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An idea that’s a non-starter at many organizations is collaborating with a competitor.
But Yale School of Management professor Barry Nalebuff says leaders who refuse to consider teaming up with other companies – even when there are clear mutual benefits – may be leaving value on the table.
In this episode, you’ll learn how companies like UPS, Apple, Ford, Google, and others have analyzed and capitalized on what Nalebuff calls “co-opetition” opportunities. You’ll also learn how to think strategically about which tasks work well for these collaborations and how to mitigate your organization’s risk through time-tested tools like contracts, performance guarantees, and conditional penalties.
This episode originally aired on HBR IdeaCast in December 2020. Here it is.
CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
In the summer of 1997, Apple was on the verge of failure. Steve Jobs confronted the reality and turned to the enemy for help. Microsoft invested $150 million in Apple, a key cash infusion in its rival in business. It came as a shock to many. Some analysts questioned why Microsoft would keep its rival afloat, and Apple loyalists couldn’t understand why their great competitor in the personal computing business was now part owner.
STEVE JOBS: And relationships that are destructive don’t help anybody in this industry as it is today.
CURT NICKISCH: This is how it sounded when Jobs announced the deal at the Mac World Conference.
STEVE JOBS: And I’d like to announce one of our first partnerships today, a very very meaningful one. And that is one with Microsoft.
CURT NICKISCH: Now that moment is seen as a key turning point for Apple and a profitable one for Microsoft that also gave it protection from more regulatory scrutiny. Both of these fierce rivals cooperated to their benefit.
Today’s guest says this idea of co-opetition holds a lot of promise, but that too many companies are still afraid to go into it for the fear of risks, and honestly because they don’t totally understand how to go about it strategically. And he’s here to explain how to think it through and make it work for you. Barry Nalebuff is a professor at Yale School of Management, and he’s the coauthor with Adam Bandenberger of the HBR article, “The Rules of Co-opetition.” Barry, thanks for being here.
BARRY NALEBUFF: Thanks for having me.
CURT NICKISCH: So, coopetition is not new at all. But for a lot of people, it is hard to wrap their heads around it. Why is that?
BARRY NALEBUFF: Well, I think F. Scott Fitzgerald said that the mark of true intelligence is the ability to hold two contradictory ideas in the mind at the same time and function. And the fact is, it’s hard to compete and cooperate at the same time. You know, when Tolstoy wrote War and Peace, it was seven years of war followed by seven years of peace, endless cycles of war and peace. And coopetition is about competing and cooperating, war and peace, at the same time. And that’s hard to do.
CURT NICKISCH: Yeah, it’s a lot easier to just be at war, I suppose.
BARRY NALEBUFF: One doesn’t like to help a rival as a general matter. You see them as the enemy. And there’s often a win-lose mindset. However, the point of cooperating isn’t to help the other side. It’s to help yourself, sometimes at their expense, and sometimes to their benefit. And the key is to focus on what it does for you, not so much what it does for the other side. The goal is to change the mindset from, in order to succeed, others must fail, into the, does this help me, does this not give away my competitive advantage, my secret sauce? Does this put me in a stronger position relative to all the other players out there, possibly not the one I’m cooperating with, though.
CURT NICKISCH: Steve Jobs admitted later that this zero sum world, where he realized, you know, if Apple were to win, Microsoft has to lose, in that world that looked like Apple was going to lose.
BARRY NALEBUFF: Correct.
CURT NICKISCH: And he had to get out of that zero sum world. That’s exactly what you’re saying here.
BARRY NALEBUFF: And other times, you cooperate not because you want to, but because the alternative of not cooperating is even worse. In my own life I had a startup with one of my former students, Seth Goldman. The company’s called Honest Tea. And we had the opportunity to cooperate and compete with Safeway, one of our supermarket chains.
And Safeway was carrying our product, so that’s the sense in which we were cooperating, and then they asked us, would we make an organic iced tea for their store brand, their Safeway O Organics line. And we didn’t really want to do that, because the more of the house brand tea that was sold, that would cut into our share. But we realized that if we didn’t do it, they were still going to have somebody make a house tea for them, and that somebody was likely to be Tazo.
CURT NICKISCH: Your competitor.
BARRY NALEBUFF: And if Tazo did it, they’d make their flavors just like ours. Whereas, if we did it, we could make our flavors more like theirs. And so, while it wasn’t our first choice to go out there and cooperate, we had to realize that the status quo was not an option, and cooperating ended up being better than not cooperating.
CURT NICKISCH: What are some of the main reasons that a leader or a company should consider a co-opetition strategy?
BARRY NALEBUFF: So, sometimes it’s easy, in the sense that you don’t have a choice. If the project is so large, so risky, that you just can’t do it on your own, you have to find other people to come do it with you. And a classic example of that is, in Europe now, you have the major car makers all coming together to build charging stations for electric cars. The cost of building the charging network is going to be in the billions. It doesn’t make sense to have different changing networks for each car company, and so they need to have this complementary infrastructure that will benefit everyone, and they’ve come together to make that happen. So, that’s the easy one, when the project is really big, really risky, too expensive to do on your own, too much duplication.
CURT NICKISCH: And I also think of here, joint ventures and new markets are places where the competition between the two companies isn’t as clear or apparent at that time that it’s being considered.
BARRY NALEBUFF: Sure. I don’t want to stick too much to cars, but you have Ford and VW coming together through Argo AI to do autonomous driving technology. And again, it’s a huge project. It will cost billions. There’s issues of regulatory approval. And that regulatory approval is more likely to happen if Ford can help in the United States, VW can help in Europe. It also helps that Ford has a much bigger market share in the US, VW in Europe. And so, even while they’re competitors, they’re not as head to head in each of the two markets.
CURT NICKISCH: So, sometimes it’s obvious that you need to do it. What are some of the other reasons?
BARRY NALEBUFF: Another reason is that one party is really better at A, and the other party is really better at B. And so, by coming together, you make something that’s just terrific. In the case of cars, Ford ended up being better in ten-speed transmissions, GM in nine-speed transmissions. So, they said, look, let’s just not waste too much of our engineers’ effort on building new transmissions. We’ll swap. I, Ford, will tell you about, do the work on the ten. You, GM, will do the work on the nine.
That’s not a sense which people don’t pick the cars because they have a nine- or a ten-speed transmission. And we will end up avoiding lots of duplication through that process, because each of us has a particular skill here that we’re better at, and effectively, we’re trading those different skills.
CURT NICKISCH: That’s a case where, you know, each of the competitors/cooperators have complementary technologies or assets or skills that they bring to the table. What happens when the power difference is greater between the two parties?
BARRY NALEBUFF: In those circumstances, there’s something that the second party always has to bring to the table, and that’s money. And so, if one party is better at A, and the other party has nothing to give in return, they can always give cash. And we see that happening. If you go back to 2008, Google was better at doing online search ad placements than Yahoo. And Yahoo understood this. They did a trial. And Yahoo estimated they could get an extra billion dollars in revenue if they let Google do the ad placement for them. So, it wasn’t that Yahoo could do something in return, other than share in some of those gains.
From Google’s perspective, they had this fantastic technology that was being applied to 80% of the market. If you wanted to use that technology in the other 20% of the market, there’s two things you could do. You could either take away all of Yahoo’s share, which seems they did over time, but at that that point, you have to lend your secret sauce to Yahoo so that you can get the advantage of it on the 20% of the market you don’t currently have control of.
CURT NICKISCH: The tech industry is really interesting, right, because there are scale benefits there that are so immediately apparent, and the competition of platforms, right, Apple versus Android, or people trying to get to viewers onto streaming platforms and to grow those. It’s a really fascinating place where the question of whether or not HBO Max should be on Roku or whether Apple TV should allow its stuff onto Roku streaming devices, for instance. What is it about the tech industry and those decisions that makes it either higher stakes or a little harder to think through?
BARRY NALEBUFF: I think it is a rapidly evolving situation where there are sometimes large network effects, sometimes scale economies, and we’re seeing interesting cases of cooperation.
CBS had developed a TV series, Dead to Me. And didn’t quite know what to do with it. And they realized that Netflix, it would make a lot more sense to be on Netflix than to be on CBS. And they also thought about it a little bit more, and said, well, look, if we don’t sell this to Netflix, what will Netflix put on in its stead? And it might pick something that would actually go after more of a CBS audience. So, here’s a case where I had content that I decided to supply to the enemy, if you’d like.
Apple TV+, interestingly enough, is not being made available to people who have Samsung phones. And so, one of the reasons that Apple believes that you’ll want to buy an iPhone is, you get exclusive content in terms of Apple TV+, but they do make it available to people who have Samsung TVs in their living room, because they realize that even people with iPhones may want to watch the show on a larger screen.
CURT NICKISCH: You know a lot of these deals require sharing information about data or metrics or numbers. Right? You may even have to share profits. You have that thing where you don’t want to share certain information with a competitor, but then sometimes just seeing on paper that a competitor is profiting so much from a deal that you’ve made with them can make it hard to swallow a little bit, too. So, how do you think through this transparency you need to keep that from backfiring?
BARRY NALEBUFF: If you go back to the Google/Yahoo! story, in that plan, Google was going to share its sauce, but not the recipe. And so, effectively, it was going to be a black box, and try and keep the information hidden.
In other circumstances, you may end up having to share some information, but you decide it’s not a deal breaker. So, UPS offered to deliver packages for DHL, to fly them around the United States. And UPS understood that because of package tracking, DHL could figure out how UPS was shipping its packages around the country. But they realized that, you know, the scale that we’re doing that is different from how DHL would do it, and so, you know what? I’m just going to have to accept that, and I’m not going to say that’s a reason not to do the project at all, or the cooperation.
On the other hand, people who sell on Amazon Marketplace, they’re giving up information that’s really incredibly important, because Amazon can figure out what products are selling, what products are selling at really high prices. And so, Amazon can say, hm, maybe that’s the stuff that we should be making for ourselves.
CURT NICKISCH: So, the Amazon Basics brand, or anything else.
BARRY NALEBUFF: Amazon Basics or anything else. And so, then you have to ask, well, why do the people on Marketplace do it? And the answer is that Amazon has this hub, and it has all these customers coming to look for different products. And so, if I’m not there, they may not find me. Moreover, then you have to say, well, why is Amazon willing to let rivals sell on its platform? One is that it makes some money when the, through commissions, through shipping fees, when rivals sell there. It also prevents other platforms from then becoming the hub. And Amazon says, well, I want everyone to start their search on me, and lastly, they get all this information, which ends up being helpful to them. It allows them to also have scale in terms of their warehousing and shipping. And so, this is a circumstance where small players end up finding themselves needing to cooperate with Amazon, but collectively, it may not be helping them.
CURT NICKISCH: Arre there companies or industries that you look at, that you feel should be more cooperative than they are already? Or have hamstrung themselves by not taking advantage of more opportunities?
BARRY NALEBUFF: Well, I’d say if we go outside of just companies into the political sphere, I mean, certainly, when it comes to global warming issues, we’re going to need a lot of cooperation that we’re not currently seeing, and perhaps there’s hope for this in the near future, but it’s too big a problem for anyone to say, to solve on their own. It’s too expensive. And so, the idea of sharing technologies is going to be critical there.
I think we’re beginning to see some very important cooperation in terms of vaccines and COVID. So, one can take heart on that. Cooperation in terms of resolving international trade wars, the notion that for China to succeed does not mean the United States must fail, and so having a new mindset in that regard I think is going to be incredibly important there. And similarly, by the way, for the U.S. to succeed, China can’t fail.
I mean, we’re not in a Microsoft versus Apple world in this sense. I’d say the bigger issue is not that companies and industries don’t do it. It’s they cooperate as a last resort rather than as a first resort. And so, they wait too long, is the challenge. All of us know about competitive strategy. How often have we turned to somebody else and said, what is our cooperative strategy? How is it that we can cooperate better? And what is the cooperation opportunities we’re missing?
CURT NICKISCH: How much of that comes from leadership?
BARRY NALEBUFF: Well, I’m hoping this podcast, the HBR article will start to have the impact on senior managers, realizing that this is something that they have not spent enough time focusing on, and that there are ways to do it that don’t really put you at risk, so that you can feel more comfortable about it. Because it is something that is by, almost by definition uncomfortable.
CURT NICKISCH: Let’s talk through a few things like that that you can do to protect yourself – being able to pull out of the agreement, things like that that might make it easier for a lot of people to go into what could be very beneficial to view those more favorably?
BARRY NALEBUFF: Absolutely, so just like you might think about a prenuptial before a marriage, you want to think about the fact that this agreement, this cooperation may not last forever. And so, are you becoming too dependent on the person? Is it possible to end this agreement and still be in a strong position? Now, some cases, whether it be CBS providing Dead to Me to Netflix, Honest Tea providing its organic tea to Safeway, museums sharing passes. If those agreements end, there’s nothing to undo, if you’d like, and so that’s super easy.
When GM and Ford swapped transmissions, they shared a technology. They standardized parts so they could get better pricing. But they didn’t go to the step of manufacturing them together. And the reason is, is that that creates an issue of, who’s going to get access to capacity if there’s a shortage? And if somehow one car really takes off, and there’s more capacity needed, GM wanted to be in the position of, OK, I’m in charge. I get to have control of that capacity. And so, one view is that we cooperate on places where disentanglement is easy, and control issues are less complex, and then we go our own ways when it becomes more challenging and more central to our business.
It’s also possible to write a contract and say, I’m expecting as part of this cooperation to have certain performance guarantees. And you’re going to be the one in charge, but here’s what you need to do in order to be successful, and if you do that, great, and if you don’t, there are penalties associated with it.
CURT NICKISCH: This notion of first resort versus last resort is interesting. Like sometimes people and companies come around to coopetition opportunities, right, just too late. Right? They miss out on some of the benefits from just timing it when they could have.
BARRY NALEBUFF: Sure. You started off with the example of Apple and Microsoft, and in the end, Apple had to wait until it was on its near deathbed before it decided to take help from Microsoft. That’s waiting too long.
One of our favorite examples concerns check clearing. So, if you go back 300 years, there were runners in the UK who would take checks from one bank to another when, in order to get the funds cleared. And instead of having runners run around literally the City of London from every bank to every other bank, the folks figured out they could just meet in a pub, get in a back room, and I’ll give you my checks, and you give me your checks. And in effect, they created the first central clearing house on their own.
And what we find interesting about that is, in many ways the runners did an end run around the banks, that the banks should have seen the value of cooperating, but they thought each of them should just be doing it on their own.
And that problem continued in the digital age because 20 years ago, actually I guess ten years ago, even, people were mailing, sending paper checks around the country, and that was literally billions of pounds of paper that was being moved around totally unnecessarily when it could have been digital images that were being shipped. And that all came to a head after 9/11 when planes were grounded for over a week, and so checks couldn’t be sent, and then nobody really knew how much was in anybody’s account. So, why didn’t the banks do this right from the start?
And the answer is that the large banks were very well set up to process digitized image, digital images, but the little banks were not. And they saw that cooperation would unlevel the playing field, would put them at a further disadvantage to the big banks. And that’s a general issue here, which is, often times when parties are cooperating with each other, they want to either level the playing field or preserve the current tilt. They’re not willing to let the playing field be more tilted. So, the solution was to have the Fed print up the digital images and ship paper versions to the small banks who needed them as they were doing the transition, and effectively protect the small banks as part of this transition. And when the large banks were willing to accommodate the small banks in this way, then the cooperation actually happened. And so, sometimes people are either trying to push their advantage, or unwilling to make sure that everybody wins. And that ends up delaying cooperation from happening.
CURT NICKISCH: Barry, I’m curious if you have people come to you I your work, in case studies or other examples, where people say, I feel like my company should be doing this. Or I feel like there is an opportunity for us to team up with a competitor to do something we can’t do ourselves. But I can’t convince people around me, and I can’t show people the way. Does that ever occur to you? And what advice do you have for somebody in that situation?
BARRY NALEBUFF: I think it helps to start with what the philosophy is. And the truth is that we don’t have to teach managers how to be better at competing. They’ve all learned how to do that. But if you can be better at cooperating, that can be a personal competitive advantage for you. And it’s not just cooperation across companies. We can think about inside the company in terms of across divisions with other people in your team. And that managers who can develop reputation for being creative, effective cooperators are those that people are looking to give more responsibility to.
It’s also the case that cooperation provides you new opportunities for being creative. That is, we’ve explored the question of what are ways in which I can gain on my rivals, but we have not always asked and answered the question, what is it we could do to create a bigger pie? And that just by asking the question, the answers are generally apparent. And so, remember, we’re not saying, give up what you know about competing. Don’t stop competing. But add cooperation at the same time.
CURT NICKISCH: Barry, thanks so much for coming on the show to talk through how to think through these problems.
BARRY NALEBUFF: You’re most welcome. Thank you for inviting someone from Yale into the Harvard podcast.
HANNAH BATES: That was Yale School of Management professor Barry Nalebuff in conversation with Curt Nickisch on the HBR IdeaCast.
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This episode was produced by Mary Dooe, Anne Saini, and me, Hannah Bates. Ian Fox is our editor. And special thanks to Rob Eckhardt, Adam Buchholz, Maureen Hoch, Nicole Smith, Erica Truxler, Ramsey Khabbaz, Anne Bartholomew, and you – our listener. See you next week.