Wednesday, September 08, 2010

Businesses Are in Competition With Their Rivals Not their Customers

Charles Green writes (7 September) for The Customer Collective HERE:

‘Why Competitors Hate Competition’

‘No other concept has been more enshrined in capitalism than the notion of competition. Just to pick one example, here is Milton Friedman on public schools, suggesting that “the only solution is competition.” Adam Smith has been taken somewhat out of context by free-market thinkers, who focus on this quote:

“Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

They forget not only that Smith’s “invisible hand” was first used to refer to a collective sense of morality, in his also-forgotten book The Theory of Moral Sentiments; a book that arguably Smith felt was the greater of the two.’ …

‘… To Compete, You Have to Collaborate

So here’s an irony for you: to be competitive, you have to collaborate. Sometimes (look at the software industry) you have to collaborate with the same businesses that you compete with in other product lines. Not only that, but that form of collaboration is not anti-competitive—it’s what Silicon Valley did. The talent, the intellectual capital, the know-how, do not reside within corporate walls. They reside in other people. Those who succeed are those who harness the capabilities of others, regardless of who writes the others’ paycheck.

Competition still works: it just doesn’t work via the ways of competing that were developed a century ago. The new invisible hand rewards those who collaborate better; it punishes those whose idea of competition is to go it alone against others.


Comment
Charles Green is not an academic economist, hence, I shall judge his remarks accordingly. He does, however, make a couple of good points that are worthy of some note.

For example, he chastises those who see the invisible-hand metaphor merely as an alleged behavioural characteristic of commercial markets, reminding those so inclined that Smith used the metaphor in regard to his book, Moral Sentiments, which was not about markets at all.

He quotes from Wealth Of Nations, correctly pointing out those modern economists, who in their legitimate enthusiasm for markets, misuse the quotation an treat it as a general rule, though not quite for the reason Charles Green gives.

Modern economists tear the quotation from its context, forgetting, or more likely not knowing, that Smith refers to some, not all traders, who are overly concerned with their own security and prefer local to foreign investment. (New readers may scroll down Lost Legacy posts and read my debate with David Friedman covering this issue in detail.)

But Charles Green is almost spot on in this section headed:

'To Compete, You Have to Collaborate’.

In my Business School days (I retired in 2005), I spoke endlessly to executives (and their aspirants) of the need for them to recognize that they are not in competition with either their suppliers or their customers. Shock, horror at my assertion often came in their responses.

How so, they often asked? Well, your suppliers and your customers are not your rivals. But you are in competition with your rivals, I replied, and your rivals are the other customers of your suppliers and the other suppliers of your customers.
It is from the misconception of the identity of your rivals that some of the worst examples of poor negotiation thrive – and damage your business interests.

You can see this at work when you follow widespread the misunderstanding of Smith’s other famous quotation, the one about seeking the attention of the ‘butcher, the brewer, and the baker’ for the ingredients of your dinner. Most read that as being about seeking their own self-interest, rather than seeking to appealing to the self-interests of ‘the butcher, the brewer, and the baker’. (Check the Smith's quotation out, Book I, chapter ii, chapter 1-9: pages 452-56, of
.)

Smith made his point in 1776 (though he was teaching from 1752-1764); today still, tens of thousands of managers get the purpose and method of negotiation absolutely wrong – they ‘negotiate’ as if they are in competition with their suppliers and customers, and they think of negotiation as a zero-sum game of winners and losers, etc.

Hence, for many years I earned fees teaching negotiation to executives –and there was no end of customers for such events.

So, reading Charles Green was a pleasure this morning; he was far more right than he was wrong (follow the link).

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1 Comments:

Blogger Charles Green said...

Gavin,

Lovely post, thanks, and thanks for the nice things said about my own post. (Not to mention your gracious way of pointing out my non-economist flaws of economic interpretation).

Let me add something to your comments about not competing with one's suppliers or customers. Much of that stuff, I believe, comes from Michael Porter's extremely influential book from about 1979, Competitive Strategy. The major model he introduced there is still taught in tons of exec ed and corporate training programs as "The Five Forces" model.

The model lists five forms of competition, including that between the company and its suppliers and customers. Of course, competition in a sense does exist there, particularly from the threat of backward or forward integration, or the potential bargaining power of one or the other relative to the company.

When that book was first published, one of its effects was to redefine the idea of corporate strategy. Until then, it had been the province of generalists (think Peter Drucker) who often chose their metaphors from military thinkers. Porter's concept, along with pioneering work by BCG, essentially made the adjective 'competitive' an implied part of the word 'strategy' ever after.

Until, hopefully, now. In a day and age so wildly interconnected as ours is now, the belief system that you and I are criticizing--the belief that it is 'right' and 'natural' to compete with one's customers and suppliers--is ludicrous. The critical relationship in short supply is not competitiveness, it is collaboration.

The successful businesses of the future will not be synonymous with single corporate entities; they will exist across and between companies, in the white spaces, as a composite of many corporations. Thus the useful sense of strategy is no longer competitive.

We're working the same side of the street; I'm glad to see you pointing out the same concept from the point of view of negotiations.

4:50 pm  

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