Stratagem 4

 

“Use unfavorable natural conditions to trap the enemy in a difficult position. Use deception to lure him out. In an offensive that involves great risk, lure the enemy to come out against you.”

—From The Thirty-Six Stratagems

A permutation of the tactic Invite your enemy onto the roof, then remove the ladder is to lure your adversary out of his stronghold and onto neutral territory and leave open his escape. Both tactics advise inducing your adversary to leave his comfort zone, but the second involves no ladder. Rather, by pulling your adversary onto terrain on which you can beat him, you benefit by forcing one of three outcomes:

• If your adversary refuses to leave his stronghold, you can advance unchallenged.
• If your adversary leaves his stronghold, you can beat him, force him to retreat to his stronghold, and thereby ensure he will not attack again.
• If your adversary leaves his stronghold, you can take it and leave him isolated.

The tiger, which is indigenous to the mountains, is difficult to hunt in its natural terrain. By luring it out of the mountain, onto the open field where you each have a better chance of winning,
you remove its advantage and put its stronghold at risk. This is the most popular stratagem among the decade’s most competitive companies. Eighteen of the 100 most competitive explain their
growth at least in part by having the discipline to stay out of their competitor’s strongholds.

Key Elements

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Your adversary is in a stronghold. You avoid his stronghold by sticking to your own. This lures your adversary out or prevents him from attacking you. You either attack your enemy on open ground or attack the stronghold.

Car-Max Lures Its Competition into the “Retail Game”

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When a local entrepreneur asked Austin Ligon, then senior vice president of strategy at the electronics retailer Circuit City, if he might be interested in the used-car business, Ligon was intrigued.

This implausible idea—that an electronics retailer could sell used cars—took richer, more experienced competitors by surprise. Circuit City’s used-car business outmaneuvered its rivals to emerge as the United States’ only superstore chain for used cars. Pulled by a competitive vacuum, Car-Max has tripled revenue over the past five years and continues unchallenged.

In 1993, Ligon first considered the used-car business. While few links between used cars and electronics were evident, Ligon had reasons to believe Circuit City could become a viable player.
Three factors led him to this conclusion.

First, the competition was disinterested and fragmented. Newcar dealers, who collectively owned 65 percent of the market, viewed used cars as a secondary business. It provided some extra income when new-car sales were down and it allowed them to lure new customers by offering to credit them for trade-ins. Thousands of small used-car dealerships fought over the remaining 35 percent.
None held more than 1 percent of the market.

Second, demand was stable. Unlike new-car sales, which spiked and fell erratically with changes in exchange rates and other economic factors, used-car sales remained fairly constant year after year.

Most important, however, Ligon and other executives at Circuit City believed they could transform the experience of buying a used car. When they interviewed used-car buyers and asked them what they enjoyed about the process, they got blank stares. Usedcar buyers could list countless reasons they disliked the experience, but rarely could they provide a balancing virtue.

The “used-car salesman” lived up to his stereotype. This reminded Circuit City of its roots. Years ago, the stereo salesperson enjoyed as poor a reputation. Circuit City helped transform this image by bringing respectability to stereo sales. The company’s executives felt they could do the same with used cars. Ligon convinced Circuit City’s CEO and its board to invest $50 million to launch CarMax.

CarMax could choose either of two general approaches. It could do what most would expect and become a used-car dealer. This approach would entail hiring reputable used-car dealers and dealership managers, learning best practices, and launching a head-on attack on used-car dealers. Or CarMax could ignore best practices and approach used-car selling as a retailer. Circuit City forwent the obvious and chose the unorthodox approach. It decided to become a “retailer” of used cars rather than a conventional dealer. This decision involved a series of subsequent choices, which ultimately made it almost impossible for incumbent used-car dealers to compete with the newcomer.

A retailer will naturally approach the challenge of selling used cars differently than a car dealer. Retailers provide shopping experiences. Dealers manage salespeople. Retailers optimize operations
and inventory. Dealers negotiate higher prices.

Drawing on Circuit City’s heritage, CarMax made a set of decisions only a retailer would consider:

1. The company offered to appraise and buy any car, even if the seller was not planning to buy its replacement from CarMax. Car dealers had long ago adopted the practice of linking their purchase of a used car with the sale of a new one, even using “guaranteed trade-in values” to attract new car buyers.
2. Circuit City invested $65 million into a technology platform for tracking key indicators. The system recorded customer visits, finance penetration, used-car purchases across demographics and markets, sales data from wholesale auctions, and the number of sales consultant–customer engagements. With this system, Car- Max built a proprietary algorithm for calculating the probability of an incoming car being sold. When an owner brought in a used car, a CarMax staff member entered the car’s year, color, make, mileage, any body damage, even noting if the car had an odd smell, into the system, which estimated at what price CarMax needed to buy the car to be reasonably sure it would sell quickly (ideally
   within one month).
3. The company paid salespeople a flat dollar commission so they had no motivation to push a one-year-old Mercedes onto a buyer seeking a four-year-old Ford. While this compensation structure was obvious to retailers, car dealers saw it as revolutionary.
4. While dealerships forced buyers to finance with their sister finance arm (e.g., a VW dealership only offers financing from VW’s finance division), CarMax offered quotes from competing firms. After a customer chose a car, the respective CarMax sales associate would walk her to a terminal where she could enter personal data to receive quotes from CarMax’s financing division and at least one competing provider.
5. CarMax hired retailers to run its operations, not car people. Indeed, none of CarMax’s top management had experience selling cars.

Circuit City entered the used-car business, but it refused to become a used-car dealer. It held to its roots. “We are not a dealer. We are a retailer,” CarMax’s chief executive officer Ligon explained.

CarMax planned to grow slowly, but as soon as it opened six stores, the competition took notice. “After our sixth store opened,our competitors came after us. We had underestimated how aggressively they would come, especially AutoNation,” said Ligon.12

AutoNation, a car-dealer superstore chain founded by the management team behind Blockbuster, was attempting to consolidate independent car dealerships as they had done years earlier with
video stores. After noticing CarMax’s early success, AutoNation decided to attack.

AutoNation faced the same choice CarMax had faced at its inception: retailer or dealer? While Circuit City stuck to what it knew best, AutoNation chose to venture out of its comfort zone.
Rather than building a business that leveraged its experience in car dealerships, it chose to copy CarMax’s retail model. It entered the same markets CarMax had and adopted CarMax’s “no hassles” sales scheme.

Copying CarMax’s flat dollar sales commission was easy. Duplicating other elements of CarMax’s model was another ballgame. It demanded abilities AutoNation lacked. The company could not,
for example, replicate CarMax’s technology platform. It would not abandon its long-time practice of preferring to buy used cars from customers who bought new cars at the same time.

AutoNation was well funded. It hired top executives from GE and McDonald’s. But, in sharp contrast to CarMax, most of AutoNation’s managers came from car dealerships, so its culture, practices, and beliefs were rooted in car dealing.

AutoNation’s strategy was inspired by its Blockbuster history:Build scale. It bought every used-car superstore chain it could find, consolidating CarMax’s entire competitive set under one roof. But
the scale advantages never materialized. AutoNation lost about $1 billion over three years, and in 1999, it abandoned the used-car business and converted its used-car superstores into new-car dealerships. From used to new, from “no hassle” to negotiation, from retailer to dealer, AutoNation retreated back into its stronghold and took all of CarMax’s head-to-head competition with it.

In the absence of competitive resistance, CarMax’s growth tripled in three years, and the company continues to grow.

A Tiger Loses Her Mountain

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Toward the end of the Han dynasty (221 BC–AD 220), China’s warlords had consolidated power so only a few independent states remained. South of the Yangtze River two rivals emerged: Sun Ce and Liu Xun. They eyed each other carefully. Whichever one survived would rule all of southern China.

Liu Xun’s capital was difficult to attack. It was well fortified, surrounded by mountains, and reachable by only a few narrow routes, each of which he could easily defend. Sun Ce had little hope of taking Liu Xun directly so he and his advisors devised a plan to lure Liu Xun down from his mountain.

In AD 199, Sun Ce sent an emissary to Liu Xun. The emissary carried precious gifts and a letter. In the letter, Sun Ce praised Liu Xun for his military might and acknowledged his own inferiority.
Liu Xun was pleased by the words.

In the letter, Sun Ce went on to complain about another state, Shangliao, that regularly attacked his territory. Shangliao, he explained, although small, was too large for Sun Ce to handle alone. He proposed that Liu Xun attack Shangliao with Sun Ce providing reinforcements. This, he argued, would offer three benefits: Victory would be assured because Liu Xun’s powerful forces reinforced with Sun Ce’s smaller army would overpower their enemy. The victory would deliver Liu Xun great wealth, because Shangliao was rich. And in the process, Liu Xun would expand his territory, becoming even more powerful.

Liu Xun was intrigued by the proposal. He consulted his advisors, one of whom argued against the plan. This advisor did not trust Sun Ce. He pointed out that defeating Shangliao would be difficult and nearly impossible if Sun Ce failed to provide reinforcements. He warned that if Liu Xun left his stronghold with his army, the stronghold would be vulnerable—and Sun Ce might attack it.

But Liu Xun, hungry for wealth and power, ignored this advice. He ordered his generals to prepare for battle.

Liu Xun’s forces marched to Shangliao and surrounded the city. Tired from travel, they were unprepared for the vigorous defense the city’s army had prepared. Complicating their situation further, Sun Ce’s reinforcements never appeared. Arrows rained from the city, cutting down Liu Xun’s forces. Their siege failed.

Meanwhile, Sun Ce learned of Liu Xun’s expedition and ordered his troops into action—not to support Liu Xun but to attack his stronghold. Liu Xun had left behind only a small secondary force,
which Sun Ce easily overpowered.

Liu Xun returned with his soldiers, defeated, tired, and now demoralized at finding their home conquered. They could not take back their city. After some effort, they surrendered to Sun Ce. The
tiger was unable to return to her mountain.