UNDERSTANDING THE NEED TO BE PROACTIVE AND COMBAT-READY

 He who is proactive and well-prepared and awaits his unprepared enemy will win.

Thus in the conduct of war. one must not rely on the failure of the enemy to come, but on the readiness of oneself to engage him.

One must not rely on the failure of the enemy to attack. but on the ability of oneself to build an invincible defense.

Troops are trained for thousands of days for moments of engagement.

The need to be proactive and combat-ready all the time is readily under stood and grasped by any shrewd military general. The same, however, cannot be said about its applications in the business realm. In my many years of teaching this subject to thousands of executives around the world, many of them still failed to comprehend the subtlety and implications behind the sayings of Sun Zi Let me illustrate with the kinds of questions that I posed to my past course participants, beginning with an easy one.

 If your company is ranked, say, number two, three, or four in profits, market share, service quality or some other dimension in the industry, a particular market or product/service area, what would your goal or ambition be? The obvious answer, of course, is that you would want to be number one, especially if your company has the capability of doing so. Any forward-looking and ambitious company would definitely aspire to become number one in market share, profits, service quality, image, etc. In fact. if it can and is able to be number one in all these dimensions, it would want to dominate them all.

 Now, what if you are already number one, say in market share, profits, image, service quality, or combination of these aspects? what would your next goal or the objective be? This is where I often got very interesting responses from executives whom I lectured around the world. The following are some typical answers:

 1. Defend the number one position.

 2. Protect the number one position (whether this is in terms of profits market share, or some other criteria) .

 3. Guard against the competitors.

 4. Maintain the leadership position.

 5. Sustain the number one position.

 6. Try to remain as number one.

 7. Stay number one.(4)

 Now if you happen to provide one of the above responses, let me say that you are only half-right. By saying half-right, I mean you are half-wrong and your .. answer is incomplete! This is because all the above answers are passive, defensive and reactive responses!. In actual fact, being number one, you are effectively the leader. As a leader. your main role is to lead. However, if you have a passive, defensive, and reactive mindset, you are likely to end up behaving likewise, that is. following instead of leading. This effectively violates the ideas advocated by  Sun Zi. Let me illustrate with an example.

 I was once called in by a company for some training cum consulting assignment This company was in a business whereby the nature of the product was fairly homogeneous. The industry is also oligopolistic in nature (that is, there are only a few players). This company had the largest market share, and hence was the industry leader (5)) Interestingly, the other competitors in the industry would occasionally harass the leader by taking turns to reduce their prices by a few percentage points. This went on for some time. Each time when one of the smaller players lowered its price, the industry leader would call its own meeting to decide on its counter strategies. Unfortunately, the corporate executives were too concerned about defending and protecting their market share and customers that they forgot how to lead anymore! They behaved along the seven responses highlighted above. As a result, each time when one of the smaller players lowered its price, the industry leader also decided to reduce its price by the same margin. What had happened? The leader had become a follower!

 Fortunately, it did not take me too long to convince the company that as an industry leader, its role is to lead the industry up and to lead the industry down if necessary. To put it bluntly and brutally, if the smaller players want to commit commercial suicide, the industry leader should oblige them by conducting their corporate funerals first. Of course, my advice to them was not that devastating. Instead, we decided to teach the smaller players a lesson, and then to lead them back into profitability again. This was what happened.

 The next time around when one of the smaller players decided to lower its price, the leader announced a substantially larger price reduction. In the past, it would simply match the price reduction. At the same time, it leaked information to the industry that should any of the smaller players decide to match its price reduction, it would lower it even further. Suddenly, all the other smaller players realized that they had annoyed the giant who has awakened. All the industry players took the "words" of the leader seriously, as any further aggravation of the price war would definitely cause the demise of the smaller players and favor the biggest player.

 This logic is not difficult to understand. In an oligopolistic industry where .ie product is fairly homogeneous, economies of scale typically favors the biggest player, that is, the biggest player has the lowest cost of production (see footnote 5) More importantly, if one of the smaller players exits the market, its market share will be distributed among the remaining players. All things being equal, it is likely to favor the biggest player as it probably has the largest distribution:n network.  When this happens. the biggest player's cost curve will be pushed down further and its competitiveness enhanced.

 Having taught the smaller players a lesson, the industry leader then decided to lead them back into profitability. It announced a price increase of about 10 percent that would only take effect about one month after the date of announcement, This move was strategic. It was a way of signaling to the rest of he industry players its intention to lead them "out of the woods." Should the other players choose not to follow, the leader would still have ample time to change its mind closer to the date of implementation. Not surprisingly, all other industry players announced similar price increases to be effected at the same date, all within a few days after the announcement by the leader. After being disciplined, they were, in fact. waiting for the leader to make the first move.

The above example illustrates the behavior of companies in industries like retail gasoline where the product is basically homogeneous and the industry)" is served by a few players. Typically, within a particular market, the leading producer would dominate by virtue of its size and extensive distribution network. It is very difficult for the small player to open price war because they risk being "clobbered" by the leader. The retail gasoline industry in Singapore is a good illustration.
It is true that while global companies like Shell, Caltex, and Exxon Mobil an still wage price wars within a particular market or region by adopting a cross subsidy strategy in order to buy into market share, there is still a limit to its success. This is because each market or region must still account for its bottom line in the medium and long run. While some losses may be acceptable in the short run, no other market or region is prepared to subsidize another one on a long term basis.

footnote:

 4. Of course. at times. I do get other extreme answers like kill the number two and eliminate all competitors. These answers, to my mind, are rather ruthless and questionable responses in the realm of business competition and are likely to evoke strong reactions from any commentator and critic

5. It is important to point out that in such a market situation, economies of scale will always favor the biggest competitor. As such, it enjoys great cost advantage and has more leeway to lower the price in order to take advantage of the price-sensitive consumers.

 Sun Zi bingfa : selected insights and applications I Chow Hou Wee