This post would not have been possible without the friendship and hours of discussion with Dr. Karen Schnietz, a strategy giant!
In a 2015 letter to shareholders, Jeff Besos says that executives make two types of strategic decisions; both pivot on the notion of reversibility. ASSET SPECIFIC decisions are those that require investments and that you cannot reverse once you are on the pathway towards implementation. OPERATIONAL decisions are reversible, like making a poor quality hire. Soon, Jeff Besos will be stepping down from the position of CEO to become the Executive Chairman of Amazon. The justification? He will be focusing all of his effort on ASSET SPECIFIC DECISIONS - because they represent the big wins for Amazon. Although this bifurcation is interesting, does it fully capture what strategic decision-making is?
There is a long-standing research tradition around decision-making. It boils down to 4 models that we see in the real-world over and over again: (1) RATIONAL DECISION MAKING: one where a leader identifies and evaluates the costs and benefits of making a particular decision - this involves research, team meetings, stakeholder consultations, etc. (2) POLITICAL DECISION MAKING: one where a leader maps out the people and systems that will serve as obstacles and cheerleaders to a particular decision. The ugly side - and sadly the more
common use of political decision making - is when leaders make decisions to increase their personal power with little regard for the impact of their decisions on their organization and its people - think of these leaders like you would pageant moms who use their kid to get what they want. (3) IMPROVISATIONAL DECISION MAKING: decisions where judgement meets opportunity in real-time - when leaders use their gut to guide decision making.
GUT = experience + non-traditional knowledge sources + judgement + a real-time understanding of the moving forces in a decision context + emotional intelligence
If you are reading carefully - you might say, “Hey Ariff, wait a minute - these four models describe HOW leaders make decisions, isn’t Besos simply explaining the KINDS of decisions leaders make.” That’s a fair point! You get 1000 points!
And now, I can talk about the point of this blog post: What drives decision-making for leaders? The answer lies in what Amazon, your seemingly local funeral home, Google, Facebook, zippers, Coca Cola and pigs have in common. What is that? The deliberate and calculated intent of locking out competitors from competing with their business models: STRATEGIC LOCKOUT.
For example, did you know it’s next to impossible to enter the zipper market - 90% of all zippers are made by one player: Yoshida Kogyo Kabushikikaisha or YKK. They have successfully locked out almost any other player from competing.
What is STRATEGIC LOCKOUT?
STRATEGIC LOCKOUT is a primary driver of decision-making in organizations. STRATEGIC LOCKOUT means making decisions to make it near-impossible for competitors to operate in certain parts of your business landscape. If that goes well, the goal moves to make it impossible for competitors to enter your market space altogether, or if they do enter, ensuring they have to give you a piece of the pie. On July 29, 2020, the US house antitrust subcommittee heard testimony from the CEOs of the Big Four tech firms: Amazon, Apple, Facebook, and Google.
The lines that stood out for me were: “Our founders would not bow before a king. Nor should we bow before the emperors of the online economy,” said Rep. David N. Cicilline (Democrat, Rhode Island).
Translation: STRATEGIC LOCKOUT does not encourage economic prosperity for the many, but rather only for the chosen few.
In response, Facebook’s Mark Zuckerberg explains, “We compete hard. We compete fairly. We try to be the best,”
Translation: We work very hard to create monopolies - we work very hard to not only be the best at what we do but to be the best at keeping other companies at bay - we do this legally - and FYI, although our users may assume that because we have democratized communication and access to information that we care about national prosperity - we don’t - we only care about our own bottom line.
Although it sounds crass, my translation of Zuckerberg’s answer to congress is pretty accurate. But keeping the conversation at the forest level doesn’t help us understand how to prevent STRATEGIC LOCKOUT or how to achieve it - we need to understand the trees: What are the tools of STRATEGIC LOCKOUT? How do companies achieve it?
To achieve STRATEGIC LOCKOUT, make investments that make customers feel they are working with a small and highly personalized business. Think about your local funeral home, the one your family has relied on for decades. Let’s call it “Jenkins Curtis Funerary Services.” Well, Jenkins and Curtis likely sold it to a conglomerate. The conglomerate keeps the name the same to create the illusion that you are working with an independent funeral home. However, unbeknownst to most, they buy up other independent funeral homes in the area, keep their names in place, and up the prices since they now have a geographic monopoly. They also likely outsource embalming and preparing the body to a local factory-like facility. No one does that! Right! Think again. Look at the history of Service Corps International - a funeral home consolidator that operates more than 1500 funeral homes and 400 cemeteries in 43 states, eight Canadian provinces, and Puerto Rico. You might say, I have never heard of them, how big could they be? You never hearing about them is the point - it’s key to the creation of STRATEGIC LOCKOUT.
To achieve STRATEGIC LOCKOUT, don’t let independent companies operate or don’t let them operate without you: If you are Coca Cola - you figured out a long time ago - that the best way to keep making money is to ensure you buy up all of your bottlers - they call it BIG - the Coca Cola’s Bottling Investment Group - where they invest in independent bottlers “temporarily” - make them super-profitable and then give them to an independent operator to run. The STRATEGIC LOCKOUT? The death of the independent bottler - start-up drink manufacturers can’t find anyone to bottle their drinks. The result: Coca-Cola, Pepsi, Dr. Pepper, Refresco, and National Beverage together control 95% of the market.
To achieve STRATEGIC LOCKOUT, create opportunities to lock customers into your business model and outside of others. Everyone loves bacon (well, not me, I’m Muslim - but that’s what the bacon lovers in my life tell me)! And I am amazed how often on cooking shows, chefs speak about bacon as though it’s a boutique item. The truth: Pork manufacturers have been on a 20-year journey towards STRATEGIC LOCKOUT. In the US, the four largest packers process over 60% of hogs. Well, they buy them on the free market. No. They have contracts with farmers that provide them preferential prices. But they don’t also sell the products in the store, do they? Well, have you heard of Smith Premium, Tyson, Smithfield, Hormel - each owned by the top 4 pork processors and each top-selling bacon brand in the US. The pork business is locked down - and as an independent player - you are locked out!
To achieve STRATEGIC LOCKOUT, leverage your size. There was a time when the scones you found at Starbucks in Seattle were slightly different from the scones you found in New York - a time when Starbucks worked with independent bakeries across the US and the Globe - a time when it valued preserving a reputation of being ‘your local coffee shop.’ Not anymore! In 2015, Starbucks acquired La Boulange - stops working with independent bakeries. In Europe - a global partnership with Princi in 2017. The result? It took away almost $3 Billion from independent bakery operators - strategically locking them out of the coffee business.
So as Jeff Besos moves to assume the Executive Chairmanship of Amazon, will he be focusing away from OPERATIONAL decisions to ASSET SPECIFIC DECISIONS? Maybe! But I put my money on Jeff spending his time on decisions that allow him to create STRATEGIC LOCKOUT.
Here is a prediction:
Today Amazon accounts for almost 15% of UPS’ revenue.
Today Amazon’s shipping costs are $30B - about $9B is recouped via Prime Memberships.
Today, UPS’ market cap is about $120B
How much longer before Amazon buys UPS? How much longer before your Etsy business has to be listed on Amazon to get better shipping rates - smell the STRATEGIC LOCKOUT - MUHAHAHA!!!!
So what does this mean for you as a decision-maker?
It depends on how you feel...
I think STRATEGIC LOCKOUT is brilliant: How can I help my company achieve it?
See my suggestions below in green...
I think STRATEGIC LOCK OUT is unethical: How can I protect my company from being locked out?
See my suggestions below in blue...
How can I help my company achieve STRATEGIC LOCKOUT?
Understand your customers’ buyer behaviour. Do they buy related products from competitors? Consider acquiring these competitors, who are sometimes upstream or downstream from you, to decrease the threat of competition to your business model. If those acquisitions allow you to exert market control - up your prices.
Think about acquiring start-ups that operate at the fringe of your business. They may allow you to change your business model or afford you the option to kill them before they destroy it.
Create loyalty programs that create real stickiness. Although most loyalty and membership programs had customer stickiness as their original goal, this didn’t pan out as planned with customers’ signing up for multiple loyalty programs. Costco is different. A Costco membership creates customer loyalty and STRATEGIC LOCKOUT; but not in the way you may think. Consider that Costco’s most profitable product sale is membership. This allows Costco to create a cash buffer that affords it to invest in locking out other big-box retail innovations by offering prices that others cannot copy because, in the grand scheme, they are subsidized through membership fees.
Create products and services with a focused, customized small-boutique-player feel, to increase your monopoly over customers. Think Amazon Business, Staples Business, or Costco Business - these are all innovations to lock-in existing business customers by creating a more unique and bespoke experience.
Think about ways to acquire market-share tomorrow by selling services today. Think flowers of the month clubs, wine clubs, buying bulk airline tickets, etc. However, no one does this better than the funeral home industry. The larger funeral homes can sell pre-need services resulting in securing market share in the future and locking out small independents from the market. This is similar to Amazon Prime that locks in customers through reduced shipping costs; locking out smaller players.
How can I protect my company from STRATEGIC LOCKOUT
Build strong, high-touch, intimate relationships with customers. This will cost you more, but it will increase your customers’ stickiness.
Invest in start-ups - that today operate at the fringe of your business - as a way to stay at the cutting edge of your industry. This will likely keep you ahead of the larger, harder-to-change, and more monopolistic-oriented competitors.
Always be a value player. When businesses take too much margin and profits, it sends a competitive signal that there is money to be made in this industry. The result is increased competition from competitors willing to take lower margins. This becomes a pathway for larger players to push smaller ones out of the market.
Differentiate your product/service in ways that are very costly for large players to do without charging much higher prices. Differentiation should not only be thought about in terms of the nature of the product/service but also in terms of the customers’ buying experience before, during, and after purchase.
Participate in regulation - help lawmakers understand the levers of STRATEGIC LOCKOUT on the ground so they can better legislate against monopolistic behaviour.