Maintaining Strategic Competitive Advantage

11 Aug, 2009 by James L. Clark in Articles & Papers, Business, Competitive Advantage, Marketing, Strategy

MAINTAINING STRATEGIC COMPETITIVE ADVANTAGE THROUGH CONTEMPORARY MANAGEMENT TACTICS – A LOOK AT COMPETITIVE INTELLIGENCE.

BY JAMES L. CLARK, SNR., ESQ.

Pressures from competitors, changing customer needs, and the macroeconomy continuously confront businesses, requiring them to constantly evaluate and change their strategic goals and their management tactics (Inkpen, 2000).

Evaluation of strategy includes ongoing assessment of internal strengths and weaknesses and external opportunities and threats. Academic researchers have found that most businesses adequately audit their internal environment but many lack the methodology to properly and accurately assess the external environment (Herring, 1996). Firms are finding that the only way to maintain strategic advantage is by implementing Competitive Intelligence (CI) programs (Caudron, 1994).

The Society of Competitive Intelligence Professionals (SCIP) defines CI as a systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals (SCIP Website, 2001).

Intelligence relies on legal and ethical gathering and analysis of information from published literature and human sources to allow for decision-making concerning competitors’ strategies, emerging industry trends, and potential threats (Sawka, 1996).

Since the end of the Cold War former intelligence operatives have infiltrated the corporate world (Brocas, 2001); they are bringing with them the tools, skills, and knowledge that executives need to stay on top; CI operatives are often the real power behind corporate decision makers (Brocas, 2001).

In Great Britain many of Her Majesty’s most effective intelligence operatives have defected to the private sector. This is in part because they can earn far higher wages outside Crown service (Brocas, 2001). Some companies prefer to have their own in-house intelligence teams, but generally, they hire outside help. Big corporations like British Petroleum, British Airways, and others take very seriously the assistance that former intelligence officers can provide (Caudron, 1994).

Information on competitors is more readily available today than ever before (McCollum, 1998). Sources of data and information available to business managers are much simpler to attain and less difficult to develop into intelligence. While there are many different sources of primary and secondary data, employees are the most valuable and readily available (Caudron, 1994). Experts believe that between 70% and 90% of the intelligence a company needs is possessed by employees who gather immense amounts of information through dealings with suppliers, customers, and other industry contacts (Caudron, 1994). AT&T Corporation, which is considered a leader in CI, established a database that lists over 1,000 employees who make themselves available to other companies to provide information about their line of business.

Research indicates that most Small Business Enterprises (SBE) do not realize the benefits associated with CI (Narayanan, et al). Many organizations lack a formal strategy and process for collecting and amassing, digesting and assimilating, and converting this information into knowledge that is useful for the strategic development process (Herring, 1992). Arrogance among business owners may be a contributing factor as studies have shown that entrepreneurs have the attitude that the owner or manager knows the market in which the business competes and does not need information or intelligence gathered in a more systematic approach (McKenna, 1996). But at the other end of the spectrum more and more large multinational corporations are adopting a formal process (McEvily, et al, 2000).

As far back as the mid 1980s companies have been implementing CI programs. One excellent example involved a large pharmaceutical company learning that a primary competitor intended on challenging their leading product with the introduction of a new product of their own. The company’s intelligence team forewarned the directors and they were subsequently able to thwart the new entry completely disrupting the new product’s introduction for over a year. Even when their drug was being laced with cyanide, they still managed to withstand the negative publicity and Tylenol® remained America’s number one pain reliever. Johnson & Johnson’s CI operatives found out about Datril® and took the initiative. Had Bristol Myers done the same thing during the research and development (R & D) phase of Datril®, they might well have surpassed Tylenol® in the hysteria that surrounded the cyanide poisonings. That is the foundation for all good intelligence: getting the necessary information to the decision maker in time for them to make the right strategic management decisions (Clark, 2000).

A survey conducted by The Futures Group between 1995 and 1997 found that businesses in the United States are slowly moving to improve their CI programs. Of those who participated in the survey in 1997, 60% had an organized CI system. That being said, many people have the misconception that information equates to intelligence. Information in its purest form is raw data that is free of context and meaning (Caudron, 1994). However, the definition of CI given by SCIP implies that information becomes CI once it is analyzed and provides implications for strategic planning and decision-making.

CI is an organized, rigorous, and coherent approach to information collection, analysis, and reporting. It includes (Nolan, 1999):

 Tasking – a CI operatives’ first order of business is to determine what kind of information is needed. Getting with the company’s directors and establishing the scope of the intelligence gathering accomplish this. It is a very goal orientated process. The managers should have a specific mission in mind such as to gather information about a product or to obtain information about a competitor’s planning in a certain area.

 Collection Objectives – once those responsible for CI understand the task (or tasks) at hand, they can develop specific objectives or particular sub-components that together represent the principal collection requirements. Once this is done they can identify the primary sources of information such as employees, suppliers, and customers. Secondary sources will likely be found in print or electronic media.

 Collection Activities – collection activities is the investigation process that takes place in intelligence collection. Often-secondary data such as trade related press, employment ads, and white papers could be looked at to help identify primary sources. These are not necessarily the best place to find up-to-date information, but they help provide a background and assist in the process.

 Interim Reporting and Initial Analysis – as the information is collected, CI operatives regularly check and measure it against known or postulated data, assessing its accuracy and validity.

 Analysis – Once the collection activities are complete all areas are subjected to rigorous analysis. Assumptions and presumptions are deliberately scrutinized so as to not undermine the integrity of the project.

 Reporting and Dissemination – this is where the intelligence operatives present the results of the collection activities and analysis in both an oral presentation and in a written report that provides greater detail to the company leadership.

Another popular misconception about CI is that it and economic espionage is the same thing. CI is not a euphemism for economic, industrial, or business espionage. These tactics represent an altogether different approach to information collection and reporting. Practitioners commonly use illegal and unethical means to gather the information ranging the gamut from bribery to computer hacking (Nolan, 1999). Gathering CI is absolutely legal and ethical whereas economic espionage will likely be both illegal and unethical.

An example of illegal and unethical economic espionage is a company (or government) sending an employee to apply for a job at a competing firm solely for the purpose of retrieving information. The arrest and conviction of Mikahel K. Chang for instance, is a striking case in point. He was sentenced to one year and one day for the theft of trade secrets by U.S. District Court Judge Jeremy Fogel following a guilty plea on one count of theft of trade secrets and admission to criminal forfeiture allegations (Department of Justice Website, 2001). The owner and CEO of Semi Supply, Chang’s former employer, said that his company would have been put out of business had the government not recovered the data (Department of Justice, Press Release, 2001).

It should be noted that publicly available information concerning economic espionage activities are limited. But sufficient evidence shows that many countries are active in this arena. (FBI, 1995)

According to the United States Department of Justice, the Chinese External Liaison Department uses intrusive methods such as monitoring data communications and computers and actively eavesdrops on digital links within China. The Chinese government often uses their visiting students and professors in nonintrusive methods to penetrate American corporate and academic laboratories and report their findings to Chinese authorities.

France uses its intelligence services to engage in a variety of intrusive methods to conduct economic espionage and to provide intelligence to various French governmental agencies, which in turn determine which French companies should receive it. Both the Directorate General of the External, which is France’s equivalent of the CIA, and the Directorate of Surveillance and Terrorism, its equivalent of the FBI, play a major role in conducting economic espionage – especially against the US (FBI, 1995). Surveillance and Terrorism monitors personnel and communications inside France, including telephone conversations and faxes, and even began in the early 1970s to bug Air France flights from New York to Paris. It has also been known to conduct what are often referred to as “bag” operations in hotels whereby it surreptitiously opens suitcases and uses bribes and prostitutes to compromise employees who can supply information or provide access (Schweizer, 1993).

In 1991, Ikujiro Nonaka created a stir when his article, “The Knowledge-Creating Company,” appeared in the Harvard Business Review. Nonaka began with a simple declarative sentence: “In an economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge” (Greco, 1999).

To the Japanese, objectivity and insight can be obtained only when they are based on access to the correct information, without which effective and profitable decisions are not possible. The Japanese word for information, joho, means having a purpose and a method (Baumard, 1994). In the United States information is seen more as a commodity. Economic espionage in Japan is very sophisticated and diverse; its mission is to make Japan even more prosperous and competitive (Greco, 1999).

Prior to World War II, Japan had a very effective military espionage apparatus, which was dismantled when the peace treaty ending the war prohibited the re-establishment of a Japanese intelligence agency. Many Japanese intelligence officers found employment in Japanese trading companies. To this day Japan does not have an intelligence agency to conduct economic espionage, but relies instead on its trade ministries to collect economic information through mostly nonintrusive methods (Greco, 1999).

During the 1950s the Japanese government began subsidizing the worldwide travel of up to 10,000 Japanese businessmen each year to gather foreign technological information. It has recently been estimated that 80 percent of all Japanese intelligence assets have been directed toward gathering information about the United States and to a lesser degree, Europe (Richter, 1995). Not only is economic espionage performed externally, it is performed internally as well. The domestic Public Security Investigation Agency is charged, like the Directorate of Surveillance and Terrorism in France, with conducting bag operations against targeted American business executives (Nonaka, 1991).

The new Russian Federation has divided the once powerful KGB into two separate agencies. The Ministry of Security is now responsible for domestic security and law enforcement while the Foreign Intelligence Service is responsible for gathering foreign intelligence. The National Center for Automated Data Exchanges at the Institute of Automated Systems in Moscow, using intrusive methods, monitors Soviet computer users and foreign data networks and databases to obtain any proprietary information or intellectual property it can. Intrusive methods for conducting economic espionage in protected environments include electronic access, physical access, and gaining access to personnel (Richter, 1995).

An example of economic espionage carried out via the computer occurred from 1986 to 1989 when a group of contract hackers employed by the KGB accessed countless computer systems and networks from terminals outside the United States. This group of hackers, based in West Germany, was run by a KGB officer based in East Berlin, with the objective of penetrating sensitive computer systems around the world. The hackers were paid both in cash and drugs for information obtained from the U.S. military, from scientific R&D organizations, and from universities. Upon penetrating the computer system at the Lawrence Berkeley Laboratory in California, the group used it as the host to access the Advanced Research Projects Agency Network, a military network, which in turn allowed the group to penetrate 450 other computers (Madsen, 1993).

The Germans have been very active and successful in the field of economic espionage through a top-secret computer facility outside Frankfurt, which has allowed the Federal Intelligence Service to enter both data networks and databases of companies and governments around the world (Madsen, 1993).

Economic, scientific, and technological intelligence gathering in Israel is traditionally placed under counterintelligence, the Israeli Defense Force Intelligence Branch or the Israeli Central Institute for Intelligence and Special Duties. These agencies have been successful at obtaining information beneficial to Israeli state-owned industries, particularly for those in aerospace, chemicals, and electronics (Schweizer, 1993).

South Korean methods for pursuing economic espionage include aggressively accessing closed source environments through the use of electronic access, physical access, and access to personnel for obtaining proprietary information. South Korean intelligence agents are extremely active in collecting political, economic, and technological secrets. For its size South Korea possesses one of the world’s most successful intelligence organizations. Its National Security Planning Agency boasts of possessing technically proficient agents, enormous financial resources, and well-organized informers who are paid large sums for helping collect proprietary information. Overseas, members of the intelligence service are usually posted to the South Korean embassy as part of the diplomatic staff, but often they arc assigned to Korea’s industrial conglomerates, such as Hyundi, Samsung, and the Lucky Group (Schweizer, 1993).

Over the years, a plethora of conceptual and empirical research studies have suggested theoretical models of CI and provided perspectives on competitive intelligence practices (Subramanian, et al, 1998).

Prescott and Smith (1989) conducted studies to determine how leading-edge organizations develop a structure of effective CI programs and found that formal CI programs tend to be quite new. They surveyed organizations and found that most had decentralized CI programs located within the marketing or strategic planning departments. They also found that, on the average, most firms only had three people working in the CI program.

Literature on CI has continued to emphasize the importance of conducting competitor analysis and obtaining competitive intelligence that is useful for the strategic management process (Narayanan, et al).

As a result of their surveys, Prescott and Smith came up with five main principles that should be considered when a company seeks to establish a CI program:

1. Competitive analysis should no longer be confined. All members of the organization are valuable intelligence agents.

2. Competitive intelligence should be project-based versus being a continuous, comprehensive program.

3. Intelligence personnel should be results-oriented.

4. Each new finding of a competitive intelligence program should be collected in a “knowledge bank”.

5. The decision-makers’ comfort zone should be recognized and their expectations should be considered when conducting competitor analysis.

The managerial implications of these research projects focused on the much-needed development of a competitive intelligence system within an organization, be it a large multi-national or a small business enterprise. Organizations, regardless of size and performance, must have the means to assess the external environment to maintain competitive edge (Groom, 2001). Lacking this, strategies will be formulated and implemented without any concern for how the market will react (Combs, Richard, et al, 1992).

The examples listed thus far have shown that engaging in CI (and economic espionage) has financial rewards. Subramanian and Ishak (1998) surveyed 85 firms from Business Week’s 1000 Most Valuable Companies to test a hypothesis relating financial performance to competitor analysis. They believed that high-performance firms, as measured by ROA, would possess more advanced competitor analysis systems than low-performance firms. They were right. What they found was better-performing firms gain a competitive advantage by using advanced monitoring systems and that firms with monitoring systems exhibited far greater performance, as measured by ROA, compared with those firms who did not engage in CI or who had poorly developed CI programs (Groom, 2001).

Whilst intelligence gathering among small organizations is largely informal many of the surveyed organizations are beginning to wake up to the fact that they can realize greater returns by implementing CI programs.

From the studies conducted by Prescott and Smith, Subramanian and Ishak, and others strongly suggest that companies with increasing revenues were more satisfied with current intelligence than those with stagnant or decreasing revenues. Larger organizations also reported using their entire (or large portions) of their employee base to gain intelligence. This appears to be very valuable, especially to small organizations with less capital (Groom, 2001).

As important as it is to become proficient in CI, a company also must guard against competitors learning about its own operations (Ettoree, 1995). Experts advise that a good operating assumption is to believe that your competitors are better at the CI process than you are. This keeps you alert and proactive (The Futures Group, 2000). Rigorously screening prospective employees (and contingent workers) and require stringent non-disclosure agreements signed by key executives assists in this process. Making security and vigilance a part of your operating corporate culture can keep your competitors from gaining critical data on your business activates (Ettoree, 1995).

The importance of assessing and analyzing the external environment and the impact such actions have on a company’s management process, cannot be overemphasized; neither can instituting a counterintelligence programme. Both competitor analysis and strong security are essential to the strategic management process (Cartwright, 1995).

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Tylenol® and Datril® are registered trademarks of their respective owners.

© Copyright 2001, 2009 by James L. Clark, Snr., Esq. All rights reserved. Duplication prohibited by domestic and international laws. This document is not for open publication and may not be released to third parties. The rights of the author have been asserted.

Website: http://www.jameslclark.com

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