These words are part of the instructions Jesus gave to His disciples when He sent them out to proclaim the Kingdom of God. With this simile—a sheep in the middle of pack of wolves—He paints a picture capable of striking fear in the heart of any sheep or saint. It assumes an antagonism between two groups of people that can reach the point of animal ferocity. And indeed, the rest of the chapter tells us about just such treatment God's people may face from government, friends, and even family. There are at least two other assumptions to be drawn here, I think.
First, God does not insist that we stay where it's safe. Nor does He suggest that we just linger on the fringe. On the contrary, He wants us to be smack-dab in the middle of some true danger spots. Always part of the flock, but still willing to face the ever-lurking wolves, who like to think this is their world and not God's. Wrong that professes to be right, and blasphemy that claims to be "spiritual," should always be challenged. And know this: they will hang onto their error and their religiosity with the intensity of a hungry wolf.
Second, notice God does not instruct us to play the part of a wolf in order to blend in. Actually, according to Matthew 7:15, it's the wolves who like to pass themselves off as sheep. When you and I are in the midst of reprobates, it would be ludicrous, as well as unbiblical, to try to find ways that we're alike! No, God wants us to go out as real sheep, fighting real wolves.
As to methods of conflict, Jesus instructs the use of wisdom and harmlessness, in the last part of the verse. "Be ye therefore wise as serpents, and harmless as doves." For instance, a serpent doesn't flaunt its superiority as a lion might; but instead is wise enough to be unobtrusive when necessary, in order to strike at the right time with the element of surprise. On the other hand, a dove lacks the subtlety of a serpent, but retains a demeanor of straightforward transparency that can be disarming to the most callous among us.
Of course, the real edge sheep have over wolves is a shepherd, who will fight to the death for them. And, as a matter of fact, our Shepherd did just that for us (John 10:11). So you and I, as the sheep of His pasture, need not fear the wolves. And by the way, they may be closer than you think.
"For this I know, that after my departing shall grievous wolves enter in among you, not sparing the flock." (Acts 20:29)