Disruptive Ecommerce Order Fulfillment: Value Creation Through Strategic Co-opetition

Once upon a time in Ancient Rome, in 3rd century BC, the Roman Empire was very large and prosperous. During that time, the four most lucrative business activities were renting buildings, agriculture, lending money and maritime trade. Lending money and maritime trade were very closely linked because in order to run a trade business, you needed to borrow money. And roads were not very developed at the time. And therefore, maritime trade was one of the foremost methods of business during those ancient Roman times. But as goods were being transported through the sea, there was a lot of uncertainty. And you can imagine this was well before the invention of telegraph. So there was a lot of uncertainty. There was no information shared about the goods until it was delivered to its final destination. So the landlords, the people that had the money, did not actually participate in this maritime trade. They would actually sell their products to local merchants who in turn would export this throughout the Roman Empire and elsewhere. So lending money was an extremely profitable activity. However, because there was too much of defection of the loans, both related to weather related activities, and also a lot of unscrupulous merchants who would conduct fraud and so on. So that led to a problem. You know, the problem was related to, you know, lending, obtaining money from landlords in order to secure your loans so you could buy your produce. And there was a rich senator and landlord by the name of Katan, and he invented this very unique concept called collective loan. So to get reimbursement of his loans, he asked his borrowers, which were the merchants at the time, to organize in a group and form an association. And his requirement was he wanted at least a minimum of 50 merchants and 50 ships to come together. And only then would he loan the money. And he would loan the money to the association as a whole, rather than giving it to the individual merchant. Because in that case, if one or two ships sank or somebody didn't pay, he would still be able to recover his loan. So this was one of the first, foremost examples of coopetition in action. And once the merchants obtained their loan, they were free to compete openly to buy those goods from the people. And they participated in a very competitive process in procuring those goods. However, once they bought the goods, they had another problem. And the problem was related to the cost of freight. How do you ship these items to different parts in a cost effective fashion? Because the shipping cost was really high, just like what we face today. And so back in those days, the higher the tonnage on the ship was, the cheaper the freight. So these merchants who were competitors really had to think again and come together rather than each Person shipping the goods individually and not making a profit, they bonded together. And if a product was going to a particular location, they would collaborate and put all their produce together into one ship, thereby reducing the cost of shipping. And once the product reached its final destination, they once again became rivals. And they ended all forms of cooperation and started selling to the same consumers that brought goods for different competing merchants on the ship. So if you examine the value chain back in the Roman times, if you look at the first part, which is collective loan, merchants come together and the only way they could secure a loan was by coming together. And then once they got the loan they had, they had to become competitors again in purchasing the goods. Once they bought the goods, they had to collaborate again in putting their freight together. So using economies of scale and to bring the cost of shipping down. And once the products reached its final destination, they once again became rivals and were competing very openly. So what the message of the whole story is the entire system benefited from this combined cooperative and competitive activities in the trading process. As the cooperation increased, the maritime merchants position improved and so did the entire Roman Empire's position. So everybody benefited from this act of cooperation. And that is what we are going to talk about today. So what is coopetition? Coopetition is the act of cooperation between competing companies with similar interests to gain advantage by cooperation, thereby generating greater value. Then they would be able to accomplish working separately or not interacting at all. So think of it as firms collaborate to increase the size of the pie and then they compete to divide it up. I still remember when I bought my first LCD TV, a 42 inch LCD TV in 2001 and I paid about $9000 and it was really expensive back then. If I had waited another three years, I would have really saved a lot of money. And the reason is because in 2004, arch rivals Sony and Samsung, they came together to build their first joint manufacturing plant for LCD TVs in South Korea. And they were really trying to capitalize on this growing LCD market and wanted to also fend off their competition, LG and Philips. And partly because of their joint manufacturing plant, in 2004, the average cost of that LCD went down from $8,000 to $1,500. So that's an example of coopetition on how it can help you grow the current market by bringing the cost down. Another great example of cooperation, I'm sure all of you have taken airplane to come here is the Star Alliance. Star alliance was formed in 1997 and now it has about 27 airlines that participate in this. And they collectively serve about 640 million travelers each year. One of the key benefits of Star alliance is something called code sharing. And code sharing is basically it's a program that allows multiple competing airlines that are part of this alliance to sell the same flight using the same exact code. So rather than each airline running routes that are unprofitable with under booked seats, these people, these airlines come together and sell this inventory as their own. And this leads to massive resource efficiency. And I would argue that airline industry would not be as cost effective today if it wasn't for something like this. And there are many other benefits. You can create a completely new standard in markets like Blu Ray. You can also improve your competitive positioning by setting new standards, which is what Apple, IBM and Motorola did. So there's some incredible benefits of coopetition. What I want to share with you today, the logistics and operation folks, I believe that our industry today is facing a very similar problem as the Romans did. The cost of shipping is incredibly high. Consumer expectations are at record high. Customers today expect free and fast shipping. But I can guarantee you, everybody in this room would agree that there is nothing called free shipping. 70% of the customers would not buy from you if you don't give them free shipping. And 40% of the customers expect two day free shipping. And we also know this chart is from the Amazon third party marketplace. That third party sellers on Amazon Marketplace collectively sell over 50% of all units on Amazon. And many of you might be in the room here. So collectively the small mid sized businesses that are selling are collectively as a group is the single largest retailer in the US And I believe that there's a better way of us going about our shipping and logistics business. So I want to point your attention to the left hand side of the map, which I call the old way, or rather the current way of how things are. And if you observe the colored icons, they represent the merchant and the respective customer. So today if you are a merchant in Pennsylvania and you have a customer in Texas, whether it's profitable or not, whether it's efficient or not, you have the sole obligation and the responsibility to ship that item yourself to that customer. So I'm here to introduce to you a new idea, a new way which we call peer to peer shipping. So in the peer to peer shipping model, it is, let's say, the same example your customers in Texas. And if there was another seller that sells the identical item as you, who's also located in Texas, it's cheaper, faster and better for that Seller to ship that item on your behalf, even though that seller might be your competitor. And likewise, if that competitor had an order or a customer in New York and you in Pennsylvania, it is cheaper, faster and better for you to ship that on their behalf. And why is it so? Because it leads to about 40% less shipping cost and it can get the items to the customer two days faster. An example of coopertition that you're all very familiar with is a product like UPS Mail Innovation, which is very popular. And this product would not have been possible if both UPS and usps, who are competitors, did not come together and leverage each other's strengths. So let's examine what is USPS great at. USPS is great at last mile delivery, last mile connectivity. They deliver to every doorstep in America, 153 million delivery points. And they're great at handling small packages under five pounds. Because they have such a large footprint of post offices closer to where the population lives, their cost of delivery of last mile is much lower than anyone else out there. What is UPS great at? UPS is great at moving large packages through its sophisticated routing logistics. UPS is great at hub to hub transport. They're great at moving large packages, large numbers of them, long distances, hub to hub, and they're able to do that very cost effectively. So the real magic happens when you marry the two and that's when you get a product like UPS Mail Innovation or FedEx SmartPost. And as a result of this, both UPS and USPS share in the revenue, they increase their market share because if this product did not exist, neither one of them possibly might have had this business at all. It results in lower cost because both of them are playing to their strengths and results in better customer experience because the customer is happy and it leads to lower delivery charges for the customer. So this is a classic example of coopetition that's present all around us that we might not be familiar with, and you probably may not be familiar with the term coopetition, but I'm sure you've seen examples of coopetition in the news almost every day. And of course, most of these large competitors are first and foremost looking to protect their own interests. So sometimes things fall apart and conflicts happen. However, at the end, the benefits are still much, much larger. That coopetition is something that I would urge for you to think about and consider. Cooperation does not happen in isolation. For the best, most successful and most sustainable coopetition arrangements to happen, where the players don't start and stop or permanently terminate, the participants need to believe that they can achieve more together than they can achieve being a part of. That is one of the core requirements of coopetition. And beyond that, you also need governance. Because the reason why coopetition doesn't happen because unless a neutral third party comes together to provide the necessary governance. So if you go back in the Roman example, the borrowers were forced to form an association because it was demanded by the lender catan. So likewise, for great coopertition to happen, you need structured management, a neutral third party that will ensure good performance of all the participants. This is the governing body that acts as the initiator and manager of coopetition. It also facilitates the relationships between all the stakeholders and resources. And it also provides the performance oversight so that players are acting in goodwill and good capacity. And there's a shared common measurement that means players are not allowed to get away with unfair tactics and strategies. And this orchestrator, the governing body, also provides the communication which is essential for building trust, which is very important in a coopertition arrangement. An example of coopetition that you all must be familiar with is the MLS listing. I would argue that real estate, residential real estate industry would not probably exist in the way it does today or be as efficient if it wasn't for coopetition. The simple fundamental principle is between the agents is help me sell my inventory and I'll help you sell yours. That's why the agents even share their commission with other agents in order to create the most liquid market ever. So there are just very many examples of coopertition all around us if we just observe and look. You're wondering, is coopetition really possible in today's day and age? What would happen if multiple large players join the network? Will you still get the benefits being a smaller player? Or is it just a scheme for the larger players to get a disproportionate share of the market by getting you to join forces? So the reservations are real and the key here is to increase the size of the pie. So we're going to take a look at two case studies. The first one is a case study from a company called Yara. Yara had a problem. Yara is one of the global leader in fertilizer manufacturing based in Norway. And it had lots of problems trying to distribute its fertilizer to African countries from its port of entry in Tanzania, even though the fertilizer had immense potential to improve the crop yields and the country was suffering badly with famine. But there was a lot of corruption at the port in Tanzania where it would take months for the fertilizer shipments to be unloaded. Roads were horrible. You could not transport the fertilizer from the port to the farmers or back. The farmers were really poor and illiterate and they didn't have access to credit either. So this was a classic example of a complete market failure, which resulted in famine and poverty. But more importantly, it really curtailed yara's growth. YARA could not sell its fertilizers. So what it did is in 2009, it worked together to bring 68 different organizations together in a partnership. They call it Southern Agricultural Growth Corridor of Tanzania. And the mission was to build a $2.4 billion fully developed agricultural corridor. So it started investing in infrastructure, fostering better managed farmer cooperatives, bringing in agro dealers, financial services providers, transport services. So this project was meant to be a 20 year project, but because of the success that they had in just three years, this ended up boosting the incomes of hundreds of thousands of the farmers in the African countries. Even though Yara, which was a dominant force here, invested about $60 million into this project, they did not control this whole operation of coopetition. That's why you need a neutral third party to manage this. This is not a social impact case study, but it's really about how it helped Yara as well. And Yara, within the short span of three years, was able to boost its sales by 50% and improve its margins by 42%. So it's a really great example of creating coopetition. Strategic coopetition can lead to win, win for many, many stakeholders, not just one. So you would say that, okay, you used an example in a far off country in Africa. So I wanted to also make a point with something that's closer to home, which is Walmart. Such problems are not limited only to emerging economies. By the way. In 2012, Walmart was working to reduce its packaging cost and it was trying to eliminate 20 million tons of greenhouse gas emissions from its supply chain. But it encountered a very unexpected problem. Its suppliers could not source enough recycled plastic to use in their packaging. And what was really surprising was not just the problem for Walmart, that 45%, and this is in 2012, not too long ago, 45% of the US population was dumping trash in landfills. So really big problem. So in April 2013, just like Yara, Walmart put together a cross sector coalition. And the CEO of Walmart, Doug McMillan, was part of this program as well. And he spoke directly with a number of his peers, with competitors like Unilever and P&G that joined forces. And what they did is they put together a $100 million closed loop fund. And the purpose of that fund was to improve the recycling infrastructure in the U.S. so they funded about 10 projects. And as a result of one such project, every household in Memphis, Tennessee, which a city before this program had absolutely zero curbside recycling whatsoever, now had full access to convenient recycling carts. And once again, you might think of this as a example of social progress. But Walmart did this to reduce its packaging cost. And as a result of this project, the benefits to Walmart was absolutely awesome because Walmart was able to increase the availability of recycled materials, strengthen its supply chain, and reduce its cost of packaging. Now that you have a little bit of sense of what cooperation really means and how it can benefit all the people that participate, this is really the true power of coopetition is when we think about leveraging this approach not only to benefit our business, but also how we can solve problems that would not be possible to solve in the traditional methods. I know that we have several skeptics in the room that agree with Gekko that greed is good. Not this guy, but this guy that you know, in the words of Gordon Gekko, that greed, for lack of better word, is good. Because greed is what has led humans to evolve so far. And this is how we as businesses operate. You know, greed in all forms, you know, greed for life, for money, for love has resulted in success for mankind. It has improved. You know, if the first caveman wasn't greedy enough to want cooked meat or a warmer cave, that first caveman might have never bothered to figure out how to start the fire. However, the problem with greed is it's a zero sum game. In a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, as Gordon Gekko said, it is simply transferred. However, the goal of coopetition really is to increase the size of the pie such that all the players reap the benefit not at the expense of each other, but by creating a shared value system that leads to upward mobility for all. So I believe that while the old way has brought us here, the new way going forward is better. And with that, I'm really proud to share with you the world's first peer to peer shipping network that my company has brought to market. Kahoot. So Kahoot. On our network, competitors collaborate to ship packages for each other. And as a result of that, it leads to enormous efficiencies that we cannot achieve working in silos. So imagine all your distribution centers on this map and all the distribution centers of all your competitors. And by combining forces, you can achieve even two day shipping at a price equivalent to ground or even cheaper than ground. Right now the network is a bi invitation only network. So I welcome you all to check it out at Kahoot AI. I'll have my contact information at the end. We have some more materials to share, but I would really encourage you to check this out and how it can benefit your business. You would think that cooperation is limited only to certain geographies or certain industries. Many times a collection of small businesses will use coopetition to forward their collective interest in an entire region, market or industry. So an example of in the Porta Alegre region of Brazil, a number of microbreweries came together to collectively purchase and distribute goods in order to lower their cost and achieve scale by making and delivering their goods. They went even one step forward to create a formal association that worked together to position Porta Allegra beer as one of the premium products out there. And you may be very familiar with the advertisements that you probably see on TV about California milk and California Cheese. Let me tell you, there is not a single company by the name of California Cheese. It is a group of dairy farmers in California that contribute collectively to the shared advertisement campaign to promote the collective markets. And through those advertisements, the sales of California milk and cheese goes up and everybody benefits. And then I want to take you to the south of France in the P. Saint Loup Wine. This is again a group of French wineries that came together to not only position themselves, but they really created a collective brand called P. Saint Loup Wine and positioned that as a premium product by working together. None of this would have been possible if they didn't work together in form of coopetition. Businesses have never perceived themselves so far as agents of social change. However, we know that there is a direct correlation between business success and social progress. I don't know if you know that the first large scale program to diagnose and treat HIV AIDS in South Africa was not conducted by any nonprofit or government agency. It was by a company, a global mining company called Anglo American. And what they were trying to do was really to reduce absenteeism among their workforce. So if businesses could stimulate social progress in every region of the globe, poverty, pollution and disease would decline and profits would rise. We all should think about pursuing financial success in a way that yields societal benefits as well. I would argue that in the year 2019 that your business is not truly making progress if you are prospering at the expense of the broader community. Many of the world's toughest problems, like income equality and climate change are so far reaching. That requires us to combine our expertise, combine our resources, and we need to evolve our way of thinking. That is true advancement, in my opinion. And to truly advance us as businesses, as individuals and as human race. Businesses today must participate in coalition, multi sector coalition. And for that we need a new framework and strategic cooperation that I've shared with you today is one such framework. Companies that embrace these new frameworks, such as coopetition, will not only advance social progress, but also enjoy much greater financial success than any of your peers. Thank you very much.