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Stratagem 33

Stratagem 33:Hide a Dagger Behind a Smile

 

“One way or another, make the enemies trust you and thereby slacken their vigilance. Meanwhile, plot secretly, making preparations for your future action to ensure its success.”

—From The Thirty-Six Stratagems

By holding its smile before drawing its dagger, a small company can defer competition as it builds the strength to compete. Timing the switch from smile to dagger can transform David into Goliath. For example, by smiling for half a decade while it gathered strength, Google veered from the inevitable tracks laid by most Web upstarts. Instead of selling out to the Internet’s behemoths, Google grew to rival them.

Google’s founders, Larry Page and Sergey Brin, met at Stanford University, where they were both computer science graduate students. Though they did not initially get along, and argued over nearly topic they discussed, they built a bond. About a year into their studies, they embarked together on a new research study. Their goal was to improve the effectiveness of online search engines.

At that time all search engines essentially looked for key words that matched their users’ query and presented the results in a list. But as the Web grew and Web crawlers—programs that scan large portions of the Web and build an index—improved, the search results lengthened to the point of uselessness. Searches for common key words, for example, required users to scroll through hundreds of entries because search engines were not good at prioritizing their results.

So Brin and Page devised a new way to rank results. They assumed that if a Web page was linked by many other Web pages, it was probably important, so they designed an algorithm that measured links as votes and counted the number of Web pages between pages so, with some mathematical manipulation, they could measure the importance of every page on the Internet.

Their method, called PageRank, proved far more effective than existing search engines. Brin and Page decided to launch a business around their creation.

Their initial idea was to sell their technology to an existing search engine company. But these companies were not interested in improving their capabilities. Common wisdom among Internet experts was that searches offered no competitive advantage and that to survive search companies needed to evolve into portals. As one CEO apparently explained to Brin and Page, “As long as we’re eighty percent as good as our competitors, that’s good enough. Our users don’t really care about searching.”84

The young entrepreneurs turned this initial cold response to their advantage. They launched a company that would take the search function away from the portals, who no longer wanted it.

In 1998 Brin and Page raised $1 million and moved out of their college dorms, where they had been running their project, into a garage. They launched a simple search engine called Google.com. That year they processed 10,000 queries per day and won recognition by USA Today, PC Magazine, and other major media publications as one of the most popular young Web sites.85

Despite a strong opening, Google remained small. Yahoo! was by far the most popular search engine, followed by a parade of other search engines, including AskJeeves and AltaVista. Google was last in popularity. To accelerate its growth, Google positioned itself as the back-end search provider to Web portals.

This position offered one major advantage. If Google could win Yahoo! as a customer, displacing Inktomi, the search engine Yahoo! was currently using, Google could instantly jump to the head of the line as the most popular search engine in the world. But to do this, Google would need to “smile.” It would show Yahoo! that it posed no threat, and that it would be a valuable and loyal supporter.

Google made several strategic decisions that assuaged competitive fears. At a time when all search engines were using a new marketing tactic, banner advertising, to boost revenues, Google refused to accept banners. It refused to post any graphic ads at all, choosing instead to exclusively display simple text ads as part of its search results. Its homepage was also starkly different from any others. It was clean, composed of little more than a search window and logo.

Experts deemed Google’s strategy flawed. Search engines had been evolving in precisely the opposite direction. AltaVista, for example, was successfully transforming its search engine into a portal. In 2000 AltaVista was the eighth most popular Web site, while Google was forty-eighth. Marc Krellenstein, chief technology officer of another leading search engine at the time, Northern Light, said, when asked about Google’s strategy, “There isn’t really good evidence, frankly, that companies focused purely on search, as Google has been, can support themselves with that model.”86 A 2000 BusinessWeek article warned that “when the whip comes down and shareholders start to demand a return on their investment, Google may have to swallow its scruple —particularly if it hopes to keep banner ads off its pages.”87 But Google endured the criticism. By sticking to its seemingly illogical strategy and keeping banner ads off its pages, Google was able to position itself as a helper rather than a threat to Yahoo! and other portals.

Yahoo! began as a search site or, more precisely, a search index. But it had evolved into a media company and was no longer seriously interested in searching. Over the three years leading up to 2000, it had signed numerous deals with media-content providers, including Hallmark, NBC, Comedy Central, and A&E Television. Its strategy was to expand its online advertising expenditures, 7 percent at the time, by focusing on three priorities: building brand equity, providing high quality content and services, and ensuring wide distribution for its media franchise. Searching was not a priority, which is why Yahoo! had begun outsourcing its search services in 1996. The Google search engine was designed to fit neatly into this new strategy.

June 26, 2000, was a pivotal day for Google. On that day Yahoo! announced it would replace it current online search provider, Inktomi, with Google. Practically overnight Google became the most popular search engine in the world.

Google’s newfound strength was insufficient to rouse competitive resistance. Even Inktomi, the company Google had ousted from Yahoo!, saw its loss with some indifference. Dick Pierce,Inktomi’s chief operating officer, argued that the loss would have “little impact with respect to profitability.”88

The search function was a commodity business. As a CNET analyst wrote in 2000, “The search market in general, meanwhile, remains a low-margin, commodity business.”89 A friendly, if apparently naïve, Google circled the world to take this commodity activity off the plates of richer rivals. It became Latin America’s premier search engine in 2001 through a partnership with Universo Online (UOL) and that same year signed an agreement with Lycos Korea to bring Google to Asian Internet users. In just two years, Google solidified its search dominance.

But behind its “smile,” Google had developed a service that would soon threaten its media partners’ core businesses. AdWords was a self-service program that allowed advertisers to place ads on Google’s search results in a matter of minutes with just a credit card. Those who had initially questioned Google’s business model had not yet understood AdWords’ potential.

Google launched a simple version of AdWords the same year it signed its landmark deal with Yahoo! At the time it was handling more than 100 million search queries per day. Over the next several years it maintained its position as an unthreatening search partner while it simultaneously evolved AdWords. As Google signed deals with more portals, it converted AdWords into a costper-click model and introduced a bidding system for advertisers.

By 2003 it had become clear that AdWords was beginning to attract advertisers away from Yahoo! and other online media companies. As Google’s share of the online advertising market grew, Yahoo! realized the threat Google posed. In 2003, a year after renewing its deal with Google, Yahoo! pulled its search activities away from its former partner. It purchased two Internet search services Inktomi for $235 million and Overture for $1.6 billion— and decided to run its search activities on its own.

But by then Google had already built a dominant position in the search function. As of 2006, Google manages over 50 percent of all Internet searches and sells advertising on each one. By being careful not to draw its dagger too early, Google convinced its future competitors to help the company build a leading search position. It displaced once larger adversaries to emerge as the dominant search and online advertising option.

The Japanese Become American


To stave off the unexpected success of Japanese cars in the United States, the big three U.S. car manufacturers appealed to consumers’ national pride. They launched a “Buy American” campaign.

Japanese manufacturers needed to devise a strategy for countering this campaign, for deflating the resistance to Japanese cars that was building among U.S. consumers. The obvious responses— increasing marketing spending, launching a countercampaign— might further agitate consumers.

So instead of attacking the “Buy American” campaign directly, Japanese car manufacturers simply became more American. They opened manufacturing plants in the United States and increased the number of American jobs supported by their car sales. When GM advised a consumer to Buy American, that consumer would consider buying a Toyota Corolla. Japanese car manufacturers pacified their adversaries’ resistance by becoming friendly. The strategy worked so successfully, Japanese car manufacturers continued it, never dropping their smile. They continued the slow shift toward becoming friendly Americans. They raised revenues and profits while they increased their employment of U.S. workers. In 2007, Toyota eclipsed GM as the largest car manufacturer in the world. Figuratively, this was the point at which Toyota drew its dagger.

An Old Friend’s Smile


In 342 BC, the states of Qin and Wei were at war. The king of Wei was worried. His army had recently lost a battle. It was weak, and its morale was low. It was in no condition to engage the 50,000 Qin soldiers marching toward one of Wei’s cities. The king wanted to avoid battle, so he assembled his advisors to study his options.

One of his ministers offered a bloodless plan. As a boy, he had known the Qin general who was now in charge of the approaching army. He believed he could appeal to this friendship and persuade the general to call off his siege. The king of Wei approved his plan and charged his minister with defending the threatened Wei city. The minister rushed off to take his position in the city waiting for the approach of the Qin army.

When the Qin general arrived with his troops, he learned that his old boyhood friend, the minister, was in charge of the city’s defenses and that he wanted a meeting to negotiate peace. The general chose his response carefully. He was not interested in peace, but he did not want to reveal this. As long as the city believed that peace was an option, their defenses would remain loose. If they felt that an attack was imminent, they would stay behind well-fortified walls, making the siege more costly. So the Qin general warmly welcomed his old friend’s proposal.

Three days later, the two friends met at a designated location. To prove his good intentions, the Wei minister brought only 300 soldiers with him. The Qin general, to display his warm intentions, invited the entire Wei party to a banquet.

At the banquet, the Qin general and the Wei minister drank and ate together as one would expect of boyhood friends. But before the banquet ended, Qin soldiers kidnapped the Wei minister and his soldiers. They stole their captives’ uniforms and marched toward the city disguised as Wei soldiers. When they arrived, the city’s guards opened the gates, believing them to be the Wei minister and his party returning from their negotiations. The Qin soldiers rushed in and took control of the unsuspecting city.

By appearing pleasant, the Qin general was able to keep his adversary off-guard. He moved into the opening that this tactic created to defeat his adversary quickly, efficiently, and nearly bloodlessly.

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Stratagem 32

Stratagem 32:Create Something out of Nothing

 

“Design a counterfeit front to put the enemy off guard. When the trick works, the front is changed into something real so that the enemy will be thrown into a state of double confusion. In short, deceptive appearances often conceal forthcoming danger.”

—From The Thirty-Six Stratagems

Reliance Industries of India was a common textile dealer—one of a thousand similar small ventures—that transformed itself into the country’s largest private-sector company. It did so by “creating something out of nothing” at two critical turning points in its history.

The company’s founder, Dhirajlal Hirachand Ambani, was born to a lower-middle-class family in a poor town in rural India. His father was a schoolteacher, but because his family could not afford to send him to university, Ambani was forced to choose a different career. At the age of sixteen, he took a job pumping gas. He applied himself to the gas retailing business for ten years, working his way up to a position as marketing manager.

But Ambani had greater aspirations; he wanted to start his own business. He rented an office (more accurately, a desk) for two hours a day and began trading anything he could get a margin on. His search for profit soon led him to textiles. Ambani jumped into the fray, battling hundreds of other small textiles traders seeking to match producers with buyers.

Ambani could have remained one of the countless traders, but he was able to create something his competitors could not. This set him apart and put him on a grand trajectory. As with most Indian industries, the textile business was dominated by a few large families. With the tacit cooperation of the Indian government, they dominated textile distribution and could demand low margins from traders like Ambani. Their presence, Ambani recognized, was hindering his growth.

While most traders were stuck thinking about how to better deal with these large distributors (i.e., trying to play using the pieces on the board), Ambani added a whole new piece to the game. He formed his own distribution business to sell his trading company’s raw textiles and, later, even sold fashions he designed. His innovation changed the game, freeing him from the restraints of the large family-dominated buyers and allowing his growth to accelerate.

Ambani has successfully used this tactic again and again throughout his career, each time transforming the game to overcome an obstacle and unlock new growth. A few years later, for example, Ambani expanded into textile manufacturing. Because large Indian families blocked him from the capital he needed to build factories, he did something that was considered a radical maneuver at the time: he tapped the public financial markets by selling 2.8 million shares of his new company for $1.8 million. By issuing a new IPO, he sidestepped financial and manufacturing barriers, and a new manufacturing company was born from nothing. Ambani’s manufacturing company soon dwarfed his original trading business, becoming one of India’s largest textile producers.

Then, Ambani, joined with his sons, did twice more what hadsuccessfully transformed their business before.

Reliance had become India’s largest producer of polyester and other synthetic products. Rather than share margins with the chemical companies that supplied Reliance with considerable raw materials, Ambani and his sons decided to enter the petrochemical business. In the 1990s, they opened a series of plants to produce the key raw materials they needed. Soon, the size of their petrochemical business rivaled Reliance’s core textile business.

In the early 2000s, they realized they could leverage the expertise they had gained from producing chemicals to expand even further. They entered the petroleum business and produced some of the raw materials their petrochemical businesses depended on.

Petroleum refinement had always been a state-run activity; but in the late 1990s, it became clear that the state’s petroleum operations were in trouble. Their reserves were running low, and they were not making the necessary investment in prospecting for new sources of oil. Reliance took advantage of this situation and began positioning itself to create a new oil company.

Reliance Refineries Private Ltd. came into being and built a gas distribution business, assembling a network of 1,000 gas stations. Ironically, the company was returning to its roots. Ambani had started his career in the gas distribution business years earlier as a gas pump attendant. When the Indian government was finally forced to liberalize the oil industry and allow private companies to produce and import oil, Reliance was well placed to take over. It won a large share of the government’s bids to explore new fields, many of which proved unexpectedly large. One, for example, was the largest natural gas field discovered in India in decades.

By creating something out of nothing four times (a textile distributor, a textile manufacturer, a petrochemical producer, and an oil company), Reliance outmaneuvered growth barriers that blocked its peers and transformed itself into India’s largest private-sector company. The company now generates annual revenues of $20 billion, 70 percent of which comes from its oil business, amounting to more than 3 percent of India’s total gross domestic product.

Guerrillas


In 1937, Mao Tse-tung put down on paper his principles of guerrilla warfare in an influential book titled On Guerrilla Warfare. The principles outlined in his book proved powerful. By following them, his movement systematically captured land and power from the Chinese Nationalist government led by Chiang Kai-shek. Over the course of twelve years, the Communists routed the government and took control of the country.

Mao Tse-tung’s guerrilla tactics were successful in part because they added new players to the game while his more orthodox and structured opponent maneuvered players already in the game.

When Mao Tse-tung’s rebels set their targets on a new town, before taking up arms they launched a recruitment effort. Rebel teams walked the countryside to recruit, convert, and train local residents. These residents, in turn, recruited other residents, until eventually the rebels could count on an organized group of supporters.

Later, when the rebel forces launched their actual attack, they did so with a key advantage: a base of support to provide information and supplies. The town’s leadership found itself battling an enemy it never expected. Its own citizens undermined the city’s defense. In effect, Mao Tse-tung’s rebels added a new opponent to the game before they engaged in battle.

Mao Tse-tung flustered his opponents, appearing in unexpected places. Using this principle, he was able to circumvent enemy lines by creating rebels behind them while attacking them. He repeated this pattern—recruit, build support, attack from inside and out— consistently and methodically until he routed the Nationalist government and seized control of the nation.

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Stratagem 31

Stratagem 31:Fool the Emperor and Cross the Sea

 

“The perception of perfect preparation leads to relaxed vigilance. Familiar sights lead to slackened suspicion. Therefore, secret machinations are better concealed in the open than in the dark, and extreme public exposure often contains extreme secrecy.”

—From The Thirty-Six Stratagems

Industries tend to focus on a common set of variables to monitor competition. The television industry focuses on ratings; the pharmaceutical industry on new patents; and investors on transactions. If you are particularly careful not to disturb these variables, you can hide your actions in them. This is moving under the cover of stillness.

As an example, consider Krupp AG’s 1991 acquisition of Hoesch AG in Germany. Throughout the 1980s, Krupp courted Hoesch with proposals of friendly mergers, all of which were rejected. Krupp nevertheless believed that a merger would be beneficial, perhaps even necessary, so it chose to pursue a more aggressive tactic. It decided to attempt to take over Hoesch by buying a controlling interest in the company.

Krupp knew, however, that Hoesch could easily mount an effective defense if it became aware of the plan. Krupp also knew that industry players would look for evidence of such takeover intentions in financial transactions, such as unusually concentrated purchases of Hoesch’s stock. Therefore, the company had to find a way to hide its stock purchases and fend off a defensive response by Hoesch.

Both Krupp and Hoesch are German firms and, as such, practiced the “house bank” tradition, whereby a company maintains close ties with its primary bank. Typically, a German company’s house bank is a significant shareholder in the company, sits on the company board, and is involved in upper-level management. In order to hide its actions, Krupp would have to deviate from this tradition. It did not inform its house bank or any of its major banks of the actions it was about take.

Over the course of six months, Krupp slowly and anonymously purchased Hoesch shares through a Swiss bank. Because the stock purchases appeared to be normal, everyday transactions, Krupp was able to collect 24.9 percent of Hoesch without triggering suspicion. By the time Krupp announced its holdings in October 1991, it was too late for Hoesch to defend itself effectively or for competitors to provoke a bidding war. Krupp successfully gained control of Hoesch by hiding its unusual actions behind a veil of normalcy.

The Walt Disney Company employed the same tactic when it purchased land for Disney World in the 1960s. Had landowners discovered that Disney was purchasing 30,000 acres of land in Florida, land prices would have risen quickly. By assembling the land from pieces purchased anonymously, Disney hid its intentions and avoided paying premiums.

Lulling an Opponent with Repetition


In the late 500s, the founder of the Sui dynasty defeated the northern kingdoms and decided to expand his successful military campaign south of the Yangtze River. He assigned a general named He Nuobi to lead his first southern effort: a siege of the Chen kingdom just across the Yangtze.

He Nuobi assembled an army and set up camp on the river’s edge just opposite Chen’s northern border. The Chen king ordered his troops to set up positions on the other shore in preparation for the attack. Both armies were poised for battle.

Soon, He Nuobi ordered his army to prepare for battle. At the sounds of the activity, the Chen army took their positions and prepared for an attack. The Sui army marched, drums beat, and dust rose into the air, but no attack came.

The Sui army was conducting maneuvers. These continued for several days. Eventually the Chen army grew weary of maintaining their vigilance. They grew accustomed to the sounds of war and stopped associating them with an attack.

He Nuobi had purchased boats and hidden them for just this moment. One evening, once he was sure he could move his troops without triggering a reaction from the Chen army, he quietly crossed the river. He and his soldiers reached shore at dawn and surprised the Chen forces. They easily defeated the Chen and established a foothold south of the Yangtze.

 

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Stratagem 30

Stratagem 30:Openly Repair the Walkway;
Secretly March to Chen Cang

 

“To pin down the enemy, expose part of your action deliberately, so  that you can make a surprise attack somewhere else.”

—From The Thirty-Six Stratagems

Marc Benioff, chair and CEO of Salesforce.com, showed from childhood a tendency toward the unorthodox path. In his teenage years in San Francisco, while his friends occupied their free time with sport, Benioff started a business producing and selling programs and games for the Commodore 64 computer. Long before his college peers at the University of Southern California had chosen the subjects they wished to major in, Benioff says, he had already decided he wanted to leave his mark on the computer industry. After graduating from university in 1986, he chose Oracle Corporation as the platform from which he could innovate.

Though Oracle was still considered a rebel by its peers, the company had grown into the world’s second-largest software company. Benioff soon felt constrained. He spent his early career working on small PC and Internet-based businesses, none of which came to fruition. However, in 1996, a decade after joining Oracle, Benioff had an epiphany. While sitting at his desk surfing through Amazon. com, he found himself wondering why customers weren’t able to access business software, such as that produced by Oracle, in the same way that customers of Amazon.com could access the shopping site via a Web browser. In the 1990s, it was quite common for software to be installed on company servers and computer desktops, yet Amazon.com users could access powerful technology without having to install anything. Why couldn’t someone do the same thing for larger programs?

For the next three years Benioff persisted at Oracle, eventually becoming a senior vice president reporting directly to the company’s chair, Larry Ellison. Despite his importance at Oracle during that time, Benioff’s idea—that software could be delivered through a browser—was not embraced.

When a company restrains good ideas, the ideas usually win out in the end. In 1993, for example, an Oracle employee named Tom Siebel conceived the concept that came to be known as customer relationship management (CRM). He had recognized the potential of software to help companies automate and integrate their customer-facing processes. With one CRM solution, a company could efficiently find, win, and retain customers across diverse channels such as phone, fax, e-mail, and face-to-face interaction. By linking software used by the sales force with software used by the call center and the company’s Internet engine, which tracks customer log-ins, for example, a company could get a full picture of one customer, regardless of when and how that customer interacted with the company. It is because of CRM software that the customer service representative helping on the phone knows that you requested technical help online last week and so may be following up on the same problem.

Rather than pursue his CRM idea through Oracle, Siebel left the company and cofounded his own, Siebel Systems, with Patricia House in 1993. Together they created the CRM market, which grew to $10–$12 billion by 2005.

Benioff decided to follow Siebel’s lead. Although he was not yet sure how he would capitalize on his vision, Benioff was nonetheless committed to it, and he left Oracle in 1999, embarking on a sabbatical to contemplate his options and form a plan. The year he returned he launched Salesforce.com, a service he created to help companies manage their sales forces more effectively, and that would, according to Benioff, put an “end to software” for good. Ironically, his decision to focus on sales force automation positioned him as a direct challenger to his fellow Oracle rebel, Siebel.

Benioff’s approach to business was different from that of his competitors. For a start, he set up shop above a trendy restaurant in San Francisco, he often wears a Hawaiian shirt to work, and one of the company’s most famous employees is its “Chief Love Officer,” Benioff’s golden retriever.

However, beneath these superficial differences lies a larger and more fundamental one. Microsoft, Oracle, SAP, Siebel, and other leading software companies all follow an orthodox path to the user, packaging software and loading customer databases on company-owned computers. Benioff did not fixate on this orthodox approach. As is often the case with highly competitive entrepreneurs, he recognized his competition was stuck, preoccupied with the expected, orthodox path. He used this insight to take his competition off-guard. He chose the unorthodox approach, crossing over to the customer in an entirely different way by putting the software and databases on Salesforce.com servers and allowing customers to access information through a Web browser.

As a result, Salesforce.com can adopt an entirely different fee model. For while Benioff’s larger competitors sell multimillion-dollar software packages that take months to install, users of Salesforce.com need install nothing. Similarly, while Siebel and its peers charge companies large licensing fees, Salesforce.com charges a simple fee per user (currently about $65). This means that companies can decrease or increase their sales force automation cost in response to changes to their employee base. This is an attractive proposition when you consider that companies that are tied to a traditional software model must continue to pay heavy licensing fees to software companies, even if their business is suffering and they are being forced to lay off staff. With Salesforce.com those companies can simply pay for fewer users, providing instant cost savings.

This fee model also allows Salesforce.com to derive profits from those customers its competitors ignore. For while leading software companies focus their efforts on the “enterprise market” (generally companies with more that $1 billion in sales), Salesforce.com’s flexible pricing model of $65 per user makes it an ideal package for smaller companies. Salesforce.com is able to serve such customers profitably because its servers and software are already paid for (and thus constitute sunk costs), so adding a new user costs close to nothing.

Salesforce.com’s competitors have been slow to respond, perhaps because by copying Salesforce.com’s Web-based model, Siebel and other large players would risk damaging the lucrative core of their business: selling and installing large software solutions. Even those companies that have developed lower-cost Web-based solutions have struggled to manage the awkward task of promoting such offerings while reassuring existing customers, who pay large licensing fees, that the Web-based offering is inferior to their chosen software.

By finding an unorthodox path to the customer, Salesforce.com has revolutionized the software business. Siebel, Salesforce.com’s most direct competitor, hit financial difficulties and agreed to be sold to Oracle in 2005. Meanwhile Salesforce.com went public in 2003 and then grew 600 percent in the following three years, from $50 million in 2003 to $310 million in annual revenue in 2006. Its net income grew from a loss of $10 million to a gain of $30 million over the same period. While the scale of its competitor’s figures may dwarf Salesforce.com’s, the company is currently growing much faster than any major software company in its market. In the words of Marc Benioff, founder and CEO of Salesforce.com, “We will destroy Oracle and SAP because they won’t be able to respond to the innovation we are about to unleash.”81

The Circuitous March Eastward


In 207 BC, the Qin dynasty was in rebellion. Two rival rebel leaders struggled for control of Guanzhong, a strategically important kingdom of the Qin dynasty. One rebel leader, Liu Bang, had originally conquered the kingdom. But another stronger rebel leader, Xiang Yu, wanted the territory as well. Because Xiang Yu’s forces outnumbered Liu Bang’s, Liu Bang was forced to concede the kingdom.

Despite his capitulation, Xiang Yu remained wary of Liu Bang’s ambitions. So he devised a plan to keep Liu Bang as far away from Guanzhong as possible. He divided the kingdom into eighteen parts and appointed Liu Bang as the leader of a remote area at the west end of the kingdom. To further insulate himself against Liu Bang’s potential threat, he divided the area between the capital and Liu Bang’s fiefdom into three parts and appointed three generals as leaders of each part. One of the fiefdoms was called Cheng Cang.

Liu Bang was already upset at having to give up the kingdom he initially conquered. He was now even angrier for being banished to a far corner of the region. As he and his soldiers marched out of Guangzhong’s capital, one of his advisors suggested that they destroy the wooden road that connected their new home in the west with the capital. This would put Xiang Yu at rest by assuring him that Liu Bang had no intention of returning eastward to seek revenge. Liu Bang agreed, and so his soldiers destroyed roads and bridges as they traveled.

Once he established his new base, Liu Bang ordered his general to rebuild the army. When the army was so strong that Liu Bang felt it could defeat Xiang Yu’s, he summoned his general. They discussed how best to march eastward and retake the kingdom. Two barriers stood in their way. First, three generals ruled the territory surrounding their new fiefdom that lay between them and the capital. Second, the wooden road that led to Xiang Yu was in ruins. However, Liu Bang and his general were wise men. They crafted a clever strategy to overcome, even draw strength from, these barriers.

Liu Bang ordered a contingent of men to set about rebuilding the wooden walkway. This impacted Liu Bang’s adversaries in two ways. First, it put them off-guard. Liu Bang’s work force was so small that it would take years for them to complete job—or so his adversaries thought. Second, his plan focused his enemies on the “obvious” path. Both Xiang Yu and the general of neighboring Cheng Cang saw that if Liu Bang ever did rebuild the walkway, they could easily block his attack by concentrating their forces at the mouth of the narrow passage.

But Liu Bang had no intention of using his walkway. His construction project was merely a diversion. He planned to attack Xiang Yu by a different, unorthodox route.

While his opposition watched the walkway, Liu Bang ordered his troops to attack Cheng Cang, his neighboring state. He surprised Cheng Cang’s general and took the fiefdom. This move caught Liu Bang’s adversaries off-guard and broadened Liu Bang’s base of power. It laid the foundation for a campaign in which Liu Bang sequentially expanded his growing power base, defeating the states standing between him and Guangzhong’s capital, until he reached Xiang Yu. Liu Bang ultimately won back control of Guangzhong, took command of the rebel movement, unified China, and became the founding emperor of the Han Empire.

 

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Stratagem 29

Stratagem 29:Clamor in the East; Attack to the West

 

“When the enemy command is in confusion, it will be unprepared for contingencies. The situation is like flood waters rising higher and higher; likely to burst the dam at any moment. When the enemy loses internal control, take the chance and destroy him.”

—From The Thirty-Six Stratagems

In the mid-1990s, John (who asked that his name and other key elements of this case be changed to avoid recognition) invested his savings and purchased a heating-fuel company. Soon thereafter he realized that the company faced a formidable competitive challenge. It had enjoyed a stable existence as the leading heatingfuel distributor in its small hometown (we will call this town Westville). Revenues were stable and sufficient to generate an attractive profit for its owners.

But history had moved on, and John’s stable company was facing a new competitive threat that was eroding the company’s revenue for the first time in years. Westville’s neighbor was a far larger town called Middleville. The leading heating fuel-distributor in Middleville had squeezed out its local competition and was now seeking growth by crossing its former boundaries to try to win market share in Westville.

Had John been aware of this new competitive threat, he would have paid far less for his new company. But the transaction was complete. John needed to save his investment. John’s obvious choices were (1) to defend by mounting a strong defense by bolstering his sales effort in Westville or (2) to launch a counterattack on his competitor’s home turf of Middleville. But John chose neither option. Instead he focused his attention on Eastville, Middleville’s other neighbor.

John had heard that a heating-fuel storage facility in Eastville was available for rent. Though he had barely enough cash to keep his business afloat in Westville and certainly insufficient capital to expand into a new, noncontiguous territory like Eastville, John leased this Eastville storage facility. He gambled that by leasing a facility he could not afford to use, he would save his company.

Heating-fuel distributors form a close-knit community, so it took little time for John’s competitor to learn who had leased the Eastville storage facility. The implication of this news was obvious: John’s company, the small heating fuel distributor from Westville, was preparing to skip over Middleville and begin selling fuel in Eastville.

John’s competitor had to respond. He needed to keep John out of Eastville for two reasons: he had to protect his business in Eastville where he had already started to expand, and he feared being hemmed in by John on two fronts. So to repel John’s attack, this competitor strengthened his position in Eastville by redeploying his sales force across town.

But John’s attack never came. His Eastville warehouse lay bare while John focused instead on his hometown, Westville. In the vacuum left by his competitor’s redeployed sales force, John was able to grow. He recaptured his original market share and more. By the end of five years, John had nearly doubled his revenue and more than doubled its profitability. He later sold the company for far more than its original value.

By feigning a move into Eastville, John duped his competition into exposing itself to an attack in Westville. In this way he led a once-stable but then struggling company into a growth trajectory. John is not alone misdirecting the competition with this stratagem. Apple CEO Steve Jobs is known to throw off the market before a product launch by publicly scoffing at what he is secretly planning. Just one year before Apple launched an iPod that played video content, Steve Jobs told the press:

They love listening to music as a background activity . . . when they’re exercising, when they are commuting and when they are just hanging out, and music is a wonderful thing because: A, it’s music; and B, because it can be listened to as a background activity. And a lot of these other things that people are talking about building in such as video and things like that are foreground activities. You can’t drive a car when you’re watching a movie. You know?It’s really hard doing that.78
“Attack him where he is unprepared. Appear where not expect.”

—Sun Tzu, The Art of War79

Crossing a River, Luring a Leader, Ending a Siege


Two rival warlords, Yuan Shao and the great strategist Cao Cao, had been at war for many years. In AD 200, they prepared for what would be their decisive battle. Yuan Shao enjoyed two advantages in this battle. He occupied a superior position, and his forces outnumbered Cao Cao’s.

Emboldened by his strength, Yuan Shao decided to cut off Cao Cao’s supply lines, support, and escape route by attacking a small city called Baima at the rear of Cao Cao’s forces (see Stratagem Ten, Remove the firewood from under the pot). He ordered enough soldiers to move against Baima so that Cao Cao’s forces would be overwhelmed.

When Cao Cao heard of Yuan Shao’s troop movement, he quickly assembled his advisors. They pondered his options but found few to choose from. If they moved to defend Baima, they would be far outnumbered and probably lose that battle. If they did not defend Baima, they would become crippled without supplies and support. They would have no chance against Yuan Shao.

Then one advisor suggested that Cao Cao pretend to attack Yuan Shao’s old stronghold, Ye. Cao Cao understood how this move would play out and agreed.

Cao Cao led troops across the river toward Ye. When Yuan Shao heard of this incursion, he ordered half of his forces to turn back from their march toward Baima to return and defend against the imminent attack of Ye. After night set in, however, Cao Cao ordered his troops to change direction. They marched all night toward Baima.

The next morning, Yuan Shao arrived at Ye confused. He was prepared for battle but found no enemy. No one at Ye even knew an attack was coming.

That same morning, Cao Cao arrived at Baima with the troops he had redirected. His army now outnumbered the half that Yuan Shao had left to besiege Baima. He defeated Yuan Shao’s forces, cut off their general’s head, and saved the city.

 

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Stratagem 28

Stratagem 28:Point at the Mulberry but Curse the Locust

 

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

—From The Thirty-Six Stratagems

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sending Secret Signals to Customers


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

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

Huan Unites Eight States


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

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

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

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

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

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

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

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

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

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

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Stratagem 27

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

 

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

—From The Thirty-Six Stratagems

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

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

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

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

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

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

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

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

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

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

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

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

The Shepherd Corpse


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

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

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

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

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

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

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Stratagem 26

Stratagem 26:The Stratagem of Injuring Yourself

 

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

—From The Thirty-Six Stratagems

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

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

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

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

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

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

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

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

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

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

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

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

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

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

—John Mackey, Founder and CEO, Whole Foods Market

Injuring an Assassin


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

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

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

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

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

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

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Stratagem 25

Stratagem 25:Shed Your Skin Like the Golden Cicada

 

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

—From The Thirty-Six Stratagems

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

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

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

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

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

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

The False King


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

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

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

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

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

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

 

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Stratagem 24

Stratagem 24:Borrow the Road to Conquer Gao

 

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

—From The Thirty-Six Stratagems

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

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

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

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

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

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

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

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

Piercing Through Your Partners


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

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

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

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

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

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

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

A Deposit of Jade


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

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

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

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

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