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My Enemy, My Friend

New research by Tuck’s Ron Adner explores the delicate balance between competition and cooperation in today’s fluid business ecosystems.

We’ve all known people with whom we don’t always get along, and yet can’t get along without.

There’s even a term for such folks: Frenemies, a coinage that deftly captures that uneasy middle ground between friendship and enmity.

You may be thinking of someone now, but if you were an executive with responsibility for Apple’s iPad, the term might not bring to mind a person at all. More likely, it would be a corporate frenemy—Amazon, purveyor of the Kindle Reader.

Apple and Amazon are fierce rivals, but that didn’t keep Amazon from developing a version of Kindle Reader for Apple’s iPad, and it didn’t prevent Apple from hosting it. The e-reader rivalry is emblematic of an increasingly common business dynamic in which firms determine that their own best strategy is to cooperate with a competitor, even if that company doesn’t reciprocate, says Ron Adner, the Nathaniel D’1906 and Martha E. Leverone Memorial Professor of Business Administration at Tuck.

“Traditionally we expect companies either to be totally open to each other or totally closed to each other. Whereas here we have this interesting asymmetry, in that you can read the Amazon books on the Apple, but not vice versa,” says Adner, whose new research explores why companies choose to engage in this seemingly counterintuitive cooperation.

Traditionally we expect companies either to be totally open to each other or totally closed to each other. Whereas here we have this interesting asymmetry, in that you can read the Amazon books on the Apple, but not vice versa.

Adner and his co-authors, Jianqing Chen of the University of Texas at Dallas and Feng Zhu of Harvard Business School, also shed new light on why frenemies are becoming more common in today’s business environment, and define the parameters under which such relationships begin and end. Their paper, “Frenemies in Platform Markets: Heterogeneous Profit Foci as Drivers of Compatibility Decisions,” is forthcoming in the journal Management Science.

To better understand the phenomenon, the scholars analyzed each firm’s incentive to become frenemies, focusing on their respective profit centers. Amazon earns more from electronic book sales than it does from its Kindle devices, while Apple profits more from iPad hardware sales than it does from e-books. By making the Kindle Reader available on the iPad, both companies advance their chosen strategy: Apple attracts more iPad buyers and Amazon sells more e-books. The frenemy relationship pencils out for both companies, but only in one direction. Neither would serve its core strategy by making Apple’s eBook app available on Amazon’s Kindle platform.
 
“Usually when we have asymmetries, it’s because one party can’t stop the other from invading its turf,” says Adner. On example is companies that make off-brand toner cartridges for Hewlett-Packard printers, without HP’s consent. But this is a new dynamic. “It’s as if they’re saying, ‘You can make the cartridges for my printer, and I won't make the cartridges for your printer—and I'm okay with that.’”

Usually when we have asymmetries, it’s because one party can’t stop the other from invading its turf. On example is companies that make off-brand toner cartridges for Hewlett-Packard printers, without HP’s consent. But this is a new dynamic. It’s as if they’re saying, ‘You can make the cartridges for my printer, and I won't make the cartridges for your printer—and I'm okay with that.’

Frenemies can emerge in other settings when competing platforms have asymmetric profit strategies. For example, Microsoft’s Surface tablet competes with iPad and Android-based devices, but Microsoft still chose to make its Office software available for both competing tablets. Google likewise made its Android Auto software compatible with GM’s OnStar navigation system, even though the Internet search giant and legacy automaker are preparing to do battle in the field of self-driving cars.

In this new world, the old rules don’t always apply. “In the paper we look at how those differences allow us to coexist in a way that more traditional rivals could not,” says Adner, who is now at work on a new book exploring the ways businesses are adapting to today’s more fluid business ecosystems.

Adner and his co-authors on the paper used game theory to model the phenomenon. They identified  how differences in profit focus interact with differences in consumer tastes in a market to cause firms to become frenemies, which provides fuller understanding of the market conditions that such relationships need to survive. “That was the cool set of discoveries—that this one-way compatibility is an equilibrium, and if you have too little or too much difference in the profit focus, it breaks down,” Adner says.

“The heart of the model is the articulation of the contingency—when do we expect this thing to happen, and when do we expect it to stop? With this, you can start considering changes in your environment and have an early indicator for where things are heading,” he says. “Because if you’re in business today, you are facing a new world of competition, so this is really, really valuable to know.”