In school, there seems like there’s only one basis of competition: grades. But there are other elements surrounding that in the school environment: friendships, relationships with teachers, appreciation of music and arts, sporting capabilities, popularity, leadership ability, strategic thinking, time management, charisma, etc.
Schools are supposedly little societies and a microcosm of the world that they eventually live in. But of course, being part of a bureacracy, a system, even an instrument of the state, there is top-down direction to skew the basis of competition towards one thing rather than another. It has to do with merit as defined by the prevailing “ruling class”. And since the ruling class is typically made of those who had good grades, that factor gradually gets amplified in importance.
But in overall society, those other basis of competition are still relevant. While the impact of grades might be persistent and have cascading impact in education, they can be compensated by confidence developed in the children from doing well in the other parameters in the “competition”.