The Death of Competition

James F. Moore

• Publisher: Harper Paperbacks
• Year: 2016
• ISBN:
  9780062671578
• Topic: Commerce
• Subtopic: Leadership

Today's marketplace is seeing radical changes in the way companies do business with one another. New partnerships and alliances are constantly being forged, the lines between industries have blurred, and it has become difficult to tell one business from another, and who's competing with whom.

The Death of Competition helps managers make sense of this chaos. Using biological ecology as a metaphor, it reveals how today's business environment parallels the natural world, and how, just like organisms in nature, companies must coexist and coevolve within their own business ecosystems. Through numerous examples, he explains the radically new cooperative/competitive relationships like the one forged between IBM and Microsoft and provides a comprehensive framework businesses can use to enhance their own collaborations with their customers, suppliers, investors and communities.

1

Why Businesses Fail

Circling the big island of Hawaii in a small plane affords one of the most spectacular visual experiences imaginable. An isolated outcropping in the sea more than 2,000 miles from the nearest continent, Hawaii has as its center Mauna Kea, a magnificent extinct volcano that rises nearly 14,000 feet. Occasionally, its tip is sprinkled with snow. Closer to sea level, along the southeastern shore, glowing red, active volcanoes smolder. These boiling kettles periodically spew lava into the ocean, adding some small contributions to the landmass and generating immense steam clouds. Amid this varied terrain are dozens of distinct and glorious ecosystems, composed of communities of species, and ranging from alpine deserts to teeming rain forests.

For most people, Hawaii brings to mind images of towering hotels and pearl divers, not to mention pineapples and papaya. For me, Hawaii offers a picture of how some communities of businesses behave and evolve.

For most of its thirty-million-year history, Hawaii was a marvelously self-contained biological world. Plants and animals arrived by wind or wave, but few established themselves. The best scientific estimates are that a successful plant immigration occurred only once every 20,000 to 30,000 years. These few colonists gave rise to a wide diversity of new species. From some 270 colonizing flowering plants, more than 1,000 were created. From a few hundred insect settlers, around 10,000 came into being. From no more than 15 bird species, more than 70 developed.¹

Evolving in protected isolation, Hawaii’s flora and fauna are reminiscent of traditional industries: heavily protected by tariffs and regulations, old guard owners, and other well-entrenched interests. Inefficient technologies and business processes abound, similar to the unique life-forms that inhabit the Hawaiian islands.

Unlike Hawaii, however, traditional industries are not scenes of verdant splendor. More often, they exhibit intractable class divisions and crusty resistance to anything that threatens the established order. Yet the pattern of their establishment and the dynamics of their demise are strikingly similar.

Hawaii’s prolonged period of ecological equilibrium was snapped by the arrival of Polynesian voyagers more than 1,500 years ago. These settlers brought pigs, dogs, and a variety of new plants. Western influence commenced with James Cook’s landing in 1778. Subsequent voyages introduced ants, wasps, cats, rats, mosquitoes, and an immense array of plants. These invaders wrought havoc in paradise. More than 40 percent of the indigenous Hawaiian bird species have become extinct since human settlement began. More recently, golf courses and housing developments have radically transformed many local ecosystems.²

In much the same way, new technologies, business processes, and organizational life-forms invade all traditional businesses. They are borne on the winds of global capital flows and managerial migrations. They cross bridges of deregulation. They are encouraged by government policies that foster economic development. A vast tangle of skills and processes is being rendered obsolete.

As a management theorist of sorts, I realize the need and the benefits of these changes. But I also acknowledge the hurt and confusion that innumerable individuals feel as their businesses and livelihoods come under intense pressure. For many people, economic and technological progress constitutes the destruction of their Hawaiian paradise.

The Death of Competition

Shift now from beaches to traffic, from sand to carpet, from bright Hawaiian shirts to gray wool suits. Every day in my work, I observe companies that are drastically affected by the changing ecology of business competition and that seek ways to understand and shape the transformations engulfing them. I tell them about the death of competition.

Not that competition is vanishing. In fact it is intensifying. But competition as most of us have routinely thought of it is dead—and any business manager who doesn’t recognize this is threatened. Let me explain. The traditional way to think about competition is in terms of offers and markets. Your product or service goes up against that of your competitor, and one wins. You improve your product by listening to customers, and by investing in the processes that create it.

The problem with this point of view is that it ignores the context—the environment—within which the business lies, and it ignores the need for coevolution with others in that environment, a process that involves cooperation as well as conflict. Even excellent businesses can be destroyed by the conditions around them. They are like species in Hawaii. Through no fault of their own, they find themselves facing extinction because the ecosystem they call home is itself imploding. A good restaurant in a failing neighborhood is likely to die. A first-rate supplier to a collapsing retail chain—a Bradlees, Caldor, or Kmart—had better watch out.

Sometimes the ecosystem as a whole is more or less robust, but the particular niche a business occupies is challenged by newly arriving species. The problem becomes that there are so many similar businesses in a market that none can make a reasonable profit. Airlines, steel companies, long-distance telephone companies, and deregulated electric utilities all face this dilemma. Their contributions have become commodities traded mainly on price. One of the most significant side effects of electronic airline reservation systems has been to enable customers to do comparative shopping. This newly efficient market has been a major factor in driving down prices and margins.

The continued expansion of electronic shopping and the Internet will bring commoditylike trading into markets ranging from groceries to automobiles. While such intense price competition is good for consumers in the short run, the threat of razor-thin margins makes it difficult for companies to justify investing in next generation offers—and can stifle innovation.

Neither of these types of business problems—the collapse of the economic fabric around your business or the invasion of your territory by too many similar contributors—is recognized by the conventional view of competition. In my consulting practice, I have seen instance after instance of well-meaning, thoughtful, hardworking people whose businesses were wrecked by these effects. This despite having good products and services, produced by well-run processes.

By contrast, the executives who lead the world’s largest, most sophisticated businesses know a great deal about these issues. In many instances, a large portion of their strategic planning budgets is spent on figuring out how to turn around businesses that are being commoditized by aggressive new competitors, often located in lands halfway around the globe. And in more cases than they care to admit, they know that their products and services face limited lives, because the economic and social conditions to which they contribute are becoming obsolete.

I know a number of executives who find themselves stunningly helpless in the face of these challenges. Their models of management, based on traditional product and service competition and process improvement, are necessary but not sufficient. One executive, who oversees a multibillion-dollar enterprise, told me, “I sometimes dream that I’m driving along in my car, and when I go to make a turn, my steering wheel won’t grab. I turn the wheel, but the car just keeps going straight. In this nightmare, I look more closely at the steering wheel, and discover it is one of those plastic wheels for babies. It looks more or less real, but does nothing.”

One response is downsizing. With great resolve and a degree of luck, a firm can be cut down to size in advance of collapsing markets. People can be put on the streets. Assets can be written off. Costs can be cut before ruthless price competition causes revenues to fall. This tactic works for a while, but ultimately ruins the business. Morale sinks. Economies of scale are lost. Costs cannot drop forever. Margins suffer. Investors and other stakeholders withdraw. The last person out shuts off the lights.

Another response is market creation. Many executives rightly recognize that innovation is the only way to move forward. They search out growing economic sectors and promising new approaches—the Internet, biotechnology and health care, new markets like those in Asia. Here they face a different concern, one also not foreseen by the traditional concept of competition: Market creation is actually a form of applied economic development. It requires intensive cooperation among diverse contributors to realize a workable economic future. It takes generating shared visions, forming alliances, negotiating deals, and managing complex relationships. Few have been schooled in these arts, nor are they anticipated by most corporate planning and budgeting systems or supported by conventional organizational structures and job descriptions. So, in many cases, the new market creation initiative stumbles along. The originating executives should be commended for aiming at new business development, but their success rate is likely to be disappointing.

A Perspective from Which to Lead Business Evolution

The rate of economic change is going to continue to be high. Obsolescence and commoditization will not abate. What we need are better tools for business development and market creation. This book provides a start. Its intended audience includes entrepreneurs and corporate managers, as well as interested citizens who are concerned about the economic well-being of our society. It is intended to be a book of hope, despite its title. Beyond the death of competition lies the advent of something new and better. There are managers and companies who are figuring out how to prosper in the new economy, and who have much to teach us.

In the new world, product and service competition remains an important aspect of what we do, as does process improvement. But the new paradigm is about market creation. It is about envisioning and helping to shape networks of contributions and processes in order to weave rich new economic tapestries.

Let me illustrate what I mean. ABB Asea Brown Boveri is a worldwide electrical engineering company that provides power generation technology, electricity transmission and distribution systems, and a wide variety of electrically powered industrial equipment.³ Headquartered in Zurich, it is jointly held by Swedish and Swiss owners and does business in 140 countries. For many years, it has been widely recognized as a source of innovative strategy-making and leadership.

In 1994, Paul Kefalas became CEO of ABB Canada, a region suffering from stagnant sales. The classic approach to reinvigo-rating the region would have been to concentrate on improving products and processes—that is, to ask what new offers might really catch on and what could be done to produce them efficiently and effectively? These questions direct attention to the present, and to oneself. Kefalas did the opposite. He asked his organization to look outward to the business environment it hoped to serve, and forward to the future. What he wondered was, Who are the major shapers of the future in this region? What visions and strategies do they have? By gleaning insights into the influences and interests shaping industry in Canada, he was able to set up learning teams to work with the movers and shakers to find ways that ABB could contribute to their success.

Leading companies were approached and asked to share their strategies with ABB. Prospects were selected because of their importance in influencing the future, regardless of whether they happened to be ABB customers. When a company was willing, ABB assembled a small group of experts from across ABB’s units and had them work with the company’s representatives to conceive creative ways to help the company realize its dreams. In one case, a large mining concern was struggling to reduce production costs and create safer working conditions. ABB is now collaborating with this firm to produce a system of mining robots, controlled by technicians stationed in comfortable offices remote from the mine, that can handle many of the most perilous and unpleasant tasks. This firm had not been an ABB client, nor was it being targeted by conventional product-oriented sales efforts.

Doing business this way has produced dramatic results for ABB Canada. More than a dozen major customer-partnering arrangements, including several joint ventures, were established by the end of 1995. Sales have turned strongly upward. Because most of the new sales are in the context of long-term partnering agreements, revenues can be expected to continue to increase.

As we will see throughout this book, close attention to one’s economic environment, and to those influencing its evolution, is essential to prosperity in the new economy. Indeed, the corporate strategy for ABB Canada reads, “ABB contributes to the success of its customers by developing mutually beneficial long-term relationships.” Not a word about specific technologies or offers or markets. This strategy stresses that, in an economy of constant change, what you do is not as important as how your capabilities relate to what others are doing. Strategy-making involves having an awareness of the big picture and finding ways to play a role in it.

Successful business strategy helps us coevolve with others to create more attractive futures. Along this line, Kefalas tells an interesting story. In 1995, ABB moved its Canadian headquarters to a new building on the outskirts of Montreal, near the airport. Down this stretch of highway lie other similar buildings, housing multinational firms like Canon, Motorola, and Sun Microsystems. In early 1995, an entrepreneur bought a flagging fast-food restaurant on this same strip. After carefully studying the area, the new owner concluded that what this microeconomy of corporate headquarters really needed was not more fast food but a high quality restaurant catering to executives. Within months, the resulting restaurant was a runaway success, largely because it filled a need. Put another way, it nicely complemented the other components of the local economic system—the real estate development activities, the office buildings, the airport, and the executives working in the area.

For ABB Canada and the restaurant, competitive advantage stems principally from their cooperative, coevolving relationships with a network of other contributors to the overall economic scene. This is the new paradigm in strategy-making, and it means the end of competition as we know it. The basic idea is simple: Understand the economic systems evolving around you and find ways to contribute. Start with an understanding of the big picture rather than of products and services. Of course, there are many subtle matters of leadership and strategy that must be addressed in order to succeed. In the new economic environment, many otherwise great businesses fail, because the context around them changes, rendering them unimportant or obsolete. The rest of this book will be devoted to exploring these issues.

The new paradigm requires thinking in terms of whole systems—that is, seeing your business as part of a wider economic ecosystem and environment. Systems thinking is a mental capability that can be strengthened and improved. There are a number of ways to do so. My personal favorite is to study biology, and especially ecology. Nature is endlessly inventive and fascinating. This book includes a fair amount of biology. The biology may sometimes seem excessive to a business reader, but it serves an indispensable purpose. Biological examples are quite simply the most direct way to explain difficult systems concepts. Each time you master a biological example, you learn a systems concept that will be valuable for comprehending the dynamics of business in the new economy.

Frameworks for Understanding Change

During the past decade, a great deal of insight has been gleaned about complex biological communities—illuminated by biologists poking around in Central American jungles, collecting insects in Asia, and observing birds in the Arctic. Much of this work has focused on the intricate and far-reaching relationships among species: predator and prey, pollinator and plant, protector and herd. What has become clear is that some ecosystems, notably those besieged by wave after wave of potential settlers, develop a special resiliency, flexibility, and resistance to catastrophes. In contrast, those that develop in isolation like Hawaii can become highly vulnerable to ecological disasters, and may even face mass extinctions.

Recent work in community ecology has dwelled on topics like “keystone” species, the most critical of the species in an ecosystem. When they disappear from an ecosystem, life within the system itself changes radically. One example is the sea otter. Sea otters on the California coast prey on sea urchins. The urchins feast on kelp beds and other seaweeds along the ocean floor. When the otters were hunted...