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Stratagem 28

Stratagem 28:Point at the Mulberry but Curse the Locust

 

“When the powerful wants to rule over the weak, he will sound a warning. One’s uncompromising stand will often win loyalty, and one’s resolute action, respect.”

—From The Thirty-Six Stratagems

In 2006 Microsoft surprised the software world by forming an alliance with a longtime nemesis. While the move was officially touted as a shift by Microsoft toward becoming more collaborative, many industry experts saw it as a tactic to deliver a secret threat to Microsoft’s adversaries.

Novell and Microsoft are natural competitors. In the late 1980s Novell launched a revolution that threatened Microsoft’s PC dominance. The company’s vision was that, instead using traditional PCs, employees would work through “dumb” terminals linked to a large central computer. Such an architecture would make Microsoft’s desktop operating system unnecessary, thereby threatening the central hub around which the company’s advantages turned.

As Novell grew, it aligned itself with nearly every major Microsoft competitor. In 1991 it formed an alliance with IBM in which IBM agreed to market Novell’s core software, NetWare. The next year it entered a product development agreement with Lotus, the company competing with Microsoft’s Outlook and other collaboration products, through which Novell would connect Lotus more closely with NetWare. It then aligned with Sun Microsystems, another Microsoft rival. In 1994 Novell went head-to-head with Microsoft by purchasing WordPerfect and Quatro Pro, the leading competitors with Microsoft’s Word and Excel programs, for $1.4 billion. Though Novell sold these businesses two years later, their purchase highlights Novell’s long, proactive offense against Microsoft.

Between 2003 and 2005 Novell struggled against IBM and other competitors, losing market share and profits. But Novell still stands at the center of a movement in direct opposition to Microsoft’s roots. Novell and its fellow open-source competitors believe a new open environment will emerge, which no company can own. They are part of a growing community of programmers who develop software anonymously, share it with others, and believe that this software should be part of the public domain, available for anyone to use at no cost.

The industry was therefore surprised in 2006 when Microsoft announced a $250 million deal with Novell. Through the agreement, Microsoft and Novell agreed to collaborate to jointly support customers who used both open source and Microsoft’s proprietary software. They also agreed to work more closely to ensure that their software integrated easily.

Was Microsoft finally giving up its struggle against “open source”? Was it shifting its competitive position from confrontation toward collaboration? Microsoft claims its decision was a good-faith effort to serve the many Novell business customers running both Windows and open-source applications, but Microsoft’s choice of partner seems to point to an entirely different motive.

Microsoft had many partners to choose from. By far the largest open-source vendor is a company called Red Hat. If Microsoft’s primary goal was to service business customers using both open and closed software, it could have reached far more such customers by aligning with Red Hat. Why did Microsoft instead choose to partner with a weaker player?

We cannot know for sure. But if we consider this deal an attack rather than a capitulation, Microsoft’s choice makes sense. As part of the Microsoft-Novell deal, Microsoft agreed not to sue Novell’s customers. A string of lawsuits had been filed between open-source and closed-source software firms, with the latter claiming that open-source programs were stealing and embedding proprietary program codes into the software that was released into the public domain. Companies that use Red Hat or Novell to customize opensource solutions run the risk that, in the future, a company such as Microsoft might claim that some of that software was actually proprietary intellectual property.

By sending the message to Novell’s customers that they will not be sued, Microsoft is implying that non-Novell customers may be sued. The secret message, then, is that if you are going to use open source software and you do not use Novell, you expose yourself to a potential lawsuit.

This message has the potential to lead customers away from Red Hat, the leading open-source vendor, toward its weaker competitor, Novell. This, in turn, could disrupt the power balance emerging in the open-source community and potentially slow the movement’s growth. This is not unlike, say, the U.S. government supporting a weaker opponent to remove an anti-Western leader from power.

The tactic of sending secret messages to scare potential clients away from the competition is so common in the high-technology space that it has earned a name: Fear, Uncertainty, and Doubt (or FUD). IBM was arguably the first to wield it successfully. Its famous marketing message that “nobody ever got fired for buying IBM” implied that not choosing IBM put your job at risk.

Though we cannot know Microsoft’s true intentions, the impact of Microsoft’s decision is clear. By aligning with a weaker player, it sent a message to any company looking at using open-source software: You may be sued.

What makes this tactic possible is the often-overlooked interdependency that links industries, companies, and actions. Actions propagate through these connections. This is similar to chaos theory: A butterfly flapping its wings in China may cause rain in Los Angeles; a decision to attack a small competitor has indirect effects, such as influencing the behavior of larger competitors.

By exploring these indirect effects, you may uncover levers of influence, means of achieving goals that you did not know you had.

Sending Secret Signals to Customers


You can apply the very same tactic to influence your customers. Movie marketers have found that young viewers dislike being marketed to, so they must appear to be targeting adults in order to sell films targeting youth. Movie posters, therefore, might display images of the adult leads but place a key teenage character not centrally but prominently. The ostensible message is, “This is a movie for adults,” and the hidden message is, “But there is also something for younger viewers.”

Take your children to Pixar’s Monsters Inc. or a similarly successful children’s movie, and you may catch yourself laughing out loud. You and the other chaperones will fill the theater with laughter but at different times than your children. This is because you and your children are laughing at entirely different things. The film is carefully designed to interweave plot lines that appeal to adults with those that appeal to children. Children miss most of the adult themes entirely. What is openly a children’s movie is also one targeted at adults. This dualmessage strategy is critical because adults are less likely to take their children to a movie they themselves will not enjoy.

Huan Unites Eight States


In 685 BC, a new duke, Huan, was installed as ruler of the Qi state. He claimed this position after years of military struggle, and he now wanted to secure peace and build prosperity.

An advisor suggested that the best way to achieve this goal would be to establish an alliance with the eight states in the region, with Duke Huan serving as the leader. The duke thought this would be an excellent plan for peacefully securing power. He invited representatives of the other states to jointly discuss his plan. He built a large platform for the conference; he assured his guests that they would enjoy lavish accommodations; and, as a sign of his peaceful intentions, he did not bring a single war chariot to the meeting.

To the duke’s surprise and disappointment, only four of the eight warlords attended his conference. An alliance among just five states would be useless, even counterproductive, because such an alliance could threaten the four states outside the alliance and trigger further conflict. Nevertheless, the five states held the ceremony and appointed Duke Huan leader of their alliance.

At the meeting, Duke Huan proposed that the five new allies attack the four states that did not join the alliance. He requested their support. Three of the four states obliged. However, the duke of Song, did not.

The duke of Song was dissatisfied with the results of this meeting. While Song was the largest state, Duke Huan led the alliance. Further, Song saw little value in an alliance that excluded four of the eight states. The duke of Song believed that if he dropped out,others would as well and the alliance would collapse. So during the night, the duke of Song secretly left the meeting.

Song’s exit from the alliance infuriated Duke Huan, who ordered a general to hunt down the duke of Song and kill him. But before his orders could be executed, one of his advisors made an interesting argument. He suggested that Duke Huan let Song alone for the moment. Instead, Duke Huan should focus his attention on a nearby state, one of the four that did not attend the meeting. Such an attack would be safer and cheaper and yet would be an effective warning to Song.

So instead of attacking his primary adversary, the state of Song, Duke Huan attacked a weaker, closer one. He led an army toward the capital city. When he reached the city walls, the head of this small state, fearing a painful defeat, sent an urgent message to Duke Huan explaining that he did not attend the alliance meeting only because he was sick and that he intended to join the alliance. In response, Duke Huan called off his attack, and this smaller state joined the alliance.

The veiled message in Duke Huan’s tactic was powerful. Fearing attack and encouraged by the duke’s willingness to forgive old enemies, each state that had missed the first meeting apologized and joined the alliance.

This left just Song outside the alliance. Duke Huan assembled a joint army and marched to Song’s capital. But before this army engaged Song, the duke of Song himself, realizing the futility of waging war again seven other states, joined the alliance as well.

Duke Huan unified the eight states, ensuring peace and gaining supreme power without bloodshed. He did this by attacking a weak enemy—pointing at the mulberry while cursing the locust.

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Stratagem 27

Stratagem 27:Borrow a Corpse for the Soul’s Return

 

“The powerful is beyond exploitation, but the weak needs help. Exploit and manipulate the weak for they need you more than you need them.”

—From The Thirty-Six Stratagems

By the mid-1990s, pagers were dying. Once the mobile communications tool of choice among doctors and business executives and later embraced by the general public, pagers were losing their place on the hips of movie stars and drug dealers. As the cost and reach of voice networks improved, mobile phones and personal digital assistants (PDAs) with mobile phone capabilities were taking over. Why would anyone want a text message when they could have a real conversation?

The industry tide’s shift toward adding more—combining Internet connectivity with voice and video and music—created an ideal opportunity for the innovative thinker willing to choose another path. It set the stage for a small, unknown Canadian company to steal the show once dominated by consumer electronic giants.

The steady decline of pagers forced BellSouth, at the time one of the leading pager service providers, to face up to a challenge. The company had invested millions in building a network of antennas, Mobitex, which passed text messages between pagers. BellSouth wanted to use its network investment. But to remain competitive, the company needed to expand its newer voice network and thereby push the older Mobitex infrastructure into obsolescence. BellSouth faced the classic “innovator’s dilemma.” It needed to destroy its old business to evolve.
Or did it?

A small wireless modem company convinced BellSouth it had a way out. The company, Research in Motion (RIM), had been founded about ten years previously by a twenty-three-year-old university dropout. He and two friends had built a business designing technology that enabled users to sell wireless data through a data network. Ericsson and a few other large companies were using RIM technology.

When BellSouth was looking for ideas for reviving their Mobitex infrastructure, RIM proposed developing a two-way pager. This idea cut across the mobile industry’s dominant momentum. Mobile phone companies and hardware producers were abandoning old text networks and replacing them with more powerful voice networks. Their vision was to build devices that could deliver everything a user would need—voice e-mail, Web pages, and videos—over one network.

RIM proposed moving in precisely the opposite direction. It convinced BellSouth to expand its Mobitex data network and launch a RIM-designed two-way pager.

The RIM device, eventually called the BlackBerry, was simple. It offered no voice service (it was not a phone) and no graphics (it only displayed text e-mails). Even the device’s design ignored the aesthetics, which Motorola, Nokia, Palm Computing’s Palm Pilot, and Compaq’s iPac deemed essential to succeed in the market place.

The BlackBerry’s utilitarian square black box with a screen and a small keyboard inspired no envy among the design-conscious. But it worked. Because RIM used an abandoned data network with excess capacity, e-mails sent from a RIM device transferred unhindered by the congestion common to newer voice networks. BlackBerry e-mails were fast and reliable.

The company introduced two other key technological innovations. It “pushed” e-mail onto its devices, while competing products required users to prompt e-mails to be downloaded. It also solved the “two e-mail” problem. At the time, people with mobile e-mail devices needed to maintain two e-mail accounts, one for the office and the other for the mobile device. RIM developed technology that enabled users to maintain one account linked to both their computer and their BlackBerry.

These innovations differentiated RIM’s two-way pager, but they did not provide a sustainable advantage. With some technical investment, competitors could, and would eventually, duplicate push-e-mail and the one-e-mail-account ability. But RIM’s strategic decision to build its business around out-of-date data networks was one that its competitors, all heavily invested in building devices that leveraged more modern voice networks, would resist copying.RIM, deemed out of place and pace, suffered the dismissive treatment most great companies experience in their early days. RIM’s results quickly provoked second thoughts among industry experts.

Palm Computing had revolutionized the PDA with its Palm Pilot, at the time the most popular PDA in the world. Compaq was investing heavily in catching up with its iPac PDA. Mobile phone manufacturers were packing their phones with new features. Collectively the mobile phone giants were investing billions in creating a consumer’s all-in-one digital device.

RIM’s unorthodox, simplified offering quickly won over corporate executives. Its name became synonymous with fast, reliable e-mail. Crackberry, a word that acknowledges the addictive nature of the BlackBerry, entered the English lexicon. RIM leveraged its strength among corporate users to expand into adjacent segments. It later added voice capabilities and Internet capabilities as it steadily ate away at the market share of well-funded competitors. In 2005, ten years after introducing its first two-way pager, RIM’s BlackBerry displaced the Palm Pilot as the most popular hand-held computer.74

The Shepherd Corpse


After the uncle-nephew team of Xiang Liang and Xiang Yu took control of the state of Wu (see Stratagem Twenty-Three, Exchange the role of guest for that of host), they continued their rebellion against the Qin Empire. Their first goal was to reclaim their home state, Chu, whose king had been humiliated and murdered by the Qin.

After they reconquered Chu, and before Xiang Liang was killed during a mission to expand the revolution, Xiang Liang vied for the Chu throne. The former king and his family were dead, so no clear heir existed. Xiang Liang, who came from a long line of respected Chu generals, had as much right to the throne as anyone. Unfortunately for Xiang Liang, a rival warlord claimed he had found a descendant of a noble clan who could be linked, albeit through distant relationships, to the former king. The warlord argued that this person should take the throne.

Xiang Liang consulted a wise man to devise a strategy to maintain control of Chu. This wise man told Xiang Liang to find a direct descendent of the former Chu king. Although he would not directly rule Chu, he could exert influence over the new king. This would also invoke the spirit of dead Chu king, ignite patriotism, and win Xian Liang broad support from the Chu people for having discovered a true heir of their beloved former king.

So Xiang Liang launched an exhaustive search. Time and persistence uncovered a direct grandson of the former Chu king—a poor shepherd. The shepherd agreed to become king and adopted his grandfather’s name.

The shepherd’s coronation marked a pivotal moment for Xiang Liang and the Chu state. It set a fire under the Chu rebellion against the Qin Empire and helped Xiang Liang and his nephew, Xiang Yu, become leading figures of that rebellion. Had Xiang Liang not found a true descendant to the Chu throne, it is not clear that Chu’s patriotic drive would have exploded with sufficient force to put Chu and therefore Xiang Liang at the forefront of rebellion that ended the Qin Empire.

Reviving the history of the Chu king was like borrowing a corpse and using it to awaken Chu’s citizens. RIM and Xiang Liang each revived the past to chart a new future.

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Stratagem 26

Stratagem 26:The Stratagem of Injuring Yourself

 

“People rarely inflict injuries on themselves, so when they get injured, it is usually genuine. Exploit this naivety to make the enemy believe your words; then sowing discord within the enemy will work. In this case, one takes advantage of the enemy’s weakness, and makes the enemy look as if he were a naive child easily taken.”

—From The Thirty-Six Stratagems

Injuring yourself can soften competitive resistance in at least two ways. A common approach is to injure yourself so that your competition, perceiving you as weak, discounts you as a threat and lets you advance. A more sophisticated approach entails wounding yourself in a way that entangles your competition in a dilemma, because defending themselves requires that they similarly injure themselves. Preferring your attack to a self-imposed one, your competition is likely to ignore you.

This stratagem has enabled Whole Foods to deliver unprecedented performance while facing minimal competitive resistance. In an industry growing at just 6 percent per year, Whole Foods is growing at 25 percent. While competitors squeeze out 4.5 percent profit margins, Whole Foods, operating on a far smaller scale, manages 8 percent.72

Since going public in 1992, Whole Foods has transformed from a lightweight, generating just a few hundred million dollars in revenue, into a serious contender. With $5 billion in annual sales, it now approaches the league defined by Supervalue, Safeway, and Kroger (which annually earn $60 billion, $40 billion, and $20 billion, respectively). Why did these incumbents allow a small natural-food store to take such a large share of their market? Whole Foods’ rise shows the Stratagem of injuring yourself at work in two phases: first, in the founding of the chain, and second, in its organization on an ongoing basis.

In 1978 John Mackay, a University of Texas dropout, convinced a group of friends and relatives to lend him $78,000 to purchase a natural-food store called Safer Way Natural Foods. Two years later he partnered with a pair of entrepreneurs to open a new store in Austin called Whole Foods Market.

The Whole Foods concept was unique. Until that time naturalfood stores had been small and had offered limited selections. At 12,500 square feet, the first Whole Foods Market approached traditional supermarkets in size and offered a broad selection of foods including meats, breads, wines, and cheeses.

The Whole Foods concept seemed to be working. By 1985 Mackay and his partners had opened two more stores. They then began acquiring existing natural-food stores, first in Texas, then in Louisiana, California, and Wisconsin. By January 1992, when the company issued its initial public offering (IPO) of stock, the company had grown to ten stores and $92.5 million in revenue.

While it’s a great success story, Whole Foods’ strategy of focusing on the natural-foods niche pre-empted competitive responses from the large incumbents. The natural-food segment was too small to be attractive to them. Whole Foods therefore appeared too specialized to be a threat. Larger supermarket chains, feeling no urgency to defend themselves against Whole Foods, allowed this small upstart to grow.

This competitive dynamic, in which an attacker commits itself to a niche deemed unattractive to incumbents, thereby pre-empting competitive resistance, has been termed the Judo Strategy. Numerous small companies have used this approach to carve out small businesses among giants.

But Whole Foods’ strategy seems to be something more; for the company has achieved the scale few Judo Strategy companies enjoy, because Whole Foods “injures” itself in ways the competition chooses not to copy.

For example, Whole Foods gives each store broad control, allowing each to operate as a separate business unit. Its stores are run by teams of managers who make decisions that larger supermarket chains typically reserve for corporate headquarters. By granting such autonomy, Whole Foods spurs healthy interstore competition. Employees know how well their store is doing relative to other stores. They want to be the best so they strive to get better.

Unleashing such competitive energy would benefit any company, even traditional supermarkets, so why don’t incumbents copy Whole Foods’ approach? Because doing so would require inflicting a self-injury few large supermarkets can bring themselves to endure. For staff to play this interstore competition game, they must know their store’s revenue, inventory turns, and profit-margin figures, and they must know how these compare with other stores. Indeed, to operate as it does, Whole Foods shares such detailed financial performance data with employees that the SEC considers each of Whole Foods’ 6,500 employees an “insider,” an outcome far-reaching consequence for a traditional supermarket chain.

Whole Foods has adopted a rule that its CEO cannot earn more than eight times the company’s average wage. Hierarchical supermarket companies, which depend on large numbers of low-wage store clerks to support regional and headquarter managers, would strongly resist such a rule.

Matching Whole Foods’ strategy would require an incumbent to self-injure in at least three ways: It would need to decentralize into autonomous stores, share detailed performance data with employees, and impose an executive salary cap. A copycat strategy is simply too painful to accept. As the incumbents ponder their alternatives, they pacify themselves with the view that Whole Foods, having injured itself, poses a minor threat. Meanwhile Whole Foods advances uncontested.

“There’s this notion that you can’t be touchy-feely and serious, we don’t fit the stereotypes. There’s plenty of managerial edge in this company—the culture creates it.”73

—John Mackey, Founder and CEO, Whole Foods Market

Injuring an Assassin


During the Spring and Autumn period (770–476 BC), the emperor of Wu was preoccupied with the prince of Wei. The emperor had taken power by killing the prince’s father and assuming the throne. The prince, seeking revenge, was assembling capable men to mount an attack. So the emperor decided to hire an assassin, Yao Li, to get rid of the prince’s threat quickly and permanently.

To kill the prince, Yao Li would need to get close. But this would be difficult, because the prince was a careful and suspicious man. He would be wary of anyone who came from within the emperor’s domain. So Yao Li proposed a plan to injure himself.

He publicly offended the emperor. In response, the emperor, playing along with the secret plan, ordered Yao Li arrested and his right hand severed in punishment. The one-handed Yao Li fled the emperor. He sought refuge with the prince and swore to hate the emperor and yearn for revenge.

He publicly offended the emperor. In response, the emperor, playing along with the secret plan, ordered Yao Li arrested and his right hand severed in punishment. The one-handed Yao Li fled the emperor. He sought refuge with the prince and swore to hate the emperor and yearn for revenge.

Yao Li eventually became one of the prince’s advisors. When the prince was finally ready to take action, he launched a waterborne attack on the emperor. Yao Li was on the prince’s boat. When their boat reached the middle of the sea, Yao Li turned to the prince and thrust a spear into him. While the prince bled to death, his men subdued Yao Li. But before they reached the shore, Yao Li committed suicide.

By injuring himself, Yao Li earned the prince’s trust and made the prince pay dearly for this mistake.

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Stratagem 25

Stratagem 25:Shed Your Skin Like the Golden Cicada

 

“Make your front array appear as if you are still holding your position so that the allied force will not suspect your intention and the enemy troops will not dare to attack rashly. Then withdraw your main forces secretly.”

—From The Thirty-Six Stratagems

The charter airline business is ruthless. It punishes with losses any airline that fails to achieve 70 percent utilization (an airline that achieves 70 percent utilization keeps its planes, on average, 70 percent full on flights). Keeping planes full, however, is a challenge. Charter airlines have few means, other than price, by which to differentiate their services and maintain high utilization rates. Passengers rarely can choose which particular charter airline to fly. Rather, institutions, such as tour operators and corporations, make buying decisions. They do not care about the airline’s name or the details of its frequent flyer program, but they do care about safety. Regulations ensure airlines’ records for safety remain similar, making it almost impossible for airlines to differentiate along this dimension. As a result, airlines are relegated to competing on price alone. Performance, to a great extent, depends on factors outside their control, such as macroeconomic trends.

The payoff for filling planes, however, is attractive. Revenue from each passenger above minimum utilization represents pure profit because carrying that additional passenger requires no meaningful additional cost. While growing profits in most industries usually involves increasing price, the way to expand the profit of an airline is to increase utilization.

The Thomson Travel Group of the United Kingdom has pieced together a system to improve the odds of its charter airline gamble. It beats the system by applying a clever stratagem to practically ensure full planes.

Thomson operates three related businesses. Its retail business, Lunn Poly, sells consumers travel services, such as hotel rooms, flights, and tour packages. Its tour operator, Thomson Holidays, packages and manages tours. Thomson’s third business is a charter airline, Britannia.

While the three businesses are independent, they can coordinate their efforts to achieve an advantage that competitors cannot. For example, Lunn Poly does not exclusively sell Thomson Holidays’ tour packages, but it sends a lot of business to this sister company. Thomson Holidays, in turn, sends much of its business to Britannia, which, in turn, benefits from well-utilized planes.

The impact of this structure is compelling. Thomson’s retail and tour businesses make little profit. Indeed, few companies in these markets do. In forgoing retail and tour profits, Thomson benefits
in two ways. First, it wards off travel retail and tour competitors with low prices and low profitability that diminish would-be competitors’ appetites. Second, by ushering customers into Britannia planes, ensuring high utilization, the company can generate abnormally high charter airline profits. Thomson’s retail and tour businesses not only serve as a conduit for the air charter business but also act as a façade that discourages the competition while the real action takes place elsewhere: Britannia earns unusually high profits.

The False King


Xiang Yu, who collaborated with his uncle, Xiang Liang, to apply he stratagem Exchange the role of guest for that of host and take control of Wu (see Stratagem Twenty-Three), continued his quest to take down the Han empire. He and his uncle successfully took control of their home state of Chu. Xiang Liang died later during a mission to expand the revolution, and Xiang Yu became warlord of Wu. In this position, Xiang Yu led many successful battles against the king of Han, Gaozu.

After one such battle in the early second century BC, Gaozu retreated with a diminished army to regroup in a fortified city. However, Xiang Yu followed, surrounded the city, and prepared to finally defeat his archrival.

Gaozu’s situation looked dire. But one of his generals proposed a maneuver to allow Gaozu to escape. The general proposed that he pose as the king, focus their adversary’s attention on him by
feigning a surrender, while the real king, Gaozu, escaped through a side exit of the city. The general was offering his life to save his king. The king accepted.

The general had 2,000 women dress as soldiers. Just before dawn, these women exited the main gate and took up battle formation. Xiang Yu’s army reacted quickly. They assembled in formation and prepared for what they hoped would be the final confrontation. But just before daybreak, when the fighting would commence, the general appeared from within the city walls disguised as the king and signaled surrender. His people had run out of food, he explained.

Xiang Yu’s soldiers celebrated their long-awaited victory in a joyous uproar. They did not yet realize that the man they thought was the king was actually a general, and the figures they thought were solders were actually women in disguise. Under the cover of this façade, with thirty horsemen, Gaozu quietly exited the city through the West gate.

The general’s carriage slowly moved toward Xiang Yu. The king was to surrender in person. When Xiang Yu recognized the general and realized he had been tricked, he grew furious. When he learned that a group of horsemen had snuck out of the city and escaped, he had the general burned to death. Gaozu, the king of Han, was saved.

 

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Stratagem 24

Stratagem 24:Borrow the Road to Conquer Gao

 

“When a small state, located between two big states, is being threatened by the enemy state, you should immediately send troops to rescue it, thereby expanding your sphere of influence. Mere talk cannot win the trust of a state in a difficult position.”

—From The Thirty-Six Stratagems

In 1984, with $80,000 in seed funding, Liu Chuanzhi created a company with a vague mission: to commercialize technology developed by the Chinese Academy of Sciences. Over the next several years, the company, Legend, evolved into an average member of China’s legion of domestic computer firms. Because the government would not grant Legend the authority to manufacture its own computers, Legend was relegated to distributing computers and related hardware for international manufacturers.

Legend, however, was learning. It would drain experience out of its partners and then build a formidable advantage. It was borrowing a road that would convert its inauspicious beginning into the third-largest computer manufacturer in the world.

Legend became the largest distributor of Hewlett-Packard (HP) computers and Toshiba notebooks in China. In this role, the company absorbed HP’s practices. It simultaneously developed a unique understanding of how to serve Chinese consumers. For example, it created a breakthrough keyboard that facilitated writing Chinese characters; and, because Chinese consumers are less familiar with computers than are United States and European consumers, it ran computer education road shows countrywide. In addition, the company established an enviable distribution network comprising more than 2,000 distributors.

HP and Toshiba partnerships afforded Legend a valuable foundation of best management practices, customer understanding, and distribution infrastructure, which enabled the company to beat rivals decisively during the 1990s. However, this changed in 1992 when China lowered import restrictions. Foreign firms rushed in and quickly cut down local computer companies’ collective market share from 70 percent to 30 percent.

Legend, which had begun manufacturing its own branded computers and still had a substantial distribution business, thrived under the pressure. Following U.S. practices, it took the radical move of offering shares in the company to the employees. This helped to attract top talent. It funneled its commercial and technological knowledge (borrowed from its alliances with HP and other foreign firms, including Intel) into the effort to become a highly competitive computer manufacturer. So while other Chinese computer firms retreated or closed down, Legend’s share grew. From close to zero, it reached 5 percent in 1995 and continued to grow. In 1998, it captured 14 percent of the market, making it the topselling computer brand in China and by the early 2000s commanded 30 percent, outselling international leaders such as IBM, HP, and Compaq.

But the company’s ambitions remained unquenched. To assert its global aspirations, the company changed its brand name to Lenovo, a word composed of Le from “Legend” and novo, the Latin word for “new.” Though it remained unknown outside China, the new Legend, Lenovo, proclaimed itself as innovative and not limited to a Chinese identity.

In December 2004 Lenovo announced it intended to buy IBM’s PC business. Five months later Lenovo completed its IBM deal, paying $1.25 billion in cash and stock and solidifying its position as the third-largest computer company in the world.

Lenovo owes a debt of gratitude to its partners for helping it build a strong foundation. Liu Chuanzhi said, “Our earliest and best teacher was Hewlett-Packard.”66 HP concurs. HP executive Ken Koo says, “Legend grew with us. They learned vendor channel management from HP. We helped develop Legend into a strong PC company in China.”67

Piercing Through Your Partners


Daniel Borel and Pierluigi Zappacosta never wanted to sell computer mice. They wanted to build software. Both were Stanford University engineering students who dreamed of bringing to their home continent of Europe the entrepreneurial energy they found so invigorating in Silicon Valley.

But European venture capitalists showed little interest in software companies, so Borel and Zappacosta had to adjust their plans. They followed a growth path surprisingly similar to Lenovo’s
and, indeed, many other technology firms: Align with larger players, build skills and capacity, and then expand beyond your former partners. This trajectory led them to create Logitech, one of the world’s largest producers of computer mice and other input peripherals.

When venture capitalists turned down the pair’s software ideas, Borel and Zappacosta switched to hardware. They bought the U.S. distribution rights for a computer mouse designed in Switzerland. Their timing was ideal. One year later, Steve Jobs revolutionized the computer industry by choosing to use a computer mouse on the Apple computer, which led to a broad adoption of the computer mouse throughout the industry. Borel and Zappacosta’s sails filled and their small hardware business began to move.

Over the next six years, their company, eventually named Logitech, signed deals to produce computer mice for the world’s leading computer manufacturers. By 1998, IBM, HP, AT&T, Olivetti, Convergent Technologies, and DEC were all buying their mice from Logitech. Logitech built plants in California, Ireland, and Taiwan. No competitor could convincingly claim more experience or capacity than Logitech.68

Though the company had won the world’s leading computer companies as clients, it remained relatively small, with revenues of $40 million in 1988. To unlock further growth, the company decided to bypass the intermediaries and begin marketing directly to end-users.

Logitech hired a new CEO and began expanding its retail business. It invested in its brand, expanded its retail marketing skills, and widened its offering to include Webcams. Its revenues jumped 31 percent in 2000, hitting $615 million, and continued to grow at 20 percent per year for the next five years, reaching $1.8 billion in 2006. Its retail sales now comprise 80 percent of its total, and since the retail channel delivers far higher margins than selling to computer manufacturers does, Logitech’s profitability has grown even faster than its size.

By following the road to consumers pioneered by HP and IBM, Logitech built a defensible foothold of skill and capacity. It then reached beyond its original channels to unlock extraordinary growth.

A Deposit of Jade


In 658 BC, the duke of Jin was contemplating how to continue expanding his state. He had, over the years, overtaken many other states and now enjoyed great power. He was particularly concentrating on two smaller states that bordered his own: Yu and Gao, which anticipated the duke’s ambitions and so fortified their borders with his kingdom. They made an informal pact to support each other in case of an attack. As a result of this coordination, a successful incursion would cost the duke considerable resources.

One of the duke’s generals suggested that if the duke could attack one of the small states through the other, his chances of success would be greatly improved, because their common borders were not heavily guarded. He proposed that the duke bribe Yu’s leader, who was known to be greedy, with lavish gifts in exchange for passage through Yu to attack Gao. The duke countered that the cost might not be worth the gain. The general responded that the duke should think of the bribes as deposits, not gifts. Once successful, the duke could withdraw his bribes from Yu’s stores again.

The duke agreed to the plan. He offered Yu’s leader fine horses and jade in exchange for passage. An advisor to Yu’s leader counseled him not to accept the gifts. “You have heard the saying, ‘Without lips, the teeth would get cold,’” he said. “Gao and Yu are close neighbors and depend on each other for protection. Without Gao, Yu might not survive. Why should we let Jin pass?” But Yu’s leader ignored the warning. He accepted the gifts and let the Jin army pass through his territory to attack Gao.

Gao fell easily to Jin’s superior forces. The Jin army, on its way home, attacked and conquered Yu. The Jin general took back his duke’s jade and horses from Yu’s stores and returned them to the duke.

Through a temporary alliance, the duke of Jin upset his opponents’ balance and overwhelmed them in succession, conquering both at minimal cost.

 

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Stratagem 23

Stratagem 23:Exchange the Role of Guest for That of Host

 

“Whenever there is a chance, enter into the decision-making body of your ally and extend your influence skillfully step-by-step. Eventually, put it under your control.”

—From The Thirty-Six Stratagems

Doug Muir faced a decision after September 11, 2001, that would have scared many other pilots. With American travelers staying on the ground, airlines needed to cut costs. Muir, a well-paid senior pilot with a major U.S. airline, was one of the first to receive an offer of furlough as a precursor to unemployment. To Muir, furlough represented a runway to a new career. “I was getting paid to not fly,” he recalls thinking.

After a few experiments in various businesses, Muir saw an opportunity to do something new in the mundane business of collecting debts. After some research, he decided to create a subrogation company, one of the many firms that specialize in helping insurance companies collect unpaid obligations. (When two people have a car accident, they exchange insurance information. If the driver at fault does not have adequate insurance or, as is too often the case, has no insurance at all, he or she must make reparations. Often, however, the uninsured driver refuses to pay. The insurance company of the other driver will make several attempts to collect the unpaid amount but if these fail, it will hire subrogation companies to collect. Subrogation companies usually keep 20 percent to 40 percent of what they collect.)

As Muir started his collections business, he realized the industry had stagnated and become inefficient. His insurance company clients sent him boxes of legal documents, which he and his staff dredged through and entered into databases so that they could begin their collection routine. He hired staff to manually enter the data he needed; the process was labor intensive and costly.

Muir wanted his clients to send their documents in digital form. This would save considerable time, but more important, it set in motion a strategic shift that eventually provided him with considerable leverage over his clients.

Muir developed software that automated much of his work and added to it an interface that enabled clients to log on and directly enter required data. Clients liked it because this saved them packaging and shipping time. Muir liked it because it made his collection system almost entirely self-operating. Once clients entered their data, his system could automatically perform three key steps in the collection process: make a phone call, send a letter, and cancel a driver’s license.

Everybody won with this solution. But Doug Muir won disproportionately because his software built client dependence.

To see how this worked, consider the typical evolution of a new client. First, a client agreed to test Muir’s subrogation service. Company officials sent him their hard-copy information as they did with other subrogation companies. Then Muir suggested they try his digital entry interface. Clients loved it. Sending the information digitally required less time. They were able to shrink their packaging and shipping department because they needed fewer people to photocopy and pack boxes. Clients could move packaging and shipping people into higher-value roles.

Clients gradually moved more of their subrogation business to Muir, each time reducing their shipping departments. As these departments shrank, the clients’ dependence on Muir grew. Eventually, the clients became captives. They had reorganized their operations around a digital solution that only Muir’s company offered. They could leave Muir only if they made a significant reinvestment in rebuilding the shipping department.

Muir was transformed from guest to host. His captive customers gave him a competitive barrier. After three years growing his business, Doug Muir sold his company to a hedge fund for eleve times his initial investment.

From Buyer to Boss


Wal-Mart offers consumers superior value. It can sell products at lower prices than its competition without forfeiting quality. This unique ability has fueled Wal-Mart’s incessant growth and seemingly insurmountable competitiveness. The retailer has been able to do what its competitors cannot primarily because it is able to cut costs out of the supply chain and thereby reduce the costs of the goods it sells. It squeezes the margins of all players in its supply chain from raw material suppliers to manufacturers. To push down manufacturers’ margins, Wal-Mart adopts the tactic Exchanging the role of guest for that of host.

An Asian apparel manufacturer shared his experience of working with Wal-Mart. He described a process Wal-Mart has repeated with other manufacturers throughout the region. The process overcomes the initial resistance that manufacturers often have to working with Wal-Mart, which, they think, allows manufacturers to earn only extremely low margins.

First, Wal-Mart places a relatively small order that the manufacturer eagerly accepts, because such a small order does not make the manufacturer dependent on Wal-Mart. Wal-Mart then requests additional capacity, which the manufacturer almost always grants. The manufacturer would rather give any extra capacity it has to Wal-Mart instead of investing the time in winning a new customer. The manufacturer’s rationale: “with a buyer waiting; why would you waste time hunting down another buyer?” So Wal-Mart’s share of the manufacturer’s sales has grown from an insignificant 10 percent to a slightly more significant 15 percent.

This development in isolation does not at first noticeably shift the balance of power between Wal Mart and its manufacturer. But Wal-Mart repeats this process a few times, incrementally growing its share of the manufacturer’s production. During this “infiltration” period, Wal-Mart demands good but not overly aggressive prices from the manufacturer. The manufacturer finds it difficult to turn away Wal-Mart’s easy business.

After some time, Wal-Mart comes to represent a significant share of the manufacturer’s capacity. Wal-Mart then begins demanding deeper discounts. The manufacturer must now choose between cutting margins and losing a large customer, perhaps its largest at this point. The manufacturer naturally acquiesces and cuts margins.

Interestingly, by cutting margins, the manufacturer increases its dependence on Wal-Mart. With lower margins, maintaining high utilization levels (i.e., keeping their machines working) becomes more critical to profitability. So when capacity becomes available, the manufacturer is motivated to sell it quickly; Wal-Mart, with its vast retail network, is the customer most likely to buy extra capacity quickly.

Wal-Mart’s process turns an initially weak position into one of dominance. By opening with a seemingly innocuous position then building dependence incrementally, the company effectively reduces manufacturer resistance. This tactic is central to Wal- Mart’s overall success. Manufacturer dependence allows Wal-Mart to demand low margins and therefore sell at prices lower than its competitors.

From Guest to Governor


Xiang Liang descended from a long line of generals. However, when his home state, Chu, fell to the powerful Qin dynasty, his family lost power. Even before this happened however, as a youth Xiang Liang had murdered a man and fled from his home with his nephew, Xiang Yu. They took up asylum in the state of Wu. Thus a man destined to lead armies became a lowly administrator, an exile, and an unwilling citizen of the oppressive Qin dynasty. He was, naturally, hungry for change.

Xiang Liang developed a reputation as a strong administrator and leader. The governor of Wu, who had granted Xiang Liang and his nephew asylum, grew to trust them. Over the years, Xiang Liang patiently climbed Wu’s organizational ladder. He became a valued advisor to the governor.

In 209 BC, when states and kingdoms throughout the Qin dynasty ignited in revolt, the governor of Wu turned to Xiang Liang. He wanted his state to join the revolt and asked Xiang Liang and his nephew to lead an army.

Xiang Liang saw this as an opportunity to complete his ascent of Wu’s governing hierarchy and take control. He asked to confer with his nephew before accepting the challenge. But the plan he and his nephew devised was not what the governor expected.

After Xiang Liang and his nephew jointly accepted the governor’s challenge, the three men met to discuss how Wu should join the revolution. In the middle of this meeting, Xiang Liang gave his nephew a secret cue. Without warning or hesitation, his nephewdrew his sword and beheaded the governor. Xiang Liang then took the state seals and declared himself governor. To quell the opposition, Xiang Yu swiftly killed any objecting onlookers.

The uncle-nephew team continued their ascent to power. They joined the revolution and won many battles, including the battle for their home state, Chu. Xiang Liang became a contender for the reconquered Chu throne but for political reasons could not secure it. He died in battle soon afterward. Xiang Yu became a contender for rule of the entire dynasty but suffered a similar fate, dying in battle before the dynasty’s next ruler was named.

The asylum seekers exchanged their roles from guests to governors. They almost continued their rise to become kings and emperors. Their success lay in timing. By accepting seemingly powerless
positions as lowly administrators, they entered the doors of power. By taking small steps, none of which warranted suspicion, they infiltrated their adversary. Once they had built sufficient trust and dependence, they took control.

“Make people depend on you. . . . You will get more from dependence than from courtesy. He who has already drunk turns his back on the well, and the orange already squeezed turns from gold into mud.”64

—Baltasar Gracian, The Art of Worldly Wisdom

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Stratagem 22

Stratagem 22:Await the Exhausted Enemy at Your Ease

 

“To weaken the enemy, it is not necessary to attack him directly. Tire him by carrying out an active defense, and in so doing his strength will be reduced, and your side will gain the upper hand.”

—From The Thirty-Six Stratagems

How does the son of a working-class welder emerge as one of the world’s richest billionaires? He sees something others do not; he sees that the battleground is about to shift.

John Fredriksen began his career with an unremarkable first job as a trainee in an Oslo ship-brokering company. He continued to work in the shipping business, becoming one of many obscure private tanker owners. In the 1990s, however, he saw that the world of tankers was about to experience a shift.

Private tanker owners such as Fredriksen had been hurting because of overbuilding in the 1970s. Oil companies exploited the resulting oversupply by pitting ship owners against each other (see the stratagem Kill with a borrowed knife) to drive down rates to levels that barely covered costs.

But Fredriksen predicted that many of the tankers built in the 1970s would soon wear out. Tanker supply was about to shrink and this shrinking would shift power away from oil companies toward tanker owners. As he said, “The world has to get crude somewhere, and OPEC is the place. We saw that.”60

He also saw that oil companies were starting to look for environmentally safe shipping options. These two shifts revealed a new future in which oil companies would be bidding for the few tanker owners that owned newer, environmentally safe tankers.

In accordance with Sun Tzu’s ancient principle that one should seize the battleground first, and when common industry wisdom was to avoid the tanker business, Fredriksen began buying tankers. In 1996 he took over a Swedish shipping company called Frontline for $55 million. Over the next three years he continued acquiring tankers, focusing particularly on buying the more expensive but environmentally friendly double-hull tankers.

Fredriksen made another strategic decision that positioned him well for a battleground shift. Instead of entangling his company in long-term contracts, he focused on the “spot market”—the market for shipping oil on short notice. The spot market had two advantages: It offered higher margins, and it gave Fredriksen the flexibility to raise prices with the market.

In 1999 Fredriksen’s prediction came true. The battleground shifted when an aging tanker spilled 70,000 barrels of fuel oil off the coast of Brittany. Headlines warning of a major ecological threat drew public attention to the risks single-hull tankers posed the environment, which in turn sent big oil companies into frenzy. To avoid such environmental, economic, and public relations disasters, they began looking for double-hull ships to ship their product. They increasing found themselves negotiating with Fredriksen.

Frontline now commands nearly 25 percent of the world’s supertanker spot market. This means that if a company wants to ship oil quickly, there is a one in four chance they will ship it with Frontline. With such bargaining leverage, Fredriksen turned the tables on oil companies. At one time, big oil companies could negotiate tanker owners down to break-even pricing. Now that they need Frontline, they are willing to pay.

In the ten years ending in 2005, Frontline has decisively beaten its competition. It has grown revenue at 55 percent per year versus 15 percent for its peers. It commands 50 percent cash profit margins while its peers produce just 20 percent. And it has produced more shareholder value, delivering on average 60 percent total return to shareholders (TR S) annually versus 30 percent for its peers.

Frontine, the company Fredriksen bought for $55 million is today (in 2006) worth $2.5 billion, making the son of a middleclass welder the richest man in Norway.

Wal-Mart Awaits Its Exhausted Competition


While Wal-Mart’s rise to become the world’s largest retailer owes its success to multiple factors, it was launched from the platform of Await the exhausted enemy at your ease. In 1945, the company that was to become Wal-Mart consisted of one variety store in Newport,Arkansas. In just over thirty years, it became the largest retailer in the world, with more than 3,000 stores in all fifty states and with operations in Argentina, Brazil, Canada, China, Germany, South Korea, Mexico, and the United Kingdom. Wal-Mart owes much of its success to a simple tactic: identifying the next battleground, setting up a stronghold there, and waiting for the competition.

When Wal-Mart began its national expansion in the early 1970s, large retailers such as Sears, JC Penny, and Kmart positioned stores only in large city and town centers. Wal-Mart took the opposite approach: It focused on smaller towns, in part to avoid direct competition and in part because it believed the battleground would shift. As Wal-Mart’s founder Sam Walton explained:

[Our strategy] was simply to put good-sized discount stores into little one-horse towns, which everyone else was ignoring. In those days Kmart wasn’t going into towns below 50,000 and even Gibson wouldn’t go to towns much smaller than 10,000 or 12,000. We knew our formula was working even in towns smaller than 5,000 people, and there were plenty of those towns out there for us to expand into. When people want to simplify the Wal-Mart story that is usually how they sum up the secret of our success: “Oh, they went into small towns when nobody else would.”61

Companies that avoid direct competition simply to reduce the cost of battle risk holding a big piece of an insignificant pie. But Wal-Mart was doing more than avoiding direct competition—it was betting that the battleground would move toward small towns and suburbs.

For various reasons that are still the subject of dispute, consumers migrated to suburban neighborhoods and increasingly preferred suburban to city-center retail stores. Leading retailers faced with declining sales in their key locations followed customers into these smaller markets. When they got there, however, they encountered an unexpectedly strong competitor.

Wal-Mart had been waiting for them, fortified with a strong brand and an efficient distribution system. The advantages Sears wielded in serving large urban centers did not carry into Wal- Mart’s backyard. Sears fell from leader to follower and still trails.

“When two great forces oppose each other, the victory will go to the one that knows how to yield.”62

—Lao Tzu, Tao Te Ching

Luring an Adversary with Campfires


In 342 BC, three states engaged in war: Wei, Qi, and Han. Wei attacked Han. While Wei was besieging Han, Han asked the state of Qi for help. Qi prepared its army and began marching to the capital of Wei to implement the stratagem Besiege Wei to rescue Zhao, just as Chi had done to Wei twelve years earlier. The goal was to force Wei to return to defend the capital and call off its attack on Han.

Remembering the painful consequences of falling for the stratagem, the Wei army, under the leadership of General Pang Juan, pulled back its troops. They rushed home to defend their capital against Qi’s attack.

But Sun Bin, the leader of the Qi army, had a new stratagem in mind. He knew that Pang Juan underestimated the Qi army. So rather than attack the Qi capital, he feigned a retreat. He used a creative ploy to lure Pang Juan out of the capital. During the first night of his retreat, he had his army light 100,000 campfires. During the second night, his soldiers lit 50,000, and on the third night, only 30,000.

Pang Juan read this as a sign that the Qi army was dwindling. Tasting an easy victory, he gathered a collection of lightly armed troops and marched them rapidly, at twice the normal speed, toward the retreating Qi army. Sun Bin calculated that at dawn Pang Juan would reach a town called Maling. He set up an ambush there and waited.

The Wei troops arrived on schedule but exhausted from their strenuous march. Sun Bin’s army, which was rested, fortified, and three times the size Pang Juan expected, easily defeated the Wei troops. Pang Juan committed suicide on the battlefield. Sun Bin had identified the next battleground, fortified his troops there, and forced his adversary to become exhausted getting there.

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Stratagem 21

Stratagem 21:The Stratagem of the Open City Gates

 

“In spite of the inferiority of your force, deliberately make your defensive line defenseless in order to confuse the enemy. In situations when the enemies are many and you are few, this tactic seems all more intriguing.”

—From The Thirty-Six Stratagems

A company regarded as a tough competitor can scare away opposition simply by making noise during its approach. Microsoft’s worldwide reputation as aggressive, persistent, and usually successful is the weapon the company wields to clear away potential opponents. When Microsoft announces its intention to introduce a new product or enter a new market, would-be competitors recalculate their projections. Investors readjust their risk assessments Customers rethink their purchases and consider waiting for the Microsoft product. In other words, when Microsoft announces it is entering a new segment, the market makes room. If Microsoft hid its intentions, it would have to spend more to win over customers and investors.

Microsoft implements this tactic intentionally and proactively. It does not depend on the market to link past successes to future success. It makes this linkage explicit.

In revealing Microsoft’s “digital home” strategy, which envisions home appliances (e.g., refrigerators, televisions, and systems, such as alarms, and lighting) networked through Microsoft products, Bill Gates said, “The way you get to our vision [of the digital home] is by building individual products that are the best in their own categories. It’s like Microsoft Office. We built that with Word being the best, Excel being the best. They all had to be the best before the whole integration thing came together.”57 In other words: Competitors, beware.

Microsoft is not the only company to rely on this stratagem. International Game Technology (IGT) is the largest designer and producer of slot machines and video-gaming machines in the world. The company sells two out of every three slot or video machines bought in the world.

In the mid-1980s, IGT was not the dominant player. It was one of six leading producers in its market. To separate itself from the competition, IGT made a strategic decision to invest more heavily than its peers in research and development. Over the subsequent twenty years, these R & D investments began paying off in two ways. First, IGT’s technological advances created new betting experiences,which captured new business. For example, the company linked one of its new computerized slot machines to a proprietary network that allowed gamblers in different states to play for the same progressive jackpot. This multistate slot machine was a breakthrough that began separating IGT machines from the pack.

But IGT’s commitment to outspend its peers on R & D had a secondary, possibly more powerful, effect. By revealing, even boasting, about the level of its R & D spending, IGT deflated competitive resistance. The company signaled competitors to give up competing with IGT using R & D spending and, possibly, convinced investors to prefer IGT stock because the company was technologically aggressive.

From the mid-1990s, IGT launched a stream of new gaming technologies and expanded into new geographic markets. Over the past decade it has averaged 13 percent annual revenue growth (twice the industry average) and produced a 30 percent profit margin (also twice the industry average).

IGT’s success offers the lesson that by a committing to a bold strategy and openly sharing it, you may convince the competition to step aside.

Using Weakness to Communicate Strength


During the Three Kingdoms period (220–265 ce), while the kingdoms of Shu and Wei were at war, the prime minister of Shu found himself in an apparently helpless predicament. Taking a break from fighting, he retired to his base city. He sent most of his troops off to battle and ordered half of the remaining troops to leave the city to help move supplies in another town. This left him with just 2,500 troops.

The news of an approaching Wei army, 150,000 soldiers strong, came too late for the prime minister to call back his men. He would have to work with what he had.

His two obvious choices were to flee or to fight, each of which meant death for him and his subjects. The Wei army outnumbered his by sixty to one. If he fought, he would lose. If he fled, the Wei would hunt him down and kill him. The situation’s helplessness made his subjects faint, but the prime minister remained calm. He had a stratagem in mind.

As great clouds of dust signaled the approach of the Wei army, the prime minister ordered his soldiers to occupy their posts as usual, threatening to behead anyone who attempted escape. He then opened the city gates and placed twenty soldiers at each gate.

Dressed as civilians, the soldiers pretended to sweep the streets. Finally, the prime minister ascended an observation post, carrying incense and a zither. He lit the incense and calmly played the zither.

Wei scouts were shocked at the strange signs of calm in Shu’s city. When they reported that the city gates were open, civilians were sweeping the streets, and guards were at their usual posts, the Wei general was incredulous. He mounted a horse to inspect the scene himself. He too found the same signs of calm. Then, when he heard the prime minister playing serene songs on a zither without a hint of fear in his voice despite the presence of 150,000 troops at his doorstep, the general concluded that the prime minister had set a trap. He explained to his advisors that the prime minister was known for being conservative and careful, and he would not take such a bold position without a powerful stratagem in hand. Wei turned his troops around and left.

Thus Shu’s prime minister saved his life and his city. He forced 150,000 enemy troops to retreat with only 2,500 soldiers, open city gates, and a zither.

“Things pass for what they seem, not for what they are. Only rarely do people look into them, and many are satisfied with appearances.”

—Baltasar Gracian, The Art of Worldly Wisdom58

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Stratagem 20

Stratagem 20:Let the Plum Tree Wither in Place of the Peach

 

“When loss is inevitable, sacrifice the part for the benefit of the whole.”
—From The Thirty-Six Stratagems

In 1999, one of the world’s leading producers of mobile phones announced it was abandoning the business. In exiting, the company admitted falling victim to stronger competition. But what had at first appeared a withdrawal was actually an attack, allowing the former hardware producer to evolve into a technological force.

Fifteen years earlier, seven mobile technology veterans had met in Dr. Irwin Jacobs’ den, aiming to revolutionize their industry through a new company called “QUALity COMMunications” (now QUALCOMM). Although they “had no particular product in mind,”53 as Dr. Jacobs explained, they wanted to apply World War II radio technology to modern mobile phones.

Digital mobile phone use was expanding, and the industry wanted to set a standard for managing the information flow between phones and networks. The Telecommunications Industry
Association (TIA) had endorsed a digital technology called Time Division Multiple Access (TDMA). However, QUALCOMM, believing its Code Division Multiple Access (CDMA) technology to be superior, ignored the emerging consensus and introduced its product. For the next six years, QUALCOMM fought to convince the industry to adopt CDMA technology.

Reversing the momentum behind TDMA and the European alternative GSM, looked improbable. It was a classic Catch-22. Nokia, Motorola, Ericsson, and other mobile phone producers were not interested in building CDMA phones because AT&T Wireless and other service providers were not using the technology. At the same time, service providers argued that mobile phone producers were not making CDMA compatible phones. To unlock this dilemma and jumpstart CDMA adoption, QUALCOMM decided to produce its own mobile phones and related infrastructure. Only by offering a completely packaged solution could QUALCOMM convince industry players to take a risk on CDMA.

QUALCOMM’s strategy worked. Its hardware and infrastructure business exploded, and the company became a well-known mobile phone consumer brand.

To accelerate its rise, the company began placing significant strategic investments in developing markets. In 1997, it entered Chile, purchasing a 50 percent interest in Chilesat PCS for $42 million. In 1998, it committed $110 million to Pegaso Telecommunications in Mexico and OxPhone Pty. Ltd. in Australia along with Metrosvyaz Limited and Orrengrove Investments Limited in Russia.

By 1998, QUALCOMM was a major player in three distinct mobile communications areas: manufacturing, operating, and technology development. Although this strategy was delivering impressive growth, cracks were beginning to show.

Conflicts of interest emerged to damage QUALCOMM’s core business. The company had invested in mobile phone operators to encourage them to adopt CDMA. But the company had not anticipated that this strategy would discourage competing operators— who hesitated to bet on technology owned by their competitors’ new investors—from adopting CDMA. Similarly, those manufacturers producing CDMA phones were hesitant to continue imbedding the internal technology because of direct competition from QUALCOMM. As a result, QUALCOMM’s hardware and operating businesses were causing its technology businesses to suffer.

Managing these different businesses was also becoming a challenge. In the technology industry, it is common to immediately hire an army of engineers when you get funding (e.g. from a government grant) and then disband them when the project ends. Such rapid labor fluctuations, however, do not work in large-scale manufacturing.

It was becoming increasingly clear that QUALCOMM could not remain competitive. It was struggling to compete with Motorola, Ericsson, and Nokia, who, with over 50 percent of the market, commanded far stronger purchasing power. Though CDMA usage was booming, it paled in comparison to its alternatives (TDMA and GSM).

QUALCOMM’s multifront war proved more than the company could handle. Analysts and investors began exerting considerable pressure on QUALCOMM to change course. QUALCOMM reacted quickly, deciding, in 1998, it would immediately begin exiting the hardware business.

On September 24 of that year, QUALCOMM’s exit from the hardware business began when the company spun its investments in mobile phone operators off into an independent public company called Leap Wireless International. Six months later, it sold its infrastructure business to Ericsson as part of a legal settlement between the two companies. QUALCOMM transferred 1,200 employees and took in a $240 million charge as part of the deal. Its stock leaped 50 percent in the following week.

QUALCOMM committed to a complete exit from the hardware business in December 1999 when it announced it would sell its entire mobile phone business to Japan’s Kyocera. A decade pushing CDMA hardware came to an end. QUALCOMM was no longer a hardware manufacturer.

QUALCOMM’s story is not one of failure because, by leaving a game it could not win, it was free to focus its resources on one it could dominate. “We’ll do the innovative part and let others do the manufacturing,” Dr. Jacobs explained.54

The results have been extraordinary. In the four years after QUALCOMM abandoned its hardware business, its patent filings more than doubled (from 700 in 1999 to 1,700 in 2003) and its patents issued nearly tripled (from 325 in 1999 to 1,000 in 2003).55 While its revenue remained flat, remarkable after shedding so much of its business, its profitability grew 135 percent (from $390 million to $920 million).

By disengaging from the competition, QUALCOMM became distinctive.

 

The General Sacrifices His Worst Horses


During the Warring States period, the royals and generals regularly entertained themselves by gambling on races among their private stocks of horses. The stakes on these races were high.

One day a well-known military advisor and descendant of Sun Tzu named Sun Bin noticed that General Tian Ji was preoccupied. When Sun Bin inquired, the general explained that his horses,which regularly lost, had cost him significant sums of money. Sun Bin offered to accompany the general to the next match to see if he could devise a strategy whereby the general would win. The general gratefully accepted.

At the race match, Sun Bin learned that the races consisted of three heats. The best horses of the contestants competed in the first heat; their second-best horses, in the second; and their worst
horses, in the third. He also noticed that the general’s horses were in each instance slightly slower than the competition. This was enough information for Sun Bin to devise a strategy that would ensure victory for General Tian Ji.

After the races, Sun Bin told General Tian Ji that he had a plan. He suggested that the general call another race and be prepared to bet heavily on it. The general had great confidence in Sun Bin, so he planned a high-profile competition. He invited the prince to compete and thousands of peasants and royal subjects to attend. He put much at risk both financially and in terms of his reputation.

In the first heat, Sun Bin advised the general to race his worst horses against the prince’s best. The prince easily defeated the general. The crowd cheered; the prince smiled confidently, but Sun Bin remained calm.

In the second heat, Sun Bin advised the general to race his best horses against the prince’s second-best horses. The general’s best horses, although no match for the prince’s best horses, easily defeated the prince’s second-best horses. The score was tied one to one.

In the final, deciding race, the general ran his second-best horses against the prince’s worst horses and won. By sacrificing his worst horses, General Tian Ji won the tournament and recouped a large share of his losses.

“The strategy of guerrilla warfare is manifestly unlike that employed in orthodox operations, as the basic tactic of the former is constant activity and movement. There is in guerrilla warfare no such thing as a decisive battle.”

—Mao Tse-tung, On Guerilla Warfare56

 

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Stratagem 19

Stratagem 19:Watch the Fire on the Other Shore

 

 

“When a serious conflict breaks out within the enemy alliance, wait quietly for the chaos to build. Because once its internal conflict intensifies, the alliance will bring destruction upon itself. As for you, observe closely and make preparations for any advantage that may come from it.”

—From The Thirty-Six Stratagems

Stories of companies that acted when they should have held back litter business history. By not considering the reaction an attack might invite, you risk unsettling a salutary balance between you and your competition.

In the mid-1990s the Swiss national postal service (the Swiss Post) found itself in a trying competitive situation. Overall demand had been shrinking as the Swiss turned increasingly to electronic instead of traditional mail. Swiss Post’s monopoly on this shrinking market was also slipping to international carriers including DHL and FedEx. Many of the historical legislative advantages the institution enjoyed were being challenged. Swiss Post had grown up under protection. With an office covering every Swiss town, sorting facilities, and a fleet of trucks and planes, the Swiss Post had built unparalleled scale. Now liberalization and globalization were eating into its monopoly. Revenues declined, but the costs of maintaining its real estate and equipment held firm. Swiss Post’s size was transforming from an advantage to a liability.

To survive, the postal service needed to change. In 2002 the board reconstituted itself. Several long-serving members and executives left so that a new line of leadership could take over. This new
leadership began testing the demand for new businesses including electronic mail and special post boxes serving remote areas.

Swiss Post, adopting the practices of for-profit firms, was following demand. But because it failed to contemplate the competition, this reinvented public service took a costly mis-step.

Market research and tests encouraged Swiss Post in 1994 to begin selling paper, pens, and other office products in its stores. The decision seems logical: Customers would easily associate the Swiss Post brand with office supplies, and Swiss Post’s locations enjoyed heavy foot traffic. In that year, Swiss Post enjoyed a significant spike in revenue and credited much of this uplift to its new office-supply business.

But Swiss Post was not convincing people to buy more office supplies. It was convincing them to shift their purchases away from office-supply stores, and these stores, to protect profits, had to respond.

Their response was to match Swiss Post’s offer. If customers were now able to mail a letter and stock up on supplies at a post office, office-supply retailers would have to allow the same service.
These retailers began offering shipping services through private letter carriers (e.g., DHL) in their stores.

By entering the office-supply business, Swiss Post introduced a new class of competitor into the battle. It had to contend not only with private carriers providing service to customers in their offices; additionally, it had to fight the neighborhood office-supply store, which was tempting consumers with a convenient postal service.

The Benefits of Inaction


Inaction can be a powerful and aggressive choice. Puma, for example, made a critical strategic decision in the mid-1990s to stop competing with its traditional opposition, Nike and Reebok. Facing a financial crisis, Puma realized it was incapable of succeeding as an athletic shoe company. So it chose to leave this battle to others.

Instead, Puma reconceived itself as a fashion and lifestyle brand. It began producing sneakers that placed aesthetics over performance. It hired well-known designers to create exclusive Puma shoes. It expanded its apparel business and diversified its product offerings, even producing a Puma bicycle.51

The results have been astounding. Fashionable Puma has been outpacing its athletic-oriented rivals, averaging 20 percent annual revenue growth over the past ten years, compared to 10 percent for Nike and just 1 percent for Reebok.

Intel is similarly careful about which battles it chooses. It intentionally holds back from many opportunities in order to avoid competing with customers. It will not, for example, introduce
products such as mobile phones or PDAs (personal digital assistants) that depend on Intel chips but would compete with existing Intel customers.

Forgoing such tempting opportunities is difficult. A near-term cost-benefit analysis might prove that such a move would create value; for example, a new Intel-manufactured PDA would generate
more profits than Intel would give up in lost customers. But the longer-term lens shows that Intel’s policy is highly profitable. Intel remains a trusted supplier of choice for most large electronics
companies. Intel may “lose” current battles, such as the PDA battle, but the long-term payoff of steady customer relationships is well worth it.

“The most yielding parts of the world
Overtake the most rigid parts of the world
The insubstantial can penetrate continually.
Therefore I know that without action there is advantage.
This philosophy without words,
This advantage without action,
It is rare, in the world, to attain them.”

—Lao Tzu, Tao Te Ching52

Cao Cao Lets a Family Destroy Itself


In AD 200, there was a turning point in the war between Cao Cao and a rival warlord, Yuang Shao. In that year, Cao Cao inflicted a number of victories over Yuang Shao and built momentum that
demoralized his opponent. In 202, the shame of constant defeat led Yuang Shao to sickness and then death. He had three sons, all of whom desired to succeed him.

In a break with tradition, the eldest son was passed over, and power was given to the middle son. The youngest son supported this decision. Naturally, the eldest did not. So the Yuang brothers began to fight for control.

Cao Cao saw the brothers’ internal conflict as an opportunity, and he attacked. But his threat convinced the Yuang brothers to set aside their quarrels and unite in defense. Cao Cao pulled back
from his offensive in order to give the Yuang brothers’ conflict more time to gestate. The brothers quickly picked up their differences, which again escalated into battles.

Over the next three years, Cao Cao capitalized on the Yuang brothers’ disunity. He picked off four of their provinces and convinced many of their subjects, including their generals, to defect. But he held off launching a full direct assault.

By 205, Cao Cao’s soldiers attacked and killed the eldest brother. By this time Cao Cao had taken control of a great portion of the Yuang family’s territory. The two remaining brothers were forced
to flee their kingdom. They found shelter with a nomadic tribe called the Wuhuan. Cao Cao’s application of the stratagem Watch the fire on the other shore was successful because he had captured all of the Yuang family’s territory at minimal cost.

He might have ended his conquest there, but he felt the remaining Yuang brothers still posed a threat. Strains of Yuang loyalty were still woven throughout the populace. If the brothers returned, Cao Cao might face a revolution.

Two years later, in 207, Cao Cao attacked the Wuhuan tribe that was sheltering the brothers. After a long march, Cao Cao’s troops crushed the Wuhuan and killed the clan’s leader. The Yuang brothers, however, managed to escape. They sought shelter from the leader of a more distant nomadic tribe, Gongsun Kang.

Cao Cao’s advisors urged him to continue his pursuit. But Cao Cao declined. He explained that he would simply request Gongsun Kang to deliver the Yuang brothers’ heads. His request was soon answered with the arrival of two boxes. Each contained the head of a Yuang brother.

Cao Cao’s advisors eagerly questioned how he knew that Gongsun Kang would grant his request. Cao Cao said, “Gongsun Kang has always been wary of the Yuang tribe. He was afraid [the brothers]
might usurp his position. . . . If we had pressed them with violent attacks, they would have joined together in defense. But our retreat prompted them to plot against one another.”

The first application of Watch the fire on the other shore delivered Cao Cao’s victory over the Yuang brothers’ territory. The second application made this victory permanent.