Debbie Brackeen was in the “innovation” business before it was even called “innovation.” After completing her undergrad at Stanford University, she found herself in the heart of Silicon Valley. She spent her first years at Apple followed by stints at a variety of high-tech companies from HP to venture-baked start-ups. Today she is the chief strategy and innovation officer at CSAA Insurance Group, one of the largest AAA insurers in the world.
You stepped into the future…but has it felt more like you stepped off a cliff? Some of the most spectacular strategic failures have been due to poor execution. Unfortunately, the momentum of vision is often short-lived as the reality of the complexity of execution begins to set in. Since 1955, only 57 companies have maintained a position in the Fortune 500 while nearly 2,000 companies have come and gone during that same time period.
If someone handed you a sledgehammer and told you to start smashing your company’s products, would you do it? That’s exactly what Haier CEO Zhang Ruimin did to prove a point to his employees. That was the first in a long line of radical decisions that have transformed the company from a fledgling refrigerator maker to the world’s number one appliance manufacturer – and kept it there.
Stratagem 36:The Stratagem of Linking Stratagems
“When the enemy possesses a superior force, do not attack recklessly. Instead, weaken him by devising plots to bring him into a difficult position of his own doing. Good leadership plays a key role in winning a war. A wise commander gains Heaven’s favor.”
—From The Thirty-Six Stratagems
Many credit the iPod’s success to Apple’s creative ethic. Unconventional design choices—a flywheel, no on/off switch—surely made for a radically aesthetic product. Inventive marketing practices such as highlighting the iPod’s white earphones, instead of the device itself, surely contributed to the generation of early buzz about the product.
But a careful dissection of the iPod’s rise reveals numerous stratagems at work. Steve Jobs’ creativity extended beyond the technology and into the business. Apple built and launched a set of interlocking strategies that deflated competitive resistance. If you had wanted to compete with iPod when it was launched, consider what you would have had to contend with:
- If you were Sony, you’d have been stuck with a conflicting agenda. Your consumer electronics group would have wanted to introduce a hard drive–based MP3 player like the iPod, but your entertainment business would have resisted. This is Stratagem Seventeen, Seize the opportunity to lead the sheep away.
- If you had been open to introducing a hard drive–based player, you would have been unable to match the iPod’s size, because Apple had secured exclusive rights to a new hard drive capable of storing more songs in less space than previously possible. There would also have been music content that you could not have made available in your online music store because Apple had secured exclusive rights to some music content. This is Stratagem Ten, Remove the firewood from under the pot.
- Even if you could have gotten your hands on a small hard drive, you would have been forced to battle Apple on two fronts. Apple initially marketed the iPod only to consumers who owned an Apple computer (the iPod was initially compatible only with the Mac). Unless you had had a similarly strong business to link to your device, you would have faced unfair odds. This is Stratagem Seven, Besiege Wei to rescue Zhao.
- You would have to struggle to secure a music library as large as that which Steve Jobs rapidly lined up by his effective use of Stratagem Six, Kill with a borrowed knife: He convinced music labels to give his iTunes music store a robust music catalog by using the threat of illegal digital music–sharing sites.
- If you had been able to launch a successful competing product, Apple would have made sure you remained on shaky ground by repeatedly implementing Stratagem Twenty, Let the plum tree whither in place of the peach, because the company is comfortable cannibalizing its products to prevent competitors from doing so first. In January 2004 Apple launched the iPod Mini, a lowercost alternative to the iPod. One year later, in January 2005, it launched the Shuffle, an even smaller and less-expensive alternative. In September 2005 Apple replaced the Mini with the Nano. This was followed one month later by the Video iPod. Keeping pace with Apple is tiring.
Apple sets up a long line of barriers for its competitors to surmount. It continues to erect them, ensuring that its competitors’ success comes only after considerable persistence and creativity.
Microsoft, long an Apple rival, has grown as a result of a competitive ethic not unlike Apple’s. Microsoft, of course, has succeeded far longer and on a greater scale than Apple. It executes multiple creative strategies across value chains, markets, and levels (from corporate strategy to operating tactics).
The company’s core strategy is Stratagem Seven, Besiege Wei to rescue Zhao, which takes the form of one business contributing to the success of another (e.g., Windows contributing to the success of Microsoft’s ISP, MSN). But Microsoft executes multiple strategies around this core strategy to confuse, frustrate, and outmaneuver its opponents.
- If you are profitable, Microsoft may sacrifice its own profits to win consumer loyalty, forcing you to give up your profits as well (Stratagem Two, Exchange a brick for a jade).
- If you beat Microsoft to market with an innovation, Microsoft may reveal its intention to soon make a similar innovation, thus drying up your supply of customers and investors (Stratagem Twenty-One, The stratagem of the open city gates).
- If you do launch your innovation successfully, Microsoft may let you proceed, and then launch a competing product only after you have proven your innovation to be successful (Stratagem One, To catch something, first let it go).
- If you command an advantage in your market, Microsoft may force you to play a different game, one it knows it can win (Stratagem Three, Invite your enemy onto the roof, then remove the ladder).
- If you are competing for distribution, Microsoft may use its cash to build influence over distributors, as it did to influence retailers (Stratagem Thirteen, The stratagem of the beautiful woman).
- Even if you win a battle, Microsoft may persist, launching small incursions that build its knowledge of your market and that incrementally erode your lead, until it overtakes you (Stratagem Fourteen, Beat the grass to startle the snake).
Competing with Microsoft or Apple demands agility. Both are opponents that will come at you from multiple directions and will keep rising from the mat until you are too overwhelmed to keep up.
Linking stratagems also means combining stratagems to create entirely new ones. This will gives you the power to generate nearly endless streams of moves. As Sun Tzu wrote, combining tactics can give rise to “an endless series of maneuvers. . . . It is like moving in a circle—you never come to an end. Who can exhaust the possibilities of their combination?”96
As an example, consider the “disruption” strategy heavily promoted by business strategists today: pursuing an approach that competitors will not copy because copying it would expose them to attack from other players in the market. This is the explanation often given for the successes of strategically innovative companies such as Southwest Airlines and Ikea, the furniture-store chain.
The Thirty-Six Stratagems would explain this strategy as being a combination of two stratagems: Stratagem Twenty-Nine, Clamor in the east; attack to the west, and Stratagem Six, Kill with a borrowed knife. First, attack your competitor in such a way that, in defending himself, he exposes himself to another attack (Clamor in the east; attack to the west). Then, rather than attacking your exposed competitor, let other players attack him (Kill with a borrowed knife).
If your competitor defends himself, he will be attacked by other players in his industry, weakening him and potentially forcing him to call off his defense against you. If your competitor decides that this makes it not worth defending against your incursion, you can move in unhindered. Either way, you win. If your competitor defends himself, he exposes himself to attack from other competitors.
The Generals’ Three Strategies
The prince of Chu was being held prisoner by the state of Qi when his father died. He naturally wanted to return home to claim his throne. But the king of Qi demanded a high price for his freedom: The prince of Chu, soon to be the king of Chu, would have to give up great stretches of Chu’s eastern lands to the kingdom of Qi. The prince reluctantly agreed.
After returning to his home and taking the throne, the new king of Chu faced a dilemma. A regiment of Qi soldiers had approached the Chu border, demanding that the king make good on his promise and surrender the eastern lands. The king was unsure how to deal with his promise whether or not to fulfill. So he summoned three of his generals to ask their advice.
The first general believed the king’s only option was to give up the land and later attempt to recapture it. He argued that a king’s ability to rule depends on his reputation. If the king proved his word to be of no value by refusing to give up the eastern lands, his authority would be jeopardized. This general offered to travel to the Qi regiment on the Chu border and surrender the land.
The second general argued that the king should defend the land at any cost because it was too large a parcel to give up. The state’s strength depends on its size, so giving up so much would be a disservice to the king’s people even if it cost him some face. The general offered to lead troops to defend Chu’s eastern borders.
The third general argued that Chu should seek an ally to help defend the land. He agreed with the second general that the land was too large to give up but feared Chu was too weak to prevent Qi from taking it. He offered to lead a diplomatic mission to a large neighboring state, Qin, to request help defending Chu’s eastern land.
The king thanked the generals for their advice and dismissed them. He thought about his three options and decided not to choose among them. Rather, he decided to pursue them all.
The next day, the king ordered the first general to do as he had suggested and travel to the Qi regiment waiting on the Chu border. He was to announce to them Chu’s intention to give up the land as promised. The general was pleased and left with a contingent of soldiers.
The following day, the king told the second general that he agreed with that general’s advice; the land was too high a price to pay for keeping a king’s word. He ordered this general to follow his own suggestion and lead troops toward Chu’s eastern border to prepare to defend against an attack from Qi.
On the third day after his initial consultation with the three generals, the king told the third general to do as that general had suggested, and to lead a diplomatic mission to neighboring Qin to request assistance. This general assembled a small mission and set off for Qin.
The Qi were confused by the mixed messages they were getting from Chu’s actions. One Chu general had approached them to surrender the land. But a day later, a second general was preparing to defend it. They decided it was time to bring certainty to their situation, so they sent for reinforcements and planned to take Chu’s eastern lands by force.
When Qi’s reinforcements arrived, the king of Qi was with them. He had planned to lead his army into battle himself.
As Qi’s and Chu’s forces lined up opposite each other and prepared to converge, the third general appeared. He was escorting Qin troops, led by a Qin general, who was ready to join forces with Chu.
Outnumbered, the king of Qi called off his attack. The Chu’s eastern lands were preserved.
Stratagem 35:To Catch the Bandits, Capture Their Leader
“Capture their chief, and the enemy will collapse. His situation will be as desperate as a sea dragon fighting on land.”
—From The Thirty-Six Stratagems
This tactic is used most often during acquisition battles. When company A wants to acquire company B, it can either offer the highest bid or it can offer an incentive tailored to the interests of company B’s owners. When the owners’ incentives differ from the company’s, this second approach can be less costly.
Consider the battle between two media moguls for the satellite television company, DirecTV . Rupert Murdoch, chair of the $68 billion media conglomerate News Corp, and John Malone, chair of Liberty Media, fought for control of DirecTV . One out-thought the market to win the battle; the other found his adversary’s Achilles’ heel and won the war.
Murdoch and Malone met at an industry gathering in 1983 and immediately struck up a friendship as two conservative outsiders in an industry dominated by liberals. Their friendship flourished in a decade-long series of collaborations.
In 1991, when Murdoch was facing a crisis with creditors, Malone was one of the first to buy ] convertible bonds from News Corp. This sign of confidence by an industry leader encouraged others to buy News Corp debt and contributed to Murdoch’s avoiding bankruptcy.
Malone again evidenced his allegiance twelve years later when both media moguls coveted DirecTV They each approached Direc- TV ’s owner, General Motors, but lost out to a $19 billion bid from EchoStar, a pay-TV company. The EchoStar deal, facing tough opposition from the Department of Justice and the Federal Communications Commission, eventually fell through, leaving DirecTV again up for sale. Malone and Murdoch jointly bid for the company.
The following year, however, it became clear that their joint bid would fail. Malone and Murdoch faced two choices for winning control: They could compete with each other or one would need to step aside.
Malone wanted DirecTV badly. It represented a critical piece in his media puzzle because it would enable him to distribute his content across the country. But Malone seemed to place friendship above profit. He backed out of the battle and conceded the DirecTV prize to Murdoch. In December 2003, News Corp purchased DirecTV for $6.78 billion, adding 12 million subscribers to Murdoch’s empire.
Malone, however, had not given up on the prize. He knew what Murdoch cared about most and believed that by using this leverage he could convince News Corp to sell him DirecTV at a discount.
Murdoch was seventy-three years old when he bought DirecTV and was concerned with his empire’s succession. With 30 percent of News Corp’s voting shares, Murdoch effectively controlled the company, and he wanted to make sure that when he passed on his ownership to his three children, the Murdoch family would maintain its control. Malone knew that continued family control would be a higher priority for Murdoch than DirecTV . So Malone forced Murdoch to choose between the two.
Over the years, Malone had acquired 9 percent of News Corps. He was the company’s second-largest shareholder behind his friend. Murdoch might have felt threatened by such a large shareholder and acted to guard his control, but the two were allies. Murdoch felt he could rely on Malone’s support.
In 2004, however, Murdoch began getting nervous about his friend’s intentions. That year, Malone doubled his stake in News Corp to 17 percent. Murdoch adopted a poison pill to protect himself against Malone. News Corp created a provision that allowed the company to issue new shares, holding Malone’s ownership share to 18 percent. News Corp essentially made it prohibitively expense for Malone to increase his level of control. But the defense was not a permanent solution and upset other shareholders.
In 2006, News Corp and Liberty Media began discussions to avert a clash. Murdoch wanted to secure his family’s continued control. Malone wanted what he had always wanted: DirecTV . The two agreed that News Corp would retire Liberty’s 19 percent voting stake in News Corp. In exchange, Malone would receive News Corp’s 39 percent stake in DirecTV as well as $550 million in cash and three regional sports networks owned by News Corp. All in all, Malone received $11 billion in assets for his 19 percent of News Corp.92
Many News Corp investors were displeased with the deal. They felt that Malone would have paid a multi-billion-dollar premium if forced to buy News Corp’s DirecTV stake under different circumstances. But Murdoch controlled News Corp and was able to direct the company to accept the swap, despite any investor discontent. By swapping DirecTV for Malone’s shares rather than selling it outright, Murdoch increased his family’s share in the company to 40 percent.93 By playing on the discrepancies between Murdoch’s priorities and those of News Corp’s shareholders, Malone won the DirecTV prize.
Extinguishing a Siege with One Arrow
In AD 756, a city in China’s Zhenyuan district was under siege by rebels. The governor of this district was able to hold off the rebels’ attacks but unable to turn away the persistent attackers. The governor needed to extinguish the siege permanently, so he decided to implement the stratagem To catch the bandits, capture their leader.
One night, while the rebel army was sleeping, the governor led a surprise attack. His soldiers poured out of the city gates, surprised the rebel soldiers, and killed many of them. In the chaos of battle, however, the governor could not identify the rebel leader. He did not want to claim victory until the leader was found, because if he did, the rebel siege would continue.
To identify the rebel leader, he ordered his archers to use tree branches instead of arrows. The rebels believed by this action that the governor’s forces had run out of arrows. Encouraged, the rebels reorganized for a counterattack. They assembled around one particular warrior—their leader.
As the rebels prepared for a counterattack, their leader mounted his horse and moved toward the front lines. But before the new battle began, the governor ordered one of his best archers to take aim with a real arrow, not a branch. This arrow hit the rebel leader in his left eye. Immediately losing his will to fight, he ordered a retreat.
Stratagem 34:Deck the Tree with Bogus Blossoms
“Use deceptive appearances to make your troop formation look more powerful than it is. When wild geese soar high above, the grandness of their formation is greatly enhanced by the display of their outstretched wings.”
—From The Thirty-Six Stratagems
Microsoft is battling competitors across multiple fronts, competitors that are creating a network of alliances to contain their powerful adversary. In 2001, for example, about ten years after Microsoft toppled Britannica using Stratagem Three, Invite your enemy onto the roof, then remove the ladder, an unusual player entered the encyclopedia market.
Jimmy Wales and Larry Sanger had been working for Nupedia, a Web-based encyclopedia that provided free content reviewed and edited by experts. Nupedia was innovative in that it delivered its content exclusively via the Web, not CD-ROM or print, and it gave its content away for free.
But organizationally it differed little from its competitors. It maintained a network of subject experts who applied a seven-step review process. The process was about as slow, and the resulting
content as stale, as any other encyclopedia.
On January 10, 2001, however, Nupedia added a new feature: an open encyclopedia that users could edit without the burden of expert review. This had the potential to unlock an ocean of content, as almost any user could submit articles, and an encyclopedia that changed daily, since this service would require no review process.
Contributors spontaneously organized to build content. By the end of its first year, the new service, called Wikipedia, grew to approximately 20,000 articles in 18 language editions. By the end of 2002, it expanded into 26 language editions, 46 by the end of 2003, and 161 by the end of 2004. By the end of 2006, Wikipedia, now a stand-alone business that absorbed its former parent Nupedia, wielded an army of over 4,500 “active editors” (those who do the bulk of the editing) who offer over 5 million articles in 229 language editions.90 Its English-language edition offers more than 1.4 million articles compared with about 100,000 for Britannica and 68,000 for Microsoft’s Encarta.91
By efficiently coordinating millions of individuals, Wikipedia has been able to replicate and arguably exceed the power of better-funded rivals. This pattern of competition—coordinating individual elements—has exposed Microsoft to another threat: open-source software.
The advantages of open-source software parallel the advantages of Wikipedia closely. Open-source software allows open communities of programmers to access, edit, and use software for free. In return, users agree to make their work—from debugging work to entirely new utilities—available to the community for free. This arrangement cuts down development time considerably and multiplies the library of software available to developers by giving them access to a vast community of contributors.
While experts believe open-source software is unlikely to oust Microsoft from its position atop the software industry because of the company’s impressive installed base, it has been steadily gaining market share.
Ironically, Microsoft pursues the same tactic of coordinating the parts into a stronger whole, but it uses company-owned assets rather than adversaries in a coalition. As described earlier, the company coordinates its products so that they support each other. By bundling its software products and ensuring that they are compatible with each other, Microsoft creates a more valuable network of products.
Similarly, in 1998, a group of handset makers that included Nokia, Ericsson, and Motorola teamed up to create a new company, Symbian. Over the years, they had seen what Microsoft did to IBM—take control of a key lucrative component (the operating system)—and did not want their handsets to suffer the same fate. If Microsoft were to dominate the cell-phone operating system market as it does the market for computer operating systems, handsets would become commodities with little more margin than personal computer clones. Individually, none of the companies in the Symbian alliance have the cash or software competency to compete with Microsoft. But by coordinating their efforts, they have been able to capture a 75 percent market share of handset software, effectively containing Microsoft’s inroads into that market.
During the Warring States period (475–221 BC), five states joined forces against Qi. Unable to resist such uneven odds, Qi lost more than seventy cities during the course of five years, until only two cities remained. Both cities were surrounded. One was under the ommand of the capable general, Tian Dan.
Tian Dan knew that he was outnumbered and could not defeat his attackers with orthodox methods. Without a brilliant plan, he would remain trapped until his people either surrendered or died of hunger. So he analyzed his nonmilitary assets and wondered how he could coordinate them until they were powerful enough to break his enemy’s encirclement.
He identified two useful nonmilitary assets: He had people— women, children, and the elderly— who were not slated for military duty, and he possessed more than a thousand bulls.
Tian Dan made three decisions. First, he ordered the children and elderly to guard the city walls and ordered the women to enroll in the military. Second, he had the bulls outfitted for battle. He ordered them covered with silk sheets painted in colorful patterns with knives fastened to their horns and oil-soaked straw bundles tied to their tails. Third, he collected gold from the citizens. Then he asked a group of wealthy men to bring the money to his enemy’s general. They delivered the message that the city was about to fall and the general was requested not to take their wives and children. This third order put his enemy off-guard. The enemy soldiers celebrated their pending return home, and then they slept soundly.
That night, however, after his enemy’s soldiers had fallen asleep, Tian Dan executed his plan. He had the oil-soaked straw bundles that were tied to the bulls’ tails lit and released the bulls outside the city walls, where they ran wild. The enemy soldiers woke up to find themselves under attack by strange ferocious beasts. Many fled for their lives. Tian Dan then ordered his soldiers to march on the enemy forces. They could do this in greater numbers because women fought with them while the elderly citizens and children guarded the city walls.
Tian Dan’s bewildered enemy fell. His city was saved. This triumph marked the beginning of a series of victories for Qi that led to the state recovering the cities that had been lost, returning Qi to its former splendor.
Stratagem 33:Hide a Dagger Behind a Smile
“One way or another, make the enemies trust you and thereby slacken their vigilance. Meanwhile, plot secretly, making preparations for your future action to ensure its success.”
—From The Thirty-Six Stratagems
By holding its smile before drawing its dagger, a small company can defer competition as it builds the strength to compete. Timing the switch from smile to dagger can transform David into Goliath. For example, by smiling for half a decade while it gathered strength, Google veered from the inevitable tracks laid by most Web upstarts. Instead of selling out to the Internet’s behemoths, Google grew to rival them.
Google’s founders, Larry Page and Sergey Brin, met at Stanford University, where they were both computer science graduate students. Though they did not initially get along, and argued over nearly topic they discussed, they built a bond. About a year into their studies, they embarked together on a new research study. Their goal was to improve the effectiveness of online search engines.
At that time all search engines essentially looked for key words that matched their users’ query and presented the results in a list. But as the Web grew and Web crawlers—programs that scan large portions of the Web and build an index—improved, the search results lengthened to the point of uselessness. Searches for common key words, for example, required users to scroll through hundreds of entries because search engines were not good at prioritizing their results.
So Brin and Page devised a new way to rank results. They assumed that if a Web page was linked by many other Web pages, it was probably important, so they designed an algorithm that measured links as votes and counted the number of Web pages between pages so, with some mathematical manipulation, they could measure the importance of every page on the Internet.
Their method, called PageRank, proved far more effective than existing search engines. Brin and Page decided to launch a business around their creation.
Their initial idea was to sell their technology to an existing search engine company. But these companies were not interested in improving their capabilities. Common wisdom among Internet experts was that searches offered no competitive advantage and that to survive search companies needed to evolve into portals. As one CEO apparently explained to Brin and Page, “As long as we’re eighty percent as good as our competitors, that’s good enough. Our users don’t really care about searching.”84
The young entrepreneurs turned this initial cold response to their advantage. They launched a company that would take the search function away from the portals, who no longer wanted it.
In 1998 Brin and Page raised $1 million and moved out of their college dorms, where they had been running their project, into a garage. They launched a simple search engine called Google.com. That year they processed 10,000 queries per day and won recognition by USA Today, PC Magazine, and other major media publications as one of the most popular young Web sites.85
Despite a strong opening, Google remained small. Yahoo! was by far the most popular search engine, followed by a parade of other search engines, including AskJeeves and AltaVista. Google was last in popularity. To accelerate its growth, Google positioned itself as the back-end search provider to Web portals.
This position offered one major advantage. If Google could win Yahoo! as a customer, displacing Inktomi, the search engine Yahoo! was currently using, Google could instantly jump to the head of the line as the most popular search engine in the world. But to do this, Google would need to “smile.” It would show Yahoo! that it posed no threat, and that it would be a valuable and loyal supporter.
Google made several strategic decisions that assuaged competitive fears. At a time when all search engines were using a new marketing tactic, banner advertising, to boost revenues, Google refused to accept banners. It refused to post any graphic ads at all, choosing instead to exclusively display simple text ads as part of its search results. Its homepage was also starkly different from any others. It was clean, composed of little more than a search window and logo.
Experts deemed Google’s strategy flawed. Search engines had been evolving in precisely the opposite direction. AltaVista, for example, was successfully transforming its search engine into a portal. In 2000 AltaVista was the eighth most popular Web site, while Google was forty-eighth. Marc Krellenstein, chief technology officer of another leading search engine at the time, Northern Light, said, when asked about Google’s strategy, “There isn’t really good evidence, frankly, that companies focused purely on search, as Google has been, can support themselves with that model.”86 A 2000 BusinessWeek article warned that “when the whip comes down and shareholders start to demand a return on their investment, Google may have to swallow its scruple —particularly if it hopes to keep banner ads off its pages.”87 But Google endured the criticism. By sticking to its seemingly illogical strategy and keeping banner ads off its pages, Google was able to position itself as a helper rather than a threat to Yahoo! and other portals.
Yahoo! began as a search site or, more precisely, a search index. But it had evolved into a media company and was no longer seriously interested in searching. Over the three years leading up to 2000, it had signed numerous deals with media-content providers, including Hallmark, NBC, Comedy Central, and A&E Television. Its strategy was to expand its online advertising expenditures, 7 percent at the time, by focusing on three priorities: building brand equity, providing high quality content and services, and ensuring wide distribution for its media franchise. Searching was not a priority, which is why Yahoo! had begun outsourcing its search services in 1996. The Google search engine was designed to fit neatly into this new strategy.
June 26, 2000, was a pivotal day for Google. On that day Yahoo! announced it would replace it current online search provider, Inktomi, with Google. Practically overnight Google became the most popular search engine in the world.
Google’s newfound strength was insufficient to rouse competitive resistance. Even Inktomi, the company Google had ousted from Yahoo!, saw its loss with some indifference. Dick Pierce,Inktomi’s chief operating officer, argued that the loss would have “little impact with respect to profitability.”88
The search function was a commodity business. As a CNET analyst wrote in 2000, “The search market in general, meanwhile, remains a low-margin, commodity business.”89 A friendly, if apparently naïve, Google circled the world to take this commodity activity off the plates of richer rivals. It became Latin America’s premier search engine in 2001 through a partnership with Universo Online (UOL) and that same year signed an agreement with Lycos Korea to bring Google to Asian Internet users. In just two years, Google solidified its search dominance.
But behind its “smile,” Google had developed a service that would soon threaten its media partners’ core businesses. AdWords was a self-service program that allowed advertisers to place ads on Google’s search results in a matter of minutes with just a credit card. Those who had initially questioned Google’s business model had not yet understood AdWords’ potential.
Google launched a simple version of AdWords the same year it signed its landmark deal with Yahoo! At the time it was handling more than 100 million search queries per day. Over the next several years it maintained its position as an unthreatening search partner while it simultaneously evolved AdWords. As Google signed deals with more portals, it converted AdWords into a costper-click model and introduced a bidding system for advertisers.
By 2003 it had become clear that AdWords was beginning to attract advertisers away from Yahoo! and other online media companies. As Google’s share of the online advertising market grew, Yahoo! realized the threat Google posed. In 2003, a year after renewing its deal with Google, Yahoo! pulled its search activities away from its former partner. It purchased two Internet search services Inktomi for $235 million and Overture for $1.6 billion— and decided to run its search activities on its own.
But by then Google had already built a dominant position in the search function. As of 2006, Google manages over 50 percent of all Internet searches and sells advertising on each one. By being careful not to draw its dagger too early, Google convinced its future competitors to help the company build a leading search position. It displaced once larger adversaries to emerge as the dominant search and online advertising option.
The Japanese Become American
To stave off the unexpected success of Japanese cars in the United States, the big three U.S. car manufacturers appealed to consumers’ national pride. They launched a “Buy American” campaign.
Japanese manufacturers needed to devise a strategy for countering this campaign, for deflating the resistance to Japanese cars that was building among U.S. consumers. The obvious responses— increasing marketing spending, launching a countercampaign— might further agitate consumers.
So instead of attacking the “Buy American” campaign directly, Japanese car manufacturers simply became more American. They opened manufacturing plants in the United States and increased the number of American jobs supported by their car sales. When GM advised a consumer to Buy American, that consumer would consider buying a Toyota Corolla. Japanese car manufacturers pacified their adversaries’ resistance by becoming friendly. The strategy worked so successfully, Japanese car manufacturers continued it, never dropping their smile. They continued the slow shift toward becoming friendly Americans. They raised revenues and profits while they increased their employment of U.S. workers. In 2007, Toyota eclipsed GM as the largest car manufacturer in the world. Figuratively, this was the point at which Toyota drew its dagger.
An Old Friend’s Smile
In 342 BC, the states of Qin and Wei were at war. The king of Wei was worried. His army had recently lost a battle. It was weak, and its morale was low. It was in no condition to engage the 50,000 Qin soldiers marching toward one of Wei’s cities. The king wanted to avoid battle, so he assembled his advisors to study his options.
One of his ministers offered a bloodless plan. As a boy, he had known the Qin general who was now in charge of the approaching army. He believed he could appeal to this friendship and persuade the general to call off his siege. The king of Wei approved his plan and charged his minister with defending the threatened Wei city. The minister rushed off to take his position in the city waiting for the approach of the Qin army.
When the Qin general arrived with his troops, he learned that his old boyhood friend, the minister, was in charge of the city’s defenses and that he wanted a meeting to negotiate peace. The general chose his response carefully. He was not interested in peace, but he did not want to reveal this. As long as the city believed that peace was an option, their defenses would remain loose. If they felt that an attack was imminent, they would stay behind well-fortified walls, making the siege more costly. So the Qin general warmly welcomed his old friend’s proposal.
Three days later, the two friends met at a designated location. To prove his good intentions, the Wei minister brought only 300 soldiers with him. The Qin general, to display his warm intentions, invited the entire Wei party to a banquet.
At the banquet, the Qin general and the Wei minister drank and ate together as one would expect of boyhood friends. But before the banquet ended, Qin soldiers kidnapped the Wei minister and his soldiers. They stole their captives’ uniforms and marched toward the city disguised as Wei soldiers. When they arrived, the city’s guards opened the gates, believing them to be the Wei minister and his party returning from their negotiations. The Qin soldiers rushed in and took control of the unsuspecting city.
By appearing pleasant, the Qin general was able to keep his adversary off-guard. He moved into the opening that this tactic created to defeat his adversary quickly, efficiently, and nearly bloodlessly.
Stratagem 32:Create Something out of Nothing
“Design a counterfeit front to put the enemy off guard. When the trick works, the front is changed into something real so that the enemy will be thrown into a state of double confusion. In short, deceptive appearances often conceal forthcoming danger.”
—From The Thirty-Six Stratagems
Reliance Industries of India was a common textile dealer—one of a thousand similar small ventures—that transformed itself into the country’s largest private-sector company. It did so by “creating something out of nothing” at two critical turning points in its history.
The company’s founder, Dhirajlal Hirachand Ambani, was born to a lower-middle-class family in a poor town in rural India. His father was a schoolteacher, but because his family could not afford to send him to university, Ambani was forced to choose a different career. At the age of sixteen, he took a job pumping gas. He applied himself to the gas retailing business for ten years, working his way up to a position as marketing manager.
But Ambani had greater aspirations; he wanted to start his own business. He rented an office (more accurately, a desk) for two hours a day and began trading anything he could get a margin on. His search for profit soon led him to textiles. Ambani jumped into the fray, battling hundreds of other small textiles traders seeking to match producers with buyers.
Ambani could have remained one of the countless traders, but he was able to create something his competitors could not. This set him apart and put him on a grand trajectory. As with most Indian industries, the textile business was dominated by a few large families. With the tacit cooperation of the Indian government, they dominated textile distribution and could demand low margins from traders like Ambani. Their presence, Ambani recognized, was hindering his growth.
While most traders were stuck thinking about how to better deal with these large distributors (i.e., trying to play using the pieces on the board), Ambani added a whole new piece to the game. He formed his own distribution business to sell his trading company’s raw textiles and, later, even sold fashions he designed. His innovation changed the game, freeing him from the restraints of the large family-dominated buyers and allowing his growth to accelerate.
Ambani has successfully used this tactic again and again throughout his career, each time transforming the game to overcome an obstacle and unlock new growth. A few years later, for example, Ambani expanded into textile manufacturing. Because large Indian families blocked him from the capital he needed to build factories, he did something that was considered a radical maneuver at the time: he tapped the public financial markets by selling 2.8 million shares of his new company for $1.8 million. By issuing a new IPO, he sidestepped financial and manufacturing barriers, and a new manufacturing company was born from nothing. Ambani’s manufacturing company soon dwarfed his original trading business, becoming one of India’s largest textile producers.
Then, Ambani, joined with his sons, did twice more what hadsuccessfully transformed their business before.
Reliance had become India’s largest producer of polyester and other synthetic products. Rather than share margins with the chemical companies that supplied Reliance with considerable raw materials, Ambani and his sons decided to enter the petrochemical business. In the 1990s, they opened a series of plants to produce the key raw materials they needed. Soon, the size of their petrochemical business rivaled Reliance’s core textile business.
In the early 2000s, they realized they could leverage the expertise they had gained from producing chemicals to expand even further. They entered the petroleum business and produced some of the raw materials their petrochemical businesses depended on.
Petroleum refinement had always been a state-run activity; but in the late 1990s, it became clear that the state’s petroleum operations were in trouble. Their reserves were running low, and they were not making the necessary investment in prospecting for new sources of oil. Reliance took advantage of this situation and began positioning itself to create a new oil company.
Reliance Refineries Private Ltd. came into being and built a gas distribution business, assembling a network of 1,000 gas stations. Ironically, the company was returning to its roots. Ambani had started his career in the gas distribution business years earlier as a gas pump attendant. When the Indian government was finally forced to liberalize the oil industry and allow private companies to produce and import oil, Reliance was well placed to take over. It won a large share of the government’s bids to explore new fields, many of which proved unexpectedly large. One, for example, was the largest natural gas field discovered in India in decades.
By creating something out of nothing four times (a textile distributor, a textile manufacturer, a petrochemical producer, and an oil company), Reliance outmaneuvered growth barriers that blocked its peers and transformed itself into India’s largest private-sector company. The company now generates annual revenues of $20 billion, 70 percent of which comes from its oil business, amounting to more than 3 percent of India’s total gross domestic product.
In 1937, Mao Tse-tung put down on paper his principles of guerrilla warfare in an influential book titled On Guerrilla Warfare. The principles outlined in his book proved powerful. By following them, his movement systematically captured land and power from the Chinese Nationalist government led by Chiang Kai-shek. Over the course of twelve years, the Communists routed the government and took control of the country.
Mao Tse-tung’s guerrilla tactics were successful in part because they added new players to the game while his more orthodox and structured opponent maneuvered players already in the game.
When Mao Tse-tung’s rebels set their targets on a new town, before taking up arms they launched a recruitment effort. Rebel teams walked the countryside to recruit, convert, and train local residents. These residents, in turn, recruited other residents, until eventually the rebels could count on an organized group of supporters.
Later, when the rebel forces launched their actual attack, they did so with a key advantage: a base of support to provide information and supplies. The town’s leadership found itself battling an enemy it never expected. Its own citizens undermined the city’s defense. In effect, Mao Tse-tung’s rebels added a new opponent to the game before they engaged in battle.
Mao Tse-tung flustered his opponents, appearing in unexpected places. Using this principle, he was able to circumvent enemy lines by creating rebels behind them while attacking them. He repeated this pattern—recruit, build support, attack from inside and out— consistently and methodically until he routed the Nationalist government and seized control of the nation.
Stratagem 31:Fool the Emperor and Cross the Sea
“The perception of perfect preparation leads to relaxed vigilance. Familiar sights lead to slackened suspicion. Therefore, secret machinations are better concealed in the open than in the dark, and extreme public exposure often contains extreme secrecy.”
—From The Thirty-Six Stratagems
Industries tend to focus on a common set of variables to monitor competition. The television industry focuses on ratings; the pharmaceutical industry on new patents; and investors on transactions. If you are particularly careful not to disturb these variables, you can hide your actions in them. This is moving under the cover of stillness.
As an example, consider Krupp AG’s 1991 acquisition of Hoesch AG in Germany. Throughout the 1980s, Krupp courted Hoesch with proposals of friendly mergers, all of which were rejected. Krupp nevertheless believed that a merger would be beneficial, perhaps even necessary, so it chose to pursue a more aggressive tactic. It decided to attempt to take over Hoesch by buying a controlling interest in the company.
Krupp knew, however, that Hoesch could easily mount an effective defense if it became aware of the plan. Krupp also knew that industry players would look for evidence of such takeover intentions in financial transactions, such as unusually concentrated purchases of Hoesch’s stock. Therefore, the company had to find a way to hide its stock purchases and fend off a defensive response by Hoesch.
Both Krupp and Hoesch are German firms and, as such, practiced the “house bank” tradition, whereby a company maintains close ties with its primary bank. Typically, a German company’s house bank is a significant shareholder in the company, sits on the company board, and is involved in upper-level management. In order to hide its actions, Krupp would have to deviate from this tradition. It did not inform its house bank or any of its major banks of the actions it was about take.
Over the course of six months, Krupp slowly and anonymously purchased Hoesch shares through a Swiss bank. Because the stock purchases appeared to be normal, everyday transactions, Krupp was able to collect 24.9 percent of Hoesch without triggering suspicion. By the time Krupp announced its holdings in October 1991, it was too late for Hoesch to defend itself effectively or for competitors to provoke a bidding war. Krupp successfully gained control of Hoesch by hiding its unusual actions behind a veil of normalcy.
The Walt Disney Company employed the same tactic when it purchased land for Disney World in the 1960s. Had landowners discovered that Disney was purchasing 30,000 acres of land in Florida, land prices would have risen quickly. By assembling the land from pieces purchased anonymously, Disney hid its intentions and avoided paying premiums.
Lulling an Opponent with Repetition
In the late 500s, the founder of the Sui dynasty defeated the northern kingdoms and decided to expand his successful military campaign south of the Yangtze River. He assigned a general named He Nuobi to lead his first southern effort: a siege of the Chen kingdom just across the Yangtze.
He Nuobi assembled an army and set up camp on the river’s edge just opposite Chen’s northern border. The Chen king ordered his troops to set up positions on the other shore in preparation for the attack. Both armies were poised for battle.
Soon, He Nuobi ordered his army to prepare for battle. At the sounds of the activity, the Chen army took their positions and prepared for an attack. The Sui army marched, drums beat, and dust rose into the air, but no attack came.
The Sui army was conducting maneuvers. These continued for several days. Eventually the Chen army grew weary of maintaining their vigilance. They grew accustomed to the sounds of war and stopped associating them with an attack.
He Nuobi had purchased boats and hidden them for just this moment. One evening, once he was sure he could move his troops without triggering a reaction from the Chen army, he quietly crossed the river. He and his soldiers reached shore at dawn and surprised the Chen forces. They easily defeated the Chen and established a foothold south of the Yangtze.
Stratagem 30:Openly Repair the Walkway;
Secretly March to Chen Cang
“To pin down the enemy, expose part of your action deliberately, so that you can make a surprise attack somewhere else.”
—From The Thirty-Six Stratagems
Marc Benioff, chair and CEO of Salesforce.com, showed from childhood a tendency toward the unorthodox path. In his teenage years in San Francisco, while his friends occupied their free time with sport, Benioff started a business producing and selling programs and games for the Commodore 64 computer. Long before his college peers at the University of Southern California had chosen the subjects they wished to major in, Benioff says, he had already decided he wanted to leave his mark on the computer industry. After graduating from university in 1986, he chose Oracle Corporation as the platform from which he could innovate.
Though Oracle was still considered a rebel by its peers, the company had grown into the world’s second-largest software company. Benioff soon felt constrained. He spent his early career working on small PC and Internet-based businesses, none of which came to fruition. However, in 1996, a decade after joining Oracle, Benioff had an epiphany. While sitting at his desk surfing through Amazon. com, he found himself wondering why customers weren’t able to access business software, such as that produced by Oracle, in the same way that customers of Amazon.com could access the shopping site via a Web browser. In the 1990s, it was quite common for software to be installed on company servers and computer desktops, yet Amazon.com users could access powerful technology without having to install anything. Why couldn’t someone do the same thing for larger programs?
For the next three years Benioff persisted at Oracle, eventually becoming a senior vice president reporting directly to the company’s chair, Larry Ellison. Despite his importance at Oracle during that time, Benioff’s idea—that software could be delivered through a browser—was not embraced.
When a company restrains good ideas, the ideas usually win out in the end. In 1993, for example, an Oracle employee named Tom Siebel conceived the concept that came to be known as customer relationship management (CRM). He had recognized the potential of software to help companies automate and integrate their customer-facing processes. With one CRM solution, a company could efficiently find, win, and retain customers across diverse channels such as phone, fax, e-mail, and face-to-face interaction. By linking software used by the sales force with software used by the call center and the company’s Internet engine, which tracks customer log-ins, for example, a company could get a full picture of one customer, regardless of when and how that customer interacted with the company. It is because of CRM software that the customer service representative helping on the phone knows that you requested technical help online last week and so may be following up on the same problem.
Rather than pursue his CRM idea through Oracle, Siebel left the company and cofounded his own, Siebel Systems, with Patricia House in 1993. Together they created the CRM market, which grew to $10–$12 billion by 2005.
Benioff decided to follow Siebel’s lead. Although he was not yet sure how he would capitalize on his vision, Benioff was nonetheless committed to it, and he left Oracle in 1999, embarking on a sabbatical to contemplate his options and form a plan. The year he returned he launched Salesforce.com, a service he created to help companies manage their sales forces more effectively, and that would, according to Benioff, put an “end to software” for good. Ironically, his decision to focus on sales force automation positioned him as a direct challenger to his fellow Oracle rebel, Siebel.
Benioff’s approach to business was different from that of his competitors. For a start, he set up shop above a trendy restaurant in San Francisco, he often wears a Hawaiian shirt to work, and one of the company’s most famous employees is its “Chief Love Officer,” Benioff’s golden retriever.
However, beneath these superficial differences lies a larger and more fundamental one. Microsoft, Oracle, SAP, Siebel, and other leading software companies all follow an orthodox path to the user, packaging software and loading customer databases on company-owned computers. Benioff did not fixate on this orthodox approach. As is often the case with highly competitive entrepreneurs, he recognized his competition was stuck, preoccupied with the expected, orthodox path. He used this insight to take his competition off-guard. He chose the unorthodox approach, crossing over to the customer in an entirely different way by putting the software and databases on Salesforce.com servers and allowing customers to access information through a Web browser.
As a result, Salesforce.com can adopt an entirely different fee model. For while Benioff’s larger competitors sell multimillion-dollar software packages that take months to install, users of Salesforce.com need install nothing. Similarly, while Siebel and its peers charge companies large licensing fees, Salesforce.com charges a simple fee per user (currently about $65). This means that companies can decrease or increase their sales force automation cost in response to changes to their employee base. This is an attractive proposition when you consider that companies that are tied to a traditional software model must continue to pay heavy licensing fees to software companies, even if their business is suffering and they are being forced to lay off staff. With Salesforce.com those companies can simply pay for fewer users, providing instant cost savings.
This fee model also allows Salesforce.com to derive profits from those customers its competitors ignore. For while leading software companies focus their efforts on the “enterprise market” (generally companies with more that $1 billion in sales), Salesforce.com’s flexible pricing model of $65 per user makes it an ideal package for smaller companies. Salesforce.com is able to serve such customers profitably because its servers and software are already paid for (and thus constitute sunk costs), so adding a new user costs close to nothing.
Salesforce.com’s competitors have been slow to respond, perhaps because by copying Salesforce.com’s Web-based model, Siebel and other large players would risk damaging the lucrative core of their business: selling and installing large software solutions. Even those companies that have developed lower-cost Web-based solutions have struggled to manage the awkward task of promoting such offerings while reassuring existing customers, who pay large licensing fees, that the Web-based offering is inferior to their chosen software.
By finding an unorthodox path to the customer, Salesforce.com has revolutionized the software business. Siebel, Salesforce.com’s most direct competitor, hit financial difficulties and agreed to be sold to Oracle in 2005. Meanwhile Salesforce.com went public in 2003 and then grew 600 percent in the following three years, from $50 million in 2003 to $310 million in annual revenue in 2006. Its net income grew from a loss of $10 million to a gain of $30 million over the same period. While the scale of its competitor’s figures may dwarf Salesforce.com’s, the company is currently growing much faster than any major software company in its market. In the words of Marc Benioff, founder and CEO of Salesforce.com, “We will destroy Oracle and SAP because they won’t be able to respond to the innovation we are about to unleash.”81
The Circuitous March Eastward
In 207 BC, the Qin dynasty was in rebellion. Two rival rebel leaders struggled for control of Guanzhong, a strategically important kingdom of the Qin dynasty. One rebel leader, Liu Bang, had originally conquered the kingdom. But another stronger rebel leader, Xiang Yu, wanted the territory as well. Because Xiang Yu’s forces outnumbered Liu Bang’s, Liu Bang was forced to concede the kingdom.
Despite his capitulation, Xiang Yu remained wary of Liu Bang’s ambitions. So he devised a plan to keep Liu Bang as far away from Guanzhong as possible. He divided the kingdom into eighteen parts and appointed Liu Bang as the leader of a remote area at the west end of the kingdom. To further insulate himself against Liu Bang’s potential threat, he divided the area between the capital and Liu Bang’s fiefdom into three parts and appointed three generals as leaders of each part. One of the fiefdoms was called Cheng Cang.
Liu Bang was already upset at having to give up the kingdom he initially conquered. He was now even angrier for being banished to a far corner of the region. As he and his soldiers marched out of Guangzhong’s capital, one of his advisors suggested that they destroy the wooden road that connected their new home in the west with the capital. This would put Xiang Yu at rest by assuring him that Liu Bang had no intention of returning eastward to seek revenge. Liu Bang agreed, and so his soldiers destroyed roads and bridges as they traveled.
Once he established his new base, Liu Bang ordered his general to rebuild the army. When the army was so strong that Liu Bang felt it could defeat Xiang Yu’s, he summoned his general. They discussed how best to march eastward and retake the kingdom. Two barriers stood in their way. First, three generals ruled the territory surrounding their new fiefdom that lay between them and the capital. Second, the wooden road that led to Xiang Yu was in ruins. However, Liu Bang and his general were wise men. They crafted a clever strategy to overcome, even draw strength from, these barriers.
Liu Bang ordered a contingent of men to set about rebuilding the wooden walkway. This impacted Liu Bang’s adversaries in two ways. First, it put them off-guard. Liu Bang’s work force was so small that it would take years for them to complete job—or so his adversaries thought. Second, his plan focused his enemies on the “obvious” path. Both Xiang Yu and the general of neighboring Cheng Cang saw that if Liu Bang ever did rebuild the walkway, they could easily block his attack by concentrating their forces at the mouth of the narrow passage.
But Liu Bang had no intention of using his walkway. His construction project was merely a diversion. He planned to attack Xiang Yu by a different, unorthodox route.
While his opposition watched the walkway, Liu Bang ordered his troops to attack Cheng Cang, his neighboring state. He surprised Cheng Cang’s general and took the fiefdom. This move caught Liu Bang’s adversaries off-guard and broadened Liu Bang’s base of power. It laid the foundation for a campaign in which Liu Bang sequentially expanded his growing power base, defeating the states standing between him and Guangzhong’s capital, until he reached Xiang Yu. Liu Bang ultimately won back control of Guangzhong, took command of the rebel movement, unified China, and became the founding emperor of the Han Empire.