competition competition policy entrepreneurship

Competing on merit, not handicaps

Unedited version of my column in yesterday’s Business Report: link to published version

Thinking about how South African companies compete in the marketplace, two conversations come to mind: one with a private equity veteran and another with a business science student. Over a cup of coffee, I remind Antony Ball of a talk that he gave a few years ago at Deloitte Consulting where he lamented the lack of competition in South African industry. He describes some of the behaviour that he saw in his career as a ‘small mining town culture’; where the prevailing impulse is to undermine one’s competitor, cut off their supply lines, tie up customers, and generally make it difficult for them to function. Competition becomes about how to handicap the competitor in tactics that do not add much value, not how to improve one’s own offering to serve the customer better.

Soon after hearing Antony Ball’s speech, I joined the Competition Commission. The case load of the competition authorities is a dispiriting catalogue of the many ways in which South African businesses shun merit-based competition. Some companies simply refuse to compete at all and form cartels. The bread and construction cases are well-known examples. Other companies seek to gain market share by engaging in behaviour that robs rivals of the opportunity to compete on a level playing field and ultimately deny customers the benefits of competition. Notable prosecutions for abuse of dominance include those against Telkom and South African Airways.

South African analysts pay disproportionate attention to labour market rigidities relative to those in product markets. It is often international institutions, like the OECD and the IMF, that consistently point to the high cost base that results from concentrated markets lacking competitive dynamism. This is not an issue of business versus government. Financing business, including start-ups, in such an environment, becomes a very risky proposition. It’s not only consumers that suffer, but investors too, who have to draw their returns from a limited pool of companies in a stagnant economy.

This brings me to the business science student. She asks me to set aside my ‘enforcement’ hat for a moment and don my ‘MBA’ hat. Do I ever encounter instances where I am moved to admire the strategic brilliance of a company’s conduct despite its illegality, she asks.

It is not a surprising question given how we are socialised to think of the business sphere as an amoral space where ‘anything goes’. But my answer is no.

The quiet life of the monopolist stunts the business mind. Breakthrough innovation is rare, but in an environment permeated by what is termed ‘handicap’ competition in the anti-trust literature, it’s almost impossible. To give an example, if the best response that managers in an airline business can conjure up to counter new entrants is to induce travel agents not to sell rivals’ tickets, what can we expect from them when the internet takes over as a sales channel? Certainly not brilliance; unused as such executives are to real competition.

Handicap competition involves improving the relative position of a company through under-handed means, without meaningful contribution to the economy. Competition on the merits, is in theory, what is being taught in business schools. This is the kind of striving that concentrates the mind on how to improve performance through providing better goods and services, lower prices or innovation.

Exclusionary and exploitative business practices will never be as good as those that seek to win on merit. Managers focus on their ‘territories’ and on policing cartels as opposed to becoming future-oriented. Diversity and transformation suffer because insiders have something to hide. It becomes difficult to integrate women into a ‘boy’s club’ that fixes prices on fishing trips on the Zambezi.

Yet it seems that introspection is taking place in some South African boardrooms. The financial and reputational costs of engaging in practices that break the law weigh heavily on the minds of business leaders. The question is whether this is enough to root out a mind-set of handicap competition.

Trudi Makhaya, a former management consultant and executive at the Competition Commission, writes in her personal capacity.

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