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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.

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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.”

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Stratagem 13

Stratagem 13:The Stratagem of the Beautiful Woman.

 

 

“When faced with a formidable enemy, try to subdue their leader. When dealing with an able and resourceful commander, exploit his indulgence of sensual pleasures in order to weaken his fighting spirit. When the commander becomes inept, his soldiers will be demoralized, and their combat power will be greatly weakened. This stratagem takes advantage of the enemy’s weakness for the sake of self-protection.”

—From The Thirty-Six Stratagems

To win adoption of a technology, service, or other innovation typically requires enrolling critical gatekeepers. If you can identify these players and target their unique weaknesses or needs, you can unlock their gates with ease.

Successful corporate innovators often implement this strategy through the placement of carefully designed strategic investments. In the late 1990s, for example, QUALCOMM was fighting heatedly
for the world to adopt its wireless technology, Code Division Multiple Access (CDMA). This required that AT&T Wireless and other mobile phone operators agree to build their systems using CDMA. If an operator chose CDMA, then phone makers such as Motorola would begin building CDMA handsets setting off a virtuous cycle of growth. But QUALCOMM’s advances went unnoticed because most operators around the world were leaning toward an alternative technology called Time Division Multiple Access (TDMA).

Mobile phone players in United States and other developed countries were fairly entrenched in their technology commitments. Convincing them to switch to CDMA was akin to entering a
crowded battlefield. In comparison, the battlefield in developingcountries, where a mobile phone was a relative novelty, seemed unguarded. QUALCOMM saw a way to influence developing countries to adopt CDMA.

Exponential growth of mobile phone usage in developing countries demanded large infrastructure investments. To remain competitive, phone operators would need capital to build new towers
and expand their networks. QUALCOMM channeled its highflying stock and robust cash flow to begin investing in mobile phone operators in select developing markets.

In 1997 and 1998, the company invested heavily in foreign operators. It purchased a 50 percent interest in Chilesat PCS for $42 million. The following year, it committed $110 million to Pegaso Telecommunications in Mexico and OxPhone Pty, Ltd. in Australia, along with Metrosvyaz Ltd. and Orrengrove Investments Ltd. in Russia. QUALCOMM was not interested in entering the phone-operator business. Indeed it later spun off all of its mobile phone–operator investments (see Let the plum tree whither in place of the peach). Rather, the company made these investments to build influence and push phone operators to choose CDMA over other options. By identifying and playing to a critical need, QUALCOMM altered the calculations of mobile phone operators in developing countries, giving them a compelling reason, beyond purely technical considerations, to prefer QUALCOMM’s proprietary technology. CDMA became a preferred technology platform in much of the developing world not necessarily because it was a better choice but because QUALCOMM designed an influencing strategy to stack the cards in its favor.

 

A Woman Topples an Empire


Around 200 BC, a ruthless warlord, Dong Zhou, indirectly controlled the Han Empire through a puppet emperor. He strengthened his power by adopting a powerful warrior, Lu Bu, as his son,
thereby ensuring Lu Bu’s and the army’s loyalty. With this solid power base, Dong Zhou was able to rule with a heavy hand and with little fear of attack. He developed a reputation for regularly
beheading those who betrayed, contradicted, or opposed him.

The governor of one of the empire’s provinces feared it was only a matter of time before he, too, was condemned, so he devised a plan to remove Dong Zhou from power. He applied The stratagem
of the beautiful woman.

The governor first found a stunning young woman who was willing to help him execute his plan. He then invited Lu Bu to his house for dinner and had the young woman serve Lu Bu wine. The young woman quickly intrigued Lu Bu. His curiosity grew as he drank, and eventually he asked the governor about the young woman. The governor said she was his niece and offered her to Lu Bu as his wife. Lu Bu eagerly accepted and made arrangements for a wedding. The governor’s first stone was in place.

Next, the governor invited Dong Zhou over for dinner. And again, in a similar fashion, the governor conspicuously displayed the young woman so that Dong Zhou became enamored and inquired after her. The governor told the warlord she was his maid and offered her to the warlord as his concubine. The warlord enthusiastically accepted and arranged for his people to pick her up the
next day. The governor’s second stone was in place.

Through the woman, the governor gained influence over the two most powerful people in the empire. The governor used this influence to play Dong Zhou and Lu Bu against each other. Each
thought the other was trying to steal the woman against her will. The woman lied to each to reinforce this belief, asking the warlord to protect her from the warrior and vice versa.

The rivalry between the warlord and his chief warrior heated up. Neither was willing to give in. Lu Bu eventually killed Dong Zhou and so freed the governor and the Han Empire from Dong Zhou’s oppressive rule. 

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Stratagem 12

Stratagem 12:Replace the Beams with Rotten Timbers.

 

 

“Make the allied forces change their battle formation frequently so that their main strength will be taken away. When they collapse by themselves, go and swallow them up. This is like pulling back the wheels of a chariot to control its direction.”

—From The Thirty-Six Stratagems

Selling beer in Britain is a lucrative proposition. About 80 percent of British adults regularly visit pubs, with an average of three visits per month, and they spend about £20 billion each year.

For decades, a few national British chains exerted protected dominion over pub-goers, maintaining their control by locking up pub locations. When entrepreneurs tried to expand their pub chains beyond a few locations, they would hit a growth ceiling because there were no pubs available for sale.

Like countless aspiring pub owners before him, English-born, New Zealand–raised Timothy Martin hit this ceiling in 1981. Perhaps because of his relative inexperience in pub operations—the twenty-six-year-old had only two years previously opened a small pub and was now looking to expand—Martin saw a strategic option that his predecessors did not, one that disrupted the structural hold
major British pub chains had enjoyed over pub locations for decades. His decision laid the foundation for the fastest-growing public company in Britain (and the ninth-fastest growing one in Europe).

Martin was an uninspired law student in London who sought consolation at the end of his day by visiting a pub. Because he couldn’t find a pub in his neighborhood, he regularly took a taxi to a certain one across town. This pub was unique for two reasons: It was small (a 500-square-foot former betting shop), and it offered a wide selection of regional beers at a time when most pubs served only a small set of national beers.

Martin enjoyed spending time at the pub far more than he did with his law books. When he learned the pub owner earned £500 per week, he decided to switch careers. He sold his apartment,
which had appreciated by £10,000, took out a £70,000 mortgage, and bought the tiny betting-shop-turned-pub.

Martin immersed himself in the pub business. His zeal and the pub’s unique location helped build a loyal following. Two years later he needed more room, but when he looked to purchase a new location, he ran into the national chains. He could not find a pub for sale.

Rather than struggle against the national chains, Martin went around them. Inspired by the betting-shop history of his current pub, Martin purchased a car showroom. This would be his new pub.

The strategy worked. Not only did it differentiate Martin’s pubs from others by providing unique experiences, it eliminated a competitive “beam” the national British chains relied on to pre-empt
competition.

Over the next two decades, Martin expanded by purchasing unusual locations and converting them into unique pub experiences: banks, grocery stores, theaters, auto dealerships. The uniqueness of
each location became a trademark of Wetherspoon, Martin’s new pub chain. More important, it eroded the structural underpinnings of an advantage his larger competitors had enjoyed for years.

Today, Martin’s pub company generates £850 billion in revenue. Over the past decade, it has grown 35 percent per year, faster than its industry and peers, which post between 1 percent and 10 percent
growth. Indeed, his company has grown faster than any other company in the United Kingdom.27

Jin Topples Qin


In AD 383, during the Six Dynasties Period in China, two empires of unequal power—Qin and Jin—faced off in a stalemate. The smaller empire saved itself by manipulating its adversary’s beams.

The stronger empire, Qin, was attempting to destroy a much weaker one, Jin. The Qin army was encamped just across a river that bordered Jin territory. Despite Qin’s relative strength (Jin was
smaller and undergoing internal conflict), there were two reasons the Qin general did not want to cross the river to attack the enemy. First, some clever maneuvering by Jin had given him the false
impression that the Jin army was less vulnerable than it actually was. Second, the army that crosses the river is always at a disadvantage to the one waiting on the shore. For this second reason, the Jin army also refused to cross the river—hence the stalemate.

To break the stalemate and free his empire from threat, the Jin general devised a plan to disrupt the Qin army’s axles, destroy the integrity of its formations, and force it to retreat.

His first step was to send an envoy to the Qin general with a deceptive proposition that he pull back his troops to allow the Jin army to cross the river. The two could then fight on solid ground and settle the conflict.

The Qin general conferred with his advisors and decided on the following plan: He would accept Jin’s proposal and order his troops to retreat. But once the Jin army was halfway across the river, he would reverse his orders and attack. The Jin army, caught in the river, would fall quickly.

The Jin general expected, even counted on, Qin’s deceit. He ordered a few of his men to dress as Qin soldiers and infiltrate the Qin camps to spread a rumor that their general had discovered the
Jin army was actually much stronger that he originally believed them to be and that he feared they would lose the battle if the Jin crossed the river.

The next day the Qin general ordered his troops to retreat as promised. The troops did not know that this retreat was prearranged, and they took it as a sign that the rumors were true—that
the Jin army really was much stronger and they were at risk of losing their lives. So instead of retreating in an orderly manner, panic broke out. The Qin soldiers abandoned their formations, dropped their weapons, and ran.

The Qin general lost control in the chaos. He ordered his troops to return to battle, but their formation and command-control structure had fallen apart, and the orders disappeared in the wind. His men kept running. His house crumbled because his beams and pillars had been destroyed. Jin was saved. 

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Stratagem 11

Stratagem 11:Shut the Door to Capture the Thief.

 

 

“When dealing with a small and weak enemy, surround and destroy him. If you let him retreat, you will be at a disadvantage in pursuing him.”

—From The Thirty-Six Stratagems

Your customer is a capricious friend, quick to sample your competitor’s offer. You may wonder what she says about you in private or whom she visits when she’s out of sight. For much of her life, you cannot see or influence her. But you do enjoy moments of control. If you can recognize and capitalize on these moments, you may seize a profitable advantage over your competition.

As the 1990s began, for example, Barnes & Noble embraced a new concept in book retailing that would transform its industry. Until then a bookstore was for buying books: The customer knew
what he or she needed, visited a store, asked for the book, purchased it, and walked away.

Barnes & Noble recognized it was forfeiting a moment of control by too easily letting customers to walk out of its doors. By thinking through what else a customer might want to buy while inside a store, it conceived of a web of new businesses to surround its clientele. Barnes & Noble expanded the book-shopping experience to include comfortable couches for browsing, a café offering food and drink, children’s play areas, and larger magazine and music sections. The company widened its aisles and scattered reading chairs throughout to encourage clientele to linger. If the amount a customer spends depends on the number of products available for purchase and the amount of time she or he browses in a store, Barnes & Noble multiplied both parts.

Barnes & Noble’s new “superstores,” at six times the size of traditional bookstores, redefined the experience and economics of the bookstore. In 1989 Barnes & Noble operated 23 superstores; today they run more than 700. Superstores generate 85 percent of the company’s sales.24

Like most significant innovations, the book superstore concept now seems obvious. It seems a simple enough exercise to explore what else you might sell store visitors. Yet before Barnes & Noble, no major book retailer had answered the inquiry with courage. The inquiry transformed an industry and generated millions in profit and value.

Nearly 10 percent of the decade’s most competitive companies I studied have applied this stratagem to secure advantage. The Capita Group, the United Kingdom’s leading business-process outsourcing firm, has grown its revenues 2,000 percent in ten years by systematically adding new services it thinks customers will need, from the common (back-office administration and HR outsourcing) to the complex (IT integration and facility design). Retailers Ross Stores and H&M have outgrown their peers over the past ten years in part by answering the question: What else might our customers need once they are in our stores?

Nintendo Shuts the Door to Secure Success


Consider how Nintendo capitalized on its strength early in the video game wars. As a pioneer, and early leader, Nintendo commanded the largest user base of any game console manufacturers. This made Nintendo the software developers’ favorite platform. Developers could make much more money writing programs for Nintendo than they could anywhere else.

Of course, Nintendo also depended heavily on its game developers. It needed an attractive library of proprietary games to maintain its lead. So the company decided to exert its power over game
developers, not by attacking them directly (e.g., by taking them over) but by containing them. Nintendo built a security chip into its console to prevent gamers from using software from other systems. As a result, developers could not reach Nintendo consumers by developing for other platforms. This tactic forced developers to sign exclusivity agreements that prevented them from selling a title to another company for two years after it had been released on Nintendo.

Software developers had two options: They could build software for non-Nintendo consoles with no hope of selling to Nintendo’s wide user base, or they could write for Nintendo exclusively. Developers consistently and logically chose option two.

By shutting the door on developers, because developers had no freedom to sell to others when Nintendo was the only game in town, Nintendo was able to set up a barrier to entry that extended its competitive lead for years.

Qin Shuts the Door on Zhao


In 260 BC, the armies of two great states, Qin and Zhao, met in a decisive battle. By seizing on a moment of weakness, Qin shut the door on—and, as a result, soundly defeated—its enemy.

The armies of Qin and Zhao were locked in an even battle when the Zhao army replaced its experienced commander with a less experienced but promising new one. The Qin general saw this switch as an opportunity to apply the stratagem Shut the door to capture the thief.

The Qin army attacked the Zhao army and then feigned a retreat to draw the Zhao troops in pursuit. The new Zhao commander pushed his troops in pursuit into Qin territory. But he soon realized his mistake. The Qin army had retreated to the sides rather than straight back and had reassembled behind the Zhao forces. The Zhao general and his 40,000 troops were surrounded. The army tried to retreat, but the Qin had trapped them.

The Qin did not close in for the kill. They held their position for over a month, during which time the Zhao army repeatedly tried to break Qin’s grasp. Qin never gave in but never closed in either.

As supplies ran low, the Zhao soldiers grew weak. Without outside communication, they grew desperate. Finally, after forty-six days, the Zhao commander gathered his best troops and made a final attempt to break out. He died in the process.

With the Zhao soldiers leaderless, hungry, and desperate, the Qin marched in and slaughtered the remaining Zhao soldiers, thus ending the long rivalry.

“That the impact of your army may be like a grindstone dashed against an egg—this is effected by the science of weak points and strong.”

—Sun Tzu, The Art of War25

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Stratagem 10

Stratagem 10:Remove the Firewood from under the Pot.

 

 

“When confronted with a powerful enemy, do not fight them head on but try to find their weakest spot to initiate their collapse. This is the weak overcoming strong.”

—From The Thirty-Six Stratagems

Throughout history, corporate battles have been waged over the issue of supply. When Apple launched its first iPod, for example, it signed an exclusive agreement with Toshiba, which prevented competitors from following quickly. Toshiba had developed a revolutionary
new hard drive that would allow Apple to introduce an MP3 player that approximated the size of flash-memory-based players but held ten times the number of songs. By locking up Toshiba’s supply, at least temporarily, Apple made it impossible for competitors to match the iPod’s performance.

To hinder its adversary, Pepsi, Coca-Cola attempted to “lock up” corn syrup supply by signing large long-term supply contracts with corn syrup manufacturers. To strengthen its competitiveness
selling consumer media devices in the late 1980s, Sony purchased Columbia Pictures and CBS to ensure these companies would not deny content to Sony.

Perhaps the best-known application of this tactic involves Minnetonka, the maker of Softsoap. The small company realized that if its new Softsoap products were successful, more powerful consumer
goods companies such as Procter & Gamble and Colgate-Palmolive would quickly introduce their own liquid-soap products and leverage their marketing and distribution muscle to overtake Minnetonka. So the company signed large long-term contracts with the manufacturers of the pumps that were needed to produce liquid-soap products.

By locking up a large share of the pump supply, Minnetonka hindered P&G’s and Colgate-Palmolive’s attempts to follow with competing products (because these companies could not get
enough pumps). This strategy afforded Minnetonka sufficient time to establish a defensible position. While most small companies that go head-to-head with P&G and Colgate-Palmolive fail, Minnetonka survived.

In each of these cases, the attacker targeted its enemy’s source of power. This approach allows a more efficient application of power than does the traditional approach of attacking the enemy directly.

Remove the Patents


In 1993, Barr Pharmaceutical was an average generic drug manufacturer, indistinct from hundreds. Years of struggling with the FDA for product approval had pushed back the company’s revenues
to $58 million in revenue, down from $70 million three years prior. But that year, the company changed its strategy. Once it began focusing on the “fire” rather than on the “pot,” the company
started growing again. Over the ten years ending 2006, the company grew revenues 560 percent to $1.3 billion while stretching its operating margin to 41 percent from just 6 percent.

The company triggered growth by systematically removing inputs large drug companies depended on to protect against competition: patents. In March 1993, Barr settled a patent challenge with
Zeneca Inc. over a breast cancer treatment drug called tamoxifen citrate. Zeneca vigorously defended its right to exclusively market the drug but eventually gave in by giving Barr nonexclusive rights to distribute a generic version of this drug in the United States. With that news, Barr’s stock immediately rose 30 percent.22 The drug grew to produce about 75 percent of the company’s sales.

This success in attacking Zeneca’s patent, led Barr to shift its focus toward patent litigation. In 1993, Barr’s CEO stepped aside to allow a former litigator, a partner at the law firm that represented Barr, to take over. The litigator-turned-CEO launched a strategy challenging select patents of large drug companies. The company challenged Glaxo Wellcome’s patent of the AIDS drug AZT. It attacked DuPont Merck’s rights to warfarin sodium, an anticoagulation agent.

In just ten years, Barr Pharmaceutical lurched out of a crowded pack to become one of the largest generic drug companies in the world. It did so by systematically removing the patents big drug companies depended on to compete.

Han Starves Rebels


In 154 BC, nine states collaborated to stage a rebellion against the ruling Han empire in China. The Han general calculated that he did not have the power to quell this uprising head-on. So he attacked the rebels’ supplies lines.

He ordered his primary troops to assemble as if preparing for battle while he led a smaller group of lightly armed troops around the battlefield. This smaller group raced behind the massing rebel forces and took up position on a key route on which the rebels would later depend for supplies.

The Han general then ordered his primary troops to engage the rebel force without launching a genuine attack. The main forces engaged. The rebels were pleased that they were sustaining the
“attack” so well; after some time, however, they realized their supply lines had been cut. Their soldiers grew hungry and thirsty, but no food or water came to recharge them. Forced to fight on, the soldiers lost first their passion, then their energy, and finally their will to rebel. In this way, Han ended the rebellion with little cost or effort.