Does business need competition?

We can learn important lessons from carmakers BMW and Skoda about business competition

Competition, we are led to believe, is as essential to business as breathing is to life.  Indeed for many of us, business and competition are pretty much one and the same.  We get into business to compete, and we succeed by competing well.  Businesses clash with their rivals, and only the strong survive.

portion of the market bmw-and-skoda

skeeze / Pixabay

These ideas are so taken for granted, so embedded in business thought, that we never take a moment to question them, and ask whether they are as true as we’ve come to assume.

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In this piece, I want to suggest that competition might not be as crucial to business as it seems - and that the very best business strategies might come from a non-competitive approach to the market.

Competition is not intrinsic in business

Seem implausible?  Then let’s give it some thought.

First of all, it’s worth noting that we humans have a track record as a species of introducing competition where it doesn't belongAs I explain in this talk on the benefits of “loving your competitors”, we have spent thousands of years going out of our way in order to create artificial competitive environments in which to satisfy our competitive urges.  Games, sports, politics, war, you name it.  We even make explicitly non-competitive things competitive.  How else to explain hot dog eating contests, lumberjack championships, and “extreme ironing”?

Considering this, it’s not surprising that we overlay competition on business too.

However, in the case of business, we think we have a good reason.  Surely, we assume, competition is unavoidable, because if you have two companies both going after the same piece of business only one of them can win, and therefore they’re locked into a competitive context. This is often true, but it is not inevitable.  Why?  Because that dynamic only exists when two companies are offering the same thing; when they are trying to play the exact same market role.  When they are, indeed, going after the same piece of business.

Competition is a choice as bmw and skoda demonstrate

Competition is a dynamic that only exists when multiple parties are trying to compete for the same prize.  Two boxers fighting over one belt; 20 soccer teams going for one championship; two guys going after one girl.  In business, yes, this often happens, but the difference is that it isn’t inevitable.  It’s simply how we choose to operate.  It is entirely possible for a company to try and offer something different to other businesses (even in its own category), thereby attracting different customers, and not actually engaging in direct competition at all.

To illustrate this idea simply, let’s imagine a hypothetical car industry. The car industry is - we assume - highly competitive.  But would it still be competitive if the only four car brands were Ferrari, Jeep, BMW, and Skoda?  On the whole, probably not.  No consumer would ever weigh up whether they were going to purchase a Ferrari or a BMW, or a Skoda and a Jeep - for the most part they offer different values in the market, and so if they were the only ones out there, they would actually care for their own portion of the market in a completely non-competitive way.

Where competition begins is if you throw, say, Mercedes, or Kia, into that mix. Because these brands double up on the role of BMW and Skoda, you have then created a zero-sum game - and consequently a competitive dynamic.  However, such an occurrence wouldn’t be either essential or inevitable, it would simply represent the choice of the companies in question.

Choosing an anti-competitive market

What we have here then, very basically, is two different visions of how a market can be organised:

  • A competitive market: with multiple businesses clustering together, offering the same value, and competing for the same market
  • An anti-competitive market: with businesses declustering from each other, allowing each other to have their own portions of the market, and looking after their own role - and only their own role within it

Human nature drags us into scenario 1, which is how most markets are organised, but the counter-intuitive scenario 2 is where true value creation and profitability lies.

Now, of course, businesses in a given market are never going to club together and collaborate in order to make scenario 2 happen (even if it might theoretically be in all their interests).  But that doesn’t mean you can’t use this logic for yourself.

How to win by not competing, beyond BMW and Skoda

One business voluntarily refusing to compete directly with the other companies in its category - essentially allowing them to have their portion of the market uncontested, so it can focus more precisely on its own part of the market - can achieve outsized profitability compared to the norms of that market.  Why?  Because it isn’t subjected to the costs of competition such as marketing spend, price compression, and “keeping up with the Joneses”.  Instead, it looks after its own role in the system, and therefore naturally and effortlessly attracts those who are shopping for it.  Furthermore, by having a resolute focus, other companies won’t be able to compete with it on its own terms, because doing so would mean sacrificing other parts of the market. In simple terms?  It’s much more profitable to own small piece of the pie than to fight over the whole thing.

To learn more about this idea, and how some real companies have succeeded wildly by refusing to compete, please watch this talk I gave about the subject:

But otherwise, I hope that, at the very least, I have cast some doubt in your mind about the essentiality of competition in business - and made you start to realise that it’s the way we choose to organise our markets; not how they naturally have to be.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver