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.
