Introduction
Although the term “coopetition” became common in business only after the release of a 1996 book with that title (Brandenburger & Nalebuff, 1996), the activities it describes have a much longer history.1 In 1936, for example, two vertically integrated oil companies, Standard Oil of California (renamed Chevron in 1984) and the Texas Company (Texaco), created a joint venture that would use Standard’s huge Middle East oil reserves to feed (directly or through crude oil exchanges) Texaco’s international refining and retailing operations. The joint venture, eventually known as Caltex, was perhaps the largest joint venture in business history and lasted until the parent companies merged in 2001. Yet, throughout the life of Caltex (a brand name that remains common in the Asia-Pacific region), its two owners continued to compete in the United States under their respective brands, Chevron and Texaco. This example demonstrates the viability of certain coopetition arrangements—despite their inherent tensions.
Cooperative arrangements among competing firms have become more common as technology has become more widely dispersed both geographically and among firms. Whereas, thirty years ago, R&D excellence and commercialization capability resided in maybe fifty to 100 private corporations worldwide (e.g., IBM, TI, GE, Siemens, Roche, Exxon, Shell), today there are dozens of strong technology firms in almost every field, a steady stream of new enterprises, and the growing phenomenon of entry across traditional industry boundaries.
At the same time, technological challenges themselves, such as autonomous vehicles, have become too complex and cross-disciplinary for most stand-alone firms to have all the relevant capabilities in-house. This is amplified by the decline in the relative importance of in-house research departments, which many corporations have refocused more narrowly on commercial projects. The digitization of everything has likewise spurred requirements for collaboration among firms at different levels—and sometimes at the same level—in an industry.
Such arrangements are filled with risks and opportunities. Opportunities include low-cost access to valuable resources and a chance for insight into a rival’s mindset. Risks include dependence on a rival and the peril of unintended knowledge leakage. The risks vary with the degrees of competition and cooperation in the relationship (Luo, 2007).
This chapter has two main goals. First, it will review and expand my previous work on coopetition. In the past, I wrote primarily about classic horizontal and vertical alliances. Today, it’s also important to consider standards organizations and business ecosystems. While these forms are somewhat looser than formal alliances, they still require analysis and strategy in order to produce good results. The second goal is to integrate the notion of coopetition with the dynamic capabilities framework. Although I’ve written extensively about dynamic capabilities since their introduction, I have not yet explicitly addressed coopetition from a dynamic capabilities perspective.
Dyadic coopetition
Although the term “coopetition” didn’t become well-known in economics and business strategy until the late 1990s, I and others were writing about these types of relationships earlier, particularly in the contexts of joint research activities and strategic alliances. In this section, I review my early writings on horizontal and vertical cooperation among pairs of current and potential rivals.
Horizontal coopetition
In the 1980s, I wrote a series of articles (including several co-authored with Tom Jorde) that made the case for cooperation benefitting competition. Then, in my 1992 article in the Journal of Economic Behavior and Organization, I summarized my arguments for the necessity of cooperation between rivals for the purpose of innovation. At the time, this was not accepted in the field of antitrust/competition policy. Looking up “cooperation” in textbooks from this period would lead to a discussion of cartels, and not much else. A nuanced appreciation of how cooperation could aid competition simply did not exist. However, in the US, the 1984 National Cooperative Research Act had opened the door for research consortia to reduce their risk of antitrust prosecution; but the limits were not clear, nor had the relaxation been extended to cooperation in manufacturing (Jorde & Teece, 1989), which finally came in 1993. Inter-firm cooperation for any number of purposes had of course been permitted and common, in Japan and elsewhere, for decades (Gerlach, 1992).
As Teece (1992) observed, horizontal collaboration among innovators can be important for defining technical standards, internalizing spillovers, sharing risk, and reducing unnecessary duplication of research effort. Shared research can range from an informal system of consultation to shared facilities. Some level of collaboration may also be needed in the case of systemic innovations requiring large-scale investments. Shipping containers, for example, required major changes to transportation equipment and port facilities before their full benefit could be realized.
The 1992 paper goes on to analyze the range of organizational arrangements for alliances that can be created to develop (and possibly also commercialize) new technologies. Horizontal alliances can include any of the following: technology swaps, joint R&D, restrictive technology licensing rights, equity investments, or co-marketing. The key element is that they involve some level of medium-term strategic coordination beyond what can be achieved through simple market transactions. The alliance mechanism, usually specified in a contract, allows the freer sharing of information and some degree of joint decision making (Mayer & Teece, 2008). As Hamel, Doz, and Prahalad (1989) emphasized, it is important to bring strategic intent to the relationship so that learning opportunities are not overlooked and technological secrets are not recklessly exposed. Classic contemporary alliances include civilian airline arrangements such as “Star Alliance” and “Oneworld” that involve joint marketing and codesharing of flights.2
Vertical coopetition
De Figueiredo and Teece (1996) considered a variant form of coopetition where a vertically integrated firm supplies a downstream competitor. This is common, in large part because a vertically integrated firm often needs to sell upstream parts to outside firms in order to operate at efficient scale and/or expose its in-house operation to market discipline. A prominent contemporary example is the relationship between Samsung and Apple. Although the two firms compete fiercely in the smartphone market and the courthouse, Samsung continues to sell Apple key components for the iPhone, such as the display. The one exception is the processor chip (manufactured to Apple’s design), for which Apple was eventually able to find another suitable supplier after its dispute with Samsung intensified.
De Figueiredo and Teece (1996) identify three potential technological hazards that can develop in such relationships if appropriate safeguards aren’t in place to protect against them. First, the integrated supplier can control the pacing of technology at the frontier, which affects the opportunities available to the downstream customer. Second, the integrated supplier may refuse to sell the most advanced inputs, at least in the quantity desired, to the downstream buyer. And, third, the downstream buyer may inadvertently reveal technical or market information to the integrated supplier that the supplier can use in its in-house downstream operation.
Safeguards that can prevent these hazards from making the arrangement untenable include the desire to maintain a valuable long-term relationship, the relative ease of substitution for either or both partners, and the financial size of the transactions involved. Nevertheless, the hazards are real. In the market for enterprise resource planning (ERP) software, ERP provider SAP began using database software from Oracle, the market leader, in 1989. Oracle learned so much about the ERP market from its work with SAP that Oracle entered the market in 1995. It became a strong competitor with SAP, but SAP continued to rely on Oracle database software (Pellegrin-Boucher et al., 2013).
As this example suggests, the hazards are sometimes unavoidable because of the dominant position of one of the firms. This is the case for small sellers in Amazon’s Marketplace program. They can’t do without the global exposure that Amazon’s website can provide, but they operate under a constant threat that Amazon will move into their product categories.
Multi-sided coopetition
Since the 1990s, technologies have become more complex and interdependent. Coopetition, accordingly, has become a multi-sided affair because even two strong firms are unlikely to be adequate to develop and commercialize major innovations, such as wireless communications. Technical standards provide the agreed-on technology foundation that enables multi-sided commercial cooperation. Standards development organizations and business ecosystems are therefore increasingly the venues in which coopetition plays out.
Standards development
Standards have become ever-more important in the digital era as products that were once separate are more easily integrated or able to communicate in a common language. The digital revolution has abolished borders between telephones, music players, the web, TVs, cameras, and more. This in turn has pushed providers of content and services towards horizontal and vertical partnerships to leverage the power of business ecosystems, as discussed in the next sub-section.
Standards for complex enabling technologies such as 3G, 4G, and 5G communications require collaborative development if they are to provide full interoperability across ecosystems and industries. Standards enable modularization, which allows firms to specialize, developing complementary products that are certain to work through the standard interface (see Langlois & Robertson, 1992).
Standards development organizations (SDOs) provide a framework for horizontal and vertical cooperation among fierce rivals. While these multi-sided arrangements are looser than dyadic strategic alliances, they are nonetheless affected by similar strategic concerns. Firms in a standards development organization develop technologies that might benefit the standard. The technology, if selected by the SDO, is integrated with others into a formal standard specification then licensed to implementers.
As candidate technologies are submitted, experts at a standards development organization cooperatively evaluate competing possibilities with an eye toward producing the highest-performance result possible. One or more firms must usually take a leadership role in order to ensure that the standard includes all the necessary technologies for an end-to-end solution. Because various proposed technologies will often have different technical advantages, decisions may be influenced by commercial feasibility. Substantial testing may be required to ensure that implementation criteria are met.
Most SDOs consist of multiple working groups, each focused on specific technologies within the standard. The 5G standard, for example, encompasses numerous separate technologies covered by hundreds of patents owned by more than a dozen organizations, primarily global corporations such as Nokia and Qualcomm. Dozens of other firms who will be implementing the standard have a stake in the outcomes. Implementers are third-party beneficiaries of FRAND agreements between the SDO and those members that provide technology into the standard.3 SDOs and regulatory bodies need to be alert to the proclivity of some implementers to free ride by bringing standard-based products to market while refusing to take licenses for the underlying patents.
Ecosystems
Horizontal and vertical coopetition also occurs when rival firms participate in a shared ecosystem. Ecosystems typically arise around a platform that provides some combination of hardware, software, standards, interfaces, and rules. In the digital world, platforms can be software-only, like Alphabet’s Android operating system (OS), or they can be linked to hardware, like Apple’s iPhone and iPad, which are tightly integrated with Apple’s proprietary iOS software. The key is that companies and users can, jointly or separately, innovate and attract users far more productively with the platform than if they were to try to achieve the same goals without it.
The platform enables providers of complements to add value and, if they choose, interact with each other. When there is platform-to-platform competition, adoption and commercial success is likely a function of which platform can recruit the most (and the best) complementors. The viability of a platform-based ecosystem depends on continued innovation and maintenance of the platform by its owner(s) and a delicate balance of cooperation and competition among the providers of complements. Complementors each seek a profitable position within the ecosystem, as in the case of two video games on a smartphone.
In another twist, a relationship that seems complementary can turn into a variant of vertical coopetition if the platform owner decides to enter the market for one or more of the complements. Microsoft, for example, diversified into browsers, streaming media, and messaging applications that were already being provided on its Windows operating system by stand-alone firms (Teece, 2012). Although this raised Microsoft’s costs, it prevented complementors from becoming large enough to exercise market power.
This can play out in reverse, with complementors moving from conflict to cooperation. Microsoft and Salesforce, for example, had sued each other over patent infringement claims in 2010 and demonstrated hostile relations at every turn until new Microsoft CEO Satya Nadella switched to a culture of cooperation. During his keynote appearance at a 2015 Salesforce conference, he underscored the need for embracing coopetition within and across ecosystems:
Our customers are going to make choices that make the most sense for them … They are going to use all these different applications and multiple platforms. It is incumbent upon us, especially those of us who are platform vendors to partner broadly to solve real pain points our customers have.
(cited in Miller, 2015)
Coopetition and dynamic capabilities
Most studies of coopetition take the existence of the relationship as given. This bypasses the fundamental question of how a coopetitive arrangement and specific partners are selected from among the strategic options.
For the past two decades, one of the primary focuses of my research has been the elaboration of the dynamic capabilities framework. It encompasses the processes, analyses, and decisions that can generate coopetitive relationships. In this section, I briefly summarize the dynamic capabilities framework then draw out the linkages between the framework and coopetition.
The dynamic capabilities framework
A strategic management approach that can help to navigate contemporary business challenges like coopetition is the dynamic capabilities framework. One of the earliest definitions of dynamic capabilities was “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al., 1997: 516). That definition still applies, although the speed of change in the environment may be less relevant than the prevailing degree of uncertainty (Teece et al., 2016).
Although dynamic capabilities are limited by some scholars to replicable routines (e.g., Helfat & Winter, 2011), the more comprehensive capabilities framework, as described by Teece (2014), incorporates both routines and managerial decision-making, which allows for the inclusion of higher-level capabilities that I organize into sensing, seizing, and transforming. While some in the literature have treated these as strictly the result of managerial cognition and decision making (e.g., Helfat & Martin, 2015), they generally entail activities throughout the organization.
The dynamic capabilities framework also encompasses other elements, particularly strategy formation, which is separate from dynamic capabilities. A strategy can be defined as “actions that respond to a high-stakes challenge” (Rumelt, 2012: 6). Capabilities provide inputs to, and then help enact, the strategy. The framework also encompasses external actors including complementors, rival firms, and the institutions that regulate and/or interact with the focal organization.
It is often helpful to see capabilities from a hierarchical perspective. At the base lie ordinary capabilities, which consist of the processes that deploy people, facilities, and equipment to carry out the current business of the firm. They lend themselves to being measured and benchmarked, which also makes them easier for others to replicate. Since they are therefore unlikely to provide a unique advantage, strong ordinary capabilities need to be accessed, but not necessarily owned.
When operating in-house, ordinary capabilities allow a firm to achieve best-practice levels of efficiency, regardless of whether the current output plan is likely to be suitable in the future. The pursuit of high efficiency can thus deprive a company of the resilience needed to change promptly when the need arises. Efficiency should be balanced by measures to mitigate risk and an organizational culture that enables rapid improvisation.
The next level of the capability hierarchy consists of components of dynamic capabilities that I call “microfoundations” (Teece, 2007). They include processes for forming external partnerships or for developing new products. Microfoundations are elements of dynamic capabilities, and they allow the firm to integrate, reconfigure, add, or subtract resources, including ordinary capabilities (Eisenhardt & Martin, 2000). Moreover, they are sometimes unique to a company, as in the case of Cisco’s distinctive competence in managing acquisitions (Mayer & Kenney, 2004). However, they resemble ordinary capabilities in that they are oriented toward following an existing plan and are relatively replicable by rivals.
Higher-level dynamic capabilities, along with strategy formation, generate a plan for the future and enable its implementation. They govern identification of the parameters for entering into a partnership and for setting the directions in which new products should be developed. These higher-level dynamic capabilities are difficult for rivals to copy because they arise from a company’s unique history of competitive experiences, organizational learning, and managerial choices. When well-developed, they allow a firm to maintain continued (evolutionary) fitness vis-à-vis the external business environment and coherence among the elements of the system (Teece, 2017a).
The high-level capabilities can be grouped into three clusters of entrepreneurial activities that take place concurrently throughout the organization: sensing, seizing, and transforming. They encompass organizational processes as well as unique managerial decisions (Augier & Teece, 2009; Teece, 2012, 2016).
The activities for “sensing” and sensemaking include environmental scanning, which brings disorganized information and unstructured data from the external environment into the organization. Managers at various levels must generate and test hypotheses about latent consumer demand, technological possibilities, and other forces that affect the firm’s future. In a firm with strong capabilities, relevant information finds its way to where it will be properly assessed and handled. The top management team combines and analyzes the data from internal and external sources to continuously monitor the firm’s environment, prioritize problems, and identify new opportunities.
“Seizing” capabilities determine how quickly the organization can respond to significant opportunities and threats once they have been identified. The activities involved include investing to commercialize new technologies; identifying and deciding how to fill capability gaps; and designing (or updating) and implementing business models for various products and services (Teece, 2017).
“Transforming” capabilities are responsible for keeping the elements of the organizational system aligned both internally, externally, and with the strategy. These capabilities are most critical when a new business model involves a significant change to the organization’s design or conflicts with an existing business model. Minor transformations must also be made periodically for a variety of reasons. Fostering an organizational culture that favors flexibility and experimentation, while challenging to bring about, can provide a solid foundation for quicker and easier transformations and, therefore, for future advantage.
Dynamic capabilities and coopetition
Coopetition involves critical issues of alignment and congruence. The dynamic capabilities approach, because of its general systems nature, highlights the importance of such factors (Teece, 2017a). In the absence of congruence, there is a real danger that coopetition will collapse, with undesirable outcomes. Strong dynamic capabilities are vital to planning and managing successful coopetition. This is clearly true in the case of a microfoundation capability such as alliance formation. This section will discuss the relationship of coopetition with sensing, seizing, and transforming.
Sensing capabilities are critical in at least two ways. In the first instance, they are important for helping to identify the most promising directions in which to expand or redirect the firm’s activity. Then, within this new direction, they enable the firm to identify possible partners or comparators for missing capabilities, depending on whether the capability is to be developed in-house.
New initiatives almost always entail developing or acquiring new-to-the-company ordinary or microfoundation capabilities. Capability gaps are the “distance” separating the existing and the desired capabilities (Teece, 2017b). Capability distance can be calculated on at least three dimensions: (i) technical distance—how close the target technology is to the firm’s existing knowledge base; (ii) market distance—how close the target customers are to the firm’s existing customer base, in terms of willingness to pay, location, etc.; and (iii) business model distance—how suitable are the firm’s existing cost structure, supply relationships, and revenue models for conducting the target activity.
Even recognizing the gaps in the first place can pose a challenge due to over-optimism about a new plan or other cognitive blinders. Often it is only after an organization falls short in one of its strategic initiatives that the true size of the gap(s) will be apparent. Management may have thought that a particular capability, such as supply chain management, was in place, only to discover that it was inadequate to the requirements of a new product or strategy.
Once a capability gap has been identified, the capabilities for seizing are engaged to calibrate and choose the best way to fill it. The greater the distance to be covered, the greater the cost in terms of time, effort, and expense if the capability is to be developed in-house. Making changes on all three dimensions at once constitutes a radical transformation for which the effort and attention required is more than the “sum” of the distances involved. With large gaps, especially when coupled with a narrow market window, some form of vertical or horizontal alliance may be the best choice.
Partnering is most desirable when a needed capability is available in a competitive supply market. In markets such as electronics assembly and back-office services, world-class capabilities can be accessed virtually at cost.
In many cases, however, potential suppliers have distinctive profiles, and the most attractive partner may also be an actual or potential competitor. In such cases, seizing capabilities can enable the focal firm to develop and manage the coopetitive relationship. After a relationship has been successfully established, care must be taken to limit technology leakage across the interface, to learn continuously from the partner, and to avoid becoming overly dependent.
Coopetition can, of course, be desirable for reasons other than bridging a specific capability gap. Examples include cases of cost-sharing and technological complementarity. Sensing and seizing capabilities are needed here, too, for judging technical trends and assessing the industrial landscape for potential allies.
Capabilities for transforming are needed to create an organizational conduit for analysis of, and learning from, the partner firm(s) so that the knowledge can be integrated and operationalized. Transforming capabilities are also exercised when coopetition takes a discrete organizational form such as a joint venture. The processes and managerial mindset required are similar to those for ambidexterity (O’Reilly & Tushman, 2008). Relevant assets must be aligned with the needs of the new unit; the unit must be ensured adequate resources and the correct balance between autonomy and integration with incumbent units; and incumbent units must be correctly reconfigured to compensate for any assets that were subtracted.
Conclusion
The conditions of knowledge dispersion and globalization that led to the emergence of the coopetition concept have only become more deeply entrenched in the business landscape over time. Coopetition takes many forms, from the dyadic alliances first analyzed by game theorists to looser interactions among the competing complementors in a business ecosystem.
The dynamic capabilities framework provides deep insights into the basis for coopetition and its implementation. The framework is broad and inclusive enough to allow the framing and assessment of the complex tradeoffs that coopetition entails. In a coopetition context, keeping capabilities and strategies aligned is challenging. But, so long as the strategic hazards are properly managed, coopetition can aid innovation and learning, and contribute to profitable outcomes.
Notes
Acknowledgement: I’m grateful to Greg Linden for very helpful comments and assistance.
1Looking beyond the world of business, co-opetition can be traced back to at least the fifth century BC, when rival Greek city-states Athens and Sparta successfully joined forces to oppose a Persian invasion before eventually engaging in an all-out war against each other. The ancient proverb that “the enemy of my enemy is my friend” also suggests elements of a co-opetition model.
2Star Alliance was founded in 1997 and today includes twenty-seven members. Oneworld was founded in 1999 and has thirteen members.
3FRAND (fair, reasonable, and non-discriminatory terms) is the criterion that licensing terms are required to meet by many SDOs (Sherry, Teece, & Grindley, 2015).
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