“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
”If you know the enemy and know yourself, your victory will not stand in doubt; if you know Heaven and know Earth, you may make your victory complete.”
It is clear Sun Tzu was an early advocate of SWOT analysis. As in SWOT, Sun Tzu recommended an analysis of Strengths and Weaknesses through knowing oneself, and analysis of Opportunities and Threats through knowing the enemy (your competitor), and the heaven & earth (environment as in industry & business outlook).
In Sun Tzu’s 13 chapters Art of War script, at least 3 chapters address the enemy and strategy, while 3 chapters are devoted to analysis of the environment. Components of assessment and analysis are also distributed over the whole script.
Sun Tzu on Environment
As noted, while the enemy and the company are the two most crucial factors in winning the war, victory will not be complete if the general does not assess the terrain and weather properly, and use it to his advantage. Namely, it is critical for a manager to assess the industry and business outlook so as to align his strategy towards getting the most out of the market. There are two important elements mentioned in the Art of War, the terrain and the ground. The terrain configuration (地形篇) is a fixed factor once the war begins, while the ground (九地篇) is the battlefield ground the general chooses to pick in waging his war.
In business, terrain is identical to the type of industry that a company is engaged in. Industries possess general characteristics that cut across geographic regions. An organization entering a certain industry is bound to make investment and operate in a certain manner pertaining to its industry.
Ground, on the other hand, is synonymous with changing market conditions. While the terrain or industry is a fixed situation, the ground or market situation is more dynamic. A general can easily decide the type of battleground on which he or she wishes to fight. If the ground is to his disadvantage, he may choose not to fight. Thus, battleground is a variable factor and is, to a larger extent, a controllable element.
Terrain Configuration as a reflection of Industry
In the Art of War there were 6 types of terrain:
1. Accessible terrain.
2. Entangling terrain.
3. Temporizing terrain.
4. Narrow passes.
5. Precipitous height.
6. Expansive terrain.
1. Accessible Terrain
An accessible industry analogous to the accessible train is an industry where there are low entry and exit barriers. Capital and technology are readily available without major obstacles.
“If we can go forth and the enemy can also advance, it is termed accessible.”
A typical industry corresponding to accessible terrain would be consumer products, certain type of retail industry (shops), food service (cafes and restaurants) or personal services (hairdressers, beauty salons). As there would be sufficient demand to go around, there could be many competitors in the industry. Competitors range from large companies down to simple mom-and-pop stores.
Competitors in this industry can choose their own pace, either to be highly competitivevying for a large share and lucrative returns, or to take their time and be content with a specific niche market.
Examples of companies who managed to secure their position well in an accessible industry include McDonalds and Wal-Mart. McDonalds secures its loyal customers through its consistency in quality, service, cleanliness and value, coupled with aggressive marketing and promotion. Essentially McDonalds delivers what the customer wants. In the same context, Wal- Mart provides value, choice and convenience for its customers, thus securing its position with customers seeking “value – no frills” type products.
“ In an accessible configuration, first occupy the heights and yang [side] and improve the routes for transporting provisions. Then when we engage in battle, it will be advantageous.”
“Occupying the heights and sunny side” can be likened to becoming the market leader within the industry. For most consumer goods companies, winning leading consumer mind share is key to success in the industry. In attaining the “heights”, customer support is crucial, as well as promotion and advertising.
The other competitive success factor necessary to sustain success in this type of industry is: “improving routes for transporting provisions.” This implies good support systems that allow employees all the necessary tools and knowledge to do their job well.
Both McDonald’s and Wal-Mart won leading market share globally as a result of clear market understanding and positioning. Both also possess superior fulfillment systems that enable them to run operations efficiently and cost effectively.
Among the relevant aspects of Market Environment Research to accessible terrain are:’
- To study market characteristics to determine the best route to achieve “heights” and “yang”.
- To determine the most efficient distribution system in order to improve fulfillment, hence increasing profitability per unit of sales.
- To study the “weather” or “climate”, to identify how the market will change.This is analogous to studying the economy and market situation, such as cultural movements, fads, new technologies, etc
In Singapore, McDonalds lifted sales of hamburgers when it offered “Hello Kitty” collectible sets with value meal. McDonalds used its dominant market position and its vast market knowledge to identify an item with mass consumer appeal (Hello Kitty) and relate it to Singaporean tastes in an innovative way.
2. Entangling Terrain
Wetlands such as marsh and swamps may look enticing. They offer food such as fish, and the soil is soft. However, their nature is entrapping. Once entered upon, it is difficult to exit.
“If we can go forth but it will be difficult to return, it is termed entangling (suspended).”
Industries analogous to entangling terrain are the ones that are easy to enter but difficult to exit. Examples of industries with entangling characteristics are businesses requiring high capital investment such as exploration, mining, and construction; as well as businesses requiring low capital investment but high operational cost.
High operational cost becomes an entangling factor when there are strong labor unions that prevent management from retrenching workers.
“In an entangling ground, if the enemy is unprepared, go forth and conquer them. If the enemy is prepared and we sally forth without being victorious, it will be difficult to turn back and this is not advantageous.”
The key to survival in this terrain is preparation. The organization has to be prepared to invest heavily before reaping the benefit, while still remaining alert in reading environmental conditions.
Due to its capital investment and many workers involved in operations, car manufacturing can be categorized as an entangling ground industry. So far the Japanese car manufacturers have proven to be the survivors in this entangling industry, mostly because of their tight financial management and corporate culture that manages employer-employee relations. On the other hand, US and Korean car manufacturers are entrapped within the industry. Most Korean and US car manufacturers are experiencing severe profitability problems some of which are related to industrial relations problems.
The entangling structure of being easy to enter and difficult to abandon has significant implications for research. Market Environment Research is needed to wisely assess the risk involved in the industry before a player enters, as well as to constantly evaluate the threats that may be lurking.
Sun Tzu said: “When you cross salt marshes and wetlands, concentrate on quickly getting away from them; do not remain.” Many contractors that became the victims of the Asia property crisis had borrowed heavily from financial institutions to finance their projects. Proper MER might have helped identify the threat of a property bust earlier, thus saving many property companies from bankruptcy.
“If you engage in battle in marshes or wetlands, you must stay in areas with marsh grass and keep groves of trees at your back.” In entangling terrain, it is important to identify factors that will reduce the uncertainty and risk inherent in the industry. MER can help identify the risk as well as the safety factors.
3. Temporizing Terrain
In temporizing terrain it is difficult to move around. It is difficult to enter, and once entered also difficult to exit. However, mastering temporizing terrain may lead the troops to occupy the best location (like the peak of hills, or the river behind a forest).
“If it is not advantageous for us to go forth nor advantageous for the enemy to come forward, it is termed temporizing (stalemated) terrain.”
Temporizing ground’s most distinguishing characteristic is that there is no advantage in taking the initiative. Accordingly, temporizing industries normally requires large capital or technology investment, but subsequently low manufacturing and operational cost. Thus, it is more beneficial for the followers in the market to avoid competing with the leader head-on but rather indirectly, through “copying.”
Temporizing industries reflect business situations where the competitive advantage is very narrow. The pharmaceutical business, to some extent possesses temporizing characteristics as many big companies invest substantially in R&D and human resources, however, out of their substantial R&D efforts, only a handful of lucrative patents will emerge.
“In a temporizing ground, even though the enemy tries to entice us with profit we do not go forth. Withdraw and depart. If we strike them when half the enemy has come forth, it will be advantageous.”
In a temporizing industry caution is the best policy. An organization has to constantly evaluate the threat and potential of the market to decide the best move. Sometimes the threat outweighs the potential profit, in which case it is best for the organization to retreat and let another organization take the lead.
As the temporizing industry is prone to influence from many factors (e.g. in the pharmaceutical industry, a review from academic bodies or health authorities of a certain product can make or break the company), MER can help the organization decide on which way is best, prior to investing too heavily.
In particular, competitor intelligence is critical. Incidence of “industrial espionage” or unethical competitor intelligence is understandably high in temporizing industries, because of the large stakes involved.
“When on the flanks the army encounters ravines and defiles, wetlands with reeds and tall grass, mountain forests or areas with heavy, entangled undergrowth, you must thoroughly search them because they are places where an ambush or spies would be concealed.”
4. Narrow Passes
“If we occupy them first, we must fully deployed throughout them in order to await the enemy.”
“ If the enemy occupies them first and fully deploys in them, do not follow them in. If they do not fully deploy in them, then follow them in.”
A narrow pass can only accommodate a limited number of troops at the same time. The terrain may be flanked by rivers at both sides, or may be situated at the top of a mountain or cliff.
The industries in this category have only a limited client base, or require great concentration and patience to master.
If the accessible terrain is analogous to the general retail industry where opportunity is abundant, the narrow-pass is analogous to the luxury brands business. Rolex and Cartier are the narrow pass lords of the watch business, as Gucci and Dior are for the dressmaker business.
“To cross mountains follow the valleys, search out tenable ground, and occupy the heights. If the enemy holds the heights, do not climb up to engage them in battle.”
“If you want to engage the enemy in battle, do not array your forces near the river, but look for tenable ground and occupy the heights. Do not confront the current’s flow.”
As in the accessible terrain, the best strategy is to occupy the “heights”. A “heights” by Sun Tzu’s definition could be a tenable ground in the middle of a mountain, or a tenable ground not to close to the river.
In this terrain, the “heights” could mean customer mind share. If a competitor has obtained mind share leadership in a certain position or a certain product category, it is best not to compete head on with them, but rather to stake out a different brand position.
While Mercedes-Benz takes the position of luxury car for the affluent consumer, BMW occupies the position of luxury car for upwardly mobile professionals.
Sun Tzu also warned against moving against the current’s flow. In the luxury fashion industry, we will see the established brands creating a certain theme for a specific season. However, a company, which tries to ride on fads it has not created, although it may achieve transient success, will not last long in lieu of sustainable competitive advantage.
5. Precipitous Terrain
Precipitous terrain is like the high slippery slopes leading to the peak of the mountain. People are standing on uneven ground, and normally the higher the position, the better the advantage is.
“If we occupy the precipitous ground we must hold the heights and yang sides to await the enemy.”
Precipitous industry is very much a capitalintensive industry where high levels of capital and technology commitment present major barriers to entry. Competitors should keep their business focus on core business activities.
With its capital intensity and high entry barriers, the airline industry can be likened to a very precipitous industry. Competitors who survive the industry typically reap high profits during the good times, but during the down times, the weak can be wiped out.
“If the enemy occupies them first, withdraw our forces and depart. Do not follow them.”
Knowing one’s strengths is very important in this industry, as well as targeting and reacting to the right market segment. Southwest Airline’s strategy, avoiding direct competition with established airline service providers in the US, proved to be a winning strategy. By carefully choosing its routes and target segment, and operating its service accordingly, it lets the competitors occupy the “yang” side of the business so that they can occupy another side.
6. Expansive Terrain
“If our strategic power is equal, it will be difficult to provoke them to combat. Engaging in combat will not be advantageous.”
Sun Tzu did not specify the characteristics of an expansive terrain. It could be a situation where the distance between one’s troop and the enemy is widened. This could be analogous to a situation where an organization that appears to be in close competition with another at the outset, due to changes in either its own or the competitor’s core competences, has drifted apart and is no longer considered a key competitor. An expansive industry situation may throw up new competitors that established players should keep an eye on.
The emergence of the internet as a new platform for business has in turn shaken up many traditional business, hence creating an expansive terrain situation. While previously the book-retail-industry was characterized by book shops and led by large chains such as Borders and Barnes and Noble, the emergence of B2C e-commerce has thrown up new players, some presenting a bigger threat than the current brick and mortar players. Suddenly, Borders realized that their biggest competitor was no longer Barnes & Noble, but instead it was Amazon.
Ground as a reflection of Market Situations
Nine kinds of ground situations were depicted in the Art of War, namely:
1. Base / dispersive ground
2. Frontier ground.
3. Serious ground.
4. Open ground.
5. Key ground.
6. Focal ground.
7. Difficult ground.
8. Hemmed-in ground.
9. Desperate ground.
1. Base Ground
“When the feudal lords fight in their own territory, it is base ground.”
“On base ground, do not engage the enemy.”
“ On base ground unify your army.”
Base ground is the home ground market. Base ground relates not only to sales revenue but also to the company’s and the country’s pride. It refers to the geographic region where the company has strongest historical and cultural roots. Japan is a base ground for Fuji as the US is for Kodak.
It is important to avoid a war in your own territory because the enemy will be more aggressive when they are invading other people’s territory. Local defenders also have more at stake, which makes their fighting spirit weaker. Hence it is crucial to protect the base ground by putting up entry barriers and not letting competitor get a foot in the market.
In the business environment, market leaders protect their base market by influencing the government’s law on protectionism regulations. Market leader should also pay attention to their customer’s needs so as not to give a reason for customers to deflect to competitor.
2. Frontier Ground
“When they enter someone else’s territory, but not deeply, it is a frontier ground.”
“On frontier ground, do not stop.”
“On frontier ground I have my army group together.”
In a frontier ground an entering company gains an easy win. It could be because it is a new market where there is demand with no established players yet. It is then important that the entering company does not lose its momentum. At this point, it is necessary to commit resources so that the company has the backing needed to access a deeper base.
A mistake that is common among many SMEs is to continue to generalize after they have won some profit, thinking that they will experience easy ground all the way. However, once penetration is significant, one has normally left the frontier market situation and entered a serious market.
Sun Tzu said, in a frontier market it is best to continue to innovate and become more organized.
3. Serious Ground
“When one penetrates deeply into enemy territory, bypassing numerous cities, it is termed serious ground.”
“On serious ground ensure a continuous supply of provision”
A company that has successfully launched an aggressive strategy into a new market, which has cut into its competitor’s territory, yet is still not firmly established, can be classified as being in a serious market condition.
To survive in this situation, the organization has to maintain continuous resources and constantly increase the morale of its people.
In a serious situation, capture and secure optimum revenue in as much territory as you can, as quickly as you can.
4. Open Ground
“When we can go and they can also come, it is traversable or open ground.”
“On open ground do not allow your forces to become isolated.”
“On open ground I focus on defense.”
When the market has large excess capacity and exploitation is equally easy for everybody, it is termed an open market situation.
In an open market situation, defense is important. Competition must be blocked, while you gather your resources to capture as much market as possible.
Companies have to be constantly on their toes to act fast and be decisive. Communication (PR and advertising) is also very important, as there is a need to react quickly to volatility in the market.
5. Key Ground
“If we occupy it, it will be advantageous to us, while if they occupy it, it will advantageous to them it is termed key or contentious ground.”
“On key ground do not attack.”
“On key ground I race our rear elements forward.”
A key market situation is a market or region that will be advantageous to the company that occupies it. If we arrive first, then we should not be complacent. Constant innovation is a must.
Conversely, one should not launch a direct offensive against a market leader who holds a key market situation. We can draw the competitor away by pretending to take off and move swiftly in other directions, thus distracting the enemy and indirectly softening the ground for future attack.
6. Focal Ground
“Land of the feudal lords surrounded on three sides, such that whoever arrives first will gain the masses of All under Heaven, is focal ground.” “On focal ground unit and form alliances with the nearby feudal lords.”
A focal market situation arises when market dominance within an industry is determined by a small area that is left open. Should this area prove profitable it will be important to capture and secure it. It can provide an edge that may be significant for a business.
Once mastered, the focal market is a profitable area. Incumbents must thus prepare for competition to come in.
7. Hemmed – In Ground
“Where the entrance is constricted, the return is circuitous, and with a small number they can strike our masses, it is encircled or hemmed-in ground.”
“On encircled ground obstruct any openings.”
“On encircled ground use strategy.”
When companies have grown and hold an entrenched position, they are difficult to beat because these positions are established and strongly defended. The continuous expansion of product lines and new models designed to hold positions and fill market gaps makes this market situation very fiercely contested.
Creativity through ingenious intellectual property defense strategies or other creative market strategies is especially important in this situation, to prolong the period of entrenchment. MER can help in observing any loopholes or exploring potential areas.
8. Difficult Ground
“Where there are mountains and forests, ravines and defiles, wetlands and marshes, wherever the road is difficult to negotiate, it is entrapping or difficult ground.”
“On entrapping ground move through quickly.”
A difficult market situation happens when economic and market conditions are unfavorable, generating minimal income and growth is slowed or recessed. There will be many instances that could lead to the demise of a company, if care is not exercised.
In an encircled (hemmed-in) situation the environment may not be very harsh, but a company may experience difficulty because competitors are closing in, while in an entrapping (difficult) situation a company is experiencing problems because of the external environment, independent of the existence of competitors.
The situation in a difficult ground situation is typically beyond the company’s control. Hence it is best to use conservative measures. A company should try to navigate a way out of this situation rather than stay put and build a business in this situation.
9. Desperate Ground
“Where if one fights with intensity he will survive but if he does not fight with intensity he will perish, it is desperate ground.”
“On desperate ground engage in battle.”
“On desperate ground I show my army that we will not live.”
“It is nature of the army to defend when encircled, to fight fervently when unavoidable, and to follow orders when compelled by circumstances.”
An army needs to fight for its life in a fatal ground, in the same way as a company’s survival is at risk in a desperate market situation. In such a market situation success can only come through an aggressive and merciless strategy.
The company must focus on the territory or core business that they are assured of holding and keep away from any activity that drains resources or risks losses. The CEO holds a crucial position as a change agent during this time.
The difference between a difficult situation and a desperate situation is that a difficult situation mostly happens because of uncontrollable factors external to the company, while a desperate situation is inflicted by the internal system of the company. Some companies have grown so complacent that by the time they realize that they need to change, they are already in a desperate situation.