Is "Coopetition" The Only Real Way Out of a Rut?

on under Digital Strategy.

chessIf this is your first time hearing the word "coopetition," your first response is probably a lot like mine was: "What is this, the corporate equivalent of 'frenemy?'"

But, it turns out, coopetition is actually an important concept, an insight from the mathematics of Game Theory, and quite possibly the only way for a company, even the market in general, to escape a state of stagnation.

On its face, the word "coopetition" seems like it should be self-explanatory. It's when two businesses that compete with each other also collaborate for their mutual gain, right? On the most superficial level, yes, that's exactly what it means. But without understanding a few important things about game theory, coopetition is both too easy to dismiss, and too easy to do wrong.

So let's talk about how coopetition works, and why there's a possibility that it's the only way for your company to progress.

Coopetition: Neither Collaboration Nor Competition

As the Harvard Business Review points out:

"Examples of high-profile failed business collaborations are everywhere. From the WordPerfect-Novell acquisition that led to bankruptcy, to the misfires of the Target-Neiman holiday experiment, it's clear that despite the plethora of management literature on how to launch a successful partnership, collaborations often go bust. It turns out, where there is money to be made, self-interest prevails, thus trumping cooperation in the process."

Coopetition gets around his problem by allowing businesses to come together to work on something for mutual benefit, while acknowledging that they are, in fact, still competing with each other.

What does coopetition look like? According to a publication by The European Institute for Advanced Studies in Management, it looks like the success story of software giant SAP. The Enterprise Resource Planning software provider builds competitive advantages not just by cooperating with clients and companies from other industries, but also by forming partial alliances with competitors:

  • They worked with competitors such as consultancy firms. SAP has it's own consultancy division, and consultancies can also compete with SAP by selling there own software. However, both can benefit mutually by distributing SAP's products. SAP expanded its market penetration by leveraging these consultancies, and the consultancies benefited by collecting a percentage of SAP's profits.
  • SAP also used coopetition strategies with rival software companies such as Oracle. Despite being rivals in the Enterprise Resource Planning software market, SAP uses Oracle as its official database provider.

Punctuated Equilibrium: Why Coopetition May Be The Only Escape From a Stagnation Spiral

If you've ever seen the movie A Beautiful Mind you've heard of John Nash. Seeing the movie won't do much to help you understand the concept of a Nash equilibrium, however.

While there's a lot more to say on the matter, the central point of a Nash Equilibrium is this. When all players in a "game" are aware of the rules and of their competitors' strategies, and they reach a point where they have nothing to gain by changing their strategy, they are in Nash equilibrium. Nobody has anything to gain by changing their strategy, so nothing changes.

To escape that situation, the rules of game itself need to change. This is called "punctuated equilibrium."

In the 1970s, evolutionary biologists believed that evolution was a gradual, steady process. But the fossil record told a different story. Fossils wouldn't change for millions of years. Then, some event would take place, and new species would diverge from old ones in a very short period of time (well, hundreds of thousands of years).

Stephen Jay Gould and Niles Eldredge proposed that species weren't caught up in a constant state of competitive evolution, where individual species would seek every tiny little advantage. Instead, they argued, species spent most of their time in a state of Nash equilibrium. It was only when something changed in the environment that species suddenly changed game plans and settled into a new equilibrium. This view of evolution was first thought to be radical, but in the wake of mounting evidence it is now accepted as the norm.

What does this have to do with business?

It turns out things work very similarly in the business world. PCs don't gradually evolve into iPhones. Revolutionary changes aren't the result of a gradual process of incremental improvements. They are dramatic changes made in response to changes in the environment: changes in the market, changes in technology. The Academy of Management Journal has investigated this exact phenomenon through an empirical study of computer companies, and Nature has published a formalized theoretical framework describing how this process works.

As a business stuck in a state of Nash equilibrium, you have two choices: wait until the environment changes and capitalize on new opportunities as they arise, or take actions that could change the environment itself.

This is one opportunity species don't get in biological evolution. In the world of business, however, it's very real.

Of course, the reality of the situation is that changing the "environment" takes resources. It requires technological leaps, changes in standards, lobbying (not my personal favorite), and creating new pathways for information.

Resources of that magnitude are rarely available to a single company, and oftentimes, it takes a strategic, partial alliance with a competitor in order to make it happen.

In short, if you're stuck, a careful alliance with a competitor could very well be in your best interests.

Image credit: chrisgj6