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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.

 

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Stratagem 18

Stratagem 18:Feign Madness but Keep Your Balance

 

 

“At times, it is better to pretend to be foolish and do nothing than to brag about yourself and act recklessly. Be composed and plot secretly, like thunder clouds hiding themselves during winter only to bolt out when the time is right.”

—From The Thirty-Six Stratagems

Getting into the soft drink business seems a crazy idea. A swarm of small competitors battle each other in the shadow of two entrenched giants for a market that is stagnating. Any reasonable
industry analyst would steer you away from launching a new soda business. But Peter van Stolk was never educated in business and did not know how to analyze an industry. Nor is he a reasonable man.

Ironically, these two traits—making uneducated decisions and acting without reason—actually provided him with an effective competitive shield. By appearing “crazy,” he convinced his competitors to ignore him while he established his power base.

Van Stolk made a seemingly illogical decision. Previously, he had founded and grown a $6 million corporation in Western Canada that distributed beverages, including Just Pik’t Juices, Arizona
Iced Tea, and Thomas Kemper sodas. In 2000, he suddenly decided to sell this successful distribution business and form a company that would produce and market its own brand of soda.43 By doing so, he was trading a stable enterprise for the quixotic challenge of taking on Coca-Cola and PepsiCo.

Van Stolk’s new soda company immediately faced resistance. Distributors showed little interest in carrying his products as many were under pressure from large beverage companies to shun small
manufacturers. Even the few distributors who did decide to carry van Stolk’s soda had little reason to be proactive in selling the products.

To circumvent this resistance, van Stolk conducted a series of seemingly “crazy” strategic decisions that disengaged his company from the competition. Instead of fighting for shelf space, for example,
van Stolk created his own “shelves,” coolers emblazoned with his company’s brand. Instead of fighting for traditional retailers, he targeted locations that did not normally sell sodas: surfing, skating,and snowboarding shops; tattoo and piercing parlors; unique clothing retailers; and music stores.

To complement these unorthodox distribution choices, Jones Soda made equally “crazy” product decisions. The company dared to produce flavors that few competitors, and surely not conservative
Coca-Cola, would dare copy. It started to offer sodas called Blue Bubble Gum, Green Apple, Bada Bing! (cherry and loganberry juices), and D’Peach Mode. For Halloween, it rolls out its Candy Corn–flavored soda, and over Thanksgiving it offers Turkey and Gravy–flavored soda!

Jones Soda wraps these unorthodox drinks in equally unusual packaging. Fans began sending Jones Soda photographs of their babies and pets, asking that they consider using the images for
labels. This gave the company another “crazy” idea. It would print consumer-submitted photographs on all of its soda labels. This started a trend, and today customers vie to get their photos on the label. For example, someone can submit a picture of her cat on jonessoda.com, and it will be included in a consumer-judged photo contest. If selected, she may find her cat’s image on Jones Soda labels at her local store and around the country.

If you want to avoid the contest and ensure your picture makes it onto a bottle, you can even order customized soda on myjones.com. If you want a case of Turkey and Gravy soda with your family
photo on it to serve over Thanksgiving, you can get it for $50. The company protected this “customization” service and now holds the patent on customizing branded merchandising over a computer network. This process has created an intense sense of brand loyalty. As van Stolk explains, “People get fired up about Jones because it’s theirs. It’s not my soda. When you buy a bottle of Jones Soda there is a person’s name on the bottle who took the photo.”44

Van Stolk empowers his “crazy” distribution and product decisions with equally unusual marketing ones. On one April Fool’s Day, for example, Jones Soda issued a false press release announcing
they were being acquired by John Deere, the tractor company. The release claimed John Deere wanted a weed-flavored soda. This antic stirred up Jones Soda drinkers and drew a lot of attention. Some were amused, others confused, but most at least heard about it.

Van Stolk’s latest idea is create a Board of Directors composed exclusively of children. His chair would be a teenager. While van Stolk admits some regard the idea as “crazy,” he thinks allowing
seventy-year-old chairpersons to make marketing decisions, as most large companies do, is much  crazier.

Jones Soda’s unorthodox strategies indeed attract consumers, but more important, they help deflect the competition. Faced with Jones Soda’s unusual tactics, most competitors discount the company as a threat too odd and indirect to warrant a response. Yet, countless companies have grown strong under the protective barrier of a “crazy” reputation. Think how Richard Branson and Rupert Murdoch continually build competitive companies under the guise of madness.

The Jones Soda story is short and the company’s longevity yet to be proven, but its growth is impressive. Now a publicly traded company, it is growing at 30 percent per year while its stock price has soared 250 percent over the past two years.45

If the company continues to use its “crazy” reputation to deflect any serious competitive response, it should continue to grow. As van Stolk points out, “There’s so much room to grow—Coke and Pepsi are so big—we’ve got a long way to go before anyone notices.”46

Virgin’s Crazy Telephone Call to Boeing


In 1984, when the Virgin Group announced plans to enter the airline business, most people wrote off the idea. Many airlines had tried to compete with British Airways, but none had had the financing to persevere against the powerful national airline.

Most companies would fight such pessimism with arguments grounded in rational analysis and strategic logic. However, Richard Branson, the head of Virgin, appeared to do exactly the opposite.
He cultivated a seemingly amateurish story about how he came up with his idea to compete in the airline business: An acquaintance happened to give him a proposal for a new airline. Branson called People’s Express (British Airway’s competition) over the weekend and was encouraged to find they never answered the phone. This pointed to an opportunity. On Monday, he cold-called Boeing to inquire about leasing a used plane. With that he “had done all the market research [he] felt [he] needed and had made up [his] mind.”47

Virgin further bolstered an offbeat image with a series of outlandish publicity events. For example, for Virgin Atlantic’s maiden transatlantic flight, Branson dressed up as a pirate and filled the plane with champagne and music stars.

These tactics benefited Virgin in more ways than one. They helped build awareness and endearment among the flying public. But the tactics also helped keep British Airways off-guard. It
was unclear, for example, how seriously the national airline should take Virgin. Would Virgin’s “crazy” image, which contrasted starkly with British Airway’s buttoned-up reputation, make Virgin
more or less threatening than other start-ups? British Airways ultimately took Virgin’s threat seriously and fought back, using all the strength it had. It is difficult to know for sure, but many believe that Virgin’s unorthodox approach created a gap or softening in British Airway’s response, within which Virgin built momentum. As the Economist stated in an article outlining the folly of Virgin’s entry into the rail business, “To be fair, back in 1984 Mr Branson’s entry into the airline business also seemed both a crazy gamble and a threat to his brand.”48

Madness Creates Opportunity


In AD 249, General Cao Shuang, who had invested ten years securing near-complete control over his state, lost his power in just four days when he turned his back on a seemingly weak adversary.

Cao Shuang and his adversary, Sima Yi, were officials of the Wei Empire. When the emperor died and enthroned his young son to replace him, both Cao Shuang and Sima Yi were charged with looking after the young prince until he reached sufficient age to rule.

Although they initially enjoyed equal power, Cao Shuang ultimately took power from Sima Yi by demanding complete control over the military. Marginalized, Sima Yi feared that Cao Shuang
would soon kill him. So he acted crazy. When one of Cao Shuang’s henchmen came to visit Sima Yi, he acted sick and senile. He spilled soup on his collar to appear weak. He pretended to misunderstand their conversation, to appear senile.

Cao Shuang concluded that Sima Yi posed no threat. He let Sima Yi live and eventually slip from his mind. No longer under heavy scrutiny, Sima Yi waited patiently for an opening. His opportunity came when Cao Shuang left the capital with the young emperor to visit the imperial tombs. Sima Yi quickly gathered his sons and followers and staged a coup. Four days later, Sima Yi took control of Wei and had Cao Shuang executed.

By feigning madness, you can bide your time in relative anonymity and wait for the right moment to act.

“Make use of folly. Even the wisest person sometimes puts this piece into play, and there are occasions when the greatest knowledge lies in appearing to have none.”

—Baltasar Gracian, The Art of Worldly Wisdom49

Seizing the Opportunity to Take an “Ally”


In 770 BC, the state of Song was under siege by an alliance of opposing states. The state of Chen led this alliance. In defense, Song implemented the stratagem of Besiege Wei to rescue Zhao. It attacked Chen’s capital, forcing Chen’s aggressors to call off their siege and leave to defend their homes. Through cunning application of this stratagem, Song freed itself from the threat.

On its return home, the Song army passed through a small state called Tai. Tai had refused to support Song’s defense, so Song decided to take the Tai capital in revenge. The Song army surrounded Tai’s stronghold and prepared for what promised to be almost certain victory over the weaker Tai state. As it turned out, however, neither state would be victorious.

Tai, facing certain defeat, sent an appeal to Chen for help. When a few days later the Chen army was seen approaching, the Song army called off its siege and hurried home. The Tai army rejoiced. The presence of Chen’s powerful army had saved them. The Tai king opened his city gates to welcome the Chen duke and his army.

The Chen duke faced an unexpected opportunity. He stood with his army in front of the open city gates of a strategically important state (Tai was in proximity to Song). Knowing that an attack on Tai would provoke little or no resistance, he marched his soldiers into the welcoming walls of the Tai capital, kidnapped the Tai king, and took over the city.

Just as the traveler in the Chinese folktale took advantage of an inattentive shepherd, Sony took advantage of an inactive RCA,and Apple took advantage of a conflicted Sony, Chen took advantage of an adversary that it knew could not defend itself. This is the essence of the stratagem. When your adversary is unlikely to react, seize the moment.

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Stratagem 17

Stratagem 17:Seize the Opportunity to Lead the Sheep Away.

 

 

“Exploit any minor lapses on the enemy side, and seize every advantage to your side. Any negligence of the enemy must be turned into a benefit for you.”

—From The Thirty-Six Stratagems

After Steve Jobs took back control of Apple, he set his sights on a new adversary: Sony. For two decades, Sony had dominated the world of portable music. With its Walkman line, Sony remained
the leading producer of traditional portable music devices (i.e., cassette, CD, and radio players) and digital MP3 players. But in the early 2000s, Sony’s long-held advantage eroded when
Apple’s iPod became the world’s leader just three years after its introduction.

Ironically, Sony fell victim to the same stratagem to which it owed its initial success. Fifty years prior, Sony had overtaken both RCA and GE in the radio market by seizing an opportunity that
the incumbents had refused to embrace. In 2005, Sony found itself similarly stuck as Apple took over the digital market.

At first, the MP3 player market was relatively small. Even as recently as 2002, only 5 million portable devices had been sold since their introduction in 1998, according to the Consumer Electronics Association.37 Two barriers were restraining growth of the digital music player market: the lack of available of music for download and the unmanageable size of players.

Music was difficult to find at that time because major record labels, fearing piracy, resisted making their music available in digital form. Instead, they invested heavily in a two-pronged attack on the growth of digital music. On one front, they launched legal campaigns against those encouraging its spread. They sued file-sharing sites and lobbied for stricter regulations. Simultaneously, they began preparing for the rising world of digital music by developing software and systems, Digital Rights Management technology, that would protect their music ownership. Until this technology could be put in place, the music labels aimed to keep their music on CDs. They avoided making any of their property available for download.

The second limitation on the business was the size of the early MP3 players. Consumers essentially had two choices. Devices based on flash memory were physically small but came with limited memory; they could hold no more than ten songs. The other option was to buy a hard-drive based player, which could hold considerably more music but was heavy and bulky.

Facing these severe limitations, MP3 players failed to gain momentum.

The bonds began loosening in 2000, however, when illegal music-sharing sites were reaching unprecedented audiences. Napster, for example, claimed to reach 50 million users. The success
of such sites forced record labels to begin rethinking their legal strategy. At industry strategy meetings, the conversation began to shift from stopping digital music distribution to seeking ways to profit from it. The industry realized that the future was in adapting to and serving the millions of consumers looking for a legitimate digital music option.

Additionally, hard-drive technology was improving. Hard drives were getting smaller and less expensive. In early 2000, Toshiba developed a hard drive capable of storing 1,000 songs that weighed less than 6 ounces.

These two developments, the explosion of digital music sharing and the shrinking of hard drives, created an opportunity for someone to finally introduce an MP3 player that would prove competitive with existing portable music devices, one with access to music (from record labels) and the ability to store many songs in a small package. Sony should have seized this emerging opportunity. In addition to owning the leading portable music brand (the Walkman), Sony had spent years developing its digital-rights technology and even owned a record label (Universal Music).

Despite its strength, Sony chose to think instead of act. The company studied the idea of putting a hard drive in an MP3 player but, as Sony Senior Vice President Keiji Kimura explained, “We
have many things to resolve.”38 These issues had little to do with the market or technology. Sony wrestled with internal barriers. The company’s consumer electronics group wanted to free users
to transfer music while its entertainment businesses wanted the opposite.

While Sony was considering how to untangle its conflicting agendas, Apple acted. In October 2001, the computer company launched the first iPod, a 6-ounce 5-GB device that could only be used on a Mac. In July 2002, Apple launched a version compatible with Windows PCs and subsequent versions offered ever-increasing capabilities. Hard drives grew to 30 GB then 60 GB, capable of storing 15,000 songs and displaying color images. Apple followed with the Micro, the Nano, and even the Video iPod.

As Sony watched and struggled to unlock its conflicting agendas, Apple took over. By 2005, Apple was earning nearly $5 billion from its iPods, while its stock had grown from $7 to $80 per
share in three years. The iPod captured 75 percent of the portable digital music market share39 and its iTunes music store captured 82 percent of its market.40

Sony Moves In as Others Pause


Ironically, Sony built its leadership in consumer electronics with precisely the move it fell to fifty years later.

In just seven years, Sony transformed itself from being a manufacturer of rice cookers for the Japanese market to the world leader in the production of consumer radios. It achieved this by seizing on a unique moment when its competitors could not or would not take advantage of a particular opportunity.

When Bell Laboratories invented the transistor in 1947, the two leading electrical and electronics leaders, RCA and GE, agreed with most industry observers that the transistor would one day replace the vacuum tube. But neither RCA nor GE wanted to adopt transistors quickly. Both companies were heavily invested in products designed for vacuum tubes and felt little competitive
pressure. So they hesitated. They made plans to study and further develop transistor technology with the goal of replacing vacuum tubes sometime in the next twenty years.

Akio Morita, the CEO of Sony, recognized RCA’s and GE’s mistake and took advantage of the opening they provided. In the early 1950s, he bought a license to use the transistor from Bell
Labs for just $25,000. He then challenged his engineers to design a transistor radio faster than the industry believed it could be done. In just two years, far fewer than the twenty RCA and GE had
anticipated, Sony introduced a portable transistor radio. For onethird of the cost of a traditional radio, Sony offered consumers a product that was a fraction of a traditional radio’s size and weight. Sony went on to dominate the world’s consumer radio markets.

This tactic is what Peter Drucker calls “entrepreneurial judo.” Small attackers can topple large incumbents because the incumbents are too heavily invested in the old way of doing things to embrace a new way.

Sony is not alone in benefiting from this tactic. Home Depot, for example, stole market share from unsuspecting home contractors by convincing consumers to “do it yourself.” Contractors could not respond in part because they refused to see Home Depot as a competitor. Coca-Cola’s now-famous strategy of attacking water consumers targeted competitors who never had cola on their competitive radar screens. Water companies never saw Coca-Cola as a threat.

Microsoft’s seemingly well-calculated strategies tend to depend heavily on this stratagem, as Microsoft’s chair Bill Gates admits:

“Most of our success comes when we end up with a competitor who doesn’t do things correctly—that’s lucky. You’re not supposed to work on a strategy that depends on other people’s mistakes, but they’ve certainly made a lot.”41

Redefining Clean


Method Home seems poised to corner its competition. Founded in 2001 by Eric Ryan and Adam Lowry, friends from Stanford University, Method is taking a new perspective on cleaning products.
The company wants consumers to pull their detergent from under their sinks and put it on display. The two friends—one a chemist, the other an advertiser—developed a line of eco-friendly products contained in high-design containers.

When they convinced Target Stores to carry their teardrop hand-soap, their company’s revenues began ramping exponentially. By 2006 they tracked over 3,000 percent revenue growth and secured the seventh spot on the Inc. 500 list of the fastest-growing private companies.42

Why have consumer product incumbents Procter & Gamble or Colgate-Palmolive not responded? In part, with revenue of around $20 million in 2006, Method was perhaps too small to draw notice. But viewing Method’s attack objectively reveals Seize the opportunity to lead the sheep away to be at work.

Traditional consumer product companies are organized by brand. The Mr. Clean brand manager, for example, holds full responsibility for the brand and operates it as an independent company. This brand-centric structure has worked well for over a century.

Method’s approach is different. The company is building a lifestyle brand that stretches across multiple products. The Method brand is independent of function. It stands for design and being eco-friendly. The Mr. Clean brand—indeed, each major cleaning supply brand—stands for what it does.

To copy Method’s approach, Procter & Gamble, owner of the Mr. Clean brand, would have to give someone oversight over Mr. Clean, Dawn (dishwashing liquid), and Fabreez (fresheners). The
cost of such a radical reorganization will outweigh the risk Method poses for many years. Until Method reaches a scale sufficient to challenge Procter & Gamble’s core business, P&G will be better
off letting Method grow. Not unlike RCA let Sony or Sony let Apple’s iPod grow.

Seizing the Opportunity to Take an “Ally”


In 770 BC, the state of Song was under siege by an alliance of opposing states. The state of Chen led this alliance. In defense, Song implemented the stratagem of Besiege Wei to rescue Zhao. It attacked Chen’s capital, forcing Chen’s aggressors to call off their siege and leave to defend their homes. Through cunning application of this stratagem, Song freed itself from the threat.

On its return home, the Song army passed through a small state called Tai. Tai had refused to support Song’s defense, so Song decided to take the Tai capital in revenge. The Song army surrounded Tai’s stronghold and prepared for what promised to be almost certain victory over the weaker Tai state. As it turned out, however, neither state would be victorious.

Tai, facing certain defeat, sent an appeal to Chen for help. When a few days later the Chen army was seen approaching, the Song army called off its siege and hurried home. The Tai army rejoiced. The presence of Chen’s powerful army had saved them. The Tai king opened his city gates to welcome the Chen duke and his army.

The Chen duke faced an unexpected opportunity. He stood with his army in front of the open city gates of a strategically important state (Tai was in proximity to Song). Knowing that an attack on Tai would provoke little or no resistance, he marched his soldiers into the welcoming walls of the Tai capital, kidnapped the Tai king, and took over the city.

Just as the traveler in the Chinese folktale took advantage of an inattentive shepherd, Sony took advantage of an inactive RCA,and Apple took advantage of a conflicted Sony, Chen took advantage of an adversary that it knew could not defend itself. This is the essence of the stratagem. When your adversary is unlikely to react, seize the moment.

0

Stratagem 16

Stratagem 16:Sometimes Running Away Is the Best Strategy.

 

 

“To avoid combat with a powerful enemy, the whole army should retreat and wait for the right time to advance again. This is not inconsistent with normal military principles.”

—From The Thirty-Six Stratagems

As 1997 came to a close, Apple Computer announced that it would lose money again; this represented its sixth straight quarter of losses. The company’s board had ousted Steve Jobs a decade earlier, and the procession of CEOs who followed him had eroded the company’s “cool.” Once a highly desired brand, Apple was becoming like any other computer company and risked bankruptcy as a result.

Apple’s fall and subsequent rise illustrates the principle behind Sometimes running away is the best stratagem. It seems logical that new products and markets will add to growth. But by resisting this logic—by “running away” from good businesses and attractive markets—companies can often grow more quickly.

The Apple board first chose a marketing guru, John Scully, the former president of PepsiCo, to replace Jobs. Scully began to move Apple away from its marketing roots while investing in new technology research projects including the development of the Apple Newton, the world’s first hand-held personal digital assistant (PDA). New product development projects flowered under Scully, but few bore fruit.

Scully repositioned Apple more deeply in the realm of high technology and focused on pursuing the same corporate clients that Microsoft, Oracle, and Sun Microsystems fought over. For example,
he took an expensive risk in translating Apple’s operating system into a platform robust enough for corporate use. However, Apple’s strengths were inappropriate for competing with the computing giants that were targeting corporate accounts. Apple was outstanding at building aesthetic products that appealed emotionally to consumers. Corporations bought computers through layers of procedures that prevented emotional purchases from slipping through. They did not care about,
or at least were not willing to pay for, more aesthetic machines.

The CEOs who replaced Scully, Michael Spindler and then Gil Amelio, sustained Apple’s expansion into head-to-head competition. This began to have an impact on Apple’s core consumer business,
because, as Apple’s attention broadened, it began to make mistakes. It recalled a new line of laptops in 1995 after two models caught fire. It ran into a component shortage that left consumers around the world waiting for $1 billion worth of computers.

Ironically, the more products and markets Apple took on, the less it sold. Between 1995 and 1997, the company’s share of desktops halved from 8 percent to about 4 percent while its share of laptops fell from 7.6 percent to 3 percent.

After the company announced its losses of $708 million in the first three months of 1997, its board decided to look for a new chief executive (the company’s third in four years). During the search, Steve Jobs took the role of interim CEO.

Jobs had been working with the company for about six months as an “informal advisor” and so had a good grasp of the direction in which Apple needed to head. During his first months as interim
CEO, Jobs held group meetings with hundreds of managers. He asked uncomfortable questions such as, “If you had to cut half your products, what would you do?” He was looking for projects to cut and told Apple managers he would keep only projects that were both strategic and profitable. Anyone who wanted to keep funding for any unprofitable strategic project would have to lobby for it.

Jobs’s goal was to cut 70 percent of Apple’s R&D efforts. “We’ve reviewed the road map of new products and axed more that 70 percent of them, keeping the 30 percent that were gems.”35 He cancelled some of Apple’s best-known efforts including the Newton, Apple’s revolutionary PDA. Some say he did so because the idea was not his own; rather, it was cultivated by John Scully. In the
end, Jobs cut more than the 70 percent he promised, reducing the number of R&D projects from 350 to 10.

By pulling out of contests Apple could not win, Jobs could now refocus on areas in which the company could dominate. He prioritized a few exciting new products (e.g., the iPod) and began
making the Apple brand “cool” again with investments in new marketing and branding initiatives.

In January 1998, Jobs was concluding a ninety-minute speech attended by 4,000 Apple fans. He began walking off the stage, but then, as if suddenly remembering, he stopped, turned to the crowd,
and said, “I almost forgot. We’re profitable.” This was Apple’s first profit in six quarters. The trend continued. Revenue began to march steadily upward from $6 billion in 1998 to $14 billion in
2005. By “running away,” Apple unleashed growth.

Surrendering to Return


In 1403, during the Ming dynasty, the Ming emperor was considering suicide. His stronghold had been surrounded by an enemy force and was about to fall. But one of his eunuchs stopped him. The eunuch explained that he had instructions from the emperor’s grandfather to direct any emperor who faced an apparently hopeless situation to open a particular chest.

The emperor agreed. He looked in the chest his grandfather had prepared and found a monk’s robe, a razor, a diploma, and some silver. His grandfather’s message was clear. He escaped through a hidden passage to a monastery, put on the robe, and shaved his head. Disguised as monk, the emperor fled the city as it burned down.

After the siege, the people assumed the emperor had died in the fire. But he had retreated to a remote monastery in the mountains where he lived in obscurity. For the next forty years, the emperor practiced the rituals and discipline of a monk.

A rumor began that the old emperor was actually still alive. To address this rumor, the new emperor launched an official inquiry. The inquiry concluded that the rumor was true. The reigning emperor found the old emperor and invited him back into the city, where he was treated with honor. The old emperor lived out the rest of his life in comfort and died a palace guest. He owed this comfortable ending to having run away.

0

Stratagem 15

Stratagem 15:Loot a Burning House.

 

 

“When the enemy falls into severe crisis, exploit his adversity and attack by direct confrontation. This is the strong defeating the weak.”

—From The Thirty-Six Stratagems

Wade F. B. Thompson and Peter B. Orthwein knew next to nothing about the recreational vehicle (RV ) business when they bought HI-LO Trailer, a small RV manufacturer, in 1977. But their willingness to buy when others wanted to sell, combined with their complementary financial and marketing skills, proved sufficient to compete. Today their company, Thor Industries, (named for the first two letters of each partner’s name, Th and Or) is the United States’ leading producer of RV s. It commands a nearly 30 percent market share, having grown revenues by 450 percent over the past ten years to $2.6 billion.32 The courage to move in when others are rushing for the exits can generate attractive returns.

Thompson and Orthwein first got a taste of the ancient stratagem Loot a burning house in 1980 when, with just three years of industry experience, the two bid for an American RV icon, Airstream.

Throughout the 1940s and 1950s, Airstream became a symbol of American culture. Its distinctive bullet-shaped silver trailers could be seen hitched to autos throughout the United States. Known for
its design and durability, the Airstream trailer served as a way for American families to explore their country at a time when family journeys across the States became symbolic of post–World War II mores. Even today, when you imagine the classic RV , you are probably unconsciously visualizing the Airstream.

By 1980, however, Airstream was on the verge of failure. The company had been sold in 1967 to Beatrice Foods, which wanted to diversify beyond its core food businesses. While Airstream had
become an important contributor to Beatrice Foods’ profits, the 1970s oil crisis kept would-be RV travelers at home and pushed Airstream’s profits into negative territory. In 1979, Airstream reported a loss of $12 million on sales of $22 million.

In 1980, Beatrice CEO James Dutt determined that Beatrice should sell all non-core companies, as well as any company that couldn’t produce at least a 20 percent return on net assets for Beatrice.
Airstream, Dutt determined, had to go.

The market for buses and RV s at the time was poor. Few wanted to bet on Airstream’s future. But two entrepreneurs who had entered the RV business just three years prior decided to ignore consensus and bid for Airstream. The two formed a new company, Thor Industries, in August 29, 1980, to buy the Airstream business from Beatrice. They paid $22 million for a company that, at the time, was losing $12 million per year.

The investment paid off. The two implemented a set of operating and marketing initiatives that simultaneously built up Airstream’s top line while it restrained its costs. Within their first year of ownership, the entrepreneurial team increased revenue to $26 million and profit to $1 million (a $13 million turnaround in profit).

They improved Airstream’s quality, sought ways to reduce costs, and improved dealer relationships. Their efforts were rewarded with unexpected results. Within one year of purchase, the Airstream brand, which had been losing money under Beatrice Foods, delivered a profit (income before taxes) of about $1 million. Airstream has continued to grow, consistently challenging the industry’s beliefs.

Thompson and Orthwein continued their strategy of Looting a burning house throughout their careers:

  • In September 1988, Thor acquired El Dorado, a troubled Kansas-based company that produced buses. Under Thor, El Dorado more than quadrupled revenue to become the largest small bus manufacturer in the United States.
  • In 1982, Thompson and Orthwein purchased Commodore Corporation’s RV business. Again, under Thor, Commodore’s business soared.
  • In 1991, Thor purchased Dutchman, which became Thor’s largest “towable” RV company (i.e., an RV to be towed behind users’ main vehicles).

Moving in when others are exiting, and buying when common wisdom drives the competition to sell can lead you to attractive competitive advantages. Thor went public in 1984, and that same year
Forbes magazine ranked Thor sixth out of 200 best small companies in the United States. In 1987, Money magazine named Airstream travel trailers one of the ninety-nine “best-made products” in America. Over the past ten years, Thor’s revenues have grown over 450 percent, while its profit margin has nearly doubled to 10 percent.33

Yue Crouches for Fifteen Years


In the fifth century BC, the states of Yue and Wu were at war. In a decisive battle in 498, the Wu army took the king of Yue prisoner and forced him into slavery. For the next three years, he groomed horses for the king of Wu. He worked without protest. Indeed, he behaved so respectfully and obediently that he won the Wu king’s trust. Eventually the Yue king gained his freedom and returned to his home.

Although the king of Yue yearned for revenge, he waited. In the years that followed his release, he continued to act respectfully toward Wu and purposely stayed close to Wu’s king. He regularly
sent gifts of gold and money to strengthen the foundation of trust between the two nations.

During this time, the Yue king rebuilt his army. This task took several years. Once it was complete, more than five years later, he had the strength to attack Wu and exact his revenge.

But he did not. He sent gifts, maintained his friendly countenance, and waited.

Ten years after the Yue king’s release, a drought hit Wu, and the Yue king sensed his moment approaching. When the king of Wu foolishly executed his most capable advisor, the Yue king prepared to strike. And in 482, when the king of Wu led his most capable troops out of the capital to meet with rulers from surrounding states, the Yue king finally seized the moment and unleashed his revenge. He attacked and took the Wu capital.

The king of Yue sat poised for thirteen years, waiting patiently for a sign of fire. When Wu’s house started to burn, he advanced. His timing gave him a clean victory and a satisfying revenge.

So in war, the way is to avoid what is strong and to strike what is weak.

“Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing.
“Therefore, just as water retains no constant shape, so in warfare there are no constant conditions.”

—Sun Tzu, The Art of War34

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Stratagem 14

Stratagem 14:Beat the Grass to Startle the Snake.

 

 

“Any suspicion about the enemy’s circumstances must be investigated. Before any military action, be sure to ascertain the enemy’s situation; repeated reconnaissance is an effective way to discover the hidden enemy.”

—From The Thirty-Six Stratagems

Most Westerners perceive the success of high-growth companies to be built on exhaustive analysis followed by the execution of bold strategies. Yet this is rarely the case. Only 7 of the 100 most
competitive companies of the decade have explicitly adopted this approach. In accordance with Wu Wei, successful companies more often take a series of small incremental steps that preserve energy,
minimize risk, and allow them to “feel out” the market.

Microsoft regularly turns to this same pattern of trial and error when it builds a new business. It is not that Microsoft identifies opportunities before its competition; indeed, Microsoft is often
a follower. The image of Microsoft using its unprecedented cash reserves to thrust into new businesses is, for the most part, inaccurate. Microsoft follows a patient, deliberate approach that allows it to feel out the competition as it works its way into a leading position over the course of several years.

Consider Microsoft’s entry into the Internet and later the server market. When the company introduced its Web portal in the mid- 1990s, industry experts believed it had missed its opportunity to be an Internet player because Yahoo! and AOL had already built insurmountable leads. Commentators often mentioned the fact that Bill Gates did not refer to the Internet in the first version of his 1995 book The Road Ahead. The publisher rapidly produced a revised version that did, but Microsoft persisted in its Internet strategy, buoyed by strong cash reserves and minimal debt.

In comparison to Yahoo!’s and AOL’s breakneck rise to power, MSN’s decades-long effort seems like a slow plod. Its execution was plagued with mistakes—and with each mistake, onlookers cheered for the smaller, independent companies. This taught the software giant lessons about the Internet and the new economy. Therein is a key to Microsoft’s success. Most observers interpreted Microsoft’s failures as faults. But these missteps also offered lessons. With each loss, Microsoft learned about its market and its competitors. Its next attack was informed by this new knowledge. Through a sequence of minor battles, Microsoft learned. With each loss, it grew more
familiar with competitive and consumer dynamics to cut further into its competitors’ leads. After fifteen years MSN has persisted as one of the Internet’s most popular Web sites. It attracts nearly
500 million unique visitors worldwide each month29 and is the third most-popular search engine after Google and Yahoo!

Its server software business followed a similar pattern. When Microsoft first entered the segment in 1998, industry experts discounted, even poked fun at, the company’s prospects. Microsoft’s product, SQL Server, was far weaker than Oracle’s and IBM’s offerings. But Microsoft persisted. Every few years, it launched an improved version that responded to competitive and customer reactions. It slowly built a legitimate position. Today it captures the third highest share of server revenue.

H&M Plods . . . Quickly


Over the past decade, H&M has emerged as one of the fastest growing and most profitable retailers in the world. It owes its recent success to a great extent to its application of Beat the grass to startle the snake.

The company was founded in Sweden in 1947. It grew from a local success story into a European one, expanding into the UK and continental Europe. Then it set its sites on the United States. As of 2007, H&M operated more than 1,300 stores in twenty-four countries.

Its philosophy is inconsistent with that of other global retailers such as the The Gap because H&M takes small steps instead of big ones and adapts to local tastes instead of standardizing for scale.

When H&M enters a new market it tests out a merchandise mix, keeping inventory levels and costs low. The new store carefully tracks local customer buying habits, whether they buy more children’s clothes or men’s or women’s or a family mix. The company replenishes stores faster than its peers so it can adjust each store’s merchandise mix almost immediately. When a store finally gets its mix right, it maximizes growth.

This trial-and-error strategy has fueled growth and profit margins at nearly twice the industry average over the past decade. In 1995, H&M sold $1.7 billion. In 2005, it sold $11 billion.

“Float a trial balloon to see how well something is accepted and received, especially when you doubt its popularity or success.”

—Baltasar Gracian, The Art of Worldly Wisdom30

Beat an Assistant to Startle a Magistrate


Although this stratagem is much older, its modern name originates from a story during the Tang dynasty (618–907 ce). The story centers on a provincial magistrate who regularly accepted bribes.
His citizens, who were fed up with the corruption, issued a formal complaint. But rather than directly implicate the magistrate, they issued charges against one of his assistant magistrates. Perhaps the citizens feared the response that a direct attack on the magistrate might evoke. Perhaps they were not sure whether the magistrate was actually involved. Either way, their tactic had the desired effect: They startled and exposed the snake. The magistrate felt the threat and ended his corrupt practices. In a moment of anxiety, the magistrate wrote: “You merely beat the grass but by doing so startle the snake within.”