Stratagems #4 and #5: Surprise, deception and deceit (Sun Tzu Series)

This is fourth installment of my Sun Tzu Stratagems series.

I’m doing an exception from one stratagem per post convention. I wanted to stick with it, but the more I researched and contemplated about Surprise and Deception & deceit, the more it made sense to combine them into a single article.

Stratagems #4 and #5: Surprise, deception and deceit

Boy, do these stratagems ever get a lot of love from Sun Tzu. Where to start, right? The Art of War is full of strategies and insights that include elements of surprise, deception and deceit. From doing battle and planning a siege to maneuvering armies, surprise and deception appear everywhere in Sun Tzu’s thinking.

To Sun Tzu, all warfare is based on deception:

A military operation involves deception. Even though you are competent, appear to be incompetent. Though effective, appear to be ineffective.^[1]

When you are going to attack nearby, make it look as if you are going to go a long way; when you are going to attack far away, make it look as if you are going just a short distance.^[2]

Draw them in with the prospect of gain, take them by confusion.^[3] — Sun Tzu

A wise military leadership understands the value of intelligence and uses disinformation campaigns to deceive the enemy.

Dead spies transmit false intelligence to enemy spies.^[4] — Sun Tzu

Sun Tzu emphasises surprise by advising on not divulging the formation of one’s forces and tactics beforehand and attacking when they are unprepared.

Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent’s fate.^[5]

The formation and procedure used by the military should not be divulged beforehand.^[6]

Attack when they are unprepared, make your move when they do not expect it.^[7] — Sun Tzu

How does one utilize surprise to the point that opponent is in constant reactive mode? One has to fight according to the enemy, with rapid OODA loop cycle, constantly reorienting and acting faster than the opponent. Therefore you can be making one, two, three or five decisions and take necessary actions on those decisions while your opponent is responding to your first move.

Surprise is the essence of victory. In battle, confrontation is done directly, victory is gained by surprise^[8].

All right, we’ve hopefully established that surprise and deception are important elements of the battle when the bullets fly for real. How about when we compete for monetary units and markets?

Businesses hate surprises

I’m telling you a little secret: people don’t like surprises. Sure, they might tell you that they do like them, but the ones they like are the ones they want. The surprises people do not want are called problems or challenges^[9]. Businesses hate them, because a surprise immediately represents a challenge, a call to action or a need for change to their existing business model, offering, market situation.

And since businesses are run by people, people hate surprises. It’s one thing being surprised on a personal level – let’s say your significant other suddenly fells ill and you can’t make the weekend trip – and completely another being surprised on corporate level, where entire staff’s economic livelihood might be jeopardized when competitors suddenly merge to create even larger rival and threat to your business. If the personal level situation just irritates you, the other one might strike a fear of losing the job to the whole company, thus hampering company performance or maybe even paralyzing the personnel.

Of course, it is a completely different ballgame and mindset when you are the one business surprising the competition and the markets. You’ll love being on introducing game-changing surprises to the economic battlefield because it positions you advantageously compared to your competition.

Ethical deception and deceit in business

Wow, quite a loaded headline: ethical deception and deceit in business. Is there such a concept as ethical deception and deceit? Everybody can probably think illegal and unethical deception tactics, recently unearthed the world-famous Bernard Madoff Ponzi scheme comes quickly to my mind as an example.

However, I think that words ethical and deception can co-exist together in a context, kind of. When I talk about ethical deception in business, what I mean is that a business keeps its cards close together its chest, its appearance to competitors seem to be different what it really is or what it wants and its actions seem like trivial ones until it’s too late for the competitors to know what hit them.

Example uses of this stratagem can be found in an excellent book Hardball: Are You Playing to Play or Playing to Win by George Stalk and Rob Lachenauer. The authors talk about two hardball strategies called Threaten Your Competitor’s Profit Sanctuaries^[10] and Enticing Your Competitor To Retreat^[11]. The first one means that one determines its competitor’s areas of business that generate the largest profits for the competitor and attacks those areas and key accounts with aggressive pricing, expanded product or service offerings, or combination of these. The intent is to choke the cashflow of the competitor and therefore forcing a change in competitor’s practices on perhaps one’s own profit sanctuaries.

Japanese car manufacturers play hardball with the Big Three

An example shown in the book described how Japanese automakers attacked the Big Three automakers’ (GM, Chrysler, Ford) profit sanctuary – minivans, light trucks and SUVs. By the late 1990s, the Big Three sold more light trucks in North America than they did cars. These light trucks could bring in $10.000 or more in profits per vehicle sold. However, in early 2000s, this profit sanctuary was almost completely financing the rest of the companies as the other business units were eating the profits.

With their superior knowledge of costs and production systems producing high quality cars, Japanese automakers such as Toyota and Honda began an onslaught by offering their vehicles on very competitive prices while high quality assured higher resale value of the vehicles. Gradually over time they gained market share and began on chipping away the profits the Big Three was and had been enjoying for quite some time. This obviously hit hard on the Big Three and threatened to choke the cashflow of the companies. They tried to fight back with the same weapons that they were successfully attacked with, lower prices and increased quality. But feeble was their attempt to strike back as they weren’t able to recapture the lost market share and profits that the competitors had significantly pushed down with their actions.

In retrospective, this is probably one of the main reasons why the car companies have now been pleading for bailout from the U.S. Congress. Toyota, Honda and Nissan have indirectly controlled the cash faucets of the Big Three and forced them to eat away their capital in the fierce fight to retain the positions in the market. Now that the vaults are empty, they’re desperately looking for American taxpayers to bail them out for bad business practices.

But why did Japanese automakers attack this profit sanctuary, other than choking the cashflow? Well, they had free reign in lower end spectrum of the vehicle market. They could quietly continuously innovate and take over more market share as the Big Three were keeping their smaller car lines in the market mostly just to meet U.S. regulations of corporate average fuel economy (CAFE) for their whole product line. The vehicles in profit sanctuary were gas guzzlers and smaller, fuel-efficient cars were offsetting fuel-wise inefficient product lines. The Big Three were also too busy trying to counter the punches in high-end market to pay attention to the low-end and changing business and regulatory environment – poor Observation and Orientation. To Toyota, Honda and Nissan, the attack on profit sanctuary was a Nebenpunkt while the takeover of low-end market and choking the cashflow were the Schwerpunkt of the hardball strategy.

Rounding out the attack with a push to retreat

Enticing Your Competitor To Retreat can be seen as both a counter-move to the threat or attack on profit sanctuaries or a complementary move to one’s own attack. In this strategy, one wants to lure a competitor out of a profitable business area into a different, less important and profitable one by leveraging the superior knowledge of one’s business activities.

Well, this is exactly what Japanese automakers did in the low-end market while attacking the profit sanctuary of the Big Three. With relentless focus on lowering the production costs and pushing the quality even higher, Toyota and the others made the Big Three to gradually abandon one by one all low-end and eventually middle market segments by making it more attractive and profitable to fight on the high-end market. Once a credible competitive threat was out of each market and only the fuel regulation window dressings remained, Toyota and the others could focus on capturing the market which would be nicely profitable when a certain high volume had been reached.

Gradually, the quality of Japanese vehicles have raised the demands and expectations of customers. Customers got accustomed to high quality cars that were fuel-efficient and affordable. That’s why sales numbers for the Big Three have been dropping like a rock when customers have been rejecting the vehicles that Detroit is pushing out of its factories. Adding to the insult was the “Great Speculation of the Oil Market”, the price hike that from 2006 to 2008 took the price of oil to some $150 per barrel and gas prices to over $4 a gallon at the pump. American vehicles had lousy fuel economy in every class while Japanese automakers could brag and boast with their energy-efficient vehicles such as Toyota Prius, capturing ever more market share.

Epilogue

Combining hardball strategies such as Threaten Your Competitor’s Profit Sanctuaries and Enticing Your Competitor To Retreat in deceptive manner can lead to devastating effects on competition as this Japanese automakers vs. the Big Three example shows. While these strategies are not easy to pull off as they require deep knowledge of the business activities and their costs, you can always start looking into using them by at least identifying the profit sanctuaries for both your business and most important competitors. Once you’ve done that, I’m sure you already have a leg-up on the competition and can start plotting ways to take advantage of these strategies.

Next up, formlessness and being unfathomable.

References

1. Sun Tzu, The Art of War, p. 67
2. Ibid., p. 68
3. Ibid., p. 69
4. Ibid., p. 219
5. Ibid., p. 137
6. Ibid., p. 74
7. Ibid., p. 74
8. Ibid., p. 124
9. Anthony Robbins, TED talk at TED 2006
10. George Stalk, Rob Lachenauer, Hardball: Are You Playing to Play or Playing to Win, p. 55
11. Ibid., p. 87

Tags: Hardball, Stratagems, Strategy, Sun Tzu, Toyota