Stratagem 20:Let the Plum Tree Wither in Place of the Peach
“When loss is inevitable, sacrifice the part for the benefit of the whole.”
—From The Thirty-Six Stratagems
In 1999, one of the world’s leading producers of mobile phones announced it was abandoning the business. In exiting, the company admitted falling victim to stronger competition. But what had at first appeared a withdrawal was actually an attack, allowing the former hardware producer to evolve into a technological force.
Fifteen years earlier, seven mobile technology veterans had met in Dr. Irwin Jacobs’ den, aiming to revolutionize their industry through a new company called “QUALity COMMunications” (now QUALCOMM). Although they “had no particular product in mind,”53 as Dr. Jacobs explained, they wanted to apply World War II radio technology to modern mobile phones.
Digital mobile phone use was expanding, and the industry wanted to set a standard for managing the information flow between phones and networks. The Telecommunications Industry
Association (TIA) had endorsed a digital technology called Time Division Multiple Access (TDMA). However, QUALCOMM, believing its Code Division Multiple Access (CDMA) technology to be superior, ignored the emerging consensus and introduced its product. For the next six years, QUALCOMM fought to convince the industry to adopt CDMA technology.
Reversing the momentum behind TDMA and the European alternative GSM, looked improbable. It was a classic Catch-22. Nokia, Motorola, Ericsson, and other mobile phone producers were not interested in building CDMA phones because AT&T Wireless and other service providers were not using the technology. At the same time, service providers argued that mobile phone producers were not making CDMA compatible phones. To unlock this dilemma and jumpstart CDMA adoption, QUALCOMM decided to produce its own mobile phones and related infrastructure. Only by offering a completely packaged solution could QUALCOMM convince industry players to take a risk on CDMA.
QUALCOMM’s strategy worked. Its hardware and infrastructure business exploded, and the company became a well-known mobile phone consumer brand.
To accelerate its rise, the company began placing significant strategic investments in developing markets. In 1997, it entered Chile, purchasing a 50 percent interest in Chilesat PCS for $42 million. In 1998, it committed $110 million to Pegaso Telecommunications in Mexico and OxPhone Pty. Ltd. in Australia along with Metrosvyaz Limited and Orrengrove Investments Limited in Russia.
By 1998, QUALCOMM was a major player in three distinct mobile communications areas: manufacturing, operating, and technology development. Although this strategy was delivering impressive growth, cracks were beginning to show.
Conflicts of interest emerged to damage QUALCOMM’s core business. The company had invested in mobile phone operators to encourage them to adopt CDMA. But the company had not anticipated that this strategy would discourage competing operators— who hesitated to bet on technology owned by their competitors’ new investors—from adopting CDMA. Similarly, those manufacturers producing CDMA phones were hesitant to continue imbedding the internal technology because of direct competition from QUALCOMM. As a result, QUALCOMM’s hardware and operating businesses were causing its technology businesses to suffer.
Managing these different businesses was also becoming a challenge. In the technology industry, it is common to immediately hire an army of engineers when you get funding (e.g. from a government grant) and then disband them when the project ends. Such rapid labor fluctuations, however, do not work in large-scale manufacturing.
It was becoming increasingly clear that QUALCOMM could not remain competitive. It was struggling to compete with Motorola, Ericsson, and Nokia, who, with over 50 percent of the market, commanded far stronger purchasing power. Though CDMA usage was booming, it paled in comparison to its alternatives (TDMA and GSM).
QUALCOMM’s multifront war proved more than the company could handle. Analysts and investors began exerting considerable pressure on QUALCOMM to change course. QUALCOMM reacted quickly, deciding, in 1998, it would immediately begin exiting the hardware business.
On September 24 of that year, QUALCOMM’s exit from the hardware business began when the company spun its investments in mobile phone operators off into an independent public company called Leap Wireless International. Six months later, it sold its infrastructure business to Ericsson as part of a legal settlement between the two companies. QUALCOMM transferred 1,200 employees and took in a $240 million charge as part of the deal. Its stock leaped 50 percent in the following week.
QUALCOMM committed to a complete exit from the hardware business in December 1999 when it announced it would sell its entire mobile phone business to Japan’s Kyocera. A decade pushing CDMA hardware came to an end. QUALCOMM was no longer a hardware manufacturer.
QUALCOMM’s story is not one of failure because, by leaving a game it could not win, it was free to focus its resources on one it could dominate. “We’ll do the innovative part and let others do the manufacturing,” Dr. Jacobs explained.54
The results have been extraordinary. In the four years after QUALCOMM abandoned its hardware business, its patent filings more than doubled (from 700 in 1999 to 1,700 in 2003) and its patents issued nearly tripled (from 325 in 1999 to 1,000 in 2003).55 While its revenue remained flat, remarkable after shedding so much of its business, its profitability grew 135 percent (from $390 million to $920 million).
By disengaging from the competition, QUALCOMM became distinctive.
The General Sacrifices His Worst Horses
During the Warring States period, the royals and generals regularly entertained themselves by gambling on races among their private stocks of horses. The stakes on these races were high.
One day a well-known military advisor and descendant of Sun Tzu named Sun Bin noticed that General Tian Ji was preoccupied. When Sun Bin inquired, the general explained that his horses,which regularly lost, had cost him significant sums of money. Sun Bin offered to accompany the general to the next match to see if he could devise a strategy whereby the general would win. The general gratefully accepted.
At the race match, Sun Bin learned that the races consisted of three heats. The best horses of the contestants competed in the first heat; their second-best horses, in the second; and their worst
horses, in the third. He also noticed that the general’s horses were in each instance slightly slower than the competition. This was enough information for Sun Bin to devise a strategy that would ensure victory for General Tian Ji.
After the races, Sun Bin told General Tian Ji that he had a plan. He suggested that the general call another race and be prepared to bet heavily on it. The general had great confidence in Sun Bin, so he planned a high-profile competition. He invited the prince to compete and thousands of peasants and royal subjects to attend. He put much at risk both financially and in terms of his reputation.
In the first heat, Sun Bin advised the general to race his worst horses against the prince’s best. The prince easily defeated the general. The crowd cheered; the prince smiled confidently, but Sun Bin remained calm.
In the second heat, Sun Bin advised the general to race his best horses against the prince’s second-best horses. The general’s best horses, although no match for the prince’s best horses, easily defeated the prince’s second-best horses. The score was tied one to one.
In the final, deciding race, the general ran his second-best horses against the prince’s worst horses and won. By sacrificing his worst horses, General Tian Ji won the tournament and recouped a large share of his losses.
“The strategy of guerrilla warfare is manifestly unlike that employed in orthodox operations, as the basic tactic of the former is constant activity and movement. There is in guerrilla warfare no such thing as a decisive battle.”
—Mao Tse-tung, On Guerilla Warfare56
