No-Fear Co-opetition

With the emergence of e-business innovations such as integrated supply chains, strategic partnerships, outsourcing and free-agent knowledge workers, many companies are finding that competing effectively no longer allows them the luxury of keeping all the resources within the confines of the organization. But as they open information and commerce channels to outsiders, companies face a complicated set of challenges determining just how much and how widely they should share.

Among the 1,000 largest corporations in the United states, about one-fifth of current revenues are directly attributable to alliances. An analysts' consensus shows that between 40 and 50 percent of new strategic alliance deals cut in l998 were between or among competitors. More firms are going to have to learn how to cooperate with competitors.

strange bedfellows
The process of simultaneously competing and cooperating is known as "co-opetition," a term whose coinage is generally attributed to former Novell Chairman Ray Noorda. The major book on the subject, Co-opetition (Doubleday, 1996), was authored by two professors, the Harvard Business School's Adam M. Brandenburger and the Yale School of Management's Barry J. Nalebuff.

Its thesis: Traditional business relationships won't work anymore for most organizations. The conventional business-school wisdom insisting that suppliers and customers are just competitors in another guise--and have to be subdued in order to keep costs in line and realize marketplace profit--has been replaced by more subtle, and more successful, partnering approaches.

The classic negative example of market competition is the price war. With traditional market economics, the expected result of most price wars is lower profits for everybody.

Now, companies must listen and respond to customers, enlist the cooperation of suppliers and establish alliances that will allow them to survive the utmost competitive pressures.

Meanwhile the bedrock business realities, including struggles for market share, adversarial negotiations with suppliers, price conflicts with customers and workplace issues with employees, all still go marching on. And it's the simultaneity of cooperation and competition, in all the aforementioned dimensions, that most people have trouble coming to grips with.

No bed of roses

For a real world example, look no farther than Microsoft and Intel, two dominant companies that split the technology pie while making it bigger for both. While their "Wintel" relationship seems purely complementary--Microsoft in operating systems and Intel in microprocessors--testimony from the government's trial of Microsoft exposed some rough spots. In 1995, for example, the two came into deep conflict as Intel planned to launch a software venture of its own, then backed down, under pressure, for the sake of the relationship.

Thus an emerging principle of co-opetition is that adversarial encounters may be inevitable, but the experience doesn't have to be destructive or even negative.

A major reason for that seems simple enough once it's stated: Co-opetition is about establishing boundaries. It's critical to be able to differentiate the knowledge you can profitably share from that which you can't afford to share--and therefore to know precisely where each resides.

"IBM can do deals with a Compaq because its knowledge-based assets make it secure," points out Delphi Group consultant Hadley Reynolds. "So it always knows when it can conduct operations at a level where a given co-opetitor cannot."

Dissolving boundaries

But, true to its paradoxical nature, co-opetition is also about tearing down boundaries.
"What you're aiming for is transparency through the supply chain to the ultimate consumer," says consultant Robert Porter Lynch of The Warren Company, a Providence, R.I., firm that formats strategic alliances, including co-opetitive ones. "So you have to network all the people who are creating value for the ultimate customer."

Once you begin to create alliances in this context, Lynch contends, you wind up with a whole new frame of reference. "The supply chain shifts from the old linearity--where people would try to squeeze each other--to where you look at it in its entire length and try to make it work like a value network."

Some key questions: How to drive down transaction costs? How to make processes work three to five times faster than they would normally work? Chrysler's efforts in networking and streamlining its supply chain had the effect of distributing responsibility for innovation. As a result it can now design a new car in a third of the time it formerly took, with a proportionate reduction in costs.

"Every part connected to every other part gives you instant feedback," Lynch adds, "but your knowledge management becomes very complex because it's happening throughout the entire system in real time or close to real time."

In the same way, rapidly emerging markets also drive co-opetition. When there isn't time to develop the knowledge to exploit these markets in-house, companies need partners that can provide complementary skills.

The power of small

Since smaller players are the more innovation-focused, they are the natural objects of co-opetition offers from larger firms. Thus it is no surprise that today's co-opetitive alliances are becoming natural precursors to mergers and acquisitions.

The theory goes: If we can get along under this kind of strategic alliance, matching up and integrating assets, including those that are knowledge-based, we should be able to successfully merge.

But that's not yet the norm, claims consultant Robert Lynch, a specialist in joint venture negotiations. Co-opetitive alliances have little chance for success when one or more prospective partners are more interested in doing a deal than creating high performance.

"Nine out of 10 who sit down to talk fail to wind up with an agreement," Lynch contends. "And if you follow those who get beyond the talking stage out four or five years, the real failure rate among them is as high as 60 to 70 percent."

Why? Lynch points to lack of a strategic approach to co-opetition negotiations as a major cause of early failure. "A win-win approach is often just too simplistic," he says. "You've got to be sophisticated enough to sit down and jointly design the future--in detail. Then you reengineer it back to the present in a series of action steps."

Beyond simply negotiating, the difficulty many firms have in integration is a major stumbling block.

"With so many technologies being cross-connected," says Robert Lynch, "the ultimate consumer is more confused than ever. He or she doesn't want plug-ins, they want a complete solution. Integration is the key all the way down the line."

"Small project teams provide the best way to get these things integrated," states Delphi's Hadley Reynolds, "because they can break things away from the managerial fiefdoms that don't work anymore. Companies have to be willing to connect the knowledge competencies in partnering organizations irrespective of the moats and castles in traditional management domains."