Stratagem 22:Await the Exhausted Enemy at Your Ease
“To weaken the enemy, it is not necessary to attack him directly. Tire him by carrying out an active defense, and in so doing his strength will be reduced, and your side will gain the upper hand.”
—From The Thirty-Six Stratagems
How does the son of a working-class welder emerge as one of the world’s richest billionaires? He sees something others do not; he sees that the battleground is about to shift.
John Fredriksen began his career with an unremarkable first job as a trainee in an Oslo ship-brokering company. He continued to work in the shipping business, becoming one of many obscure private tanker owners. In the 1990s, however, he saw that the world of tankers was about to experience a shift.
Private tanker owners such as Fredriksen had been hurting because of overbuilding in the 1970s. Oil companies exploited the resulting oversupply by pitting ship owners against each other (see the stratagem Kill with a borrowed knife) to drive down rates to levels that barely covered costs.
But Fredriksen predicted that many of the tankers built in the 1970s would soon wear out. Tanker supply was about to shrink and this shrinking would shift power away from oil companies toward tanker owners. As he said, “The world has to get crude somewhere, and OPEC is the place. We saw that.”60
He also saw that oil companies were starting to look for environmentally safe shipping options. These two shifts revealed a new future in which oil companies would be bidding for the few tanker owners that owned newer, environmentally safe tankers.
In accordance with Sun Tzu’s ancient principle that one should seize the battleground first, and when common industry wisdom was to avoid the tanker business, Fredriksen began buying tankers. In 1996 he took over a Swedish shipping company called Frontline for $55 million. Over the next three years he continued acquiring tankers, focusing particularly on buying the more expensive but environmentally friendly double-hull tankers.
Fredriksen made another strategic decision that positioned him well for a battleground shift. Instead of entangling his company in long-term contracts, he focused on the “spot market”—the market for shipping oil on short notice. The spot market had two advantages: It offered higher margins, and it gave Fredriksen the flexibility to raise prices with the market.
In 1999 Fredriksen’s prediction came true. The battleground shifted when an aging tanker spilled 70,000 barrels of fuel oil off the coast of Brittany. Headlines warning of a major ecological threat drew public attention to the risks single-hull tankers posed the environment, which in turn sent big oil companies into frenzy. To avoid such environmental, economic, and public relations disasters, they began looking for double-hull ships to ship their product. They increasing found themselves negotiating with Fredriksen.
Frontline now commands nearly 25 percent of the world’s supertanker spot market. This means that if a company wants to ship oil quickly, there is a one in four chance they will ship it with Frontline. With such bargaining leverage, Fredriksen turned the tables on oil companies. At one time, big oil companies could negotiate tanker owners down to break-even pricing. Now that they need Frontline, they are willing to pay.
In the ten years ending in 2005, Frontline has decisively beaten its competition. It has grown revenue at 55 percent per year versus 15 percent for its peers. It commands 50 percent cash profit margins while its peers produce just 20 percent. And it has produced more shareholder value, delivering on average 60 percent total return to shareholders (TR S) annually versus 30 percent for its peers.
Frontine, the company Fredriksen bought for $55 million is today (in 2006) worth $2.5 billion, making the son of a middleclass welder the richest man in Norway.
Wal-Mart Awaits Its Exhausted Competition
While Wal-Mart’s rise to become the world’s largest retailer owes its success to multiple factors, it was launched from the platform of Await the exhausted enemy at your ease. In 1945, the company that was to become Wal-Mart consisted of one variety store in Newport,Arkansas. In just over thirty years, it became the largest retailer in the world, with more than 3,000 stores in all fifty states and with operations in Argentina, Brazil, Canada, China, Germany, South Korea, Mexico, and the United Kingdom. Wal-Mart owes much of its success to a simple tactic: identifying the next battleground, setting up a stronghold there, and waiting for the competition.
When Wal-Mart began its national expansion in the early 1970s, large retailers such as Sears, JC Penny, and Kmart positioned stores only in large city and town centers. Wal-Mart took the opposite approach: It focused on smaller towns, in part to avoid direct competition and in part because it believed the battleground would shift. As Wal-Mart’s founder Sam Walton explained:
[Our strategy] was simply to put good-sized discount stores into little one-horse towns, which everyone else was ignoring. In those days Kmart wasn’t going into towns below 50,000 and even Gibson wouldn’t go to towns much smaller than 10,000 or 12,000. We knew our formula was working even in towns smaller than 5,000 people, and there were plenty of those towns out there for us to expand into. When people want to simplify the Wal-Mart story that is usually how they sum up the secret of our success: “Oh, they went into small towns when nobody else would.”61
Companies that avoid direct competition simply to reduce the cost of battle risk holding a big piece of an insignificant pie. But Wal-Mart was doing more than avoiding direct competition—it was betting that the battleground would move toward small towns and suburbs.
For various reasons that are still the subject of dispute, consumers migrated to suburban neighborhoods and increasingly preferred suburban to city-center retail stores. Leading retailers faced with declining sales in their key locations followed customers into these smaller markets. When they got there, however, they encountered an unexpectedly strong competitor.
Wal-Mart had been waiting for them, fortified with a strong brand and an efficient distribution system. The advantages Sears wielded in serving large urban centers did not carry into Wal- Mart’s backyard. Sears fell from leader to follower and still trails.
“When two great forces oppose each other, the victory will go to the one that knows how to yield.”62
—Lao Tzu, Tao Te Ching
Luring an Adversary with Campfires
In 342 BC, three states engaged in war: Wei, Qi, and Han. Wei attacked Han. While Wei was besieging Han, Han asked the state of Qi for help. Qi prepared its army and began marching to the capital of Wei to implement the stratagem Besiege Wei to rescue Zhao, just as Chi had done to Wei twelve years earlier. The goal was to force Wei to return to defend the capital and call off its attack on Han.
Remembering the painful consequences of falling for the stratagem, the Wei army, under the leadership of General Pang Juan, pulled back its troops. They rushed home to defend their capital against Qi’s attack.
But Sun Bin, the leader of the Qi army, had a new stratagem in mind. He knew that Pang Juan underestimated the Qi army. So rather than attack the Qi capital, he feigned a retreat. He used a creative ploy to lure Pang Juan out of the capital. During the first night of his retreat, he had his army light 100,000 campfires. During the second night, his soldiers lit 50,000, and on the third night, only 30,000.
Pang Juan read this as a sign that the Qi army was dwindling. Tasting an easy victory, he gathered a collection of lightly armed troops and marched them rapidly, at twice the normal speed, toward the retreating Qi army. Sun Bin calculated that at dawn Pang Juan would reach a town called Maling. He set up an ambush there and waited.
The Wei troops arrived on schedule but exhausted from their strenuous march. Sun Bin’s army, which was rested, fortified, and three times the size Pang Juan expected, easily defeated the Wei troops. Pang Juan committed suicide on the battlefield. Sun Bin had identified the next battleground, fortified his troops there, and forced his adversary to become exhausted getting there.