“The art of war teaches us to rely not on the likelihood of the enemies not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable.” Sun Tzu – The Art of War

Several decades ago, I met with the CEO of a company that was one of two manufacturers of a specialized product. The product was comprised of two components. This CEO proudly told me that, after many years, he grew tired of his competitor. So he quietly purchased the sole manufacturer of one of the components, intentionally made defective units, and sold them unbeknownst to his competitor. In less than a year, he beamed that his competitor was out of business.

Let’s evaluate this sequence of events from the competitor’s hypothetical perspective. The competitor could have had best-in-class people, systems, procedures, corporate culture, and revenue channels. Perhaps, ownership had laid out a 5-year exit strategy and had identified its next generation of ownership to lead the company into its next stage of growth and prosperity for both ownership and its employees. Enter an exogenous, silent threat, and the company is suddenly no more.

While this behavior was not cool, to say the least, it left me with an indelible lesson to never be so introspectively minded that I would ever lose sight of external threats. Like it or not, every company is potentially facing grave internal and external threats from both known and unknown sources. In this edition of Business Advisory Services Market Insight, we apply the teachings of the Chinese military scholar, Sun Tzu, in his The Art of War. Dating back to the founding of the Roman Republic, this book provides invaluable (and perhaps at times paranoid) insight into how to defend your interests.

“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.” The Art of War

A common fallacy is to assume that companies have an infinite lifespan. In a fascinating article, it is written that “only 36% of companies last 10 years and about 21% survive to see their 20th anniversary. Beyond that, the U.S. Census Bureau reports that only about 12% of companies are older than 26 years.… The prevailing theory, though unconfirmed, is that only about a half a percent (0.5%) of all companies have what it takes to last 100 years.”

While the hope is that every company enjoys a successful exit, the likelihood of this outcome is driven by hard work, smart decision-making, a bit of luck, and the ability to anticipate and survive both internal and external threats.

As a first step, it is critical to detail internal and external threats and to have a game plan in place for swift and calculated actions. Simply put, make a list of the “if this happens, we are in trouble” events and take the time to detail pensive courses of action sooner than later. It is very difficult to think and to act clearly when chaos and anxiety are thrust upon you. It is always better to roleplay, plan and strategize during calmer times.

“He who exercises no forethought but makes light of his opponents is sure to be captured by them.” The Art of War

Potential Internal Threats

• What if ownership passes away or becomes incapacitated?
• Is your firm vulnerable to legal or performance threats by customers, vendors, or employees?
• What if a group of key employees were to resign and start a competing entity?
• What if revenues or key clients were to drop by 10%, 20%, 30%? Do you have a plan in place to reduce expenses and maintain profitability?
• What if your IT system was successfully hacked by bad characters? What if your files were corrupted or stolen? What if vendor payments were diverted away from your company to rogue recipients?
• Are you too reliant on a particular employee, collaborative partner, revenue channel, or client?
• What five internal events could spell potential doom for your company, and how will you survive?
• With a shrinking labor market, how are you competing to attract and retain top talent?
• How involved is your leadership in identifying and addressing internal threats?

“For it is precisely when a force has fallen into harm’s way that is capable of striking a blow for victory.” The Art of War

Potential External Threats

• Do you know your competition and your competitive position (think SWOT analysis)?
• How vulnerable is your customer base to moving to the competition?
• Do you have contingencies in place if your company falls out of favor with its lenders or investors?
• Is there a budding market entrant or product that can make your offerings obsolete?
• What if interest rates and inflation continue to rise?
• To what degree are you vulnerable to economic cyclicality?
• What if a key vendor or component is no longer readily available? What if component costs increase beyond expectations?
• What is your vulnerability to supply chain threats?
• Is your industry or competition investing heavily in automation or next-gen AI to gain a competitive advantage?
• What if there was a major change in your competitive, tax or regulatory risk profile?
• What five external events could spell potential doom for your company and how will you survive?
• How involved is your leadership in identifying and addressing external threats?

The good news is that you do not have to prepare to face internal and external threats alone. We have advised hundreds of entities and take immense pride in empowering companies to proactively embrace and even thrive during uncertain times. If you are interested in learning more about how you can prepare to fight for your company’s health, safety and prosperity, reach out to the LGA Business Advisory Team.

Thank you,

LGA BAS Team