Speech to the Social Market Foundation
A speech delivered by the Chair of the Competiton and Markets Authority, Marcus Bokkerink
Introduction
Thank you for having me here at the Social Market Foundation. For over 30 years you have been thinking about how to achieve positive outcomes for society through fair markets and I very much look forward to our discussion and Q&A after my remarks.
So, who am I? As of relatively recently I’d answer that as ‘I’m Marcus, the new Chair of the U.K.’s Competition and Markets Authority’. Now the fact that I am still new to the role does beg the question, what could I possibly come to talk to you about so soon after being appointed? Shouldn’t I spend a little longer on the job so that I have some reflections on competition and markets to share with you?
While relatively new to my role at the Competition and Markets Authority, I am far from new to the experience of competition, of looking out for the customer, and what that pushes businesses to achieve. Over the past 30 years, I’ve had the privilege of working with over a hundred businesses of all shapes and sizes. This has allowed me to get under the skin of what makes a company tick, how their industry works, what innovation and competing to win looks like in their fields of play. It has allowed me to work with long-established multinationals and scrappy start-ups alike on their customer propositions, their business models, their competitive strategies and how they can build competitive advantage.
So, I look at competition not from the perspective of an economist or a politician or a lawyer but as a businessperson, and it is that perspective that I want to share today.
And I feel very lucky – it has been a tremendous learning experience, across those different, highly varied businesses, to be able to focus again and again on the fundamental questions that all businesses ask themselves: who are our customers, who are our competitors? Where will growth come from? Where should we play, and how will we compete to win? What’s our competitive strategy to grow and create value - how do we innovate our customer proposition? How do we innovate our business model and make it stronger? How do we build, sustain, protect, renew our competitive advantage?
What did I learn about competition across that career? The headline would be that competition and truly contested markets can be an astonishing force for good outcomes. That’s good outcomes for people who get genuine choice at high quality and low prices. Good outcomes for businesses who are free to innovate and grow and reap the rewards of innovating, of building differentiated customer propositions and competitive business models. And good outcomes for the economy through higher productivity, more business investment, and as a result higher job creation and real wage growth.
Now that view is not unique to me. What is perhaps more unique to me are the experiences I’ve had working alongside all these different businesses that have shaped my views and shaped the lens through which I personally understand the world.
And so in these opening remarks, I’d like to take you through 3 ‘a-ha’-like realisations, 3 quite simple insights that really clicked with me, that have shaped my views on competition. Then I’d like to use those insights to address some of the misconceptions about competition that I have seen crop-up in varying forms across my career and as the Chair of the CMA; and I’ll finish by offering some initial thoughts on what that could mean for how the CMA goes about its work and, perhaps also of interest to this audience, by starting a conversation on how policy and regulation can be used to enhance competition.
Realisations about competition
The 3 realisations I’m going to share are:
- in a truly contested market, there is a staggering spectrum of performance and returns achieved across competing businesses;
- the existence or threat of competition is the single most powerful motivator to action for a business; and,
- achieving and sustaining competitive advantage is really hard work – and vulnerable to shortcuts that skip the hard work of competing.
1 . In a truly contested market, there is a staggering spectrum of performance and returns achieved across competing businesses.
The first realisation came from looking across all that variety of businesses and markets over time. In any given industry, in any given external environment, there is a truly staggering spectrum of performance and returns achieved by businesses competing in that same industry, facing that same environment.
We often hear things like “it’s been a bad year for airlines” or “it’s been a good year for the grocery retailers” or “it’s great to be a software subscription business”. But it struck me, working on the ground across these companies, that within any of these industries you will see a vast range of performance returns. In a bad year for ‘x’ market or a good year for ‘y’ market, you will see companies that do much better than the average and see companies that do far worse, especially when you take the longer time horizon that businesses and investors use to set strategies and make decisions.
And why is that interesting? Well for me, it perfectly encapsulates the magic of competitive dynamism, caused by something equally magic, the search by each and every firm for competitive advantage. It shows that businesses who compete in the same broad space, facing the same external challenges and opportunities, are making very different decisions, following very different strategies, and seeing vastly differing levels of success as a result. Fundamentally, these differences in strategies and performance exist because markets that are contested by multiple competitors are never static. Each player has to deal with the unpredictability of their competitors’ actions. And in the face of that uncertainty, some businesses mobilise their resources, adapt and innovate their offerings to customers better than others, and are – rightly, deservedly – rewarded.
In short, the search for competitive advantage drives incredible competitive dynamism. And it becomes self-reinforcing – that dynamism manifests in more experimentation and innovation and investment, which adds to the competitive uncertainty which fuels that competitive dynamism.
2 . The existence or threat of competition is the single most powerful motivator to action for a business
This takes me to my second realisation. This second realisation emerged bottom up, company by company.
That vast spectrum of performance reflects just how powerful a motivator the existence or threat of competition can be. In fact, it is the single most powerful motivator to sustained action, period. More powerful than moral exhortation to ‘do the right thing’, more powerful than subsidies, more powerful than prescribed rules.
Let me give 2 examples from my career. I’ve had the good fortune to work with 2 different corporations, operating in different sectors, each in highly contested competitive environments, who kept outperforming their respective rivals. How did they do this? By adopting a mindset that turned out to be 2 sides of the same coin.
The first of those firms was obsessed with the customer. Genuinely obsessed. Every meeting would start with questions about their customers. What alternatives are our customers choosing between? How are they making those choices? What compromises are they making? Why are they having to compromise? How can we differentiate ourselves in their eyes? How can we solve their problems better than any of their alternatives? This company was completely centred on the idea that the customer is making a choice between them and competing alternatives and that therefore, as a company, they needed to keep innovating and improving in order to keep winning that choice.
The second business was equally obsessed but was instead obsessed with its strongest competitors. Every meeting they would be looking at their competitors and questioning how they could be better than them. Always thinking about how to make their products better, how to get their costs lower, how to make their supply chain more efficient, how to make the customer journey faster and cheaper for their customers than what their competitors could achieve. They were incredibly focussed on being better than the competition on anything and everything that mattered.
These 2 complementary mindsets, created by the need to compete in a highly contested environment, motivated each of those 2 companies to keep getting better, continuously. Relentlessly. They kept doing the hard work to try and stay ahead of the pack and build and renew their own competitive advantages. And they – their investors, their employees, their suppliers – were rewarded for it. They kept creating more value and both remain major, successful enterprises today.
Those 2 examples brought home to me how powerful a motivator to action that existence of competition, that threat of competitor action, is for businesses, large and small. And that it takes a huge amount of effort to keep competitors at bay. These businesses had to work really hard to keep innovating, to keep improving their customer proposition, to keep adapting and strengthening their business model, to keep building and renewing their competitive advantage. When they succeed, the rewards are high, and deservedly so.
That potential for reward, for financial returns, is important. For private enterprise that is the carrot; that is one of the main reasons making all that effort worth it. Businesses that work hard and manage to build an advantage that benefits their customers deserve to have the potential to make significant returns, to generate profit. But it takes continuous, hard effort.
Indeed, I’ve often seen what happens when a leader who has built a high returns business starts to rest on its laurels, by taking prices and margin and investing a little less in innovating its customer offer and its business model. In contested markets, they soon, or eventually, get pummelled by the competition.
Competition then, provides the discipline and motivation to keep up the hard work. Competition is what ensures that, after firms have managed to build an advantage, they do not rest and extract returns without continuing to innovate, continuing to improve the customer offer, whether that be better customer choice, quality, convenience or prices, to keep winning the customer; and continuing to improve the methods and costs of delivering that. It’s relentless.
3 . Competition is vulnerable to shortcuts to skip the hard work of competing hard
My third realisation, however, is that there are shortcuts to higher returns that skip this hard work of competing.
Perhaps not surprisingly given the high potential rewards and the relentless hard work required, I’ve seen that some businesses will end up succumbing to these short-cuts. Instead of competing and getting better than rivals, some end up trying to restrict, disarm or even remove their rivals.
The most obvious example of this that’s usually mentioned in this regard is mergers and acquisitions - if you can’t beat your competitors, buy them.
Now, we have to de-average here – the business world is far more richly and wonderfully diverse than some simple slogans allow. In my experience, M&A can be very positive. It can be a very effective way for a player to access or build a complementary capability, technology or route to market, which then enable them to bring better propositions to more customers more effectively and efficiently. These positive outcomes are reflected, by the way, in the very small proportion of mergers that the CMA intervenes in – of the many thousands of transactions made in or involving the UK in the last last reporting year, around 800 transactions were reviewed; of those, less than 10% went to a phase 1 merger investigation; and of those, the majority were cleared after phase 1, some with remedies, some without; leaving only a handful that underwent deeper phase 2 scrutiny.
Unfortunately, however, it is not always the case that M&A is pursued for positive reasons. We have seen some firms use M&A to take-out directly competing capacity and increase the market share of the combined entity. When this happens, in my experience, down the line you then see less money being invested in innovation and less work being done to make the customer proposition better. These are the sorts of deals where the CMA is vigilant, in line with our statutory duty, regardless of whether that’s M&A between headline grabbing household names, between ‘behind the scenes’ firms, or even at a local level as with our recently concluded merger inquiries around the acquisitions of dental services businesses.
M&A is not the only way to shortcut competition. Some firms will go as far breaking the law by misleading customers – as we are currently keeping a close eye out for around environmental claims – while some firms will agree with rivals not to compete as we have found in a number of completed cases relating to construction, for example. And the shortcuts can change over time – where we previously would have thought of the ‘M&A shortcut’ being about buying out one of your biggest rivals in an established market, we have seen the emergence, in rapidly evolving digital markets, of buying out a potential next big rival before they’ve made it that far, as was the case with Meta and Giphy. Indeed, some of those firms that have done the hard work to get to the top now have such vast financial investment resources that they have been able to make hundreds of acquisitions of smaller innovators, and indeed have done so with very little scrutiny.
What these shortcuts have in common though, is that they all dull the magic of the competitive process. You don’t see ambitious companies growing their new offerings, you don’t see such high levels of innovation and you don’t see customers getting more and better choices at better prices.
Misconceptions about competition
So there you have my 3 personal ‘a-ha’ realisations about competition.
With those in mind, I would like to address some recurrent misconceptions about competition – some misplaced ideas that have a habit of resurfacing after periods of quiet.
Misconception 1: Competition is at odds with shareholder value creation
It is wrong to say that competition is at odds with value creation for businesses.
Over any meaningful period, the top quartile public companies in terms of value creation deliver highly positive average annual shareholder returns. They do this at roughly twice the average and ~4x the bottom quartile. Such large spreads in long-run value creation are also evident within highly contested markets.
Why is that the case? It takes us back to my first lesson. In competitive markets, the top value creators achieve above-average growth at attractive returns by innovating the customer proposition and/or the business model. We should not be surprised by this – vigorous competition spurs companies to innovate and to become more productive to win and retain customers. Open, competitive markets do not dampen value creation, they enable it. What matters is making sure those markets remain open to other entrepreneurial firms who seeks to compete through innovation. That innovation exists as a possibility for all, not only the dominant few. That vigilance is at the heart of much of the CMA’s work.
Misconception 2: Big is bad
The second misconception or myth is that ‘big is bad’. Some would suggest that big companies must by definition be bad for competition, bad for quality, and bad for prices. In fact, as I’ve got into my role, I’ve been surprised to hear that some of our stakeholders assume that is the view of the CMA also. Though I’m less surprised to discover that people with vested interests like to claim that CMA holds that view. Either way, let me be clear: that is not the case.
Big is not inherently bad. Small entrepreneurial firms with innovative propositions and business models and strong execution grow into market leaders. Large market leaders, when operating in contested markets, continue to develop their offering and to innovate to retain customers and grow. And we have seen time and again that scale can lead to efficiency which then translates into better quality and lower prices if markets remain contested and contestable. So, big is not inherently bad.
But it is often the case that ‘big firms’ can end up being less innovative, or slower, or more risk-averse, over time. In open competitive markets, large incumbents are often challenged by more innovative entrants who bring a fresh understanding of the customer, a differentiated proposition, or a more effective business model. These entrants often deploy new insights or technologies in novel ways. We will all have examples that come to mind: well-established bricks and mortar book store chains and online book retailers and e-readers; retail banks and fintech challengers; grocery supermarkets and discounters; broadcast TV and streaming services; global beer brands and craft breweries; desktop- and text-first social media and mobile- and video-first social media; ‘native’ hardware-based versus cloud-based publishing, gaming and the like.
What matters far more than the size of individual firms in a market space, is whether the market remains contested and contestable. We fail to reap the benefits of competition, innovation and entrepreneurship if these are held back by government policies or by actions of large incumbents that restrict that competition taking place – whether this is through cartels, or leaders buying future competitors, or abuses of position to restrict access to markets, or anti-competitive practices such as tying. This is where the CMA focuses its attention.
Misconception 3: Big is necessary
My third misconception is the opposite. I’ve heard equally assertive arguments that ‘big is necessary’ and we should actively be encouraging incumbents to get bigger. These arguments tend to fall into 3 camps: big companies, especially digital leaders, drive innovation; big companies bring much-needed resilience in essential goods and services; or the UK needs national champions to compete at global scale.
The facts and practical experience show that the opposite is usually true. The evidence suggests that many true innovations come from outside established leaders - and this also holds true for digital markets. The largest digital companies today were once the disruptive challengers themselves, created by entrepreneurial start-ups – and allowed to compete. Big is the result of innovating in these cases – that’s not the same as big results in innovation. Furthermore, the origins of many of the innovative services offered today by the western world’s largest digital companies were created by other entrepreneurial start-ups who were subsequently acquired and developed, or in some cases copied, by these incumbents as part of an expansion strategy that took in hundreds of acquisitions over the past decade. Let me put this another way. Innovation requires competition. And there is no competition without competitors.
On resilience, we all know the most resilient ecosystems, whether in industry or in nature, are those which are diverse and not dependent on 1 or 2 dominant variants. One only needs to look at the recent supply issues in CO2, ammonia and audit in the UK and Baby Food in the US to understand the fragility of markets that rely on few scale leaders. To paraphrase what I just said: there is no resilience without alternatives. There are no alternatives without competitors to provide these alternatives.
When it comes to National Champions: it is very rare that geographic markets with 1 or 2 dominant incumbent leaders in a sector, have, over the long run, been able to deliver more innovations, higher quality and service, and lower prices for customers than more contested markets elsewhere. Just compare retail banking in the US versus the UK when the UK opened the market to fintech challengers for payments, or the US versus UK telecoms market. Protecting firms from normal competitive forces – in short: coddling – has yet to create world beaters. And from an economy-wide perspective, protected markets are unlikely, according to the empirical evidence, to be growth- or productivity- enhancing in the long run.
Across these 3 camps we often hear from lobbyists that ‘too much’ competition means firms can’t afford to invest and innovate. Now in my experience, what you hear inside the executive meetings of firms facing stiff competition and with an ambition to grow is that they can’t afford not to invest and innovate.
Summary and implications
So I’ll briefly summarise. If my 30 years of working with businesses have taught me anything, it’s the power of competitive dynamism in delivering great outcomes – for people as customers, for businesses as innovators, value creators and employers, and for the economy. Competition – specifically, the relentless search for competitive advantage in truly contested markets – creates tremendous system-wide value. It is foundational for innovation, investment, and growth. And vulnerable to shortcuts, which must unambiguously be avoided. And when it comes to misconceptions about competition, these are typically false dichotomies – often promoted by those who favour shortcuts – that have a habit of resurfacing.
So what does all this mean for the work of the CMA? And what might it mean for policymakers?
CMA
Thinking of how this all ties in to the work of the CMA, for me personally, it means 3 things.
First, precisely because competition for the customer’s active choice is foundational for innovation, investment and growth, the CMA must and will continue to get on with the job of protecting consumers and ensuring that markets remain contested and contestable, for today’s innovating businesses and for the innovators of the future.
Second, it means we need to communicate, clearly and in plain terms, why we do what we do and why these things are so important. If we fail to communicate that well, then the misconceptions will grow louder, and this will be to the detriment of us all. For example, in communicating why competition is so foundational, we can be even more explicit to our stakeholders why the search by rival firms for competitive advantage is such a driving force. The clue is in the word competitive. No competition, no need for competitive advantage. No need for competitive advantage, no need for a business to innovate to find ever better ways to bring ever more value to the customer in ever more productive ways.
In the same vein, we need to continue to communicate clearly how we do what we do. The merger control and competition law enforcement system in the UK is highly open, highly transparent, highly evidence-based, with important independent safeguards built in, and involves high levels of engagement with the parties involved compared to other regimes. Nonetheless, when we talk about how we evaluate whether or not competitive dynamism exists and can continue to thrive in a given market, we can complement our legal and technical guidelines with the language of business. For example, when looking into a market some of the questions we consider are:
- what choices is the customer making? What alternatives are available? How is that choice set changing?
- what is the basis for competition in that space? Where does competitive advantage come from? Is that changing? How could it evolve?
- how is that competitive advantage created? How is it sustained?
- does it end up being a power that reduces rather than maintains or expands choice for customers? That allows, or restricts, or excludes rival or potential future rival innovators from accessing customers, from bringing their innovations to market?
And third, as an independent authority, the CMA must push ahead with a clear ambition to deliver demonstrable, tangible, positive outcomes through the work that we do. Positive outcomes for the people of the UK, for businesses operating and investing in the UK, for the UK-wide economy. Where people are provided with great choices and fair deals; where competitive, fair-dealing businesses are unconstrained to innovate and grow; where the economy reaps the rewards of those 2 things by growing productively and sustainably. Those target outcomes are front and centre of our new strategic and annual plan which we put out for consultation at the start of the year.
And I’d like to think we are putting our money where our mouth on this. On top of our existing portfolio, we are today pushing on with 2 pieces of work that deal with some of the most important issues facing people, businesses and the economy today.
The first is in the core consumer need of ‘having somewhere to live’: today’s launch of further work in the accommodation space, with the official start of our market study into housebuilding, together with a separate, complementary effort to explore issues faced by renters. This work continues our focus on such an essential area for people and follows the real positive change the CMA delivered last year for leaseholders.
The second is new draft guidance we are publishing today on sustainability agreements that will help businesses work together towards climate goals without undue fear of breaching competition rules. None of us can overstate the importance of sustainability and tackling climate change and I am personally very committed to the CMA playing its role here by using the power of competitive forces.
Policy, regulation and competition
So that’s the CMA. But what does everything I’ve been talking about mean for policymakers? Well, I’m looking forward to hearing your thoughts on that. But I might suggest for those of you here thinking about big policy issues as I know you do, that there are a couple of corollaries with the implications for the CMA.
The first is pushing yourselves to think about how to utilise the power of competitive forces to help deliver positive outcomes. When policy makers intervene in markets, there are many choices and levers that can have a detrimental or positive impact on how that market develops and how competition will play out. When designing those interventions, we should be thinking about how we can make those as pro-competitive as possible without compromising the policy objective. How can it help enhance supply diversity? How could it help lower barriers to entry and expansion? How can we mitigate resilience issues such as excessive market-wide financial risk tasking? And perhaps most relevant to my comments today on the power of competitive dynamism – how do I design policy and regulation so that I am directing rather than stifling the engine of competition and innovation to help deliver my policy objectives?
This is exactly the sort of thinking that is involved in many of the CMA’s market studies, such as our market study on Electric Vehicle Charging, and more recently on Children’s Social Care which I know you, James, and the Social Market Foundation were very supportive of.
The second implication is again about how we communicate. How we communicate the value of competition in the policy world. How do we steer the conversation away from false dichotomies about all regulation being at the expense of competition, or policy objectives precluding the need think about how we use competition. How do we instead get more decision makers thinking about how to improve interventions that may be inhibiting good market functioning, rather than conclude that regulation by definition inhibits competition. Fundamentally, how do we get more people talking about how we can best use regulation and policy to promote well-functioning markets, enable competition and give people the confidence to engage in the market.
Because, as I have said over and over this morning, competition, competitive dynamics, the search for competitive advantage are an incredibly powerful motivator and, if well directed, a phenomenal force for good. The more people that really grasp that, the more we will see competition delivering those positive outcomes.
Thank you.