection between your unique capabilities in your core market and a critical strategic control point in another. Think of Amazon taking its supply chain expertise into multiple markets.

The identification of these opportunities is key in the interconnected business environment of today. It essentially represents the difference between success and failure.

Written by Dr. William Putsis.
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Dr. William Putsis
Dr. William Putsis is a Professor of Marketing, Economics and Business Strategy at the University of North Carolina-Chapel Hill, and a Faculty Fellow for Executive Programs at Yale University. He is also president and CEO of Chestnut Hill Associates, a strategy consulting firm, and founder of the software company, CADEO Economics, which automates his data modeling-based strategy development processes. His new book is The Carrot and the Stick: Leveraging Strategic Control for Growth (Rotman-UTP Publishing, Feb. 20, 2020). Dr. William Putsis is an opinion columnist for the CEOWORLD magazine.