March 2018

Understanding How Co-opetition Can be Vital for Business Success

Value Creation

Understanding How Co-opetition Can be Vital for Business Success

 

Competition seems to be inherent to business and the market, but in today’s technology-disrupted landscape, businesses could do well to consider collaborative competition. Also known as co-opetition, collaborative competition offers a unique approach to strategy: by collaborating with your competitors, you can reap mutual advantage and grow the value of your business. By understanding how co-opetition works in practice, you can make use of this strategy when the opportunity arises.

 

What’s co-opetition and why is it important?

Co-opetition involves agreeing with an otherwise rival business for mutual advantage. This strategy of collaborative competition allows you and your competitor(s) to reap benefits through, for example, product enhancement and market expansion.

Co-opetition can be a vital strategy for businesses struggling in the current economic landscape, in which consumers are highly educated about goods and services. In the past, the zero-sum-game approach to competition meant selling the same quality goods and services at a lower price, and this allowed you to beat out the competition. However, in today’s highly networked, information-dense marketplace, competition is increasingly between networks and ecosystems rather than individual companies.

For forward-thinking organisations, this is an opportunity. By bypassing the traditional confrontational competitive approach and instead building collaborative networks with your competitors, you and your new partners can enhance the overall value of your businesses, by growing the overall economic pie.

 

Forms of co-opetition

Examples of co-opetition include sharing technological intellectual property, joint R&D schemes, shared distribution channels, merged production capacity, marketing campaigns, and even back-office capabilities. The goal of these initiatives is to grow the total value of your companies and so increase the value of individual firms. However, it could also strengthen your collective market share and prevent new entrants from gaining a foothold in the sector.

Giants like Amazon are early adopters of the collaborative-competition approach. Through initiatives such as Amazon Marketplace, Amazon Web Service, and Apple partnership, Amazon has been empowered to build platform businesses. This broadening addressable market has enabled Amazon to grow its capacity as an individual firm and expand its list of revenue streams.

 

Three key ways co-opetition enhances company value

The following three ways are possible ways co-opetition can drive higher company value.

 

1. Innovation

The right co-opetition initiatives can drive more efficient innovation, and Sony’s partnership with Samsung is a great example. Although fierce rivals, the two technology hardware multinationals engaged in a joint venture to share technology and manufacturing capacity in South Korea. Sony brought to the joint venture its technological know-how, while Samsung contributed its production and marketing expertise. The outcome was lower production costs, increasing technological improvements, and both companies enjoying a leadership position in the LCD-TV segment.

 

2. Expand addressable markets while transforming growth trajectory

Collaborative competition enables firms to grow their addressable market and in the process change their growth trajectory for the better. Instead of focusing your resources on eliminating competitors, organisations can direct more attention to redesigning their business models to enlarge potential markets.

For example, in the Sony-Samsung case, the two firms were able to lower costs and focus on servicing the lower-priced LCD-TV market. This allowed them to expand the number of consumers who could afford their cheaper TVs.

In expanding your addressable market, you could reduce the likelihood of new entrants gaining market share at your expense. At the same time, the widening addressable market boosts the potential growth trajectory of all firms in the sector.

 

3. Higher valuation multiples and profit margins

A co-opetition strategy could lead to higher valuation multiples as well as maintaining or raising profit margins. Consider the reversed scenario where years of price-based competition has led to razor-thin price margins and goods and services that are effectively commodities. Come trade-sale or IPO time, these firms will achieve valuations that are much lower than those in high-profit-margin sectors.

On the other hand, if firms can maintain or grow their profit margins through smart co-opetition, they could, for example, re-engineer themselves into platform businesses and obtain a much higher valuation.

In a highly networked, information-dense marketplace, firms should look to new strategies like co-opetition to stay competitive. Though it can appear counterintuitive, collaborative competition could be the key to maintaining or growing your profit margins. By successfully working with your competitors, you could boost innovation, expand your addressable market, and achieve a higher valuation of your business.

Arowana is an operator of small and medium-sized companies and specialist asset manager. To find out more about how we work with entrepreneurs and leadership teams to grow strong, sustainable businesses, explore our website or contact us for a discussion today.

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