An old tradition returns-with a twist

The current drive to return to cooperation may be the last gasp of diehard adherents of sustainable advantage and traditional collusion-based strat­egy. If they cannot cooperate tacitly, they attempt to cooperate openly. If they cannot sustain their advantages by ordinary means, they try to do so by the extraordinary means of neutralizing the competition that is eroding advantages. This is quite often the lazy way out, which appeals to unimag­inative managers who do not see ways to move on to new advantages. Rather than continue to improve their products and services, rather than continually develop new advantages in each of the four arenas, they are trying to freeze everyone in place. This cannot succeed when hyper­competitors simply refuse to go along with the traditional rules of the game.

1. Cooperation Escalates Conflict

The current view of alliances is that they can be win-win situations. Rather than fight over a limited pie, both competitors work together to increase the size of the pie, and everyone does better. But even if the two competitors manage to increase the size of the market, they will eventually end up fighting for bigger shares of this larger market. As Plato said, “Only the dead have seen the last of war.”

While there are uses for cooperation in hypercompetition, as discussed below, cooperation should not be seen as a panacea for the very real chal- lenges of intense competition. Instead it is merely a pause in the action, leading to more intense levels of competition. Ultimately, because of the dynamic nature of markets in hypercompetition, cooperation does not lead to a dampening of competition for two reasons.

First, when one group of competitors forms an alliance to compete more effectively, another group of competitors may then form its own alliance. Each move tends to up the ante, leading to more intense levels of compe­tition. For example, Toyota and Nissan responded to the Big Three’s consortium to develop a battery for the electric car of the future by talk­ing about their own joint effort. Cooperative strategies actually can con­tribute to more intense competition. The alliance of France, England, and the Soviet Union only escalated the conflict with Germany, Italy, and Japan during the 1930s to a world war. It works the same way in busi­ness.

Second, as Michael Porter comments, “Alliances carry substantial costs in strategic and organizational terms. .. . Today’s partners also often be­come tomorrow’s competitors, especially partners with more robust com­petitive advantages or that are more dynamic. Japanese firms have demon­strated this in countless industries.” He notes that alliances are often “a response to uncertainty, and provide comfort that the firm is taking action.”1

Kenichi Ohmae, urging managers to overcome their fear of global alli­ances in an article in Harvard Business Review, compares alliances to mar­riages.2 But alliances are not a long-term commitment. Competitors are not linked until death do them part but are actually engaged in a fight to the death. Alliances are formed when they are mutually beneficial and are dissolved at will, usually leaving one partner at a disadvantage and creat­ing confusion and disruption. Like the fate of many modem married cou­ples, however, business alliances have to deal with the market disruption that results from the dissolution of the alliance.

As long as there are hypercompetitive firms in the market, cooperation will lead to more intense competition. Hypercompetitors will take advan­tage of industries with less aggressive players the way wolves attack sheep. There are a variety of ways that hypercompetitive firms use cooperative agreements to advance their positions and move to higher levels of com- petition.

2. The Hypercompetitive Use of Cooperation

While cooperation is not an effective antidote to hypercompetition, it can be an effective part of aggressive hypercompetitive strategies. There are several ways companies use cooperation effectively in hypercompetition:

To gang up against other groups Companies cooperate with two or three other players to work against other large companies or alliances. In effect, they may form an ad hoc keiretsu or larger conglomerate to match the resources or know-how of their competitors. As discussed in Chapter 4, this is one way small companies overcome large firms with a deep-pocket advantage. For example, Japanese keiretsu combine the forces of diverse firms to compete in global markets.

To limit the domain of competition Companies often cooperate in one area and compete in another. For example, they may cooperate on price by signaling and through other methods of establishing a stable price in the industry. Then they may compete on quality or on know-how, using the profits gained by avoiding price competition. Or as can be seen from Sematech and other recent R&D consortia in the United States, compa­nies may agree to work together on developing know-how and then com­pete on manufacturing products, using that know-how. Companies also use cooperation to limit the geographic domain of competition. For exam­ple, some groups of Japanese companies have agreed to cooperate at home to fund competitive actions abroad.

To build resources Companies frequently use cooperative agreements to gain needed resources and expertise that they do not have in-house. Companies need to carefully measure the costs and benefits of such ar­rangements. It is rare that a cooperative agreement doesn’t favor one side slightly over the other. In this case, one partner gains a disproportionate benefit from the arrangement, and this tilts competition in its favor. In retrospect, Intel and Microsoft gained far more than IBM from the ar­rangement to produce personal computers.

To buy time Companies sometimes cooperate with other companies to throw them off guard. A weak competitor will cooperate with a stronger one to keep from being killed or to build up sufficient resources for an attack. When Komatsu was weak due to the strong yen in the late 1980s, it offered Caterpillar a chance to raise prices and end the price wars it had triggered, hoping that Caterpillar would become a less fierce competitor.

To gain access This is the Trojan Horse strategy of riding into a market through an alliance with a foreign competitor and then competing aggres­sively against the competitor. The company that accepts the Trojan Horse often regrets the move later.

To learn In addition to gaining access to markets, cooperation is also used to gain access to knowledge. The partner joins with a competitor to gain an understanding of its unique processes or approaches. For example, the General Motors-Toyota NUMMI venture ostensibly offered GM in­sights into Japanese production techniques and offered Toyota insights on American markets and workforce.

These hypercompetitive uses of cooperation result in increased levels of competition. In each of these instances, cooperation is a strategy used to gain a temporary advantage over a competitor or to create an even greater challenge or threat to another alliance.

3. Divorce American Style

In most cases, one partner in these transactions is very often losing ground as its opponent gains ground. One partner is providing its future competi­tor with time to build its resources, resources to use in future competitive interactions, or its access to markets. In a dynamic market cooperative agreements are only sustained as long as they provide a temporary advan­tage to at least one of the companies.

In sum, cooperation is no longer a strategy that creates an oligopolistic bargain or tacit collusion. The old tradition of cooperation now has a new wrinkle. It is not used for earning excessive dividends or paying excessive wages to unionized workers seeking a piece of the action. It is used for conflict escalation because cooperation has several hypercompetitive pur­poses. It cannot be used to dampen competitive rivalry because the only effective strategy in hypercompetitive environments is one of dynamic, aggressive movement up the escalation ladders.

As described in the following chapter, U.S. antitrust policies—which were designed to counter the collusive strategies of companies—also need to be realigned to acknowledge the new realities of hypercompetition. Be­cause hypercompetition has made collusion obsolete, the antitrust laws are protecting against an evil that does not exist. Hypercompetitive markets destroy sluggish colluders and force them to change their ways or die. Cer­tainly the steel and automobile companies have learned these lessons. While more aggressive anticollusion, antitrust enforcement might have helped these industries in the 1970s, the market has taken care of the problem by itself The steel and car companies had to adapt to more ag­gressive competitive methods. The old oligopolies are as dead as the ideol­ogy that it is best to compete by not competing.

4. A New American Ideology: Compete To Win

Traditional, collusion-based strategy no longer holds in a dynamic envi­ronment. It does not lead to stability. Instead it invites entry by more ag­gressive competitors or it leads to higher levels of competition by pitting hypercompetitive alliances against each other.

In a dynamic, competitive race there will be winners and losers. This is not a win-win situation for everyone. It is, however, a win-win situation for consumers, who benefit from the intense competition, and for the dy­namic, hypercompetitive firms that dominate the pack. By trying to slow down the race, managers have only assured that their firms will be the losers. Our current view of competition is outdated. In a vain attempt to slow down competition, these collusive approaches and competition avoidance are undermining the source of true competitive success in hypercompetitive environments. American firms can no longer compete by limiting competition as they did in the past. They must face up to com­peting by using the New 7-S’s.

Competing harder sounds scary. There are obvious casualties to busi­ness warfare. Witness the steel towns and automobile towns that have be­come ghost towns in the face of global competition. But a variety of tacitly collusive arrangements with competitors did more to create this problem than to prevent it. Only cooperative agreements that are used for hyper­competitive purposes (such as to create a market disruption based on the New 7-S’s) are effective in today’s hypercompetitive environments.

In hypercompetition companies cannot afford to cling to the ideologies of the past. They cannot cooperate their way out of hypercompetition. They cannot apply static strategic approaches that seek sustained advan­tages and stable conditions to dynamic markets. They must meet compet­itive challenges head-on and compete to win. This, of course, does not mean fighting endlessly fruitless price wars. It does mean staying price competitive and using the dynamic strategic interactions (discussed in Chapters 1 to 4) and the New 7-S’s to disrupt markets by jumping up to higher and higher rungs on the escalation ladders. It may sound like some­thing Yogi Berra would say, but surprisingly, the American tradition of competing by avoiding competition makes it news to say that firms only win by winning.

Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.

Leave a Reply

Your email address will not be published. Required fields are marked *