Co-opetition

“Business is a game where you can compete and cooperate at once. The challenge lies in mastering both to create value and share it wisely.”

1. The Birth of Co-opetition: Combining Competition and Cooperation

In the complex world of business, players often have overlapping roles. While it’s easy to think of competition and cooperation as opposites, reality suggests a mix can be more beneficial. Co-opetition is the blend of these two elements, where businesses collaborate to create value and compete to divide it.

For instance, complementors, such as a hardware company working with a software firm, make each other’s products more valuable. Yet, they also compete to claim their share of the total value generated. This dual role adds a dynamic layer to strategy-making, demanding that businesses recognize the nuanced relationships they share with others.

Being mindful of these roles ensures that businesses don’t just strengthen their competitive edge but also build mutually beneficial relationships. With the co-opetition perspective, businesses can be allies and rivals at the same time, navigating between these roles to achieve their goals.

Examples

• Cosmetics manufacturers and retailers complement each other while deciding who gets what percentage of a customer’s spending.
• Microsoft’s collaboration with rivals by sharing patents reveals co-opetition where both parties benefit.
• Airline partnerships, like code-sharing agreements, demonstrate collaboration even among industry competitors.

2. The PARTS Framework: Understanding Business as a Game

Viewing business relationships through the lens of game theory can redefine strategies. Brandenburger and Nalebuff present the PARTS framework—Players, Added value, Rules, Tactics, and Scope—as a guide to analyzing and shaping business dynamics.

Players form the foundation of the game. They include customers, suppliers, competitors, and complementors. Understanding how each participant influences the game helps businesses identify opportunities to strengthen their position. Added value, the second element, represents what unique contribution each player brings to the table.

The remaining elements, Rules, Tactics, and Scope, involve finer strategy points. Rules define how the game is played. Tactics work to shape players’ perceptions, and Scope reflects the boundaries and connections of the market. Together, they create the blueprint for change.

Examples

• Retailers in the telecom industry leverage customer loyalty (added value) to demand better deals from suppliers.
• By introducing product bundles, Amazon adjusted the rules of retail, pulling ahead of competitors.
• Expanding from a PC-focused strategy to include mobile devices, Microsoft widened its game scope.

3. Value of Entering the Game: Make It Worthwhile

Joining a marketplace can transform the dynamic for every existing player. Surprisingly, even competitors might see value in your entrance if it attracts new customers or builds new markets. Still, businesses must ensure that their participation is equally rewarding.

Think of the risks—massive upfront costs to develop and market products, potential loss of existing customers, and intensified rivalry. These obstacles make it essential to secure commitments from partners or customers beforehand. For example, entering the game by offering a bundled solution or an upfront license fee guarantees value from day one.

When managed well, inviting others into the game, like new suppliers or complementors, can expand existing opportunities. Even bringing competitors along could inspire innovation and growth for all involved.

Examples

• Tesla captured consumer interest through pre-orders, securing market value before releasing a single car.
• New entrants in grocery markets often negotiate shelf space guarantees, ensuring customer visibility.
• Apple’s entry with the iPhone set a new standard, prompting both competition and partnerships.

4. Added Value as Leverage

The power of a business lies in the value it adds. If your presence in a market brings value that no one else can provide, you hold leverage. On the other hand, diminishing others’ added value can also boost your bargaining power.

Consider Nintendo in the 1980s. By controlling the supply of its Mario franchise, they built immense consumer demand. This tactic lowered customers’ ability to dictate pricing, giving Nintendo the upper hand. Conversely, in less monopolistic situations, businesses work on boosting their added value by fostering loyal customers or reducing production costs.

Trade-offs and trade-ons become useful tools to manipulate added value. Trade-offs involve reducing quality for lower prices, while trade-ons achieve the rare feat of enhancing product value while cutting costs.

Examples

• A loyalty program like Starbucks Rewards increases customer dependency and ensures recurring business.
• Nike uses athletes as brand ambassadors, boosting the perceived importance of its products.
• Uber edges out competitors with dynamic pricing in underserved areas, adding value to both riders and drivers.

5. Changing Rules Alters Outcomes

Rules in business are not always static. Players can renegotiate terms to tip the balance of power in their favor. Government regulations certainly form the backbone, but contracts offer flexibility to redefine relationships.

For instance, Most-Favored-Customer (MFC) clauses guarantee customers the best rates compared to others, pushing suppliers to innovate in cutting costs elsewhere. Similarly, Meet-the-Competition (MCC) clauses ensure businesses can retain customers by offering matched deals. These adjustments allow players to protect their interests while upending previously rigid dynamics.

New rules don’t just affect relationships with customers; they ripple across other elements of the game, altering how suppliers and complementors interact with one another.

Examples

• The Uber Eats pricing structure utilizes MCC-like adjustments to match competitors, retaining users.
• Suppliers offering bulk discounts to major retailers shift negotiating dynamics to favor buyers.
• Spotify’s exclusivity contracts with artists redefine competition’s rules in the streaming industry.

6. Perception Shapes Behavior

The way players see the game changes how they act. Perception influences decisions more than actual circumstances. This means that controlling how others view your performance or stability could alter their behavior entirely.

Take negotiation: calm, confident behavior reshapes a perceived power imbalance. On the flip side, excessive aggression usually alienates partners. Businesses can also guide perceptions by sharing selective information. They might highlight strengths while concealing vulnerabilities.

For instance, a polished storefront or an appealing competitor comparison chart can establish confidence with potential customers, steering them toward purchase decisions.

Examples

• Google’s claim of reducing carbon usage encouraged customers and regulators to view it more favorably.
• A startup offering free tools like Grammarly shows confidence in its premium product potential.
• High-end advertisements signal quality, reinforcing luxury brands like Louis Vuitton.

7. Expanding Game Scope Opens New Opportunities

Every game belongs to a larger one. Businesses can uncover fresh markets or players by shifting their focus to adjacent industries or fields. This strategy changes the competitive landscape, often reducing direct conflict with major incumbents.

Sega entered the gaming market by focusing on 16-bit systems instead of competing with Nintendo’s 8-bit dominance. This clever move gave them room to innovate without triggering open competition. By redefining how markets are divided, businesses can selectively remove themselves from rivalries and create a niche.

Expanding scope also highlights possibilities for collaboration. Instead of disrupting existing sectors, finding linked markets can provide growth without contention.

Examples

• Amazon introducing Audible expanded its scope to serve both readers and listeners.
• Tesla’s pivot to energy storage enhances its core offerings while creating new sectors to lead.
• Airbnb expanded from lodging to offering local experiences, growing its value proposition.

8. Strengthening Relationships for Long-Term Growth

Building meaningful relationships ensures stability in otherwise fluctuating markets. Loyal customers, accommodating suppliers, and aligned partnerships become assets, no matter how competitive an arena may be.

Companies like Costco retain loyal members by offering consistently high value in return, keeping the competition at bay. Similarly, suppliers who understand the long-term value of deals tend to prioritize established agreements even when competitors approach them.

Strengthening relationships also acts as a buffer, ensuring businesses survive market shocks.

Examples

• Apple uses ecosystem loyalty to retain users across devices and services.
• Starbucks nurtures its suppliers, ensuring high-quality coffee despite global challenges.
• Disney’s partnerships with cinema chains balance mutual interest even during streaming surges.

9. Using Strategy to Create Stability

Navigating competitive environments relies on solutions that ensure dynamic stability. Businesses must keep refining both their tactics, like pricing models, and contracts to manage unforeseen conflicts. Flexibility is core to staying relevant.

Just as video games with evolving levels keep players engaged, businesses use adaptive models to manage dynamic markets. By investing in strategies, revisiting old assumptions, and utilizing interconnected games, businesses better prepare for sudden changes in demand or competition.

Examples

• Netflix’s shift to producing original content gave it power over licensing uncertainty.
• Zara’s just-in-time production model keeps it nimble, adapting to changing trends fast.
• Microsoft’s transformation from software provider to cloud-based solution ensured relevance.

Takeaways

1. Use flexible contracts like MFC or MCC clauses to secure favorable terms and respond to changing competition.
2. Build strong relationships with customers and suppliers to create a buffer against market risks.
3. Expand your scope by identifying untapped or interconnected opportunities in adjacent markets.