Circus of the Sun, Von Clausewitz, Positioning, and the Principle of Force
In 1984, the city of Quebec was celebrating the 450th anniversary of the discovery of Canada by Jacques Cartier. As part of the celebration, the city decided to sponsor a series of shows and events such as fireworks, plays, and street fairs. Among the proposals they received was a bizarre show presented by Guy Laliberté called The Grand Tour of the Circus of the Sun. It was different from the traditional circuses conceived a century earlier by P. T. Barnum, James Bailey, and the Ringling Brothers. Though the show took place in a borrowed circus tent, it had no animals, clowns, or ringmaster; instead it was a combination of theatrics and circus. It had a storyline and bizarre acts such as fire breathing and stilt walking. It was intended to run for eleven performances. It has continued to perform for more than twenty-five years and in the process has managed to create a niche that few others have been able to compete with.
Today, Cirque du Soleil touts itself as a “dramatic mix of circus acts and street performance.” It has more than four thousand employees and twenty concurrent shows on five continents, and it generates nearly a billion dollars in annual ticket sales. In Las Vegas, it has several performances every night and plays to more than 10,000 people every day of the year. At the Bellagio, a $100 million theater seating two thousand people was constructed for a show called O that’s been running for more than twelve years. It’s performed in and around a 1.5-million-gallon tank of water, with a cast of hundreds and costumes that average $10,000 per performer. Special makeup had to be invented that’s suitable for submerged performers. In a town of over-the-top shows, it is in a class of its own. Even without a headline performer like Cher, Celine Dion, or Elton John, the show’s been sold out for a decade. In the competitive business of live entertainment, Cirque du Soleil is unique, incredibly successful, and remarkably enduring. As a business strategy it’s triumphant.
Put simply, the Circus of the Sun is in a business category all its own. It’s created a market niche with no other competitors. It’s triumphant because it’s playing a game that no one else is playing. For us, it’s the perfect example of creating a market category and then owning and defending that category. The most important question a business strategy must answer is “Where am I going to compete?” In battle, the question a general must answer is “Where am I going to fight?” For a gambler, it’s “What game am I going to play?”
The best way to answer that question is to use a concept called the Principle of Force. The Principle of Force is how we make the battlefield decision, and doing so is based on the tactical inventory we took in the previous chapter. The inventory helped us define our resources—how many men, weapons, tanks, and bullets we have to fight with—and zero in on our best options. Eisenhower chose Normandy because he understood the Principle of Force.
Carl von Clausewitz was a Prussian soldier, aide-de-camp, and German military theorist who fought against Napoleon in the early 1800s. As a field commander, he experienced bitter defeat and was held as a French prisoner of war for several years. He escaped, joined the Russian army, and led a corps command as chief of staff at Waterloo, where Napoleon was ultimately overcome by superior forces, conquered, and sent into exile. It was those experiences that led Clausewitz to conceptualize the philosophy of warfare and write the seminal work on the subject that was published in 1832, a year after his death. On War is mandatory reading today at military schools. In it, Clausewitz theorizes on the basic principles of warfare, the strategic alternatives, and how one’s tactics should determine strategy. He puts primary emphasis on the Principle of Force. All else being equal, the larger army will always defeat the smaller one. It’s purely a numbers game. Of course, all else isn’t equal, and so the game for military planners is to shift a battle to a place where one has a superiority of force. It’s called “massing forces,” and it allows smaller armies to defeat larger ones by concentrating their armies and attacking at a weak point. It’s a matter of choosing the battlefield to your advantage so that you can create a situation in which you have more men at the point of conflict than your enemy does. A good example is what’s known as a “flanking maneuver.” Instead of attacking the enemy with a full-frontal assault, an army attacks the fringes, the flanks, and so creates a battlefield situation in which it has more men at the place of attack than the enemy does.
At Chancellorsville, during the Civil War, Robert E. Lee’s Confederate Army was outnumbered by two to one by the Union Army. Instead of attacking at the center, where the Union was strong, Lee split his army in two and sent half of it on a fifteenmile march through the woods, surprising the Union Army on its right flank, where it was weak, capturing more than four thousand soldiers and sending the entire Union Army into a retreat back to Washington. Another example is guerrilla warfare. The North Vietnamese were badly outnumbered by the South (because of U.S. troops and firepower), but they were able to defeat the bigger enemy by changing the battlefield into the jungle, where they turned it into a more even man-to-man fight. Instead of attacking where the enemy was strong, they attacked on a more concentrated front. We see the same thing in Afghanistan today: the warlords attack the fringes of the occupying forces, not the center.
In business, in the competition for market share with competitors, all else being equal, larger companies will defeat smaller companies because they have more advertising dollars, more salespeople, more bargaining power with vendors (and so lower costs), and more resources in general. Smaller companies should therefore change the battlefield and compete in a place where they do have superior forces. In business, for example, we can concentrate our forces through guerrilla marketing, on a small scale, or through category creation, on a larger scale.
In guerrilla marketing we choose to market to a subsegment of customers, isolating them through segmentation or by simply competing or concentrating our forces geographically. For example, traditionally Dr Pepper has not competed with Coca-Cola on a global scale and instead concentrates its forces in the American South. The company buys local television, sponsors local events, and can match Coke’s spending at the local level. You can also isolate a certain segment of users and concentrate on them, designing products specifically for them. For example, in 1996, Nelson Gonzalez and Alex Aguila founded a small computer-manufacturing company in southern Florida. Realizing that it would be impossible to match resources with companies such as Dell, Sony, and Apple, they decided to focus on a very specific group of users, that is, “gamers.” Video and computer games were becoming very popular at the time. From a technical standpoint, gamers’ computers required more horsepower than the products supplied by Dell or Hewlett-Packard. They used vast amounts of RAM and huge amounts of storage. It was a niche that Dell, at the time, wasn’t interested in compared to other segments. So the company designed these high-end products and became very successful. Alienware became an established brand and grew to over $100 million in sales in a few years.
The company’s success caught the eye of Dell, which tried to develop its own line of high-end gaming computers, but Alienware had such a concentrated mass of forces in this niche market that Dell could not compete. So Dell did the logical thing; in 2006 it simply bought the company.
Larger companies have to find bigger segments, or more segments, to maintain and grow their revenue. Smaller companies can compete by narrowing their focus and finding a niche. For example, though Cirque du Soleil is clearly outnumbered in Las Vegas in the category of live entertainment, it has managed to shift the battlefield by creating a unique subcategory of entertainment called a “contemporary circus.”
Category creation is the most fundamental of all business strategies, and the history of business is the history of companies creating new categories. In the 1600s, there were only a few dozen categories of goods and services. A few hundred years later, there were hundreds of categories. And today there are thousands. Products and services tend to divide and create new product and service categories over time. For example, automobiles were originally hobbyists’ vehicles used by wealthy playboys. But other customers began to use them to haul materials. So designers created a new category of automobile by dividing its function. Now there were cars and trucks. Cars were then divided between luxury and family cars. Trucks were divided into pickup trucks, vans, and delivery trucks. Today there are dozens of automobile categories—sports cars, minivans, SUVs, hybrids, compacts, and subcompacts—each the evolutionary descendant of another category, usually the result of designers’ dividing the uses of the product. Different companies will likely dominate different battlefields by concentrating their forces there. For example, the Jeep brand is very strong in the SUV category but not so strong in the sedan category.
Applying the principle of force requires a well-defined goal in a well-defined category, with tactics that are reasonable and can achieve the goals. Because Cirque du Soleil is so highly focused, it can drive out any competitors in its narrow category. The Apollo program was much more highly focused on a specific goal (placing a man on the moon and safely returning him), while the shuttle program lost its focus and ended up trying to compete in a category it was not designed to compete in (low cost to orbit). No matter how big or small our company, however grand or narrow our focus, it must always be our goal to dominate the category. It’s the lower-tier companies that struggle to survive. The ones that own the category survive. If you’re not the leader in your category, you should be looking for another battlefield on which to fight.
Of course, your battlefield will change as your business model evolves. As you grow, you can take on larger categories because you’ll have the additional resources to do so effectively. Mark Zuckerberg did this brilliantly at Facebook.
Facebook was originally a social network exclusively for Harvard University students. At the time, Myspace had millions of users and Friendster had millions more. Zuckerberg chose not to compete in those larger categories but to concentrate his forces on a much smaller battlefield. Remember, his idea was to create Facebook as a communication tool that would enhance existing relationships, and he knew college campuses were ripe for this strategy because they already have tight-knit, overlapping networks of relationships to enhance. Zuckerberg was able to exploit this, develop his tactics on a small level, learn how to perfect them, and thereby have the ammunition and tactics fully worked out before he took a larger market. It’s not that he didn’t dream of Facebook going global; he did, but he was smart enough to understand the Principle of Force and focus his (very limited) resources on a battlefield he could win.
Once he conquered Harvard, he turned, one at a time, to Columbia, then Stanford, then Yale. Again he stayed focused on each social network as he expanded. Some of these schools had their own fledgling networks, but Zuckerberg and Facebook had developed clever enough tactics that they were able to outgun them. After only a week at Stanford, The Stanford Daily reported, “The facebook.com craze has swept through campus.” Early on, Zuckerberg concentrated on Ivy League schools because he felt they had much stronger existing social networks than most of the other colleges. After all, the success of an Ivy League education isn’t necessarily based on the courses you take or the professors you study under, it’s very much about the contacts you make with your fellow students. With each new school, he developed new tactics and, tried them out; some failed, and some succeeded. In the meantime, Myspace was growing astronomically and so felt very little pressure from Facebook. Let Mark Zuckerberg have the colleges, it’s too small a space for us to worry about, they thought. After he conquered the colleges, he went to high schools. By that time he’d developed a very sophisticated and automated way for different schools to adopt Facebook as their local social network.
By the time I met Mark at the venture capital office in Palo Alto, two years into his plan, Facebook was still just a college social network. However, his users were fanatical and were spending large amounts of time on the site, the primary metric of success that Mark had identified and the one that he and his team were devising their new tactics to enhance. In fact, the reason Mark was at the venture capital office was that he felt that he was “ready for prime time,” ready to expand his strategy to a more global arena, and he realized he was going to need some additional resources. Again, staying true to the Principle of Force, he fought only battles in which he had the resources to compete.
This leads us to the second principle of warfare, which is based, in part, on the first one. It’s called “the Superiority of Defense,” and we need to understand it before we can begin to develop the focus of our business strategy.
The Superiority of Defense
Clausewitz was not the first to point out that it is easier, all other things being equal, to defend territory than it is to capture territory or to engage in an offensive campaign against a defensive army. In Napoleonic times it was understood that defensive forces had a three to one advantage over offensive forces (the ratio changes with the time and the technologies used to fight war, and the advantage ratio isn’t what’s important for us to understand—it’s just the fact that there is almost always a defensive advantage). Imagine you’re a Union field commander at Gettysburg and you’re asked to defend Little Round Top, a hill strategically located on the left flank of your army. Since you have a few hours before the battle, you have your men build some trenches and assemble some rock walls that they can hide behind. When the enemy attacks, you’re safely in your trenches or behind these walls. The Confederates must march out in the open.
B. H. Liddell Hart, the military theorist who coined the term “grand strategy,” was so adamant about the superiority of defense that he said, “Direct attacks against an enemy firmly in position almost never work and should never be attempted” and “To defeat the enemy one must first upset his equilibrium, which is not accomplished by the main attack, but must be done before the main attack can succeed.” Violating these principles, he said, was the reason for the high casualty rates in the First World War.
In business, it’s much easier to defend a position you already have in the market than it is to launch an offensive. Established companies, by definition, already have a certain share of the market, while new companies must look to take some of that share away. In order to do so, they must wrestle a customer away from a current product, and, as any seasoned marketing or salesperson will tell you, it’s much easier to retain an existing customer than it is to acquire a new one. This is because you have to overcome “buyers’ momentum.” The number one driver of sales, in almost any market, is repeat business. This is in part because we live in an overcommunicated environment. We’re bombarded with commercial messages, so we have to tune them out. There is another key reason we’re reluctant to switch. John Gourville, a Harvard Business School professor, wrote an article called “Eager Sellers and Stony Buyers: Understanding the Psychology of New Product Adoption,” in which he showed that new products force consumers to change their behavior, which has a high psychological cost. He did extensive studies and showed that people overestimate the value of the things they currently own or the value of the brands they currently buy, so it takes a ninefold advantage to switch. In fact, numerous studies have shown that people demand two to four times as much compensation to give up products that they already possess than they are willing to pay for those same items in the first place. Once we make a buying decision, a brand decision, we tend to stay with it. After all, if we had to evaluate every buying decision every time we acquired something, our lives would grind to a halt because our days would be filled with product evaluations. Another factor that contributes to the superiority of defense is the herd mentality. We feel comfortable buying the bestselling brands because we feel that everyone else couldn’t be wrong. In an unfamiliar town, which restaurant do you choose? The one with the full parking lot. You go with the herd.
Combining the Principle of Force with an awareness of the superiority of defense facilitates smart strategic decisions. We need to determine where we have power. And we don’t want to fight an offensive battle with defensive weapons. Many battles and many wars are lost because the combatants don’t realistically assess their situations. Liddell Hart said, “The profoundest truth of war is that the issue of battle is usually decided in the minds of the opposing commanders, not in the bodies of their men.”
In 1997, Al Ries and Jack Trout published a book called Marketing Warfare. Using the principles defined by Clausewitz, they defined the strategic alternatives available based on a company’s position in the market. Though they segment into several different categories, I’ll simplify here into just offense and defense and show the basic strategic differences.
First, if you’re the market-share leader, you should play a defensive game—focus on growing the category and leveraging the herd effect. For example, if you’re Gillette, you work on growing the shaving market. Any innovations in your space should be quickly copied, or if they’re protected by technology or patents, you should buy the company that owns them.
If you aren’t the leader, you need to switch the battlefield on which you’re fighting. A key way of doing this is by finding a place where you can be stronger. It could be a segment, or it could be geographic. This subcategory must be one that you can defend. For example, BIC attacked Gillette by creating a disposable razor, creating a new category. So far, so good. But Gillette quickly copied BIC, and today Gillette owns the category. Those on the offensive, if they don’t have the resources to overpower the entrenched person, need to shift the battlefield more decisively.
Your tactical inventory is a vital aid in choosing your battlefield; it allows you to objectively evaluate whether or not you are equipped for any given fight and what new weapons you might need. Once you’ve chosen your battlefield, it’s time to develop your business model. Traditionally, there’ve been two ways to do this: you can take a top-down approach, in which you choose a strategy and then develop whatever additional tactics you need to implement it (the method employed by most large companies), or you can begin on the basis of your existing tactics and then develop a strategy from those tactics, the bottom-up approach (the method employed by most entrepreneurs). In other words, either you can start with a problem and then search for the right way to solve it or you can take your tactics and search for a new problem to solve with them. As we’ll see in the next chapter, what’s most important either way is that your tactics and your strategy be well aligned. Ideally, this will follow from combining the top-down and bottom-up approaches, joining the best of both worlds.