Competition as Cooperation Serves Competitors

Article / Produced by TOW Project
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Surprisingly, vigorous competition helps, rather than harms, the competitors themselves. If Honda delivers more value to customers, that will force Ford to improve, and vice versa. This brings to mind the proverb, “Iron sharpens iron, and one person sharpens the wits of another. (Proverbs 27:17). Tough, unrelenting pressure from others is often the way we become our best. In this way, being a tough competitor can be a way of loving both our competitors and our societies. Countries that suppress competition by selecting a “national champion” company in a particular industry eventually discover that they have not enabled the company to thrive, but have set it on a path to complacency, mediocrity, and ultimately failure.

Isn’t it still possible that competitors harm one another by competing? If Ford succeeds in making vehicles customers want and selling them at lower prices than Honda, won’t Honda’s employees lose their jobs and stockholders lose their investments?

Not necessarily. Michael Porter, a professor at Harvard Business School, emphasizes that competition does not mean competing to “be the best” or “be number one,” which implies a zero-sum competition focused on defeating rivals – one company wins by causing another company to lose. Rather, competition means competing to “be unique,” to create value for customers in ways your rivals don’t. Value can be created in many different ways for many different customers, so there is room in a competitive market for many companies to flourish, as long as they compete to be unique as value creators rather than all seeking to serve customers in the same (“best”) way.

Ford’s success does not, by itself, force Honda to go out of business. It forces Honda to search for an alternative way to serve customers, one that satisfies needs Ford isn’t satisfying. Ford may beat Honda hands down in, say, the truck market, but Honda can respond by focusing on other markets, such as economy cars. Even within the economy car market, if Ford beats Honda at making one kind of economy car, Honda can find another kind of economy car to make that Ford doesn’t make (or doesn’t make as well). Honda goes out of business only if it cannot find any alternative opportunities to serve customers sustainably—in which case, keeping Honda in operation when it’s not succeeding at serving people is neither a sustainable option nor a morally preferable one.

In an interview at Harvard Business School, Porter was asked to summarize “the most common strategy mistakes.” He replied:

The granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results. This is a hard race to win. So many managers confuse operational effectiveness with strategy.

Another common mistake is confusing marketing with strategy. It’s natural for strategy to arise from a focus on customers and their needs. So in many companies, strategy is built around the value proposition, which is the demand side of the equation. But . . . it’s about the supply side as well, the unique configuration of activities that delivers value. Strategy links choices on the demand side with the unique choices about the value chain (the supply side). You can’t have competitive advantage without both.[1]

In other words, the goal lies not in persuading customers that you deliver value, but in actually delivering it. It is not to defeat competitors in delivering value, but to deliver value uniquely, through a distinct matching of your own (unique) abilities to customers’ needs.

In one widely used text, Joan Magretta summarizes Porter’s key insight:

Competition to be unique reflects a different mind-set and a different way of thinking about the nature of competition. Here, companies pursue distinctive ways of competing aimed at serving different sets of needs and customers. The focus, in other words, is on creating superior value for the chosen customers, not on imitating and matching rivals….

Competing to be unique is unlike warfare in that one company’s success does not require its rivals to fail. It is unlike competition in sports because every company can chose to invent its own game. A better analogy…might be the performing arts. There can be many good singers and actors – each outstanding and successful in a distinctive way. Each finds and creates an audience. The more good performers there are, the more audiences grow and the arts flourish. This kind of value creation is the essence of positive-sum value creation….

To be sure, not every company will succeed. Competition will weed out the underperformers. But companies that do a good job can earn sustainable returns because they create more value.[2]

All this is congruent with the idea of competition as cooperation. It identifies the function of competition in terms of producing or promoting shared goods. It specifically repudiates the idea that harming or defeating rivals should be the purpose of competitive activity. Competitors seek to create value for customers, enriching themselves by enriching others and putting pressure on their rivals to do the same.