coopetition

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Real long-term business success comes not solely from competing successfully within your current industry, but also from being an active participant in shaping the industry’s future. That way, you can create opportunities for future success the way you want them to be, rather than simply making do with the way things currently are. To actively change the game of business, you need a strategic framework within which to work, and co-opetition theory provides just such a framework. That way, you can change not only the way you play, but which game you play as well for maximum benefit. Part 1 - Co-opetition and the Game of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 2 In its purest form, business can be considered as a game in which money represents points won or lost. The person or company which gathers the greatest numbers of points wins. The biggest opportunities in business don’t come from playing the game better than everyone else - they come from changing the fundamental nature of the game itself to your advantage. Business strategy, and the concept of co-opetition, is designed to provide a framework by which companies can gain a sustainable competitive advantage by changing the game to their own advantage. Part 2 - Changing the Game of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 3 - 7 ELEMENT #1: Players Any time the players in a value net change, the overall market value of the entire net is either worth more or less. Therefore, before you enter any new value net, stop and ask ‘‘Which of the current participants in this value net has the most to gain by my participation?’’ Then find a way to get that player to pay for your participation. ELEMENT #2: Added Values Every value net has a total commercial value, which is made up of the sum of the added values of each participant in the value net. Therefore, if a new participant joins the value net, the amount by which the value of the whole net increased is that participant’s added value. The objective, in business, is to maximize your own company’s added value. ELEMENT #3: Rules Many people simply assume the rules of business - both formal and informal - are set in stone and are not subject to negotiation. That’s incorrect. There’s no reason why you should blindly follow the rules - you can change them at any time. But, keep in mind that works both ways. At any time, your competitors, customers, suppliers or complementors can change the rules as well. They don’t necessarily have to follow the same rules you do. In the marketplace, whichever party has the most power gets to make the rules. ELEMENT #4: Tactics Tactics are actions players take to shape the perceptions of other participants in the value net. The game can be changed, inadvertently or deliberately, by changing people’s perceptions. Everything you do and everything you don’t do sends signals, from which others form perceptions. The collective sum of those perceptions is the game. Most business is conducted in a fog of uncertainty, snippets of information, deliberate misinformation and partial facts. Tactics can be used to: 1. Clear up the fog 2. Preserve the existing fog 3. Stir up new fog ELEMENT #5: Scope In the real world, no value net exists in isolation. Each value net is linked to other value nets through common players, a common location and so on. And each value net can exert influence on other value nets by virtue of those links. In the final analysis, the boundaries of any particular value net are not physical, only mental. There are no real boundaries, only those a person chooses to create. Every value net operates in the context of the bigger picture, and boundaries can be moved, expanded or altered at any time. Understanding those common links that exist between value nets and using them to your benefit is the fifth and final element of business strategy. Part 3 - Applying Co-opetition Theory in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 8 The real payoff in learning about co-opetition theory comes when it is applied. Therefore, you need to develop some practical systems for applying co-opetition theory to everyday business. One way to do that is by using a set of self-diagnostic questions built around the PARTS elements of co-opetition theory. Co-opetition - Page 1 PART 1 CO-OPETITION AND THE GAME OF BUSINESS Main Idea In its purest form, business can be considered as a game in which money represents points won or lost. The person or company which gathers the greatest numbers of points wins. The biggest opportunities in business don’t come from playing the game better than everyone else - they come from changing the fundamental nature of the game itself to your advantage. Business strategy, and the concept of co-opetition, is designed to provide a framework by which companies can gain a sustainable competitive advantage by changing the game to their own advantage. Supporting Ideas Concept of Co-opetition Co-opetition is part competition and part cooperation. It describes the fact that in today’s business environment, most companies can achieve more success in a dynamic industry than they ever could working alone. Specifically, when companies work together, they can create a much larger and more valuable market than they ever could by working individually. Companies then compete with each other to determine who gets the largest share of that market. Co-opetition allows for the real-world business situation that there can be multiple winners in the marketplace. Business, unlike war, is not a winner takes all proposition. The objective is to maximize your return on investment - regardless of how well or how poorly other people or other companies perform. The Value-Net To visualize the business environment, consider the following value net: Suppliers provide resources to all companies within your industry. Competitors, from the customer’s perspective, are all those companies whose products or services make whatever your company offers seem less valuable. Complementors, again from the customer’s perspective, provide products or services that add value to whatever your company offers. Example: computer hardware and software companies are complementors - their individual products are worth more when combined. The biggest commercial opportunities and greatest profits don’t come simply from playing the game better than everyone else. They actually come from expanding the game from whatever it is at present to a new game that is bigger, better and more valuable for everyone involved. To change the game of business, you have to alter one or more of its five basic elements: 1. Players You can alter the mix of competitors or complementors for your company. 2. Added Values Whichever company adds the most value to the value net holds the power. Change the added value of the various players and you change who holds the power, and the game itself. 3. Rules If you can change the rules by which the game is played you can influence who will be most successful. In business, the rules are negotiable. 4. Tactics By altering the players’ perceptions, you can change the outcome of the game. Perceptions are shaped by tactics. 5. Scope By understanding how other commercial games influence this game, you can take advantage of any implicit boundaries other parties are using to improve your own competitive position, and change the game. Key Thoughts ‘‘You have to be able to compete and cooperate at the same time.’’ -- Ray Noorda, founder, Novell ‘‘On any given day, AT&T may find Motorola to be a supplier, a buyer, competitor or partner.’’ -- Gary Hamel and C.K. Prahalad ‘‘When I am getting ready to reason with a man, I spend one-third of my time thinking about myself and what I am going to say, and two-thirds thinking about him and what he is going to say.’’ -- Abraham Lincoln ‘‘The ability to see the other side of the situation as the other aside sees it, as difficult as it may be, is one of the most important skills a negotiator can posses. It is not enough to know they see things differently. If you want to influence them, you also need to understand emphatically the power of their point of view and to feel the emotional force with which they believe it.’’ -- Roger Fisher and William Ury ‘‘Philosophers have only interpreted the world. The point, however, is to change it.’’ -- Karl Marx ‘‘It is not enough to succeed. Others must fail.’’ -- Gore Vidal ‘‘You don’t have to blow out the other fellow’s light to let your own shine.’’ -- Bernard Baruch Customers Competitors Complementors Suppliers Your Company Co-opetition - Page 2 PART 2 CHANGING THE GAME OF BUSINESS ELEMENT #1: Players Main Idea Any time the players in a value net change, the overall market value of the entire net is either worth more or less. Therefore, before you enter any new value net, stop and ask ‘‘Which of the current participants in this value net has the most to gain by my participation?’’ Then find a way to get that player to pay for your participation. Supporting Ideas The objective is to create as big a value net as possible. The more customers, competitors, complementors and suppliers there are, the more the entire value net will be worth, and the more your percentage of the overall value net will be worth. To encourage more competition, customers can: 1. Offer to subsidize any capital investment that would be required for a new company to enter that industry. 2. Provide a guaranteed sales contract if a new company will commit the resources required to enter that market. 3. Offer a last-look provision - in which a new company can match whatever is the best price offered by competitors. 4. Provide better access to information to a potential newcomer. 5. Link initial market entry business with additional future business opportunities. 7. Supply a potential newcomer with a price at which he is prepared to give them the business. To increase the number of customers in the value net, companies can work together or individually to: 1. Educate the market about product benefits. 2. Be prepared to lose money on early customers in order to build market momentum. 3. Subsidize customers who buy complementory products - they more of those they buy, the more they also buy of your own product. 4. Become their own customers - by setting up new companies to buy and use their own products. To increase the number of suppliers in the value net, companies (again working by themselves or with others) can: 1. Pay companies to establish operations in that supply industry, thus offsetting their capital costs. 2. Form a buying coalition in which companies pool their orders to create a viable market penetration level for a new supplier. 3. Become their own suppliers, by setting up new companies to guarantee supply and to stimulate competition. To increase the number of complementors, companies can: 1. Form a buying coalition with customers to steer them towards the lowest priced complementors, or towards new complementors. 2. Pay companies to develop complementory products. 3. Become your own complementor by establishing manufacturing capacity and business operations for a suitable product. Large companies frequently become their own competitors by launching a number of brands for similar products. The competition keeps everyone performing well. Similarly, the other way to expand the value net is to introduce new competitors, by: 1. Aggressively licensing your technology to other companies - generating license fees and forcing your company to continue to develop newer and better versions. 2. Creating second sources of your products - so buyers won’t be concerned about being dependent on just one source of supply. 3. Creating your competition in-house - by creating stand alone brands which compete aggressively for market share. All of these strategies are designed to increase the total market value of the value net by adding more players in form of more customers, more suppliers, more complementors or more direct competitors. From the perspective of a company which has not yet entered any specific value net, they should ask that critical question: ‘‘Which of the current participants in this value net has the most to gain by my participation?’’ The answer to that question will be the group who will offer the best financial incentives for your company to enter that value net. You should then approach them, and structure some way they can pay you to enter. On the other hand, if your company doesn’t add overall value by entering any specific value net, and can’t find any rationale for the current participants to pay them to participate, it will make more sense to sit on the sidelines. Key Thoughts ‘‘If you don’t have a really tough competitor, you ought to invent one. Competition is a way of life.’’ -- Bill Smithburg, CEO, Quaker Oats ‘‘Looking back, it was not our original intention to do our own title development. We wanted to be a licensing company. But after we launched the system, it became clear that the one company that had 3DO at stake was 3DO. It quickly made sense for us to do software development. By putting some leading-edge titles out in the marketplace, we benefit everyone. We benefit customers, we benefit software licensees, we benefit hardware licensees. For now, we really have to control our own destiny.’’ -- Amy Guggenheim, Product Manager, 3DO ‘‘Business is war. The traditional language of business certainly makes it sound that way: outsmarting the competition, capturing market share, making a killing, fighting brands, beating up suppliers, locking up customers. But the way people talk about business today, you wouldn’t think so. You have to listen to customers, work with suppliers, create teams, establish strategic partnerships - even with competitors. That doesn’t sound like war. In fact, most businesses succeed only if others also succeed. The demand for Intel chips increases when Microsoft creates more powerful software. Microsoft software becomes more valuable when Intel produces faster chips. It’s mutual success rather than mutual destruction. It’s win-win. It’s simultaneously war and peace.’’ -- Adam Brandenburger and Barry Nalebuff Co-opetition - Page 3 ELEMENT #2: Added Values Main Idea Every value net has a total commercial value, which is made up of the sum of the added values of each participant in the value net. Therefore, if a new participant joins the value net, the amount by which the value of the whole net increased is that participant’s added value. The objective, in business, is to maximize your own company’s added value. Supporting Ideas Suppliers would prefer the value net to always be kept in a state of under supply - that is, that your company, your competitors and your complementors will not be able to get as much product as they’d like because production is at full capacity already. The advantages of this are: 1. Suppliers get a bigger piece of the total value net business than they would in an equilibrium situation. 2. Customers may buy slower moving products instead of waiting to be supplied with products in short supply. 3. Suppliers get a lot of publicity and place their companies in strong commercial positions. The disadvantages of under supplying are: 1. You create ideal market conditions for a new supplier to enter the value net. 2. The total size of the value net is reduced by each missed customer sale. 3. It may cause future friction with other value net participants. The central challenge of business is to find ways to create additional added value, by making a better product or by using resources more efficiently. Most of the time, creating added value creates both trade-offs and trade-ons. Trade-offs most frequently occur along a quality-cost axis: improving the product increases the costs. In this case: 1. Your objective is to spend another $1 in such a way that customers will pay an extra $2 for your product. If you then raise prices by only $1.50, both you and the customer win. 2. The alternative is to cut $2 from your costs in such a way that customers are still prepared to buy your product for $1 less. Again, you can cut prices by $1.50, again creating a win-win situation. In an ideal situation, however, quality improvements can be made at the same time as costs are lowered. These can be called ‘‘trade-ons’’. The computer industry exemplifies the trade-on concept, with year-by-year performance increasing while costs are reducing simultaneously. Trade-ons: 1. Lower costs in ways that help companies deliver better generations of products. 2. The alternative is to deliver a better product in a way that helps lower costs. Of course, in a competitive value-net, everyone is working towards creating more added value for themselves by developing trade-offs and trade-ons. Sometimes the best way to maximize your own added value is to create solid relationships with your customers. This objective frequently involves creating loyalty programs, which say ‘‘Thank-you for your business’’ to your customers in tangible and effective ways. The most effective customer loyalty programs: 1. Reward loyal customers with products or services they value highly rather than in cash. 2. Offer better deals to loyal long-term customers than are offered to new customers. 3. Say thank you with products that build business - perhaps by offering discounted complementory products or services, or by giving loyal customers a complimentary pass so they can bring a friend along with them. 4. Are well timed. They say thanks once a solid customer relationship is built, without waiting too long. 5. Tell you right from the start what you can expect once you become a long-term customer. 6. Recognize that not only does your company have to compete for loyal customers but that other companies will be doing the same. Therefore, you avoid offering deep new business discounts, because that will simply reshuffle existing customers between the two competing loyalty programs. 7. Are actively pursued, even in monopoly situations, to exclude the possibility of new value net entrants. 8. Are symmetrical - they reward loyal customers and loyal suppliers, because both are essential to your company’s operations. Of course, keep in mind that any successful customer loyalty program is likely to be copied by your competitors. That’s fine, as long as your program is a long term win-win situation in which both you and your customers gain benefits. If, however, your program is imitated by someone for short-term gains, fight back by: 1. Use customer feedback to produce a product which is highly specific to your customer group, and customized. 2. Create a brand identity. 3. Increase your production volume as rap