Kevin Chin, an Entrepreneurs' Organization (EO) member in London, United Kingdom, is founder and CEO of Arowana, which invests in, operates and grows small- to medium-sized enterprises. In 2005, Kevin was the major shareholder and part of the executive leadership team of RuleBurst, an artificial intelligence rules engine software company that embraced and applied co-opetition by partnering with SAP. Though SAP was a competitor with similar software, it lacked the natural language inferencing capability of RuleBurst's software. The collaboration significantly enhanced RuleBurst's reputation and market profile―enough that Oracle, SAP's fiercest competitor, ultimately acquired RuleBurst in 2008 for a healthy revenue multiple. We asked Kevin how co-opetition can impact business valuation. Here's what he shared.
Co-opetition―that is, collaborative competition―is an agreement between ostensibly rival businesses to glean mutual benefits that can include product enhancement and market expansion. In our world of advancing technology where consumers are better educated about their purchases than ever before, it may be a vital aspect of success.
How did we arrive in the golden age of co-opetition? Well, for centuries, engaging in "confrontational" competition to maximize your share of customers' revenue wallets to the detriment of competitors was the traditional competitive strategy. This modus operandi is based on a zero-sum game mindset: If you sell the same high-quality widget at a lower price, customers will flock to your store, thus decimating the competition.
However, as we have advanced into a highly networked, information-intensive global economy, competition is increasingly experienced between networks and ecosystems rather than among individual firms vying for customers. Forward-thinking business leaders recognize this and understand that establishing a more "collaborative" model between competitors can enhance the overall value of their firms more than the traditional confrontational competitive approach.
The collaborative aspect can take many forms, including sharing of technological knowhow, R&D initiatives, distribution channels, production capacity, marketing campaigns and back-office capabilities. The underlying premise of co-opetition is that it is not a zero-sum game but rather that through collaboration, the economic pie can be expanded and the resulting spoils shared to the mutual benefit of all who engage.
Furthermore, co-opetition can help to fortify an industry's key players against interloping from future competitors, which are increasingly coming out of left field. For example, who foresaw Amazon entering the grocery sector through its acquisition of Whole Foods?
It may surprise you to know―given its reputation as a relentless competitor―that Amazon was an early adopter of co-opetition practices through strategic initiatives. A few examples: Amazon Marketplace, which allows third-party competitors to sell on Amazon's online platform; Amazon Services, which started as Amazon operating its biggest rival, Borders', online store then evolved into Amazon Web Services; and Amazon's collaboration with Apple, which involves their respective Kindle and iPad products. What is clear is that with each of these initiatives, co-opetition enabled Amazon to build powerful platform businesses that expanded its overall capability and provided additional revenue streams.
Here are three key ways in which co-opetition can enhance the value of your company:
- Co-opetition fosters innovation in a more efficient manner. Look no further than the case of Sony and Samsung. The fierce business and cultural rivals established a joint venture to share technology and manufacturing in South Korea. The result: The duo emerged as clear market leaders in the LCD-TV segment by leveraging their respective strengths―Sony in technology and Samsung in production and marketing. This had the benefit of driving down production costs while continuing to advance technological improvements.
- Co-opetition can expand addressable markets and transform growth trajectory for firms that engage in it. Rather than solely obsessing on how to beat or eliminate competitors, firms engaged in co-opetition focus more heavily on redesigning business models in a way that can expand potential markets. For example, driving down costs to enable lower priced LCD-TVs expanded the addressable customer base as more and more consumers could afford them. Co-opetition also helps fortify against future competition. A rising tide lifts all boats: When the addressable market expands, the potential growth trajectory of all firms in the industry rises.
- Co-opetition can help drive higher valuation multiples for firms that engage in the practice and as a result, maintain or expand their profit margins. Conversely, there are industries where years of confrontational cut-throat price competition has eroded the price margins of its key players so dramatically that they operate on razor-thin margins. For these players, the valuation multiples achievable for a trade sale or IPO are significantly lower than for industries where profit margins are higher and competitive dynamics are more rational and sustainable. These players are like wounded animals carrying the battle scars of years of conflict; the lower valuations ascribed to them reflect this. At the other end of the spectrum, if a firm is able to leverage co-opetition and re-engineer itself into a platform business, then a hefty "tech unicorn" valuation multiple could well be ascribed to it.