Art of War in Business Ventures, Acquisitions and Diversifications

An entrepreneurial perspective

Sri Sai Business Publishers

Interpretations for modern day entrepreneur and business based on aphorisms of Sun Tzu’s Art of War

Popular representation of Sun Tzu

Art of War

Art of War is a set of teachings that has come from Chinese Antiquity from more than 1000BC. Art of

War is a collection of aphorisms from the teachings of Ancient Chinese sages, which was later

consolidated into the Chinese way of life. This ‘Way’ is much similar to Taoism, which literally means

Way (Tao = Way). Art of War described the collection of aphorisms as it dealt with War and strategies.

Art of War is very much relevant in present day as it was during the era of Sun Tzu, the author and

compiler of these percepts circa 600BC. Art of War is a prescribed teaching course in almost all military

academies and with higher ranking promotions dependent on the person being able to understand,

assimilate and interpret the Art of War correctly.

The concepts of Art of War however are not confined to battlefields alone. Expert can adduce these

percepts into any walk of life, as these were fundamentally meant to be so.

Here we try and describe what Art of War would state for mergers and Acquisitions, the new-age battle

field of corporate world.

Currently, we do not align to understand all the concepts of Art of War for M&As, as it would be an

exhaustive material. We therefore restrict ourselves to an entrepreneurial perspective of these.

Let us chalk out the scope of this booklet. Every entrepreneur and business persons, and not limited by

any size, have to make decisions on what businesses can be pursued and what businesses can be

ignored. This is a highly frustrating decision especially during diversifying ones businesses. Art of War

has some Aphorisms which can effectively help us in understanding how we can deal with this situation.

The main theatre of Art of War is battlefield; hence all our interpretation of Art of War has to be in

conjunction to its equivalent value. Venturing in to new businesses might be regarded in Art of War

language and context and entering and conquering a new territory or country.

Art of War and Type of terrains

Art of War gives aphorisms or percepts on capturing six types of terrains. We can say there are

therefore six types of businesses that we can venture, acquire or diversify into.

Great Sun Tzu (pronounced - Soon Tsu), gives the importance and the strategies to deal with these types

of terrains.

1.

First type of Terrain is called Accessible Ground. In simple words, an accessible ground is a place or

territory that is easily accessible to you as well as your enemy. Therefore the entry barriers in these

types of businesses are very less, and hence you will find yourself quickly grappling with competitors.

Since, these types of businesses are very open, lots of time and energy is taken up in protecting the turf.

Sun Tzu advices us not to concern with the accessible terrains if they are not of strategic importance.

They may constitute some part of our portfolio of businesses but these can never be solely cash flow.

The risks in these types of businesses are very high and hence care should be taken in differentiating

ourselves from the competition.

A popular example of this business is that of Social Media Consultant. Over past few years, every body

seems to have become an expert in Social media. Hence for a new entrant capturing the mind space is

very difficult and what ever mind space is captured can be quickly eroded if care is not taken. There are

not clear differentiating factors which separate people competency and hence it is an open ground.

2.

The second type of Terrain Sun Tzu describes is termed Entangling Ground. Though the Chinese

translation of the term is close to the word Entangling, it appears to be a bit of misnomer. The correct

meaning of this term would be close to Ground of Advantage. These types of ground or businesses are

the types, which once established gives you a lasting advantage over the rivals. In other words, these

types of businesses have serious business entry barriers and give the businesses a very good monopoly

or oligopoly situations.

Sun Tzu advices us never to quit these ground, or to quit these ground only under direst of the

circumstances. The reason being, once the hold on these ground/ territory is given up we loose

substantial advantage to the enemies and would have a hard time to recapture, if at all be able to

recapture, the market.

The classic example of this type of ground can be the war between Microsoft and IBM. Though it was

IBM which popularized the personal computers, Microsoft took very advantageous position of holding

on to its ground. Thus, IBM slowly lost out on the Computer Operating system race. Once Microsoft

was able to entrench itself, any player finds it difficult to dislodge the giant. The same principle can be

applied to Google in Search engines (where Yahoo and Microsoft were rivals) and Twitter in Social

Media (where Google and Microsoft’ effort were lost)

The lesson for us is when we want to enter any space but we have an entrenched competitor which we

may find it to dislodge, we should not try and capture the space unless it is of critical and strategic in

nature. If these new spaces do not offer any strategic or crucial benefits, do not waste your efforts in

taking over the fort. If you do want to, you can do so by employing stratagems (i.e. do not take them on

head-on) and being ready to pay high price.

3.

The third type of ground that Sun Tzu describes is termed as Temporizing Ground. This is a ground,

which unlike an Accessible ground, enables fortifications but at the same time does not offer any first-

mover to gain significant advantage in the space.

In this type of grounds, first mover only has a slight advantage over the rival. This slight advantage is the

only fortification from turning the ground into Open Ground. War trenches are a good example of such

temporary advantages but which can become critical advantages.

A good example for this may be strategy of price cuts. When all the players have a stable price regime,

it does not benefit one company to upset the cart and reduce the prices. This is because even though

the first-mover has a razor thin advantage, he is easily caught up by the rivals and hence a long term

loss.

The nature of telecom industry is an apt example for this type of scenarios where one player cutting the

price leads to entire industry do the same, and hence general lower prices and profits for all the players.

The same is the case for computer hardware industry. However, one notable example might be the

industries where the network effect is critical to growth. For example, companies like Twitter, Pay Pal or

Linkedin have definite first-mover advantage; which is hard to overtake by rivals.

The lesson for us is to keep away from aggressive posturing in the markets if such a move is harmful or

does not add much value over a long term. If such a move does not help you capture and substantially

differentiate from your rivals this would be a very bad move to make. For example, as an entrepreneur

do not venture into something that can easily be managed by any others. Therefore, if you do venture,

ensure that you create enough differentiators and always keep the product pipeline coming and

surprising your rivals. Only way to stay in this game is to keep pulling away from your chasers every so

often.

4.

Narrow Passes is the fourth type of Terrain Sun Tzu discusses in Art of War. Narrow passes in contrary

to Temporizing ground, gives strong and significant advantage to the first-mover. The examples of

Twitter, Linkedin, Adobe, Pay Pal, and Ebay may be apt here.

Sun Tzu advises if there is any opportunity which will give you a strong advantage in the battlefield, be

the first to move to such a place. It is hardly surprising all innovative companies start numerous

ventures, even though they are well aware only few would succeed. But strategically, it is significant

that they have presence in as much possible domains as possible, to tap, entrench and gain advantage

of first-movers.

Narrow Passes: Advantage once gained is long retained

These types of ground are usually the grounds where the leading player is able to dictate and set the

direction for the rest of people to follow. For example, in media space, Google Ad Programs pretty

much defined the entire industry. It is significant to note that Google was not the first player in the

market with the program but captured some significant positions, in this case its search engine based

businesses.

When entering the businesses where advantage can be gained, move first. The valuations of these

companies are much higher in the initial stages and may later dissipate. These are the companies that

will usually be found on the rising hype cycle.

5.

Precipitous heights are the next terrain described by Sun Tzu. We can describe this as a combination of

Entangling Ground and Narrow Passes. The army chooses such a position that it gives itself almost

unassailable position and its victory is assured. This is the best position to be in. It is aggressive while

being defensive, the best of the combinations.

Most of these companies are monopolies and are just impossible to reach by ordinary efforts. For

example, to create a Fortune 50 company would be virtually impossible for the players. Exxon Mobil or

Wal-Mart would not face any serious threat from a new entrepreneur, in the game where Exxon Mobil

and Wal-Mart are kings.

Sun Tzu envisions this position as a hill top fort, which is very hard to capture. The attack up the hill is

strictly forbidden by Sun Tzu as a foolish act. To take on Wal-Mart, for instance, in its own game is not

possible. But there would be places and methods by which you may be able to take on Wal-Mart in

instances, as an entrepreneur understand your strengths and match them over the enemies’

weaknesses.

Attacking Precipitous Heights is a hard effort

6.

The final terrain described by Sun Tzu is “Positions at great distances.” In Art of War, Sun Tzu repeatedly

chastises attacking places which are great distance away from your fortifications. This is because, when

a great endeavor is taken, the army becomes weak and gets exposed in many ways. There fore as an

entrepreneur, unless, you are able to withstand the “great distances’ and its challenges you will face in

accomplishing these, do not attempt it. Perhaps the best example for such a case is Napoleon’s invasion

of Russia.

A company trying to build a car company overnight would be a good example. It is a great endeavor and

would need sacrifices and new venture may also put pressure on the existing ones, hence avoid it. The

reasoning also being, if the enemy is at great distance, the chances are also that enemy would not attack

your ground.

The valuation of the company that diversifies with ventures that are “positions at great distances” would

undoubtedly go down. And if the nature of the venture succeeds regain its valuation, but the initial

sacrifice is part of the package here.

Conclusion:

Sun Tzu’s book of aphorisms, collected quotations from many centuries of wisdom, is essential reading

for our present day world. Whatever be the nature of the business that we engage in be it a social

media, a pro blogger, a web property founder, or application developer, we all can learn effectively from

what Sun Tzu has to tell us.

In the nature of Sun Tzu, this book too is intended to create ideal atmosphere for such a meditation. An

entrepreneur faces lots of challenges in business, but if the business itself is a mistaken venture, no

amount of effort can reliever him or her. Avoid all such pitfalls by reading, understanding and mediating

on the percepts of learned sage Sun Tzu.