In 199 AD, in a now-legendary Chinese military tale, a general named Sun Ce defeated his larger opponent by tricking him into leaving his stronghold unguarded. This maneuver led to a historic turning point: the first unification of southern China after centuries of unrest.
It also imprinted in military doctrine an ancient concept that great innovators continue to leverage today against their competitors.
The lesson is this: if you design your approach in such a way that your competitor is forced to leave his stronghold to defend against it, then you will win. Either your opponent will venture out into unfamiliar terrain and become easy prey; or, better yet, he will refuse to confront you, and you can advance uncontested.
This pattern of disruptive innovation continues to work today, and companies like Tradestation (TRAD) provide us with a great modern-day example of this ancient strategy.
TRAD – an online broker unlike any other
TRAD has increased revenues from $100 million to $150 million in the past three years, and it has grown profits even faster. While today’s economic crisis is challenging even the most established financial service firms, TRAD is holding its ground and even benefiting from a surge in market activity.
TRAD’s uniqueness mirrors Sun Ce’s lesson above. TRAD puts its competitors in the same dilemma – leave your stronghold or let us grow.
In my interview last week with TRAD’s CEO, Salomon Sredni, I asked him about TRAD’s business strategy. Sredni was incredibly clear and concise, and his answers offered a classic "outthinker" perspective.
Although TRAD is an online brokerage firm, it actually considers itself a software company. Indeed, TRAD was born as a software company that sold an application to help highly active traders program sophisticated rules that automatically executed trades.
Since then, TRAD has given up the old software license business and transformed itself into a brokerage firm. But the company remains highly committed to what makes it distinctive – providing the best software for "rules-based" active world traders.
As Sredni explains, "We’ve only been in the brokerage industry for eight years. When we first entered [the brokerage business from the software business] people said ‘you will never make it.’ We explained that we are a technology company; we have the best magnet for active traders."
Technically TRAD competes with Charles Schwab (SCHW), E*Trade (ETFC), and TD Ameritrade (AMTD). But internally, the company senior management believes TRAD functions as a software business. Its strategy is to compete with software companies rather than brokerage firms.
Sredni reiterates this message continually to his people and the outside market – TRAD is a technology company, not a brokerage firm.
The difference may seem minute, but the corporate identity a company chooses can have profound, transformational impact on downstream decisions. What seems logical for a technology company to do will seem inconceivable for a brokerage firm.
For example, TRAD has decided to avoid expanding into seemingly attractive businesses, such as mutual funds. While TRAD’s brokerage firm competitors expanded into new avenues, TRAD chose not to.
"[For us,] growth comes from being narrow, not broad," Sredni explains.
To unpeel this ancient pattern of disruptive innovation, here is what TRAD can teach us:
· Your company’s identity has a profound influence on its decision and direction. TRAD is a technology firm, not a brokerage firm.
· If in attacking your stronghold your competitors have to abandon their own, you win because you will either beat them on your ground or they will resist coming out against you. TRAD’s competitors don’t know how to be software companies and don’t want to commit exclusively to active, rule-based trading.
· Staying on the narrow path can only happen when your company’s message is continually reiterated. Sredni must constantly reinforce this strategy to help his company avoid the temptation to follow the pack.
To see what opportunities are available to you by applying this pattern, ask these four questions:
1. What is my competitors’ stronghold?
2. What is my stronghold?
3. How could I change my stronghold or identity so that a competitor, being smart and well-funded, would choose to not attack me?
How can I communicate to my people – today, tomorrow, and every day – what our company is and why we are different?