From the December 1996 issue of Entrepreneur

As a supplier of printing, packaging and in-store displays, James A. Klein competes against every printer, box-maker and display-builder in and around Chicago. But he also buys products and services from 50 or so of these same firms. And if he learns that a promising prospect is already doing business with one of his printers or suppliers, he backs off in a hurry.

"We will not compete against the vendors we use because that would not be fair," says the president of eight-person Diversified Merchandising Inc. in Skokie, Illinois. It also wouldn't be good business practice, say advocates of a half-and-half approach that blends competition and cooperation in a strategy called "co-opetition."

Co-opetition, according to Adam Brandenburger, a Harvard Business School professor and co-author of Co-opetition: A Revolutionary Mindset That Combines Competition and Cooperation (Currency/Doubleday), is a way to avoid destructive competition and to build a market for all participants, including competitors, suppliers and customers. The idea is to work together to discover new markets and expand existing ones rather than endlessly fighting over customers.

Although co-opetition may go against entrepreneurs' instincts, Brandenburger urges them to bury the hatchet and take up the olive branch of peace. "The old world of competitive strategy really misses the picture," says Brandenburger. "[Businesses] fight over the division of the pie, but just as important are strategies for growing the pie."

Origins Of Co-Opetition

The term "co-opetition" is generally credited to Ray Noorda, founder of the software networking company Novell Inc., who has urged others in the information technology industry to find ways to compete and cooperate at the same time. Today's brand of co-opetition has its roots in game theory, a mathematical method of analyzing competitive situations to pick the best course of action.

Game theory has long been used in political, economic and military planning, as well as in analyzing strategic games such as poker and chess. During World War II, Brandenburger says, the British Navy used game theory to improve the success rate of planes and warships hunting down German submarines. In recent years, many companies in a variety of industries, including Xerox, Bell Atlantic and Citibank, have applied game theory ideas about co-opetition to business.

Opponents of traditional game theory point out that one of its traits is that its strategies are counter-intuitive or just don't make sense. "Game theory can show that it's rational to do some things that are actually very harmful," explains Gary Fethke, dean of the College of Business Administration at the University of Iowa in Iowa City.

Co-opetition, however, is a case of the reverse--something that sounds irrational but is actually very beneficial. The key difference between co-opetition and most business strategies is that co-opetition assumes there doesn't have to be a loser for every winner. In other words, business is not a zero-sum game.

Though this goes against some prevailing ideas about competition, many experts agree. As proof of the harm traditional business strategies can cause, they point to the air-fare price wars of the early 1990s, when the airline industry lost more money than it had made since the beginning of flight.

"A lot of business strategy has been devised to compete and drive our competitor out of the marketplace," says Fethke. "But the notion of competing has been driven too hard in business."

Key Concepts

Co-opetition is perhaps best illustrated by example. Brandenburger and his co-author, Yale School of Management professor Barry Nalebuff, cite Intel and Microsoft's relationship as one leading example of co-opetition.

These high-tech giants have some conflicting interests. Microsoft wants computers to be inexpensive, while Intel wants software to be cheap, the authors note. They also have mutual interests, however. Microsoft's newest software requires faster computers, while Intel's latest computers allow customers to run more complex programs. By cooperating in designing new chips and software rather than competing destructively, the two companies expand each others' opportunities.

Many similar cases exist. Bill Meade, an assistant marketing professor at the University of Missouri, St. Louis, who specializes in studying co-opetition, cites a small hardware store owner who was threatened by the arrival of a superstore. In addition to competing where possible on price, the small store offered to provide repair services that the superstore didn't.

Eventually, the superstore outsourced all its tool repair work to the smaller store. That helped the superstore sell tools, to be sure, but also allowed the small-time operator to stay in business.

"As soon as you create that positive relationship with a competitor, you have transformed the competitive relationship," says Meade. The tactic can be especially valuable to small companies facing large rivals. "Instead of just stomping on you," explains Meade, "they're going to have a moment of doubt before bringing down the boot. And wonderful things can happen."

One of the basic concepts of co-opetition is that of complementors. A company is your complementor, Nalebuff and Brandenburger explain, if your customers value your product more when they also have your complementor's product than when they have your product alone. An example is a hot dog vendor whose wares sell faster when mustard is available.

Brandenburger considers a business's complementors equal in importance to its competitors. One key to effective co-opetition, he says, is to look for complementors when possible.

"The players in your business are your traditional customers, suppliers and competitors, but also your complementors," he says, throwing out examples such as "hardware and software, TV networks and TV Guide, bookstores and coffee bars. There is a range of opportunities there."

Co-Opetition Constraints

Co-opetition works well, Meade says, with products that have many different components and between companies that are peers. Businesses with extremely thin margins and products that are late in their life cycles or have little room for technical innovation are less likely candidates.

In many situations, a different tactic such as outsourcing or a strategic alliance is preferable. A strategic alliance, for instance, is best when a cooperative arrangement would require large capital investments. And outsourcing may be better when a more formal relationship is needed.

Generally, co-opetition tends to be an informal relationship, often not even acknowledged by one or both sides, Meade says. And it may primarily or only benefit one side.

Co-opetition can also be risky business. An entrepreneur who doesn't explain it properly to employees and others risks looking foolish or, at best, will confuse them by seeming to unexpectedly sell out to the competition. "Even if you succeed," warns Meade, "you may fail because people can't understand [what you're doing]."

Co-opetition Costs

Co-opetition is more of a mind-set than a sweeping initiative. As such, it doesn't call for much in the way of training or other investments. It's also not as dependent on a company's size, sophistication or resources as some other strategies.

"The idea is to simply think about the complement to your business," says Brandenburger. "There's really an opportunity there for businesses large and small."

In addition to Nalebuff and Brandenburger's book, Meade says many marketing texts refer in some fashion to simultaneous competition and cooperation. Formal training opportunities are also beginning to appear: Fethke recently hosted a two-day seminar on the subject at the University of Iowa.

Whether new or old, familiar or strange, the idea that cooperating may be as important as competing seems to be striking a chord even among the most hyper-competitive of entrepreneurs. There's no doubt which of the two James Klein believes is most important. Is he interested in pursuing more co-opetition? "If it means cooperating with vendors, yes," he says. "If it means competing with them, no."

Contact Sources

Diversified Merchandising Inc., 5225 Old Orchard Rd., #4, Skokie, IL 60077, (847) 966-7766.