Co-Opetition - Adam M. Brandenburger [53]
Bringing in Competitors?
If you don’t have a really tough competitor, you ought to invent one.… Competition is a way of life.
—Bill Smithburg, CEO, Quaker Oats31
Bill Smithburg has no shortage of real competitors. In sports drinks, his product Gatorade is taking on Coke and Pepsi. In the ready-to-drink iced tea market, his newly acquired Snapple is up against Coke’s Fruitopia and Pepsi’s Lipton. Smithburg’s point is that competition can push you to achieve your personal best. Most runners prefer to train by racing against a rival than by running against the clock.32
Management guru Tom Peters tells the story of Quad/Graphics, a company that puts this philosophy into practice: “[It] licenses its most advanced technology to arch-competitors for the express purpose of keeping the heat turned up under itself (and making a buck in the process).”33
Of course, you don’t want to overdo it. Ideally, you want to get the benefits of competition without giving away the store. Large companies have the luxury of being able to create competition all under their own roofs. Procter & Gamble is famous for encouraging its separate brand managers to compete against one another. Head & Shoulders, Pantene, Pert, Prell, and Vidal Sassoon shampoos are all P&G brands in the same market. Likewise for Tide and Bold detergents and for Ivory and Safeguard soaps. Yet each brand is managed as a separate business with independent advertising, pricing, and strategy. The internal competition across brands keeps everyone on their toes.
Even if you don’t think that you need the benefits of competition, your customers may take a different view. Sometimes they won’t be willing to do business with you unless you have a competitor, in which case you’d better bring one in.
Chip off the Old Block After Intel developed the 8086 microprocessor in 1978, it provided a second-sourcing license to IBM, Advanced Micro Devices (AMD), and ten other, foreign manufacturers, such as NEC. It effectively gave up its monopoly on this technology. Why did it do that?
Its primary customer, IBM, was quite concerned about investing in developing hardware that relied on the Intel chip and then finding itself with only one supplier. One issue was the question of Intel’s manufacturing reliability. At that time, Intel didn’t have the track record it has today. IBM insisted on the right to license Intel’s microcode in order to manufacture chips for its internal use.
Another issue was the price that Intel would charge in the future. Buyers were worried about the game tomorrow as well as the game today. They required that Intel license second sources. Even though IBM was protected by its right to self-manufacture, it wanted “backup” protection. By agreeing to widely license its microcode, Intel assured hardware makers that there would be a competitive market for the chip and they wouldn’t end up being held hostage. With this guarantee, buyers were willing to commit to Intel’s technology. The market for the 8086 chip was indeed very competitive; by 1987 Intel had less than 30 percent of the market.
However, buyers may not have recognized that once they went down Intel’s road, it would be difficult to turn back. Intel’s commitment to widely license its chip technology did not extend to the 286, 386, 486, Pentium, or Pentium Pro chips. Only five companies were granted a second-source license for the 286. And as things turned out, only IBM ended up with a license for the 386 and beyond, and even that license was restricted to production for internal use.
Why didn’t IBM and others look forward and insist that Intel contract to license out every generation of chip technology? In fact, Intel did write long-term licensing contracts with AMD and IBM. But long-term contracts are hard to write, especially in the context of rapidly changing technology. Not surprisingly, legal disputes arose over the interpretation of both the AMD and IBM contracts. AMD lost its second-source