Make Your Competition Work For You

Companies today are paranoid, afraid that even their allies will steal their business. Yet a creative collaboration with your biggest competitor may be the best opportunity for revenue and survival. But remember that dancing with the wolves can also get you eaten for lunch. You have to take the risk but keep your wits about you.

Your goal is coopetition: to find a way to partner with your competitor in such a way that both parties can substantially benefit from the other's resources — without stealing customers or damaging anyone's credibility. It's a great survival strategy for small companies or entrepreneurs, and a good expansion strategy for even the largest companies.

As an example, a few years ago I worked for small software company selling an expensive enterprise workflow product. It was heavy on visual development capability but light on modeling and simulation, and we kept battling a competitor in the marketplace who had essentially the inverse strengths in a similar product. We were both losing in the lucrative high-end market segment. Neither could afford to build what the other had, but we could easily integrate some of our combined features in a shared product.

We finally decided set up a strategic partnership with a joint product to capture this elusive segment of the market. As a result of our increased coverage and wider range of solutions, we both gained revenue and credibility, while reducing marketing and development. In the following quarter, we jointly signed up two new customers who loved our integrated solution.

This example is only the first of six approaches for coopetition, with potential wins for both sides:

1. Best of both creates a new market. Your competitor has strengths, and you have different strengths. A strategic combination can win in a new segment of the market, which neither of you could do alone in the same time frame or at the same cost.
2. Cost sharing and economies of scale. Companies work together on segments of their business where they believe they can minimize costs but not jeopardize their unique attributes. For instance, Dell and HP are both strong competitors on notebook computers, but they offer Intel processors, rather than building their own, to keep component costs down and broaden their application market through compatibility. Both now lead with the same processors, but Dell offers custom system configuration at ship, while HP capitalizes on more impressive display and battery technology.
3. Upsell related products after the initial sale. If your customers would benefit by having both of your products, you might negotiate the opportunity to include your competitor's product as a later add-on, or vice versa. This is called up-selling, or cross-up-selling, and both parties share the profits. You see this every day in retail outlets that are not company stores. They are more than happy to sell you alternate brand of shoes that match your suit, or suggest a premium appliance from another manufacturer, once you have selected the lowest cost refrigerator.
4. Integrate for new or critical mass. If your competitor has a similar product that could complement your own, you might consider arranging a deal where both you and your competitor would offer an integrated bundle or new product. Another way to coopetate is to create a critical new offering to address a common enemy. For example, if you're selling a travel magazine, you could add a free travel video when someone buys a subscription. You're now targeting people who want the travel magazine and those that want the specific video you are giving away. Others will now buy your travel magazine over a travel book, for example, which competes with both your magazine and the video individually.
5. Cross endorsement. If your competitor isn't really competing with your direct market, you can refer business to each other without anyone losing customers. Affiliate marketing might actually be one of the more effective (and easier) ways to partner with someone else in the industry. Online, this starts with link exchanges, leading to referral fees. This also works for two businesses with different products but similar clientele, to increase the market for both. It could be something as simple as a chiropractic office that offers acupuncture and physical therapy cross-endorsing with a neighboring gym. Gym members could get discounts on chiropractic services and chiropractic patients might get free on-site body fat analyses from the gym.
6. Possible investor. Once you have established your credibility and value, a strategic partnership may extend to a financial relationship. They may have the finances you need and are ready to invest in a business area they know. Also, this competitor will now be a better candidate for merger or acquisition due to the existing relationship, when either of you is ready for that step. For example, IBM, Intel, and other large companies routinely allocate and manage venture funds to invest in startups with new technology that may compete with their own. Buying the startups that get traction is cheaper and faster for them than trying to manage similar development efforts within a large company.

Of course, for a strategic alliance to work, you must take precautions. Companies need to very clearly define where they are working together and where they are competing. The right place to start with a good joint non-disclosure and non-compete agreement. Also, make sure there is no misalignment of priorities between your organizations, which can negate all the positives. For example, if your pride is your customer service reputation, don't risk it by partnering with a company who has related items at a lower cost but consistently poor customer service.

While it is normal to instinctively look for ways to avoid, evade or protect ourselves from the perceived threat of a competitor, take the time to look at the opportunity strategic alliances may provide. You will find that it is sometimes smarter to capitalize on the positive aspects of a competitive situation, rather than fight to the death of both of you.

Martin Zwilling is the founder and chief executive officer of Startup Professionals.

Thanks to Martin Zwilling / Blogs HBR