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When Competitors Should Team Up

Vigorous competition among companies for customers, talent and capital serves free enterprise well, but certain forms of competition can be harmful, two directors of Mercer Management Consulting contend in a new report.

“When companies fight over things that hold little value to customers or that offer little potential for differentiation, they are wasting time and resources while reducing profits of their entire industry,” say the report’s authors, Adrian Slywotzky and Charlie Hoban. “This helps explain why a wide array of industries, from music to airlines to consumer electronics to textiles, have experienced steady erosion in profitability.”

Strategic collaboration offers a way out, according to Slywotzky and Hoban. They point out that by joining forces to carry out common and largely undifferentiated functions or processes, companies can avoid redundant expenditures and capitalize on economies of scale and shared expertise. Collaboration can take many other forms, consistent with antitrust laws, including the sharing of back-office functions, factory production, R&D efforts, marketing and distribution and repair or return facilities, they say.

While there have been calls for greater business cooperation before, they have focused largely on complementary efforts—that is, on businesses doing different things that complement each other in a way that creates added value. The strategic collaboration that Slywotzky and Hoban advocate involves working together on the same things—key shared activities with an industry’s value chain.

The Mercer consultants note that the notion of joining forces with competitors naturally encounter resistance from many managers who have been trained in a swashbuckling corporate culture. The music business is a good example. After Napster kicked off the digital file downloading craze, music companies suffered big declines in revenue. Rather than uniting around a single system for legal downloads, the music companies offered a fragmented response. Universal and Sony launched a joint venture called Pressplay, while AOL Time Warner, Bertelsmann and EMI worked with RealNetworks to launch MusicNet. The two services refused to license songs to one another, thereby reducing their appeal to customers, and neither captured enough paying customers to be viable. Slywotzky and Hoban observe that “Apple Computer walked in with its iTunes store and did for the music industry what it wouldn’t do for itself—create a system where everyone was better off.”

Yet even bitter rivals have sometimes joined forces to achieve common goals and solve common problems. Two notable examples are the Airbus consortium of European aircraft manufacturers and the Sematech consortium of U.S. semiconductor manufacturers, both of which played a critical role in helping their members regain market share and boost profits.

In those cases, governments played a role in spurring cooperation. But Slywotzky and Hobanpoint to other cases where competitors themselves have taken the initiative. Banks worked together to launch Visa and Mastercard, reaping the efficiency benefits of shared payment processing and marketing. And small hardware stores use the TruValue organization for cooperative marketing, purchasing and loyalty programs that allow them to compete against national giants.

“Collaborating on well-defined activities offers an immediate payoff in reduced costs,” the Mercer consultants point out, while adding that “collaboration tends to promote, rather than hamper, constructive competition in the areas most valued by customers.” Givent he harsh realities of business today, they urge managers to take a fresh look and start shifting the compete/collaborate ratio toward a more productive balance for suppliers and customers.

Adrian Slywotzky and Charlie Hoban are based in the firm’s Boston office and can be reached at 617-424-3200.