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STRATEGY

Let's Be Friends

It seems nuts. But new research says that CEOs who become pals with their rivals do better than those who don't .
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Marianne D'Eugenio didn't know what to think. It had been just two weeks since she'd opened Quadrille Quilting, a store in North Haven, Conn. Now she was on the phone with the last person she ever expected to talk to -- Marty Childs, proprietor of Calico Etc. in nearby Cheshire and her closest competitor.

Childs was calling to ask if she could come by D'Eugenio's new store the next week to have a look and get acquainted -- "a friendly welcome to the quilting community," was how she put it. D'Eugenio said yes because she didn't know what else to say. "What does that woman want from me?" she wondered.

At the very least, she assumed, Childs most likely intended to spy on her. As for the possibility that Childs might simply be a nice person looking to make a new friend, it never crossed D'Eugenio's mind. And who could blame her? After all, everyone knows that rivals can't really be pals.

Or can they? New research suggests that not only is it possible to make friends with your competitors -- it's advisable. No matter how competitive their industry, rival CEOs who form friendships are at a distinct advantage over those who who go it alone, says James D. Westphal, professor of management at the University of Texas at Austin, who recently completed a study of CEO friendship in 293 companies in a broad range of sectors.

What accounts for the advantage? When CEOs become friends, they talk shop. In the course of casual conversation, they compare notes, share information, and swap impressions about business conditions. That takes some of the uncertainty out of doing business. What's more, because competing CEOs are operating with similar information, they tend to make similar decisions, Westphal says. Say one CEO decides the time is ripe to raise prices. Chances are the rival-friend will do the same. Such informal coordination reduces risk. It's far less dicey, for example, to boost prices if you have a pretty good idea that your rival is too. And if you've both misread the market, at least one of you isn't going to put the other out of business. "A personal relationship between CEOs is going to tend to reduce rivalry," says Westphal. "That can only be good for both companies."

Researchers found that entrepreneurs who believe they're in business to vanquish the competition are less successful.

But before you invite your toughest rival over for tea, there are a few things to consider. Becoming buddies will require you to adjust your attitude about what it means to compete in the first place, says Kaihan Krippendorff, a professor of entrepreneurship at Florida International University. "Our knee-jerk reaction to a competitor's gain is to take it as our loss" -- an attitude that is bad for business, he says. Over the past seven years, Krippendorff has analyzed 400 business case studies, the results of which are collected in his 2003 book The Art of the Advantage. His key finding: Entrepreneurs who believe they're in business to vanquish the competition are less successful than those who believe their goal is to maximize profits or increase their company's value.

Admittedly, this is not an easy notion to embrace. Bob Weinschenk, for example, is having none of it -- despite what the academics have found. For Weinschenk, the CEO of Britestream Networks, a network security company in Austin, friendship with a competitor is simply out of the question. When Weinschenk bumps into a rival, "I'll nod and say hi, but it's really difficult to go beyond that," he says. "I'm not going to say, 'Let's go get a beer,' when what I really want to do is hurt your company." As he sees it, friendship is simply not part of an entrepreneur's job description. "My job is to take the team across the finish line and deliver return to the investors," Weinschenk says. "Anyone that interferes gets put on the bad-guy list."

Given the high stakes involved in running a company, it's an understandable attitude. But Charles O'Hearn, CEO of Summit Educational Group, a tutoring firm in Boston, says moving at least some competitors off the bad-guy list has been a boon for his business. Over the past 10 years, for example, he has developed a strong friendship with Lisa Jacobson, CEO of Inspirica, a tutoring firm in New York City. Jacobson, he says, has been an invaluable sounding board for brainstorming thorny business problems and confirming his sense of business trends.

But two years ago, that friendship was put to the test when Jacobson nervously informed O'Hearn she had decided to open a second office -- in Boston, O'Hearn's home turf. O'Hearn considered his options. He could have gotten upset and ended the friendship. He could have made a countermove and opened an office in New York. Instead, he wished his friend luck. Sure, he was worried about losing business. But O'Hearn also knew that a new, smart competitor like Jacobson would only force his company to work harder. An avid basketball player and golfer, he makes the easy comparison to sports. "I like playing with people who are better than me," he says. "That makes me a tougher competitor."

It turned out that Boston has been big enough for both companies. And if O'Hearn does start to lose market share down the line? "I'd be bummed, but I'd just say, 'What do we need to do to compete?" he says. "I could even see myself calling Lisa and asking, 'What are we doing wrong, and what are you doing right?" The way O'Hearn sees it, it's better to have your butt whipped by a friend than an enemy. At least that way you're more likely to find out why.

Still, it's important never to forget where friendship ends and business begins. After all, not every apparently friendly rival is going to have pure intentions. There are plenty of things that O'Hearn won't share with even his closest pals in the industry; most new business initiatives, such as a new direct-mail strategy he's investing in, remain close to the vest. Everyone draws the line in a different place, but it's important to set limits and stick to them, particularly as your ties grow stronger.

Assuming your psyche is in order and your business boundaries firmly in place, there's no good reason not to pick up the phone, dial the competition, and see if you can't make yourself a new friend. That's what Marty Childs was doing when she first rang Marianne D'Eugenio at her quilt shop. As it happened, the pair developed a friendship that has paid dividends for both of their businesses. D'Eugenio, for example, prefers to work with floral fabrics, while Childs favors bright colors. Rather than stocking up in the other's area of specialty, they refer customers back and forth. "I think customers appreciate the fact that we're friendly with each other," says D'Eugenio. "When you have a friendship rather than a rivalry, it makes your life a lot easier." Indeed, when yet another quilt shop recently opened in the area, D'Eugenio didn't hesitate. She picked up the phone and gave the owner a call. Sure, it was a new competitor -- but perhaps it was a new friend, too.




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