The importance of strategic competitive intelligence

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Image: The importance of strategic competitive intelligenceCompetitive intelligence (CI) began to make inroads at a few leading-edge US companies such as Motorola and Kellogg back in the mid-1980s. Since then, companies have been investing in personnel, software, and consultants' services to systematically monitor their competitors.

At one point in time, (old) ATT had over 30 people in its business services division's CI department, and pharmaceutical firms were not far behind. Today, 90+ per cent of all Fortune 500 companies have some form of formal CI activities. Yet, ask top executives to recall one occasion of how CI affected their strategy, and they go blank. Ask them who their intelligence analyst is, and they have no idea. At an age when “rising global competitive pressure” is on every executive's lips, why has CI failed to leave real impact on companies' C-suites?

The answer is deceptively simple: companies never built real competitive intelligence capabilities. Instead they created elaborate and detailed practices for closely monitoring competitors' every little move.

How much do competitors matter?

According to The Economist, in 1956-1981 an average of 24 firms disappeared annually from the Fortune 500 list. That number rises to 40 during the period 1982-2006 and probably much higher if we include 2007-2010 in the statistics. How important were competitors in the elimination of companies from the Fortune list? Firms run into difficulties for a variety of reasons, some internal (e.g. BP), others criminal (e.g. Enron). Studies attribute between 35 per cent and 55 per cent of all business failures to strategic blunders. In assessing the role of competitors, these failures are more relevant.

As the deep recession lingers in the USA, two industries stand out prominently as bona fide testimony to large-scale strategy failures:

  1. the US automobile industry; and
  2. the US financial industry.

How important were competitors in the decline at General Motors, Chrysler and Ford?

At one point in time, GM had close to 50 per cent of the global market. Today it stands at 11 per cent. Its former CEO, Rick Wagoneer, was an embodiment of clueless management, as he made optimistic forecasts as late as 2008. In one interview he said he never loses sleep over GM's situation, because a tired executive is not effective. Chrysler went from proud engineering leader to a shadow of its former self under the leadership of Nardelli. But the demise of the US auto makers has not been the result of these executives' failure to deal with Toyota or Honda. It was not even the direct result of labour cost differentials. Sure, buying industrial peace with high wages and benefits, and carrying legacy liabilities competitors did not have (like health care) did not help. But the root cause of Detroit's dethroning started much earlier and was much more basic: the decline started when consumers' preferences shifted from performance to reliability.

US auto makers excelled at serving the consumers of power – large, flashy cars, powerful drive trains, and loud revving were Detroit's hallmarks. Male drivers, especially the young, loved American cars the world over. But as more and more women started driving, and longer and slower commutes became the norm on clogged routes to work, raw power was usurped by demand for long lasting cars, more fuel efficiency (regardless of the cost of fuel), shorter chassis for easier parking in urban areas, and less time spent in the shop for repairs. The boring, smaller but reliable Japanese cars filled that need. Competitors did not kill Detroit, ignoring changing buyers' needs did. The fact that competitors were able to fill the changing needs with cheaper and higher quality cars due to better manufacturing techniques was just the cherry on the cake.

When Bear Sterns collapsed in 2007, and sold for $10 a share to JPMorgan Chase, one could point out a slew of characters responsible for the collapse of this once venerable financial powerhouse. Jimmy Cayne, its CEO, was clearly a good example. He was a salesman who was hired into Bears because he was good at the game of bridge. The one who hired him, Ace Greenberg, who would become Bear's CEO in 1978, was a fan of the game. As a salesman, Cayne was out of his element in the complicated world of hedge funds and derivatives and debt securitization, but it did not stop him from making it a cornerstone of Bear's business. When the sky fell down, he was the wrong man at the wrong time.

"Most business declines have little to do with direct competitors. Competitors may expose the underlying strategic problem, but they are rarely the strategic threat itself. "

Bear Sterns' fall was technically due to the company reliance on very short term financing known as overnight repurchase agreements (repos) for the company daily's cash needs of about $50bn. When repo lenders become skittish, for whatever reason, and stop the overnight lending, it exposes the company to immediate bankruptcy. This is a hugely risky practice, and that is how most – if not all – of Wall Street operated! In Bear's case, the repos were backed by mortgage securities, again a common practice on Wall Street, and when those started to go bad, lenders scuttled. So was Bear's fall the result of competitors? No. The deterioration of the mortgage market brought down many respected firms, such as Merrill Lynch and Lehman Brothers. In the case of Wall Street, almost everyone followed the herd mentality and stacked their portfolios with questionable mortgage securities. It is much more difficult to find competitors that bucked the trend of excessive risk taking on mortgages. If Jimmy Cayne knew the details of competitors' repos deals to the last letter of their agreements, would it have made a difference?

There is a difference between strategic intelligence and competitor watching, and the latter has little relevance to the concerns and tasks of top management. Most business declines have little to do with direct competitors. Competitors may expose the underlying strategic problem, but they are rarely the strategic threat itself.

Strategy without intelligence

Strategy based on creating and sustaining differences is subject to constant attack by imitators and subject to erosion as customers' preferences, technology, regulations and substitutes shift. It has been in vogue in the USA under the Democratic administration to vilify executives of large companies for being greedy yet strategically myopic. Few people have sympathy for highly paid CEOs such as Richard Fuld of Lehman Brothers, who bankrupt their shareholders.

The truth, however, is that reading the tea leaves in an uncertain environment can be a much easier task from the sideline and in hindsight than in real time from the executive suite. Executives need all the help they can get. Therefore, as long as CI focuses on competitors' minutia, it has no value for executives. If anything, being involved and informed in the fine points of competitors' every move is a distraction that will add nothing to their effectiveness. So, if you are a top executive, and you are told competitive intelligence is basically a close and detailed monitoring of your competitors, you would be completely justified in pushing it down in the organization.

The result of this simple dynamic has been to push CI down to the product-market level. Commensurate with this focus, many CI managers in corporate USA and Europe are relatively young and inexperienced. They are better suited for mundane information tasks such as collecting and disseminating raw competitor data than they are to sophisticated strategic intelligence analysis relevant to their leadership; hence the lack of familiarity of senior execs with their CI analysts alluded to at the beginning of this article.

One may argue that even at lower levels, collecting tactical competitor information is misguided. Even young and inexperienced CI managers can be trained to understand competitors well enough to make exceedingly accurate predictions of their next moves and countermoves, facilitate war games and in general provide much higher value added than disseminating hoards of useless market statistics.

Strategic (i.e. competitive, not competitor) intelligence can have an impact magnitude larger than tactical competitor information, and its absence leaves executives vulnerable to strategic surprises and severe blind spots. The result of having no serious strategic intelligence capability for most of the Fortune 500s is that strategic decisions are made at the top with less reality check than one would expect from decisions that cost millions, make or break careers, and sometimes, can bring down the whole enterprise.

Practical strategic intelligence

Practical strategic intelligence is not a “process” or a “function”. Its location in the organization is immaterial. Practical strategic intelligence is first and foremost a perspective.

This might be an uncomfortable notion to executives who typically look for the budget line, human resource requirements, reporting relationships and other decision-ready solutions to problems. Instead of creating departments, and worrying about where in the organization to locate them, executives should think of strategic intelligence as a cultural attribute in their organizations, and ask themselves: do we have it on our floor? Whether it is one senior person in an executive meeting or three junior managers in a marketing meeting, capability is created by sanctioning, developing and instituting a mentality of “intelligence as perspective”. Companies already focus significant efforts on driving a mentality of execution, which is the dominant modus operandi in organizations. Companies that pride themselves on “acting” and “moving” need to add just a bit of “reality-testing”. Reality-testing is organizations' best defence against wishful thinking and chest pumping.

It does not matter who provides intelligence as perspective, as long as it has an honest and incorrigible voice on the executive committee. In a way, this is the role of external consultants, but their conflict of interest is too big to provide true value. Companies must develop this capability in house, finding their own unique ways to overcome turf issues, as several powerful functions and executives stake a claim on “strategy” and its derivatives, and will not welcome an intrusion into their space. The price of not doing it right is strategy without intelligence, and its corollary, intelligence without strategy.

September 2011.

This is a shortened version of “Strategy without intelligence, intelligence without strategy”, which originally appeared in Business Strategy Series, Volume 12 Number 1, 2011.

The author is Benjamin Gilad.