Saturday, 26 April 2014

Co-opetition, Complementarity and the 'Sixth Force' of Competitive Strategy

What’s the most powerful force in the economy? If you’ve studied some basic microeconomics, you might suggest it is competition, which (in theory) drives prices down to marginal cost, and maximizes social welfare. You might be drawn to a similar conclusion if you’ve studied business strategy or marketing, and learned about the importance of differentiating your offer from your competitors to prevent profits being competed away.

The central thesis of Adam Brandenburger and Barry Nalebuff’s 1996 book ‘Co-opetition’ is that this singular focus on competition is misguided – and that co-operation is at least as important. In fact, they argue, competition and co-operation are inextricably linked, two sides of the same coin, so when they combine these words in their book title they mean it literally.

Co-opetition along the supply chain

A typical firm procures some inputs – materials and services – from a set of suppliers. It adds value to those inputs, then sells the product or service on to some customer. A long chain of many of these value-adding activities, in many different firms, will stretch from the extraction of raw materials at one end to the consumer market at the other. Brandenburger and Nalebuff point out that a firm’s relationship with its suppliers and customer has a co-operative flavor, because they are working to jointly create value for the end customer at the end of the supply chain. However the relation is also competitive, because they need to bargain over how the value is distributed between them. In other words, they need to co-operate to ‘grow the size of the pie’ but then they are in conflict over ‘how to split the pie.’

Co-opetition within an industry

The idea that firms within an industry are in competition with each other is well-known. Firms compete for market share, which by definition is a ‘pie’ that adds up to 100%. Firms also compete over input resources, such as ‘star’ talent and capital investment. Competition in these arenas is often fierce – so where does co-operation come into the equation? Collusion is clearly possible, but illegal. Brandenburger and Nalebuff do not advocate collusion, but they also question the need to act in a highly competitive manner all of the time. For example, they advise against aggressively pursuing a competitor’s customers with low-priced offers, as the competitor will only go on to reciprocate, stealing away your customers further down the road.

Moreover, there are legitimate ways for firms within an industry to engage in mutually-beneficial co-operation. They can pool resources in a joint venture when engaging in a risky initiative, such as pioneering research and development or expansion into a frontier market. They can support 3rd party trade associations which represent the industry to the government and the press. They can sit on standards-setting organizations, and back common certification standards so that consumers are better assured about the quality of the goods and services they are buying. These co-operative strategies can benefit all the firms involved, and the end consumer, and are an increasingly important part of a corporation’s portfolio of strategic initiatives.

The power of complementors

To me the single most powerful idea in the book is the concept of complementors. To quote their definition: 
“A player is your complementor if customers value your product more when they have the other player’s product than when they have your product alone.”
So essentially any pair of products or services which are typically consumed together are complementors: hot dogs and mustard, games consoles and video game software, airplanes and airports, iPods and MP3s, cognac and karaoke bars… the list is endless. Complementarity creates a form of strategic interdependence which means a co-operative strategy can be enormously effective.

Brandenburger and Nalebuff use the example of Nintendo, which managed to dominate the market for 8-bit videogame consoles in the late 1980s, largely because of its control over the complementary goods – the games. It had a strong capability to design games in house, based on its history making arcade games machines, but it also cultivated a set of external suppliers, none of which was permitted to become too powerful in its own right.

Intel is another classic case example of a firm which invests in complementary technology. By helping external firms to develop applications which put high demands on the computer processor, they stimulate demand for new generations of their CPU chips. Intel’s corporate venture capital program is legendary, and while successes are rare they have hit a few home runs (the typical venture capital ‘portfolio’ approach). Unfortunately, one example which the authors dwell on in this book is, nowadays, looked back upon as a failure: Intel’s foray into video conferencing, with its ‘ProShare’ software in the early 1990s. They invested $750m in developing this technology, but never gained a critical mass of uptake*. (The irony is that when we analyze this case now, we can trace the failure of video conferencing to take off to an absence of complementary services: high speed internet connections were very rare at the time).

When I came across Michael Porter’s Five Forces framework in my undergraduate course, it seemed elegant, all-encompassing and, therefore, close to perfect. From time to time, in unashamedly nerdy discussions with my colleagues we might speculate about what might be missing from this framework, how it might be improved. We never settled on a firm answer. Having read Brandenburger and Nalebuff’s book, I can now answer with conviction: that elusive ‘Sixth Force’ in business strategy is the presence of Complementors.

A great 21st Century illustration of this is Apple. The success of Apple has not so much rested on its market power with respect to suppliers and customers (although this plays a part). The really critical success factor, the magic essence, is the large ecosystem of complementary products and services it has created around its core offerings. The music for its iPods, and the Apps for its iPhones, sold through proprietary platforms; the mobile network infrastructure and Wi-Fi hotspots on which it relies for mobile data delivery; the broad range of peripherals for its hardware which helps establish them as quintessential lifestyle devices. Apple has not just one set of complementors (which would be easy for other firms to imitate) but a whole array of them.

Brandenburger and Nalebuff’s book may be approaching twenty years old, but it is still well worth a read. Their game theoretic approach to strategy is grounded in timeless principles of mathematics, so it is unsurprising that it remains relevant today. If anything the technological trend towards an ever-more interconnected world makes their message of considering complementors ever-more valuable as time goes on. 


*For a detailed account of Intel's strategy during the 1990s - including its errors - I can recommend Annabelle Gawer and Michael Cusumano's  excellent book Platform Leadership