Is competition always good?
Photo: David Iliff. License: CC-BY-SA 3.0. Source: Wikimedia
Competition has been touted as “good for what ails us.” Competitive markets spur innovation, lower prices, and better customer service. Upset with your cell phone provider? Encourage competition: another provider that wants to win your business by providing better cell coverage, better customer service, or charging lower prices. The economist Milton Friedman attributed many of our social problems to a lack of competition in the public sphere: in schools, roads, on the airwaves, for retirement services, and so on. In the same way that athletic competition drives physical excellence, market-based competition boosts social improvements.
Except that competition sometimes pushes people to do stupid things.
A case in point is the blood-testing fraud at Theranos. Theranos was a health-care diagnostic testing company founded by Stanford student Elizabeth Holmes. Its key innovation was its claimed ability to conduct thousands of tests on a single drop of blood using microscopic volumes and innovative testing machines and methods. At its peak, the company was valued at over $9 billion and employed over 900 workers. They boasted key partnerships with prominent Board members, the Cleveland Clinic, and the drug-store chain Walgreens.
Elizabeth Holmes. Photo: Glenn Faucett. Source: DOD
During their vetting process, some Walgreens executives had serious misgivings about the product: Holmes had denied them access to their labs, had refused to do a simple comparison study, and had failed to give Walgreen’s pharmacy chief the results of a personal blood test. The red flags were piling up. But despite these concerns, Walgreen’s went forward with a clinic arrangement. They didn’t want to risk having a competitor make a deal with Theranos shutting Walgreen’s out.
We now know the rest of the story: the entire premise of Theranos was fraudulent. They never had the innovative machinery they claimed to have. Holmes went from billionaire wunderkind to pariah. She was sanctioned by the SEC and labeled “One of the World’s Most Disappointing Leaders” by Fortune. Dozens of institutional investors had to write off hundreds of millions in losses.
It’s kind of like cheating in sports: competition drives us to do our best, but sometimes it tempts us to do unethical things. Athletes cheat in all kinds of ways: “flopping” in soccer, blood-doping in bike racing, stealing signals in baseball, and so on. In the same way, companies in competitive industries can cut corners in their accounting, their products, and in their legal dealings. The greater the stakes, the greater the temptation.
Public Domain. Source: Wikimedia
Competition may be good, but nothing in this world is absolute. Investors need to trust, but verify, management’s claims.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”