Stratagem 23:Exchange the Role of Guest for That of Host
“Whenever there is a chance, enter into the decision-making body of your ally and extend your influence skillfully step-by-step. Eventually, put it under your control.”
—From The Thirty-Six Stratagems
Doug Muir faced a decision after September 11, 2001, that would have scared many other pilots. With American travelers staying on the ground, airlines needed to cut costs. Muir, a well-paid senior pilot with a major U.S. airline, was one of the first to receive an offer of furlough as a precursor to unemployment. To Muir, furlough represented a runway to a new career. “I was getting paid to not fly,” he recalls thinking.
After a few experiments in various businesses, Muir saw an opportunity to do something new in the mundane business of collecting debts. After some research, he decided to create a subrogation company, one of the many firms that specialize in helping insurance companies collect unpaid obligations. (When two people have a car accident, they exchange insurance information. If the driver at fault does not have adequate insurance or, as is too often the case, has no insurance at all, he or she must make reparations. Often, however, the uninsured driver refuses to pay. The insurance company of the other driver will make several attempts to collect the unpaid amount but if these fail, it will hire subrogation companies to collect. Subrogation companies usually keep 20 percent to 40 percent of what they collect.)
As Muir started his collections business, he realized the industry had stagnated and become inefficient. His insurance company clients sent him boxes of legal documents, which he and his staff dredged through and entered into databases so that they could begin their collection routine. He hired staff to manually enter the data he needed; the process was labor intensive and costly.
Muir wanted his clients to send their documents in digital form. This would save considerable time, but more important, it set in motion a strategic shift that eventually provided him with considerable leverage over his clients.
Muir developed software that automated much of his work and added to it an interface that enabled clients to log on and directly enter required data. Clients liked it because this saved them packaging and shipping time. Muir liked it because it made his collection system almost entirely self-operating. Once clients entered their data, his system could automatically perform three key steps in the collection process: make a phone call, send a letter, and cancel a driver’s license.
Everybody won with this solution. But Doug Muir won disproportionately because his software built client dependence.
To see how this worked, consider the typical evolution of a new client. First, a client agreed to test Muir’s subrogation service. Company officials sent him their hard-copy information as they did with other subrogation companies. Then Muir suggested they try his digital entry interface. Clients loved it. Sending the information digitally required less time. They were able to shrink their packaging and shipping department because they needed fewer people to photocopy and pack boxes. Clients could move packaging and shipping people into higher-value roles.
Clients gradually moved more of their subrogation business to Muir, each time reducing their shipping departments. As these departments shrank, the clients’ dependence on Muir grew. Eventually, the clients became captives. They had reorganized their operations around a digital solution that only Muir’s company offered. They could leave Muir only if they made a significant reinvestment in rebuilding the shipping department.
Muir was transformed from guest to host. His captive customers gave him a competitive barrier. After three years growing his business, Doug Muir sold his company to a hedge fund for eleve times his initial investment.
From Buyer to Boss
Wal-Mart offers consumers superior value. It can sell products at lower prices than its competition without forfeiting quality. This unique ability has fueled Wal-Mart’s incessant growth and seemingly insurmountable competitiveness. The retailer has been able to do what its competitors cannot primarily because it is able to cut costs out of the supply chain and thereby reduce the costs of the goods it sells. It squeezes the margins of all players in its supply chain from raw material suppliers to manufacturers. To push down manufacturers’ margins, Wal-Mart adopts the tactic Exchanging the role of guest for that of host.
An Asian apparel manufacturer shared his experience of working with Wal-Mart. He described a process Wal-Mart has repeated with other manufacturers throughout the region. The process overcomes the initial resistance that manufacturers often have to working with Wal-Mart, which, they think, allows manufacturers to earn only extremely low margins.
First, Wal-Mart places a relatively small order that the manufacturer eagerly accepts, because such a small order does not make the manufacturer dependent on Wal-Mart. Wal-Mart then requests additional capacity, which the manufacturer almost always grants. The manufacturer would rather give any extra capacity it has to Wal-Mart instead of investing the time in winning a new customer. The manufacturer’s rationale: “with a buyer waiting; why would you waste time hunting down another buyer?” So Wal-Mart’s share of the manufacturer’s sales has grown from an insignificant 10 percent to a slightly more significant 15 percent.
This development in isolation does not at first noticeably shift the balance of power between Wal Mart and its manufacturer. But Wal-Mart repeats this process a few times, incrementally growing its share of the manufacturer’s production. During this “infiltration” period, Wal-Mart demands good but not overly aggressive prices from the manufacturer. The manufacturer finds it difficult to turn away Wal-Mart’s easy business.
After some time, Wal-Mart comes to represent a significant share of the manufacturer’s capacity. Wal-Mart then begins demanding deeper discounts. The manufacturer must now choose between cutting margins and losing a large customer, perhaps its largest at this point. The manufacturer naturally acquiesces and cuts margins.
Interestingly, by cutting margins, the manufacturer increases its dependence on Wal-Mart. With lower margins, maintaining high utilization levels (i.e., keeping their machines working) becomes more critical to profitability. So when capacity becomes available, the manufacturer is motivated to sell it quickly; Wal-Mart, with its vast retail network, is the customer most likely to buy extra capacity quickly.
Wal-Mart’s process turns an initially weak position into one of dominance. By opening with a seemingly innocuous position then building dependence incrementally, the company effectively reduces manufacturer resistance. This tactic is central to Wal- Mart’s overall success. Manufacturer dependence allows Wal-Mart to demand low margins and therefore sell at prices lower than its competitors.
From Guest to Governor
Xiang Liang descended from a long line of generals. However, when his home state, Chu, fell to the powerful Qin dynasty, his family lost power. Even before this happened however, as a youth Xiang Liang had murdered a man and fled from his home with his nephew, Xiang Yu. They took up asylum in the state of Wu. Thus a man destined to lead armies became a lowly administrator, an exile, and an unwilling citizen of the oppressive Qin dynasty. He was, naturally, hungry for change.
Xiang Liang developed a reputation as a strong administrator and leader. The governor of Wu, who had granted Xiang Liang and his nephew asylum, grew to trust them. Over the years, Xiang Liang patiently climbed Wu’s organizational ladder. He became a valued advisor to the governor.
In 209 BC, when states and kingdoms throughout the Qin dynasty ignited in revolt, the governor of Wu turned to Xiang Liang. He wanted his state to join the revolt and asked Xiang Liang and his nephew to lead an army.
Xiang Liang saw this as an opportunity to complete his ascent of Wu’s governing hierarchy and take control. He asked to confer with his nephew before accepting the challenge. But the plan he and his nephew devised was not what the governor expected.
After Xiang Liang and his nephew jointly accepted the governor’s challenge, the three men met to discuss how Wu should join the revolution. In the middle of this meeting, Xiang Liang gave his nephew a secret cue. Without warning or hesitation, his nephewdrew his sword and beheaded the governor. Xiang Liang then took the state seals and declared himself governor. To quell the opposition, Xiang Yu swiftly killed any objecting onlookers.
The uncle-nephew team continued their ascent to power. They joined the revolution and won many battles, including the battle for their home state, Chu. Xiang Liang became a contender for the reconquered Chu throne but for political reasons could not secure it. He died in battle soon afterward. Xiang Yu became a contender for rule of the entire dynasty but suffered a similar fate, dying in battle before the dynasty’s next ruler was named.
The asylum seekers exchanged their roles from guests to governors. They almost continued their rise to become kings and emperors. Their success lay in timing. By accepting seemingly powerless
positions as lowly administrators, they entered the doors of power. By taking small steps, none of which warranted suspicion, they infiltrated their adversary. Once they had built sufficient trust and dependence, they took control.
“Make people depend on you. . . . You will get more from dependence than from courtesy. He who has already drunk turns his back on the well, and the orange already squeezed turns from gold into mud.”64
—Baltasar Gracian, The Art of Worldly Wisdom
