Co-opetition as a Business Srategy - Coursework Example

This paper discusses the concept of co-opetition as a business strategy. This will be addressed about the port industry that has since dumped its tag as a passive provider and instead operates as a proactive organization in an extremely competitive environment. This report will also critically examine the nature of port competition within the context of logistics providers. The strategies of co-opetition used within the port industry are also highlighted in the report. Table of Contents Introduction 3 Criteria for co-opetitive relationships 4 Criteria for Survival of Co-opetitive Relationships 5 Benefits of Co-opetition 5 Negative Consequences of Excess Co-opetition 6 Port Competition within the Context of Logistic Providers. 7 Strategies of Cooperation in the Port industry 9 Reasons for Port Co-operation 9 Objectives of Port Co-operation 10 Port Co-opetition: Case of Hong Kong and South China 11 Interactions Between ports 13 Conclusion 15 Introduction Co-opetition refers to a business strategy that consents competing firms to manage a common interest and goal in order to gain value (Dagnino and Rocco, 2012). As the name suggests, co-opetition is based on a combination of cooperation and competition between business competitors for business gains (Mongkhonvanit, 2014). It implies that the interaction between organizations can take place either by rivalry due to conflicting interests and cooperation due to mutual interests (Bengtsson and Kock, 2000). Co-opetition is a relationship based on specific factors namely: suppliers, distributors, subcontractors, “complementors” and competitors. These factors are collectively harnessed to add value to add value to each other’s organization (Mosad, 2004). Bradenburger and Nalebuff explains further the meaning of a competitor by saying “a player refers to a competitor to a company if customers value the firm’s product less when they have the other company’s product than when they have the firm’s product alone”. In addition, “a player is a competitor if it becomes disadvantageous for a supplier to provide resources to the firm when it is also supplying the other company than when it is supplying the firm alone” (Bradenburger and Nalebuff, 1996). They also argued that one group, complementors, was equally important in business but often ignored. They went further and stated that “a player is a complementor if customers value the firm’s product more when they also have the competing company’s product than when they have the firm’s product alone” (Bradenburger and Nalebuff, 1996). In simple terms, a complementors’ product is meant to compliment another firm’s product rather than provide competition. Criteria for co-opetitive relationships Mosad Zineldin outlines several preconditions to be fulfilled for s mutually beneficial business relationship to exist between two or more organizations. These are: There must be the willingness of two or more organizations to engage in an interactive mutually beneficial exchange relationship. As per the definition of co-opetition, each organization must have something valuable to the other organization or organizations involved. After the establishment of what value each party has to offer, each party must now be willing to offer the value of what they bring in exchange for the value brought by the other party or parties. Rejection or acceptance of the terms and conditions of the exchange is per the free will of each party involved in the case of dissatisfaction or satisfaction. As in similar relationships, communication is a key factor and therefore the parties involved must be able to conduct effective communication between them and interact with each other. The parties must also recognize the importance of ethical values and norms, interdependence, commitment and adaptation in the creation, development and enhancement of a sustainable long-term relationship. The parties involved should be able to strike a positive balance between the advantages and disadvantages of the relationship (Mosad, 2004). Criteria for Survival of Co-opetitive Relationships Relationships are known always to have their ups and downs and business relationships are no exceptions. The survival of a co-opetitive relationship is always down to trust and commitment from all the parties involved. Sherman argues that one of the biggest impediments to a successful co-opetitive relationship is lack of trust (Sherman, 1992). Trust in this case must be defined within the boundaries of business ethics. It cannot be imposed and therefore must be earned. Existence of trust, moral & ethical standards, and patience in developing strategic business relationships, minimizes risks and uncertainty. Therefore builds a platform for a long-term mutually beneficial relationship for the individuals involved (Mosad, 2004). Benefits of Co-opetition As stated earlier, co-opetition should be mutually beneficial when sustainable. It offers parties involved numerous advantages and opportunities such as “development of collaborative programs beyond their legal boundaries and development, production and joint sourcing.” These collectively lead to benefits such as (Mosad, 2004): Economies of scale. Lower operational costs. Abundance of skilled labour force. Increased levels of research and development. Access to superior technology. Expansion of market due to access to newer markets. Added customer value Profits for all parties in the business coalition. Negative Consequences of Excess Co-opetition It has been noticed that more attention has been given to the benefits of business relationships, and this has led to neglect on the negative consequences. Little research has been done and published regarding the negative consequences of co-opetition. Mosad Zineldin, however, enlightens us on some of the negative consequences of “too much co-opetition” below: As much as co-opetition might lower operational costs in the long term, building and maintaining the co-opetition demands a lot of resources. It can be defined as “an uncertain investment without a certain outcome.” Misinterpretation of the values of cooperation might lead to the reduction of efficiency, productivity and profitability. Inadequate experience in dealing with new partners can considerably demand a lot of management’s time and in the process lead to neglect of the other core activities of the organization. Too many costs may be incurred in the coordination and control of cooperation and competition strategies as well as sustaining the relationship. The adaptations required to maintain and enhance the relationship such as technological, economical, cultural, psychological and administrative adaptations, require substantial resources even though the predicted return on the investment is not certain. There is a sense of loss of freedom developed due to sharing of some activities that may lead to surrender of control over some company resources. Poor management of a co-opetitive relationship may inevitably lead to loss of a strategic opportunity. Conflict may arise in the case where one party may use its power over the other party to force it to act in a way beneficial to only one party. Dependence is also another source of conflict as it gives more power t one party that can be used to exploit the weaker side. Organizations dependent on other parties increases their vulnerability. When a co-opetitive relationship gets too close, it may become increasingly hard for one partner to leave. This is because of the feeling of betrayal generated by the prospect of one of the partners losing substantial investments made in the relationship. Port Competition within the Context of Logistic Providers. Logistic providers are firms or companies whose main function is to manage the flow of goods and materials especially in supply chain management. These may include carriers, port operators, freight forwarders and shippers. In the previous decades, ports were managed and controlled by public institutions that provided financial resource and subsidies. These public institutions also provided protection against any sort of foreign competition. The monopoly enjoyed by ports at these times limited competition and rivalry (Bichou, 2014). Competition among world ports has skyrocketed over the last three decades. This is due to several factors such as growing deregulation and privatisation practices, the globalization of commerce and trade logistics, and the development of transport and cargo handling technologies. Nowadays port markets are contested by a wide range of competing ports and transport suppliers. Each of these firms offers an alternative for shippers, shipping lines and logistic intermediaries. Further increase in competition between global carriers and logistics leads to a corresponding increase in rivalry between sea ports and other potential competitors (Bichou, 2014). Governments and port authorities have been able to stimulate competition in various ways to avoid the risk of monopolistic behaviour. Khalid Bichou argues that in the case of public ownership, port authority should abandon the public-service model and move to the landlord model where it retains ownership of the basic infrastructure but divests itself of managerial and financial responsibility for commercial facilities. In the case of private ownership, governments and port authorities should limit or regulate the number of dedicated operations in favour of common-user port operations. Restrictive working practices and barriers should also be removed in favour of free competition and service deregulation (Bichou, 2014). Port decisions became dependent on services offered by port terminal operators, drayage services between the port and cargo origin or destination, customs clearance, liner shipping services and value added services provided by third party logistics firms (Abraham, Jasmine and George, 2014). There are various types of port competition. These include: Intra-port competition. This is competition between terminal operators within a port. This requires a port to be large enough to allow the existence of many terminal operators of similar traffic type (Bichou, 2014). Inter-port competition. This is competition between ports situated in a shared range or hinterland (Bichou, 2014). National competition. This is inter-port competition within a country. International competition. This occurs between ports in different countries. Vertical competition. This is competition between logistic providers within a supply chain. Strategies of Cooperation in the Port industry Song argues that multinational corporations usually have two options available when they are seeking access to foreign markets. One such option is non-cooperation while the other is cooperation through establishment of alliances with other firms. In the port industry, the latter always presents the most desirable option as it provides enhancement of the port’s market power and enables it to fulfil its strategic objective (Song, 2003). According to Clarke-Hill, Li and Davies, ports have developed various strategies of cooperation to deal with the ever increasing intensity of competition. These strategies include forming strategic alliances and joint ventures to give the cooperating firms an advantage over other non cooperating firms. Cooperation allows for the economies of scale in tangible assets, sharing of labour among partners and limited investment risk when entering new markets. It also allows learning and development of new technologies to protect domestic and strategic industries. Short term corporate restructuring are also boosted by lowering existing barriers in mature and declining industries (Clarke-Hill, Li and Davies, 2003). Reasons for Port Co-operation Dong-Wook Song explains several driving forces that led to port cooperation (Song, 2003). These include: Globalization and shipping alliances: Globalization led to a sharp increase of competition in international trade. This led to rationalizations in form of mergers, takeovers and alliances for the fulfilment of market needs. Larger size of vessels and intermodality: larger containers are usually built mainly to achieve economies of a larger scale. Inland intermodal hubs allowed for the shipment of containers over long distances to establish connections with other ports. Intense port competition: As in globalization above, players in the port industry faced severe competition and therefore sought other ways to reap benefits from their competitors, and this came in the form of co-opetition. This enabled ports to compete well against other ports, both locally and regionally. Objectives of Port Co-operation The objectives of port co-operation are not very distinct or different from objectives of co-opetition in general. Dong-Wook Song explains some the objectives of co-opetition in regards to specifically the port industry. He says that through co-operation, ports aim to achieve rationalization and eventually save on costs. This can be effectively achieved by pooling of resources to expand and advance in research and development, marketing and accounting systems. It brings about the benefit of risk sharing. Co-operation makes possible the international expansion of port operators. This can be easily done by penetration of a previously untapped geographical market. Formation of alliances strengthens partners against other organizations in terms of competitiveness. Through collaboration, ports achieve increased capacity and capacity utilization that may result in spare capacity at the port. Stronger bargaining powers against “government-mandated trade, investment barriers, mega-carriers and shipping alliances” are obtained (Song 2003). Port Co-opetition: Case of Hong Kong and South China For further illustration of port cooperation, the paper uses the case of Hong Kong and South China. Hong Kong’s strategic location, modern facilities in banking, finance and insurance systems, and modern telecommunication and transportation network, has ensured its position as the Chinese mainland gateway to the rest of the world (Song, 2002). The world also still views Hong Kong, largely, as the main entrance to the Chinese mainland (Sung, 1998). Hong Kong’s role in trade in China is, therefore, largely an intermediary role. The trade between Hong Kong and the Chinese mainland is mainly characterized by both “re-exports and outward- processing” (Song, 2002). Over the past ten years, the Hong Kong port has gained reputation as one of the busiest container ports. This is supported by the remarkable Twenty-foot Equivalent Units recorded during that time. The only blemish was 1998 where Hong Kong relinquished its position at the top to the port of Singapore. This is perceived to be partly caused by Singapore’s major efforts to establish itself as a major hub port in the region. The other reason could be the successful efforts made by southern Chinese ports to provide competition to Hong Kong’s port. Hong Kong’s port is believed to have expanded simultaneously with the skyrocketing economic development in South East Asian countries and China. It also grew along with an expanding international trade connection with other parts of the world. However, today Hong Kong faces stiff competition from upcoming regional ports such as Singapore and Yantian. Both are located in the southern China region. The consequences of the emerging competitions is the threat posed to Hong Kong’s position as the region’s leading load centre and transshipment for China-bound cargos. This is because of developments such as “the reversion to China in 1997, port development in China, speculation on the opening of direct shipping links between mainland the Chinese mainland, and the easing of restrictions on access to Chinese ports of foreign shipping lines” (Song, 2002). Song states that almost every major international container shipping company engages in trade with China and operates direct line services to the steadily increasing number of Chinese ports. This occurrence of direct line services has been noted to be in place within the past few years. Previously, the largest proportion of the container trade with China went through Hong Kong, Taiwan and Korea ports. However, the Chinese government is “operating a deliberate policy” to reduce the proportion of container trade via these three territories (Drewry Shipping Consultants, 1999). Yantian, a port located in the eastern part of the Shenzhen Special Economic Zone, is one of the major promising ports in China with the potential to be a formidable front-runner against Hong Kong and its counterparts. This is further boosted by its geographical position. The speed of Yantian’s forecasted development is however dependent on the pace of cargo expansion in the surrounding areas (Song, 2002). Interactions Between ports The administrative and ownership structures of both Hong Kong and Yantian ports provide an insight into the cooperation and competition between the two regions. Hong Kong’s structure is a three-tiered hierarchy. The Government of the Hong Kong Special Administrative Region (HKSAR) constitutes the highest tier since it maintains ownership over land the container terminals are built on (Song, 2002). Just below the HKSAR is the Marine department that acts as the port authority and oversees all matters of navigation in the region besides traffic vessel traffic management and setting safety standards for all vessels. The Maritime Board is also involved in the planning and development of ports, though not as a governmental body. The HKSAR leases land sites to private terminal operating companies. These companies are owned by four private companies namely: Modern Terminals Limited (MTL), Sea-Land Orient Terminals Limited (SLOT), Hong Kong International Terminals Limited (HIT) and COSCO-HIT Terminals (HK) Limited (COSCO-HIT) (Song, 2003). Yantian International Container Terminals Limited (YICT) heads the port of Yantian operations. YICT enjoys the services of advanced port facilities complete with a developed inland transport links. Shekou port is positioned on the east bank of the Pearl River and is well placed geographically to take advantage of business flow around the Pearl River estuary. Shekou Container Terminal Limited owns the container terminal, a joint venture between China Merchants (SCT) Holdings, P&O ports, Swire Pacific and COSCO. Of the three ports, Chiwan is the smallest and acts as sub-distribution centres for the Hong Kong branch (Song, 2003). Considering the analysis of each port’s organizational structure, it has been noted that the ports in the region exist in a state of competition. However, it has been also noticed that they cooperate with each other for mutual gains. In Hong Kong, HIT, MTL, COSCO-HIT and SLOT are in competition. Dong-Wook Song, however, argues that only HIT and MTL are in ‘real’ competition since SLOT is a dedicated terminal to its mother liner company, Sea Land. COSCO-HIT mainly deals with COSCO cargos and at the same time shares a common owner with HIT enabling them to share personnel (cooperation) to fight the other firms in the market (Song, 2002). Local competition also exists between Yantian, Shekou and Chiwan ports on the Shenzen side. The competition is more intense between Yantian and the other two ports. This is due to port ownership patterns. Some form of cooperation exists between Shekou and Chiwan since they have common ownership under the China Merchant Holding (International) Company. This is evidenced by the awarding of the management contract for Shekou Container Terminals to MTL, a shareholder of Chiwan port, when Hekou port expanded trade to the Chinese mainland in 1998 (Song, 2002). Hong Kong still holds control, although to some extent, of key operational ports in South China through various cooperative measures. Hutchison Port Holdings Group and MTL, also involved in Yantian and Chaiwan respectively, compete both locally and regionally. Despite the fierce competition experienced between these ports, cooperation also exists between Hong Kong and Yantian. This happens through their Hutchison Port Holdings Group’s common ownership. Common ownership also plays a role in the cooperation between Hong Kong and Chiwan (Song, 2002). Conclusion This paper has discussed the concept of co-opetition and explored its paradoxical nature of simultaneous co-operation and competition extensively. With the help of texts by Dong-Wook Song, the application of co-opetition in the port industry has been highlighted. Benefits of co-opetition have been explored. Despite limited research regarding its limitations, some of co-opetition’s glaring shortcomings have been highlighted. The use of case studies of Hong Kong and South China has further assisted in illustration of how co-opetition has been applied in the port industries by shareholders to gain an upper hand References Abraham, Z., Jasmine, S. L. L. & George, Q. H. (2014), ‘Port strategy in the era of supply chain management: the case of Hong Kong, Maritime Policy & Management’. The Flagship Journal of International Shipping and Port Research. Bengtsson, M. and Kock, S. (2000). Tension in co-opetition, C&C. Paper presented at the 1st International Conference on Cooperation & Competition, Va¨xjo¨ University, Va¨xjo¨, 8-10 November. Brandenburger, A. and Nalebuff, B. (1996). Co-opetition, A Currency Book. New York. Bichou K. (2014). Port Operations, Planning and Logistics. CRC Press. Clarke-Hill C., Li H. & Davies B., (2003), ’The paradox of cooperation and competition in strategic alliances: towards a multi paradigm approach.’ Management Research News, Vol. 26 Iss 1 pp. 1 - 20 Dagnino, B., Rocco, E. 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