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.