Competitive Intelligence

Gathering, Analysing and Putting it to Work

Christopher Murphy

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317162872
• Edition: 1
• Topic: Business
• Subtopic: Industrial Management
• Index: Business

Every business manager needs intelligence to find suppliers, mobilize capital, win customers and fend off rivals. Obtaining this is often an unplanned, instinctive process. The manager who has a conscious, systematic approach to acquiring intelligence will be better placed to recognize and seize opportunities whilst safeguarding the organization against the competitive risks that endanger its prosperity - and sometimes even its survival. Christopher Murphy's Competitive Intelligence explains: ¢ the theory of business competition ¢ how companies try to get ahead of their rivals ¢ methods of research and sources of information that generate the raw material for creating intelligence ¢ analytical techniques which transform the mass of facts and opinions thus retrieved into a platform of sound, useable knowledge to support informed business decision making. The text includes plenty of examples and experiences from the author's own consulting experience. He draws on a wide variety of disciplines, including literary criticism (or how to read between the lines of company reports, announcements and media stories) and anthropology (understanding corporate culture), as well as the more obvious ones such as financial analysis, management theory and business forecasting techniques. This fusion of insights from many fields of expertise provides a very readable, practical and imaginative framework for anyone seeking to gather and make effective use of market and company data. While focused on the British business environment, the lessons drawn are of universal application, and examples are taken from across the globe. In addition a chapter is devoted to researching industries and companies in other countries. Although primarily concerned with commercial enterprises, many of the principles and techniques will also be of considerable practical relevance to managers in the public sector or not-for-profit organizations. Competitive Intelligence also provides a legal

PART I Steps Towards More Effective Competitive Intelligence

Understanding the competitive landscape and contributing to better decision-making

CHAPTER 1 Competitor Intelligence is Not Enough!

This chapter sets the scene for the rest of the book by arguing that the commonly held view of competitor intelligence as merely ‘keeping an eye on our competitors’ is much too restrictive. In order to realize the full potential of this discipline for protecting and increasing profits its scope must be far wider. The chapter covers the following topics:

• motivation determines actual behaviour so I shall begin by examining some generalized theories about what motivates those involved in business

• the harm that can result from an excessively narrow focus when scanning the competitive environment is then considered. Evidence regarding this, drawn from a major empirical study, is presented together with some business examples

• three major influences on the competitive landscape (technological developments, changes in consumer tastes and the general economic climate) are briefly explored

• CI is shown to be concerned with threats to existing levels of profit and opportunities for increasing them. It also involves the identification of alliance partners (including competitors in some cases)

• the chapter ends with a discussion of terminology – what should this discipline be called?

People engaged in business are often said to have a simple goal – to make as much money as possible. Success or failure is measured by the amount of profit made. This is the classic version of the ‘Theory of the Firm’ and forms the cornerstone of microeconomic analysis. Compare this clarity of aim with the multiple goals a public administrator has to pursue, trying to balance fairly the interests of different groups and without this single objective measure as the yardstick of performance.

The idea that most of those in business want as much profit as they can get is a valuable analytical fulcrum. While it is an over-simplification of a more complicated reality, it provides us with a good initial point of departure for explaining the behaviour of firms and those managing them. Nevertheless, an awareness that the pursuit of profit does not embrace the whole range of economic motivation and behaviour – and the ability to discern ‘non-rational’ factors at work – are essential qualities in a good strategist or competitive analyst.

In the real world businesspeople’s motives are more complex. The assumption that they are ‘rational economic actors’ pursuing profit maximization to the exclusion of everything else is flawed. A person who is utterly fixated with a single idea and purpose is surely better described as ‘obsessed’ rather than ‘rational’. All life is a trade-off between various desirable ends. Some business owners prefer to grow their firm to a size that provides them with an acceptable standard of living without the toil, stresses and anxieties that would accompany a bigger scale of operation. In contrast to these ‘lifestyle’ businesspeople, others may gain greater satisfaction from maximizing the size and growth rate of the enterprise – and hence its economic and social ‘presence’ – regardless of the effect on profits.

Indeed, William Baumol¹ argues that many firms aim at maximizing sales rather than profits as this led to greater emotional and material rewards for management. This is particularly likely in most large companies, which are run by a cadre of professional managers acting as stewards on behalf of the actual owners. Such an ‘agency’ relationship offers scope for them abusing their positions and there have been plenty of cases of ‘fat cat’ executives who were more concerned with ensuring a lavish corporate lifestyle for themselves than looking after the bottom line for shareholders. Similarly, given the notoriously poor record of achieving enhanced profits in the case of numerous mergers and acquisitions, many executives were clearly mesmerized by building corporate size rather than profitability when they set out on the acquisitions trail.

So both owner and hired managers are often motivated by goals other than profit alone. For instance, they may be desperate to damage their rivals (regardless of the effect on their own firm’s profits) or may simply end up so focused on the task in hand that they forget why on earth they are doing it. Profit maximization may also be sidelined if its pursuit in a particular situation conflicts with executives’ emotional or ethical imperatives. Finally, the best may be the enemy of the good. Aiming to increase profits is an achievable goal; trying to maximize them for a sustained period, as Andrew Ehrenberg has pointed out, is unattainable (because rival firms can undercut the maximizer’s prices) and may actually wreck long-term profitability.²

Other theorists have proposed a ‘behavioural theory of the firm’ which views enterprises as a coalition. This eschews any kind of maximizing objective because the groups and individuals within a firm are primarily pursuing their own interests, hence the way a business actually operates is a compromise between these. This model, principally associated with the Carnegie Institute of Technology, also asserts fluid rather than fixed objectives as the goals of these varied interests – or the balance of power between them – change over time.

Competitor intelligence

The discipline I shall be discussing in this book is often termed ‘competitor intelligence’ and involves observing the other players in our market, comparing their operation with ours and trying to divine their next moves. This approach relies heavily on benchmarking where we make comparisons, using various indicators, between our rivals and us. The result will be something like a school report, flagging up those areas where we enjoy superiority over our competitors and those in which we lag behind them. Strategy will then be guided by efforts to maintain our advantages and close the gaps in areas where our rivals out perform us. One benchmarking study I was involved with concentrated on the client’s transport costs. These were found to be considerably higher than those of most other players in their sector. The action conclusion was to eliminate this weakness and the actual means adopted to cut costs was the replacement of the client’s expensive dedicated car pool by outsourcing its transport function. Similar exercises trimmed costs without harming performance in other parts of the firm’s operations, improved its competitive position relative to other market players and gave a sustained boost to its profits. Learning from others thus allowed the client to gain ground on them.

Yet benchmarking is not enough.

In reality, a too narrow view of ‘competing’ can be a dangerous distraction. Chan Kim and Renée Mauborgne of the Insead business school near Paris carried out an intensive study of some 30 companies across the world to uncover the factors which lead to high growth.³ They found that the less successful enterprises were the ones who were competitor fixated, devoting their energies to benchmarking themselves against their rivals and making incremental competitive improvements. The winners were those that concerned themselves less with their opponents and their industry’s accepted wisdom. Instead they concentrated on ‘breaking the mould’ by looking at what customers wanted, rather than what suppliers were currently giving them, and devising innovations that delivered a radical improvement in value in the eyes of the purchaser.

In the mid-1980s when IBM found that its market share in personal computers was being eroded by Compaq’s cheaper, yet good quality machines, the company made beating its rival the centrepiece of its strategy in PCs. The two firms then became locked in a struggle to produce ever-more technologically sophisticated, feature-laden desk computers. They fell into imitating each other’s marginal enhancements instead of creating fundamental innovation and were focused on each other’s moves rather than shifts in customer preferences. What both companies failed to recognize was that they were offering expensive complexity when what most customers wanted was a cheap and easy to use machine. At the end of the 1980s these deadly rivals saw other, seemingly less well-placed enterprises, trading on low price and user-friendliness, devour their market.

Another case quoted by Kim and Mauborgne – demonstrating the ability of a company to seize a market opportunity by breaking away from the pack – is Callaway’s ‘Big Bertha’ golf club. This was an industry with well-entrenched manufacturers of clubs and thus seemingly unattractive soil in which to nurture market leadership. However, Callaway noted that there was little to distinguish between the products then being sold and found golfers reacted warmly to a club with a bigger head which gave them a more satisfying game.

One major risk is where people in a company have so much industry experience and knowledge that they assume only their accustomed rivals pose competitive danger. They will then fail to detect and respond to an aggressive newcomer. Xerox failed to spot Canon’s ability to break into its market because the Japanese company was not perceived as a reprographic equipment manufacturer. Likewise US car makers regarded Honda as a motorcycle producer and woke up too late to the damage it would inflict on them when it began building automobiles.

Attaining pole position in terms of product excellence, a coveted goal for many enterprises, can also leave a firm competitively exposed. Encyclopedia Britannica was proud of its ‘best of breed’ encyclopedia and had enjoyed a long period of unchallenged pre-eminence. When Microsoft brought out its electronic Encarta encyclopedia, Britannica scorned it as far inferior to their product. Just as with IBM and Compaq, the company had lost touch with the market. Encarta was much cheaper and adequately met the needs of many people for an ubiquitous reference source. Britannica then had to make radical and painful adjustments to its offering to stay in business. Market leaders in other sectors have been bruised in a similar way, indeed Clayton Christensen,⁴ coined the term ‘disruptive technology’ to describe situations where a technically inferior offering destabilizes an industry by giving customers most of what they want at a much lower cost.

So ‘competitor intelligence’ is insufficient in itself to enlighten a business to guard against competitive threats or to seize market opportunities. This certainly does not mean ignoring rival firms and what they are up to, but does require a much wider sweep of vision.

Competitive intelligence

Hence this discipline is better described as competitive intelligence or CI.

Thus its scope is not limited to researching and assessing other firms and acting to outperform them. It embraces all factors that could endanger or enhance a company’s revenues and profits. I shall be looking at these in more detail in Chapter 5. For the moment I wish to pave the way by considering the impact of a) technological developments b) changes in consumer tastes c) the general economic climate.

TECHNOLOGY

One of the most influential articles to be published in the Harvard Business Review was Theodore Levitt’s ‘Marketing myopia’.⁵ His theme was the dire consequences when an industry failed to see beyond its own limited boundaries. Thus makers of buggy-whips remained blissfully unaware of the implications for their trade posed by the spread of the horseless carriage until their market collapsed. US railway companies were slow to recognize and respond to the competitive threat offered by the nascent automobile and, later, aviation industries. They perceived themselves as operating in the railroad business, whereas they were really providing transport services and their customers would desert in droves once other modes of travelling became more attractive to them.

A more contemporary example of the risks posed by technological development would be Filofax, makers of personal organizers. This product was inspired by the binders filled with technical data and specifications engineers carried with them while on site. The idea of replacing a diary, address book and other reference aids with a single folder whose pages could be added or removed whenever needed proved hugely appealing and the company enjoyed high sales. As electronic miniaturization galloped ahead Filofax found its market under siege. Customers could now access a great deal more information in electronic organizers the size of a cigarette case instead of carrying around a cumbersome volume. They were also able to perform more powerful and faster search and retrieval functions. Filofax had to move from its original business proposition: ‘this makes you more efficient’, to a greater emphasis on the aesthetics of a fashion accessory that was also useful and easy to use.

CHANGING CONSUMER TASTES

Levitt focused on the capacity of technological change to undermine the competitive foundations of an industry, but other types of shifts in the wider business environment can also cause them to crumble. Consumer tastes may change, devastating a once prosperous sector. Up to about 1960 western men tended to wear hats. A hat was regarded as necessary as a jacket and in old films, when detectives rush out of their office on the way to the scene of a crime, they still grab their hats before leaving. Inside a relatively short period wearing a hat habitually became positively eccentric for all but older men. Some fashion historians trace its sudden decline to Jack Kennedy’s inauguration in 1961. On a bitterly cold winter day in Washington, he broke with custom by appearing hatless. The youthful vitality of the handsome, eloquent new president contrasted strongly with his elderly, highly conventional predecessor and is alleged to have inspired men to abandon their hats. This sector of the clothing industry remained in the doldrums until the wearing of baseball caps brought a revival many years later.

GENERAL ECONOMIC CONDITIONS

At first glance it would seem extraordinary that anyone engaged in business would fail to take the general economic climate into account and yet it has happened only too frequently. Examples abound, but I will quote one from my own experience.

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CASE OF THE ‘FOLLOW THE HERD’ FINANCIAL INSTITUTIONS

At the end of the 1980s I was working as a conference producer and we decided to hold a conference on estate agency. Our choice was an obvious one because the sector was going through a period of radical change. A booming house market in Britain had spurred both the number of property transactions and their prices. Estate agents’ fees were a percentage of the purchase price, so their income was boosted by both factors. Most agents were highly profitable, small-scale partnerships. Strategists in big financial institutions such as the Prudential saw this as a wonderful opportunity. The market was attractive and they reasoned that buying out partnerships scattered across the country and imposing uniform nationwide branding and exploiting economies of scale would further enhance its profitability. So the financial houses were busily buying up agencies and placing their names over the doors.

In preparing the conference we took soundings from the various players involved and met with a senior executive from one of the acquisitive institutions. My boss and I outlined a counter-scenario to him whereby property prices could not continue rising at such a hectic pace indefinitely, especially as the UK government had adopted a restrictive fiscal and monetary stance to check inflation. We also argued that most of the value of the acquired agencies resided in the local knowledge of the former partners who were now quitting the business and enjoying affluent lives of leisure from the proceeds of selling their firms. On that basis these very expensive acquisitions were a poor investment. In response our adviser said: ‘I hea...