Strategic Collaborations

On possible collaborations between competitors, and their effect on the marketing mix

Published in Hebrew in Status - Management Thinking Magazine  Issue 191, May 2007
By Ari Manor, CEO of ZOOZ

Should you collaborate with your competitors? Absolutely yes, especially if you both have a common enemy. This enemy can be a competitor that threatens you both, a large customer that is too demanding, a supplier that you want a discount from, a government whose regulations are harming your revenues, or a country that you are both experiencing difficulties exporting to. In this article we will survey the diverse forms of possible collaboration between competitors, according to the various components of the product mix. You will see that there are many collaboration possibilities with competitors. I hope that some of the possibilities presented here will turn out to be a source of growth and prosperity for you.

A. Collaboration regarding the actual product.

The development of new products can lean to a certain extent on competitor activity. Firstly, manufacturers tend to get ideas from each other. Companies that adopt a "me too" strategy have turned it into the art of "let others develop, we'll just copy". True, that isn't exactly collaboration, but it is a basis for cooperation. In the fashion industry for example, there are seasonal trends that the majority of the major designers share, to the point where it is not always clear who copied from whom.

A more advanced possibility is Research and Development (R&D) collaboration. Small but creative companies collaborate with wealthier but more conservative companies in order to jointly develop new technologies and products. For example, the Israeli company Compugen identifies genetic and protein sequences with medical significance, and offers wealthy laboratories around the world to develop drugs based on its discoveries, in return for percentages of the potential revenues. Similarly, Israeli companies can enjoy R&D budgets of OECD countries to develop drugs or technologies in collaboration with European corporations. In addition, competing companies join forces to determine regulations for new products and technologies, thus protecting their interests. For example, determining the various regulations for media storage devices (video, CD, DVD, etc.) is a continuous arena for collaboration and competition between Sony, Philips, Kodak, and many other companies.

Another manifestation of collaboration between competing companies is more elusive: companies can simply maintain the status quo in the market and not rock the boat. For example, a brand-name company can rigorously maintain its positioning and protect its competitors' positioning (Mercedes will remain prestigious, Volvo will remain synonymous with safety, etc.); a niche company can stick to its niche and allow others to develop in other niches (a home for the elderly will not try to rent rooms to student); and a company that offers cheap imitations will stick to its strategy and enable others to present innovations at premium costs.

B. Collaboration regarding the product price

Collaboration between competitors in order to attune prices is illegal, but not rare. Firstly, there are competitors that do indeed coordinate prices between them, assuming that they will not get caught, and perhaps the majority indeed does not get caught. Businesses, by nature, aspire to earn more and decrease the competition, and if they can't be a monopoly on their own, creating a cartel with a competitor will lead to similar profitability (the common enemy in this case are the customers). I do not recommend that you adopt this approach, but it is important to note that it is not always necessary to coordinate things with a competitor in order for coordination to actually occur. The status quo principle also exists here. A company that takes "the most expensive and the best" strategy will always ensure that its prices are the highest. If a competitor raises its prices, it will always respond by raising its own prices in order to maintain the highest price in the market. Imitation of business and cost accounting models is also widespread, and also creates coordination between competitors. For example, the commissions that the various banks in Israel charge are very similar, even if they were not agreed upon in discussions between the various bank managers.

And while price coordination is illegal, there is cooperation between competitors that affects the price but that works in favor of the consumer, or at least not against him, and therefore the law does not prevent it. For example, competitors can collaborate in order to reduce expenses: to conduct a joint purchase, to promote technologies that will lead to manufacturing optimizations, to join forces and pressurize to lower prices of commodities or credit company commissions, and even to jointly acquire an automatic and more efficient manufacturing plant. When agriculturalists unite and establish a joint modern packaging plant, assuming that a portion of the saving will be passed on, the price to the end customer decreases. We can take franchisers as a case of optimization that affects price: three gas stations belonging to the same chain (Paz, for example) scattered along one highway, compete with each other but enjoy cheaper expenditures due to their purchasing power and the professional know-how of the entire chain, and therefore the customers also benefit.

Another case where potential competitors collaborate to reduce prices is when manufacturers from a developing country unite around a common vision and market very cheap products to a developed country. For example, Chinese manufacturers cheaply and extremely successfully export almost every product under the sun to the Western world.

C. Collaboration regarding product distribution

Distribution is apparently the most common and widespread forum for collaboration between competitors. For example, competitors can establish a joint distribution company that will save them expenses and increase their market power. In addition, competing businesses can cooperatively coordinate a geographic division of the market, so that potential customers in a specific area will turn to one competitor, in another area they will turn to the second competitor, and in the third area the two competitors will compete with each other. A specific and important instance of collaboration of this type is based on the Michael Porter's Clusters Theory, which states that it is worthwhile to identify an industry in a particular country where there are already excelling companies, and to market and leverage them together to the rest of the world. For example, Israeli companies that develop technologies in the water industry (such as Mekorot, Netafim, MetzerPlast, Amiad, and Plastro) have previously joined together in China and other countries and they currently collaborate and market Israel as an international source for smart water technologies, with the help of the Waterfront NPO that was established specifically for this purpose.

Another common possibility for collaboration is when a company with good development and manufacturing capabilities prefers, even if it has its own product lines, to develop product lines for companies that compete with it directly or indirectly, because they excel in distribution and marketing. For example, FreshOnes - Albad's wet wipe brand, contributes only a small percentage to Albad's revenues, while the majority of revenues are generated from the development and manufacture of private brands for retail chains worldwide. Another interesting example in this context is Checkpoint, which at the beginning succeeded in marketing its security solutions via Sun Microsystems, benefitting from Sun's worldwide distribution capabilities. Checkpoint later began marketing independently and Sun developed a competing product (its own firewall) that was somewhat less successful. Checkpoint eventually became an internationally renowned company that exclusively markets via its distributors and not via Sun.

D. Collaboration regarding product promotion

Joint advertising (such as co-positioning) is not characteristic to competing companies, but rather to companies with complementary goods and services. However, small businesses may definitely unite and publish a joint advertisement, even the magnitude is of a few competing restaurants on the same street. In such cases, collaboration will generally involve a joint purchase of media, but each business will receive a separate section in which it will advertise itself. On the other hand, when an industry has growth potential, the players involved may unite and publish a joint advertisement whose aim is to increase consumption in the entire industry. For example, the citrus fruit industry in Israel may publish an advertisement that praises the nutritional benefits of citrus fruit, and the U.S. National Dairy Council has been running an especially creative campaign for years where celebrities are photographed with a "milk mustache" and the ad says: "Got milk?"

Competing exporters from the same country may present together in the national pavilion in a central exhibition abroad. This is especially prevalent, for example, in areas allocated to Indian and Chinese presenters in the large DIY exhibitions - the displays look similar, and the competitors collaborate under the same national vision that was previously mentioned - to offer very cheap products to the entire Western world.

In the sales arena, hard-core competitors can collaborate when their sales avenues are blocked. For example, when the Clalit Health Service Provider in Israel forbade pharmaceutical company representatives from entering its hospitals and marketing to the physicians, the pharmaceutical companies consulted with each other on how to handle the situation.

Competition and collaboration in the sales promotion arena have co-existed not only between organizations, but also within organizations. For example, separate business units at Teva Pharmaceuticals manufacture and market competing drugs. Notwithstanding, there is a marketing headquarters at Teva that assists each of these units to successfully compete on the international market. In other words, in specific areas the corporation helps all the units, often collaborating between themselves, while in other areas there is partitioning and fierce competition between them.

E. Summary

Business competition, as fierce as it can be, is not the aim of the business, and in fact is not desirable to businesses. Smart businesses aspire to attain a permanent advantage, meaning an exclusive advantage, without competitors. However, for the most part it is not possible to get rid of the competition. It an existing fact whose presence is very real. It also occasionally happens that when one competitor is finally eliminated, another much tougher and more dangerous competitor takes its place. Therefore, instead of trying to eliminate or ignore the competition, you can try and get ahead with their help. You can learn from them, stabilize the market in unison (even if not explicitly stated), and you can also legally collaborate with them in a number of ways outlined in the article and in many other ways. I wish you pleasant and productive collaboration!

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The article was written by Ari Manor, CEO of ZOOZ Marketing & Organizational Consulting. ZOOZ conducts training for managers and employees. Send your comments to ari@zooz.co.il.