Business and Competitive

Analysis

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Business and Competitive

Analysis

Effective Application of New and Classic Methods

Craig S. Fleisher and Babette E. Bensoussan

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Library of Congress Cataloging-in-Publication Data

Fleisher, Craig S. Business and competitive analysis

methods: effective application of new and classic methods/Craig Fleisher, Babette Bensoussan.

p. cm. ISBN 0-13-187366-0 (hardback : alk.

paper) 1. Business intelligence. 2. Competi- tion. I. Bensoussan, Babette E. II. Title.

HD38.7.F57 2007 658.4'032—dc22

2006030892

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Dedication

This book is dedicated to my immediate family, my wonderful wife Angela and three awesome boys Zachary, Austin, and Kieren.

They have contributed love, patience, and understanding—characteristics that were

particularly needed during the cold, winter months as we put the finishing touches on this effort and tried to keep the synapses connected. Thanks again everybody—I

couldn't have done it without you and your support.

—Craig S. Fleisher I dedicate this book to Garry Johnston,

my husband and best friend. His encourage- ment, patience, and love throughout the

countless days, weeks, and months involved were instrumental in me emerging with

some semblance of sanity. Garry, you have been a tower of strength. Thank you.

—Babette E. Bensoussan 11/1629

Table of Contents

Acknowledgments About the Authors Preface 1 Business and Competitive Analys-

is: Definition, Context, and Benefits Understanding the Terminology

Competitive Strategic Analysis Intelligence

Analysis as a Component in the Intelli- gence Cycle

Competitive Analysis and Decision Making

The Competitive Context Facing Con- temporary Enterprises

Contemporary Context Facing the Analyst

Shifting Organizational Priorities for Analysts and Analysis

Summary References Endnotes 2 Performing the Analysis Process

Understanding the Customers of Analysis Defining the Analysis Problem Identifying the Scope of the Analysis

Intelligence Analysis at Differing Organ- izational Levels

Strategic Intelligence Analysis (SIA) Tactical Intelligence Analysis (TIA) Operational Intelligence Analysis (OIA)

Evaluating the Inputs to Analysis Making Sense of the Analysis

Facts Perceptions Beliefs Assumptions Projections Synthesis

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Infrastructure to Support the Analysis Process

Intelligence Solutions Limitations of Intelligence Solutions Managing the Internal Network Managing the External Network Proactivity, Efficiency, and Perpetual

Learning Summary

Fleisher and Bensoussan's 10 Com- mandments for Business and Competitive Analysis

References Endnotes 3 Avoiding Analysis Pitfalls

Analysis of Failure Failure Location Sources of Failure

Four-Level Hierarchical Model of Analys- is Failures

Individual Analyst-Level Failures Analysis Task-Level Failures

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Internal Organizational-Level Failures External Environment-Level Failures

Overcoming the Barriers and Improving Analysis Performance

Provide Empowerment Realize the Value of Analysis Value the Link Between Analysis and

Success Ask the Right Questions Develop Recognized Analysis Training Measure Performance Appropriately Position the Analyst Correctly Provide the Right Tools Differentiate the Task

Summary References Endnotes 4 Communicating Analysis Results

The Art of Effective Communication Packaging the Results of Your Analysis Delivering the Message

Face-to-Face Briefings

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Written Reports and Briefings Presentations in Meetings, Seminars,

and Workshops E-Mail/Instant Messaging Intelligence Systems Exercises and Planning Sessions

Common Products and Reports Used by Analysts

News Bulletins and Newsletters Assessments Competitor Profiles Strategic Impact Worksheets Intelligence Briefings Situation Analysis Special Intelligence Summaries

Creating the Report Communication Difficulties Faced by

Analysts Effective Listening and Answering the

Questions of Decision Makers Conduct Communication Follow-Up and

Gather Feedback

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Pragmatic Considerations Summary References Endnotes 5 Applying the FAROUT Method

Applying the Techniques An Evaluation Scheme for Assessing the

Adequacy of Tools and Techniques: FAROUT

Using the FAROUT Rating System References Endnotes 6 Industry Analysis (The Nine

Forces) Short Description Background

General Environment Operating Environment/Industry

Analysis Internal Environment

Strategic Rationale and Implications Strengths and Advantages

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Weaknesses and Limitations Process for Applying the Technique Case Study: Rating the Nine Forces Model

in the Australian Airline Industry Barriers to Entry-Weighting 9 Bargaining Power of Buyers-Weighting

6 Bargaining Power of Suppliers-Weight-

ing 6 Government-Weighting 6 Social-Weighting 5 Competitors-Weighting 9 Technology-Weighting 8 Substitutes-Weighting 3 International-Weighting 6

FAROUT Summary Related Tools and Techniques References Endnotes 7 Competitive Positioning Analysis

Short Description Background

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Strategic Rationale and Implications Develop and Build on the Firm's

Position Maintain and Hold the Firm's Strong

Market Position Defend a Dominant Position Withdraw from a Market

Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Identify Current Strategy and Market/ Product/Project Parameters

Conduct Analysis Review Results and Formulate Posi-

tioning Strategy Summary Case Study: Financial Services FAROUT Summary Related Tools and Techniques References Endnotes 8 Business Model Analysis

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Short Description Background Strategic Rationale and Implications The Business Model Classification of Business Models Strengths and Advantages

Comprehensive Detailed Understanding Integration of Value Delivery

Mechanism Innovation

Weaknesses and Limitations Disruption from Outside the Industry Innovation Market Orientation

Process for Applying the Technique Step 1: Articulate the Value Proposition Step 2: Specify the Target Segment Step 3: Determine Competitors Step 4: Evaluate the Value Chain and

the Cost Model Step 5: Evaluate the Value Network

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Step 6: Determine the Revenue Model for the Firm

Step 7: Determine the Critical Success Factors for the Industry

Step 8: Complete an Analysis Grid De- tailing Each Element of the Business Model

Case Study: Dell Computer and the Print- er Market

FAROUT Summary Related Tools and Techniques References Endnotes 9 SERVO Analysis

Short Description Background

Strategy Environment Resources Values Organization

Strengths and Advantages Weaknesses and Limitations

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Process for Applying the Technique Step 1: Evaluate the Current Perform-

ance of the Firm Step 2: Assess the Current Strategy and

Discern Whether Change Is Necessary Step 3: Develop and Evaluate Strategic

Options and Programs FAROUT Summary Related Tools and Techniques References Endnotes 10 Supply Chain Management

(SCM) Analysis Short Description Background Strategic Rationale Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Rules and Tools Case Study: ATale of Two Supply Chains:

Best Buy vs. Sears/Kmart

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FAROUT Summary Related Tools and Techniques References Endnotes 11 Benchmarking Analysis

Short Description Background Strategic Rationale and Implications

Taxonomy of Benchmarking Strengths and Advantages

Powerful Competitive Analysis Tool Objective Stretch Goal Setting and Per-

formance Measurement Flexibility Removal of Blindspots Improves Cost Efficiencies and Quality Not Reinventing the Wheel but

Redesigning It Media Recognition Requirement for Other Certifications Creates an Innovative Culture Open to

New Ideas

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Weaknesses and Limitations Copycat Syndrome High Rate of Failure What Works Well in One Organization

Might Not Work in Another Benchmarking Is Resource Intensive No Firm Does Everything the Best Low-Performing Firms Have a

Disadvantage Some High-Performing Companies

May Not Be Willing to Share Information Process for Applying the Technique

Step 1: Identify the Processes That Need to Be Benchmarked

Step 2: Identify Performance Measures Step 3: Evaluate Your Own Firm's

Capabilities Step 4: Identify Firms to Be

Benchmarked Step 5: Conduct Research of Selected

Firms

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Step 6: Analyze the Collected Data and Develop an Action Plan

Case Study: Delivery of Packages by Federal Express

Step 1: Identify the Process That Needs to Be Benchmarked

Step 2: Identify Performance Measures Step 3: Evaluate Own Firm's

Capabilities Step 4: Identify Firms to Be

Benchmarked Step 5: Conduct Research from Selected

Firms Step 6: Analyze the Collected Data and

Develop an Action Plan FAROUT Summary Related Tools and Techniques References Endnotes 12 McKinsey 7S Analysis

Short Description Background

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Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique Case Study: Privatization of Kenya Air-

ways in the New Millennium FAROUT Summary Related Tools and Techniques References Endnotes 13 Shadowing

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Shadow Teams Team Composition Team Structure Performance Goals Shadowing Developing a Shadow Market Plan

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Case Study: Illuminating Strategy by Shadowing

Sources of Information Inferences Confirmation Tentative Conclusions Monitoring

Mini Case Studies Case 1-Deregulating Utility Case 2-Packaged-Food Multinational Case 3-Ready-to-Eat Foods Case 4-Pharmaceutical Firm

FAROUT Summary Related Tools and Techniques References Endnotes 14 Product Line Analysis

Short Description Background Strategic Rationale Strengths and Advantages Weaknesses and Limitations

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Process for Applying the Technique Step 1: Initial Product Audit Step 2: Assess the Product Relative to

Its Position in the Product Life Cycle Case Study: eBay, Inc. in 2004 FAROUT Summary Related Tools and Techniques References Endnotes 15 Win/Loss Analysis

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Step 1: Determine the Target Segments and Identify Prospects

Step 2: Understand Internal Cultural Issues

Step 3: Develop the Questionnaire Step 4: Preparation for the Interviews

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Step 5: Conducting Interviews Step 6: Analysis and Interpretation Step 7: Dissemination

Case Study: Microsoft Business Solutions Understanding the Environment Learning from Their Losses Leveraging the Data Keeping Current

FAROUT Summary Related Tools and Techniques References Endnotes 16 Strategic Relationship Analysis

Short Description Background Strategic Rationale

Purposes Served by SRs Two Key Strategic Relationship

Processes Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

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1. Studying Your Own Firm's Relation- ship Formation Readiness

2. Studying a Rival's Relationships FAROUT Summary Related Tools and Techniques References Endnotes 17 Corporate Reputation Analysis

Short Description Background Strategic Rationale and Implications Strengths and Advantages

Universal Bottom Line Competitive Differentiation Qualitative

Weaknesses and Limitations Practical Uses Reliability of Results Return on Investment

Process for Applying the Technique Reputation Quotient

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Focused CRA Media Ranking and Monitoring Reputation Management

Case Study FAROUT Summary Related Tools and Techniques References Endnotes 18 Critical Success Factors Analysis

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Leidecker and Bruno's Identification Techniques

Determining Critical Success Factor Importance

Summary FAROUT Summary Related Tools and Techniques

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References Endnotes 19 Country Risk Analysis

Short Description Background Strategic Rationale Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Economic Risk Transfer Risk Exchange Risk Location/Neighborhood Risk Sovereign Risk Political Risk

Case Study: Zyboldt Metals (ZMC) Ex- pansion into Eastern Europe

Hungary Ukraine

FAROUT Summary Related Tools and Techniques References

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Endnotes 20 Driving Forces Analysis

Short Description Background Strategic Rationale Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Step 1: Identifying an Industry's DFs Step 2: Assessing the Impact of the DFs

Summary Case Study: The Digital Music Industry FAROUT Summary Related Tools and Techniques References Endnotes 21 Event and Timeline Analysis

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations

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Process for Applying the Technique Plot the Target Firm's History of Key

Events on a Line Develop a Chronological Table of

Events Develop an Events Matrix Event and Causal Factors Analysis

Case Study Timelines in Competitive Analysis

Development of the Timeline FAROUT Summary Related Tools and Techniques References Endnotes 22 Technology Forecasting

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

1. Delphi Technique-Expert Opinion

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2. Trend Extrapolation 3. Growth Curves 4. Historical Analogy 5. Scenarios 6. Morphological Analysis 7. Relevance Trees 8. Monitoring

Using the Information Case Study: Bell Canada and the Delphi

Process FAROUT Summary Related Tools and Techniques References Endnotes 23 War Gaming

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Step 1: Is a War Game the Way to Go?

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Step 2: Getting a Business War Game Off the Ground

Step 3: Who Should Play? Step 4: Preparing for Your War Game Step 5: Playing the Game Step 6: After the Game

Case Study FAROUT Summary Related Tools and Techniques References Endnotes 24 Indications and Warning

Analysis Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Step 1: Establish the Set of Indicators Step 2: Establish Meaning Behind

Indicators

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Step 3: Validate and Rank Indicators Against Threshold Levels to Determine When Warnings Need to Be Issued

Step 4: Determine and Recommend Ap- propriate Firm Responses to the Warning

Summary FAROUT Summary Related Tools and Techniques References Endnotes 25 Historiographical Analysis

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Step 1-Develop a General Proposition Step 2-Collect Primary Information Step 3-Collect Secondary Information Step 4-Select the Best Sources for the

Third Draft

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Step 5-Reporting Case Study-Australian Menswear

Retailer FAROUT Summary Related Tools and Techniques References Endnotes 26 Interpretation of Statistical

Analysis Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Percentage Changes Percentiles and Quartiles Normal Distribution and Bell Curve Summarizing Data with One Value-

Central Tendency Standard Deviation Comparing Data

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Regression Analysis Correlation P-Values

FAROUT Summary Related Techniques References Endnotes 27 Competitor Cash Flow Analysis

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Processes for Applying This Technique

Future Cash Flow Analysis Tip Sheet on Cash Flow Analysis

Case Studies Historic Cash Flow Analysis: Burns

Philp Future Cash Flow Analysis: Power

Brewing FAROUT Summary

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Related Tools and Techniques References Endnotes 28 Analysis of Competing

Hypotheses Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Step 1: Identify the Possible Hypotheses to Be Considered

Step 2: List the Significant Evidence in Support of and Against Each Hypothesis

Step 3: Prepare a Matrix with Hypo- theses Across the Top and Evidence Down the Side

Step 4: Refine the Matrix Step 5: Draw Tentative Conclusions

About the Relative Likelihood of Each Hypo- thesis by Trying to Disprove It

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Step 6: Analyze How Sensitive Your Conclusion Is to a Few Critical Pieces of Evidence

Step 7: Report Conclusions Step 8: Identify Milestones for Future

Observation That May Indicate Events Are Taking a Different Course Than Expected

Summary FAROUT Summary Related Tools and Techniques References Endnotes 29 Linchpin Analysis

Short Description Background Strategic Rationale and Implications Strengths and Advantages Weaknesses and Limitations Process for Applying the Technique

Linchpin Assumption Sensitivity Analysis

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Process for Using Linchpin Analysis in Assessing Risk

FAROUT Summary Related Tools and Techniques References Endnotes Index

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Acknowledgments

I, Craig Fleisher, want to express my gratit- ude and thanks to a number of friends and colleagues without whose help the book could not be written. My first expression of gratitude goes out to my co-author Babette Bensoussan, who worked alongside me for the last few years in developing this text. Se- cond, a big dose of thanks goes out to Sheila Wright, my colleague and fellow SCIP Board member who researches and teaches com- petitive intelligence and marketing courses at Leicester Business School (De Montfort University, UK), and who was a magnificent and timely help in polishing Part 1, as well as being a particularly helpful sounding board for my ideas. Go Tigers! My highly capable research assistant Jennifer White did a mar- velous job in helping me uncover and organ- ize the materials as well as develop

PowerPoint slides for each of the technique chapters, and Sanjay Gupta assisted in re- viewing and commenting upon several chapters—particularly the one on business model analysis, which he helped develop, as did my long-time research assistant Victor Knip, who was his usual hard-working self. I also want to thank the many individuals who helped review these chapters and provided valuable advice. I'd particularly like to thank long-time competitive intelligence and related professionals Brad Ashton, Al- bert Cruywagen, Bill Fiora, Alex Graham, Arik Johnson, Timothy Kindler, Victor Knip, Martha Matteo, Rainer Michaeli, John Prescott, Pascal Savioz, Pat Shaw, Fred Wergeles, and Melanie Wing. Thanks to many excellent MBA students in my various CI courses at the University of Windsor, University of New Brunswick, and Wilfrid Laurier University. The book also benefited from feedback from students and workshop

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attendees at the University of Sydney and Sydney Graduate School of Management (Australia), Nihon University (Japan—spe- cial thanks to my friend and colleague Yoshio Sugasawa), Stellenbosch University, Gradu- ate School of Business Leadership at UNISA (thanks to Peet Venter), University of Pretor- ia and North-West University in South Africa (special thanks to Wilma Viviers). They offered me a wonderful sounding board for discussing many of the book's ideas. Addi- tionally, I want to acknowledge David Blenk- horn, who co-taught CI courses at WLU with me, where I also benefited from teaching re- lated strategy courses with my colleague Kenneth Harling, and Conor Vibert of Acadia University, with whom I regularly discuss these concepts. Additionally, several valuable workshops and conferences held under the auspices of Society of Competitive Intelli- gence Professionals (SCIP), CBIA (South Africa) and its long-time leader Steve

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Whitehead, my friends Mike Kuhn and Marie Luce-Muller of IBIS South Africa, Frost & Sullivan, KMWorld, and Marcus Evans Conferences, in particular, have also allowed me many opportunities to hone these ideas. Last but not least, I want to ex- press my appreciation to various agencies that provided funding and other forms of support along the way in developing this book, including the Canadian Council for Public Affairs Advancement, National Re- search Council (Canada), National Research Foundation (South Africa), Odette School of Business, Dean Allan Conway, and the Wind- sor Research Leadership Chair and Odette Research Chairs—University of Windsor. I, Babette Bensoussan, readily acknowledge that I am right on the cutting edge of the still relatively new competitive intelligence mar- ket in Australia. This positioning has not only presented me with a multiplicity of challenges when compiling this book, but it

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has also placed me in a somewhat unique professional situation. While I have been privileged to witness and indeed help create the emergence of this field in Australia and Asia over the past dec- ade, the fact remains that relevant expertise is still very thin on the ground locally. This situation has, however, provided me with a wonderful opportunity to tread new ground, refine implementation frameworks and ideas, and help excite the Australasian busi- ness environment about the value that com- petitive intelligence can deliver when it is ap- plied professionally and comprehensively. Putting this book together in these market circumstances has been personally fulfilling and challenging at the same time. I have been propelled largely by my keenness to make competitive intelligence a more funda- mental consideration in both Australian and Asian businesses. Turning that keenness into hard copy, however, would not have

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happened without the knowledge that every- one who knew about my efforts added a di- mension and fully supported me—even with just a few words of encouragement to keep me focused during the tougher times. There are several people and groups of people to whom I owe a note of thanks for their contribution—whether direct or indir- ect—to the existence of this book. May I firstly acknowledge and express my thanks to my co-author Dr. Craig Fleisher, who has shared my vision so completely in both this and our first book. I would also like to extend heartfelt thanks and appreciation to Dr. Gra- ham Godbee, whose expertise in competitor cash flow analysis delivered that chapter with style. In addition, my continuing appre- ciation to my undergraduate and postgradu- ate students over the years at Sydney's Graduate School of Management both in Sydney and Guangzhou, China, and Queensland's Bond University who

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have—possibly unknowingly—given me addi- tional impetus to commit my ideas to paper; to the SCIP organization for helping to build and consolidate my international profession- al profile and allowing me to test my analyt- ical ideas in practical situations, and to the Australasian business community, who con- tinue to provide the clay with which I work. With everything in life, you do it all with a little help from your friends—and there are several who stand out. For support in getting this manuscript finalized, I owe heartfelt thanks to Kerrie Tarrant, Carolyn Schmidt, and Korina Ashbrook—what a team—thank you. To my dearest friends—Cyndi Allgaier and Christine Bull—ladies, without your on- going encouragement, where would I be! Last but certainly not least, we thank the ex- cellent staff at FT Press and Pearson who helped us all along the way, particularly Martha Cooley, Betsy Harris, Russ Hall, Mi- chael Ablassmeir, Paula Sinott, and Megan

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Colvin. It was a genuine pleasure to work with each of you.

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About the Authors

Authors Fleisher and Bensoussan are uniquely placed as experts in the field of business and competitive analysis. They have extensive corporate consulting, research, and teaching experience in strategy and compet- itive intelligence and have both published and spoken internationally. Their collabora- tion also brings the book a healthy balance of both theory and application. Craig S. Fleisher is the Windsor Research Leadership Chair and Professor of Manage- ment (Strategy and Entrepreneurship), Odette School of Business, University of Windsor, Ontario, Canada. He was the 2006 President of the Board of Directors of the in- ternational Society of Competitive Intelli- gence Professionals (SCIP), inaugural chair- man of the Board of Trustees of the Compet- itive Intelligence Foundation (Washington,

DC), founding editor of the Journal of the Competitive Intelligence and Management, is an SCIP Fellow, and is on several editorial boards of journals in the intelligence field. Author or editor of eight books and scores of scholarly articles and chapters, Craig has been recognized as one of Canada's top MBA professors by Canadian Business magazine, is named in the Canadian Who's Who, and has taught university and executive courses in the strategy, analysis, and competitive in- telligence areas for nearly two decades. A well-traveled speaker, he regularly advises leading corporations, associations, and pub- lic sector agencies on CI and analysis. Babette Bensoussan is the Managing Dir- ector of The MindShifts Group Pty. Ltd., a Sydney, Australia, based consulting firm spe- cializing in strategic planning, competitive intelligence, and strategic marketing projects in the Asia Pacific region. Over the past 15 years, Babette has carried out over 300

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intelligence and strategic projects in a wide range of industries and markets, including aerospace, information technology/com- puters, insurance, transport, financial ser- vices, waste services, pharmaceuticals, utilit- ies, mining, and manufacturing opera- tions—to just name a few. Babette was a Founder and Vice President for the Society of Competitive Intelligence Professionals in Australia (SCIPAust), a member of the Journal of Competitive Intelligence and Management and Competitive Intelligence Review editorial boards, and was awarded the CI field's highest individual honor by be- ing named SCIP's Meritorious Award winner in 2006, as well as having been the first in- ternational recipient of the SCIP Fellows Award in 1996. She also has successfully taught undergraduate, MBA, and executive courses on competitive analysis and intelli- gence at the Sydney Graduate School of Management and Bond University.

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Preface

This is a book about how individuals in or- ganizations can turn data and information into insights that decision makers cannot and will not ignore. This book provides its readers with 24 commonly applied methods for helping generate actionable recommend- ations for decision makers, as well as a hand- ful of detailed chapters that address the pro- cess of competitive analysis itself. Given the priority of competitiveness in firms today, business managers need to have a benchmark about what business and com- petitive analysis is and how it works. More importantly, they need to be able to convert the wealth of available data and information into a valuable form for decision-making and subsequent actions. Collected data must be converted into intelligence. This is accom- plished through analysis.

Business and Competitive Analysis (BCA) is a book about analysis. Analysis is one of the more difficult and critical roles a manager, consultant, functional specialist, strategist, or intelligence provider is called upon to per- form. Although great strides have been made in recent years in terms of planning strategy and intelligence projects and collecting data, the same cannot be said for analysis. Much of the background research we per- formed in developing this book was derived from practice and research in the larger field of competitive intelligence (CI). This field is not one most of our readers will have en- countered during their formal education, and their current employers may not have anybody with that discipline in their job titles. Nevertheless, nearly every firm per- forms some of the CI functions, and most of them perform it on a regular basis in ad- vance of making key decisions. Analysis is one of the key roles performed by individuals

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in the CI field, and it is the one that arguably generates the highest value for executives. In our view, business and competitive analysis can and should be a key weapon in the firm's arsenal for achieving competitive advantage. Despite many advances and steady growth in the CI field, some areas of this growing field have received more or less attention than others. The growth of digital communication and information technology and especially the Internet has led to much attention being given to processes and techniques of data collection, as well as information and know- ledge management. Planning competitive in- telligence projects has also received a boost from the ever-present attention given more broadly to strategic planning and strategy development. Despite these areas of popular interest, two areas that have received dispro- portionately less attention are analysis and its communication. In fact, our own observa- tions, experiences, and several studies

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underlie the authors' contention that many practitioners have limited understanding of the breadth and depth of the challenge un- derlying these areas. We seek to remedy this situation by offering this needed book that is devoted entirely to the process, tools, and techniques for con- ducting business and competitive analysis. This is our second book in this subject mat- ter area, with our first, called Strategic and Competitive Analysis: Methods and Tech- niques for Analyzing Business Competition, having been published several years ago and subsequently translated into half a dozen dif- ferent languages. We received a lot of con- structive feedback on that effort, particularly from managers and analysts who were using the techniques described in that book. Based on the feedback and reviews, readers typic- ally found it to be an excellent, one-stop source for reminding and guiding them on the key steps of a particular tool to address a

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particular problem they were facing, as well as providing them with an enhanced idea of what was supposed to be accomplished by applying the tool. That book was used in many well-known enterprises to help train newly hired analysts and consultants. Fin- ally, the book was used in business school courses in scores of countries to help stu- dents learn and apply these techniques to decision-oriented case studies and "real- world" projects. We took the feedback we received and incor- porated it into this book in the form of a wider range of proven techniques and a bet- ter background on the process and context of business and competitive analysis. This book is absolutely not a second edition and con- tains completely new content. Between the two books, we provide lengthy coverage of nearly 50 different techniques, which is surely the most detailed coverage of business

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and competitive analysis methods ever produced. We recognize that there are literally hun- dreds of business and competitive analysis techniques that we could have included in this book. It was not our intention to offer an exhaustive list and detailed description of all these techniques. Instead, we have extens- ively reviewed the literature in the field, con- sidered survey research and our own experi- ences in determining those techniques we view as potentially being the most applicable across a broad range of decision making con- texts supported by the business and compet- itive analysis process. Although we have tried to include both "clas- sic" and evolving techniques, we recognize that some techniques that are being used in consulting and industry may not be included here. One reason for this is that some of these tools are and remain proprietary to the consultancies employing them. Another part

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of the reason we may not have included a useful tool here is that analysis is a process that requires both technical knowledge and creativity. We recognize and hope that man- agers and analysts will creatively develop techniques not included in this book that provide for better outcomes in their specific contexts. The reader should also be alert to the fact that any listing of techniques is bound to run into a variety of problems of semantics and definitional confusion. Some of the tech- niques included in this book are known by multiple names. This may have occurred be- cause the technique came to be associated with a particular originating organization or particular company's use (e.g., McKinsey 7S), a particular author (e.g., Porter's Five Forces Model), or has retained a generic name (e.g., benchmarking analysis). We re- cognize that some of the techniques included in this book have seen modifications in use

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over the years or are derivatives of other closely related techniques. In all cases, we have tried to include and describe the most popularly utilized versions of the techniques, as opposed to all of a technique's possible de- rivatives. Throughout our methods chapters, we have tried to alert the reader to where there is overlap between techniques by sug- gesting that the reader refer to the overlap- ping constructs elsewhere in the text. Many of the techniques included in this book were created by leading economists, finan- cial and cost accountants, futurists, sociolo- gists, anthropologists, intelligence agencies, business professors, consultants, and other insightful practitioners or theoreticians. They often developed their ideas in an effort to solve pressing analytical problems that they faced. We are grateful to these individu- als for enlightening our understanding of business and competitive analysis. We make

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a sincere attempt to acknowledge the origin- ators of these techniques in the book. We must also note to our readers that it was not our primary intention to "invent a new wheel" when it comes to analytical tech- niques. The techniques we have included all have a history, with some having been ap- plied for several decades or longer. This book's techniques have been and are in use in real organizations and do not exist just in theory. However, we have included several techniques that are likely to be unfamiliar or novel to many readers, even those who have gone through graduate business, manage- ment, or marketing courses, as well as indi- viduals who have been performing analysis in their enterprises for many years. We be- lieve strongly that unfamiliarity is a particu- larly bad indicator of a method's value. We believe our readers will find that even some of the new techniques (to them at least) will be of high potential value in helping them

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make sense of their firm's business and com- petitive contexts.

How to Use the Book

To assist our readers, the majority of this book is self-contained, with the array of ana- lytical techniques being supported by refer- ences for further reading for those individu- als who want lengthier treatments. The book is organized into two main sections, with the first providing the reader with an under- standing of what the evolving body of know- ledge in the field has revealed about analysis in its real-world context and how analysis processes actually are supposed to work. This book includes five detailed chapters that describe, define, and discuss the basic facts about analysis, how analysis can ideally be performed, avoiding analytical pitfalls, and communicating analysis results. The last

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chapter in the opening section describes our unique FAROUT method for understanding the application of the various tools. We strongly recommend that readers thoroughly review that particular chapter before pro- gressing into the remaining sections of the book that contain coverage of the analytical techniques themselves. We have tried to make the book easy for the reader to use. The basic structure of the chapters containing the analytical techniques is common throughout the second part of the book and contains the following format:

• Short Description—A brief defini- tion of the purpose and objective of the analytical model to provide an analyst with a quick and handy refer- ence guide.

• Background—To place the model in context of management, this sec- tion outlines a broad description of

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the history behind the development of the analytical technique.

• Strategic Rationale and Implica- tions—Understanding the strategic thinking and implications associated with a particular analytical technique is important in order to evaluate the appropriateness of a particular tool. This section reviews the strategic is- sues inherent in each technique.

• Strengths and Advantages—Each model has its own strengths and ad- vantages that need to be weighed in light of the purpose of the analysis. This section briefly reviews those strengths and advantages.

• Weaknesses and Limita- tions—Likewise, each model has its own inherent weaknesses and limita- tions. The weaknesses/limitations identified in this section need to be

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taken into account when performing the analysis.

• Process for Applying the Tech- nique—This is the "how to" of the analytical technique and identifies the necessary steps required to use this tool. Case studies, figures, and tables are also provided to guide the analyst through the strategic thinking required for each model.

• FAROUT Summary—Unique to this book, the FAROUT Summary al- lows analysts, at a quick glance, to identify the ease of use, practicality, and usefulness of each model.

• Related Tools and Tech- niques—Each model of analysis is related to or supported by a number of other techniques that may aid or enhance the analyst's task. This sec- tion provides a useful guide of related tools and techniques that support the

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objective and purpose of each analyt- ical model.

• References—For those analysts wanting to delve further into a partic- ular technique, references for addi- tional readings are provided at the end of each chapter.

Readers will benefit by becoming familiar with this template. This book was not de- signed to be read in one sitting—if nothing else, its length would probably make that an extremely tiring task and practically im- possible for most individuals. Instead, we have designed it as a handy comparison and reference source. In this respect, it can be most effectively applied in a "just in time" fashion so as to proactively or concurrently meet an organization's analytical needs as they arise. The book features conceptual ideas about business and competitive analysis, along with a strong bias toward practical

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application. Among the unique aspects of this book that readers should find valuable are the following:

• It provides in one easy location two- dozen of the most common and pop- ular models of analysis used in busi- ness. Normally, executives and stu- dents would have to go to multiple sources to locate each model. Here, for the first time, the most commonly used models are defined and ex- plained in one book.

• Every model is also uniquely evalu- ated using FAROUT—an evaluation process for identifying the ease of use, practicality, and usefulness of each model. FAROUT allows analysts or decision-makers to understand the strengths and weaknesses of the techniques.

• An easy-to-use, consistent format (i.e., template) is utilized to provide

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the reader with a faster understand- ing of how to apply the techniques.

• The book covers both the so-called "classic" strategy techniques, such as industry analysis, along with some of the newer popular techniques, such as business model analysis. Several of these models, such as win/loss ana- lysis, strategic relationship analysis, driving forces analysis, and event and timeline analysis, among others, have never been treated this comprehens- ively in any other publication.

• It provides external techniques ad- dressing the environments and in- dustry that the organization com- petes in, along with the techniques for focusing internally on the organization.

• It provides references to more com- prehensive treatments of the

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techniques for those who want to in- vestigate them in greater depth.

We expect to stimulate others to begin clos- ing some of the knowledge gaps in business and competitive analysis that we have expli- citly and implicitly identified throughout this book's chapters. We also hope that this book encourages practitioners to further share their experiences and observations with re- searchers and teachers like us in the field. We anticipate that the book will compel our readers to question some, if not a large num- ber, of their current analysis practices and understanding. Our ultimate aim is that this book be viewed as a valuable contribution to the knowledge and practice of business and competitive analysis. Whether or not we achieve our aim is left in your hands, our readers, as it should be. Please feel free to contact either of us if you would care to share your views.

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Babette E. Bensoussan The Mindshifts Group Pty. Ltd. Level 6, 8 Help Street Chatswood New South Wales 2067 Australia telephone: +(61-2) 9411-3900 fax: +(61-2) 9411-3636 email: ba- [email protected]

Craig S. Fleisher Odette School of Business University of Windsor 401 Sunset Aven- ue—508 OB Windsor, Ontario, N9B 3P4 Canada telephone: 519-253-3000 x3455 fax: 519-973-7073 email: fleish- [email protected]

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1

Business and Competitive Analysis: Definition, Context, and Benefits

Business competition now comes in many different forms and from a great variety of competitors, and the challenges are increas- ing. Successfully positioning the enterprise, properly deciding on the correct allocation of resources, and deciding what an acceptable level of performance might be in such a com- petitive environment are key tasks of senior decision makers. Consequently, skillful busi- ness and competitive analysis (BCA) is critic- ally important in determining how an enter- prise can compete and deliver value to its stakeholders. This book is designed to assist analysts to de- velop high value insights, to aid them in

making sense of the competitive environ- ment confronting their organizations, and to guide them in advising their decision makers. Our underlying premise throughout this book is that a good analyst, working in any environment, must have a robust and healthy repertoire of methods, tools, and techniques to help answer important ques- tions on the enterprise's ability to compete, not only in the present, but also the future. For the most part, the end users of an analyst's output are decision makers, and as such, they will be the clients or customers taking action based on those results. Uniquely, this book focuses specifically on analysis, analysis methods/techniques, and the analysis process. It is not designed to be another strategic management or strategic planning text. There are plenty of good titles

of those genres available,1 although the pro- cesses and techniques described herein will certainly benefit strategic planners and

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managers. We have decades of experience advising, consulting, instructing, practicing, and researching how BCA is used in all types of enterprises. What surprises us about competitive and strategic analysis is the relatively limited number of tools and techniques used by most practitioners and how little genuine in- sight emanates from them! These adverse results occur not only because some tools are badly chosen, outdated, or in- correctly used, but also because they are mis- understood and/or misapplied. This book provides comprehensive instruction on a range of constructive processes, tools and techniques that are available, direction on how the method was developed, analysis of its strengths and weaknesses, an outline of the process used to actually employ the tech- nique as well as sample applications, and identification of complementary techniques,

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resulting overall in that vital ingredi- ent—insight. Our first text in this area identified 24 differ-

ent techniques.2 Since the first book was published, we have seen many instances and heard countless anecdotes from practitioners who wished to have an "analyst's manual" of BCA tools and techniques. We believe that this book goes some way toward meeting that desire.

Understanding the Terminology

This book emphasizes a handful of key words: competitive, strategic, analysis, and intelligence. These are all part of the normal business and management lexicon. As we use these words repeatedly, it is useful for us to clearly identify what we mean when we use them.

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Competitive

In this book, we look at businesses that are in competitive markets and typically operate in a competitive mode. We are addressing the processes and means by which firms pos- ition themselves and their products or ser- vices against their rivals to win market share. Competitive means that a contest is occur- ring between two or more parties. The sources of this can be multi-faceted, originat- ing in product or service offerings, shelf- space negotiations, supplier contracts, and investor relations, to name just a few. Usu- ally, competitive bouts end up with a winner, and no further contest is needed. The focus of this book is on the market place, though, and this is quite a different proposi- tion. Competition here is about achieving a sustainable winning performance, not

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delivering one action that simply wounds, but consistently beating the rest who are working, most likely, toward the same or very similar goals as your enterprise.

Strategic

Strategic is a word used today to describe al- most every decision and/or action taken, when in reality there is a clear mix of the no less valuable, tactical decision making taking place. The generic use of a word such as "strategic" can diminish its real role and mask the impact that a true strategic de- cision has. Strategic matters are a key focus of this book. Strategic decisions, as opposed to tactical, operational, or instantaneous decisions, have a unique set of characteristics to differentiate them. These distinctions occur along the di- mensions of time, frequency, effort required,

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consequences, and impact. Strategic de- cisions typically:

• address at least a medium-term time horizon, at best long-term (time).

• occur infrequently or emerge from a formalized planning cycle (frequency).

• require significant input from key people (effort).

• require significant information input from key functions (effort).

• require substantial resources to for- mulate and implement (effort).

• affect the long-term direction of the organization (consequences).

• affect many, if not all, of the organization's activities (consequences).

• affect competitive dynamics (impact).

• involve major change to the firm's activities (impact).

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• become the over-arching blue-print for subsequent decisions (impact).

If all or a significant number of the preceding elements are present, the greater the likeli- hood that the decision is indeed strategic. We want to make it clear that just because a decision is not strategic does not make it un-

important.3 Many non-strategic decisions help to determine the performance of an en- terprise in a marketplace, particularly in the shorter term. Decisions such as seasonal price discounting, direct mail campaigns, product enhancements, and ambush market- ing are all examples of non-strategic de- cisions. They have a short-term lifespan and a short-term effect. The key to our identification of a strategic decision is that they are the ones typically made by senior executives, managing direct- ors, and/or the senior management team. Consequently, the enterprise that gets the

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strategic decisions "right" has a far greater chance of also getting the non-strategic de- cisions right.

Analysis

Where does analysis fit in with competitive understanding? Competitive analysis is the cornerstone of effective strategy formulation

and execution.4 Valuable analysis helps de- cision makers to understand and predict critical market-changing actions that may be taken by competitors and other competition- impacting stakeholders. These decision makers are charged with answering a small number of very powerful questions about their organization, including the following:

1. 1. What is our current status or situation?

2. 2. What are our options?

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3. 3. Which direction do we want to go? 4. 4. Which direction should we go? 5. 5. How can we get to where we have

decided we are going? 6. 6. How will we know that we have

gotten there?

Many of the analysis tools in this book will be beneficial to strategic decision makers in their effort to address those critically import- ant questions. Properly conceived analysis aids decision makers in generating, choos- ing, and validating appropriate strategic responses. Analysis is a term that generates much con- troversy and disagreement. Before we provide our definition of analysis, it may be helpful to examine definitions put forth by others that are in common usage. These can be found in Table 1-1. Table 1-1 Common Definitions of Analysis as Used in Intelligence Contexts

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Although there is some value in these defini- tions, we find each of them to be lacking in some aspect. As such, in this book, analysis is defined as: "The skilled application of sci- entific and non-scientific methods and pro- cesses by which individuals interpret data or information to produce insightful intelli- gence findings and actionable recommenda- tions for decision makers." Like many developing fields of inquiry, busi- ness and competitive analysis is NOT purely

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art or science, but a combination of substan- tial portions of both in its effective applica- tion. As with the type of research formally taught to scientists, the analysis process can be viewed as holding much in common with the scientific method. Analysts will observe certain events, persons, or actions, develop a proposition or hypothesis that describes/ex- plains what they have observed, and then use the hypothesis to make predictions about what may subsequently occur. These predic- tions can then be further assessed through additional observations or data, and the hy- potheses can be modified based on the res-

ults.5

This process, which can be applied in theory by analysts, gets complicated very quickly by factors present in the real world of business and market-place competition, as well as the politics and social nature of decision makers and enterprises. Analysts frequently work in groups or teams and benefit from the

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pooling of expertise. Hypotheses aren't al- ways developed, tested, or reformulated, but are frequently modified in real-time by the evidence that is acquired. These factors point to genuine business and competitive analysis being more of a social scientific pursuit than that of physical or pure science. The "real world" tends to bring out the "art" aspect of analysis. When conducting an ex- periment using control groups, we know that some percentage of a treatment group's ana- lyses will not confirm the control group's analyses. Analysts in these two groups will weigh the same data or information differ- ently, based on schemes that may be hard for others to accurately replicate. Even when analysts do substantively agree about the nature of the problems being addressed, they can still subsequently disagree about the proposed course of action. Consequently, analysts may never be able to "prove" they were right. It is these kinds of experiences

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that points to why analysis can sometimes be viewed as more akin to art than science. The following humorous parable helps point out some of the important differences between the two perspectives.

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A Parable About the Artist and the

Scientist

There were once two people, a scientist and an artist, sitting next to each other, traveling on a bus. They had never met before, and there wasn't much conversation between the two. The artist was minding her own business, looking out her window at the beauty of the passing terrain. The scientist was uptight, trying to think of things he didn't know so he could try to figure them out. Finally, the scientist was so bored, that he said to the artist, "Hey, do you want to play a game?" The artist, being content with what she was doing, ignored him and con- tinued looking out of the window, humming quietly to herself. This infuriated the scient- ist, who irritably asked again, "Hey, you, do you want to play a game? I'll ask you a

question, and if you get it wrong, you give me $5. Then, YOU ask ME a question, and if I can't answer it, I'll give YOU $5." The artist thought about this for a moment, but she decided against it, seeing that the sci- entist was obviously a very wise man. She politely turned down the scientist's offer. The scientist, who, by this time was going mad, tried a final time. "Look, I'll ask you a question, and if you can't answer it, you give me $5. Then you ask ME a question, and if I can't answer it, I'll give you $100!"

Now, the artist, who was not that smart aca- demically, wasn't stupid either. She readily accepted the offer. "OK," the scientist said, "what is the EXACT distance between the Earth and the Moon?" The artist, obviously not knowing the answer, didn't stop to think long about the scientist's question. She took a $5 bill out of her pocket and handed it to the scientist. The scientist gladly accepted

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the bill and promptly said, "OK, now it's your turn." The artist thought about this for a few minutes, and then asked, "All right, what goes up a mountain on three legs, but comes down on four?" The big smirk quickly van- ished from the scientist's face. He thought about this for a long while, taking out his pencil and making numerous calculations on his books. When that didn't lead to an answer, he took out his laptop and accessed the Internet. After about an hour of this, all the while with the artist quietly watching the mountains go by, the scientist finally gave up. He reluctantly handed the artist a $100 bill. The artist accepted it graciously, turning back to the window. "Wait!" the sci- entist shouted. "You can't do this to me! What's the answer??" The artist smiled sweetly, pressed a $5 bill into his hand, and said "I don't know."

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Business and competitive analysts are tasked with making sense out of often ambiguous, complex, and challenging matters that de- cision makers care about. Like the artist on the bus, they too have to weigh up the odds, work through the scenarios, work out what they know as opposed to their competition, and take action. They have to make sense of, or create meaning from, a typically con- strained sample of data and information. In an often-confused and rapidly moving com- petitive landscape, they try to answer the three critical questions commonly asked of them:

1. 1. "What?" 2. 2. "So what?" 3. 3. "Now what?"

Any of these three questions may be answered in a variety of constructive ways using replicable procedures and methods

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(science), as well as intuitive or creative ones (art).

Intelligence

It is important to understand the place of in- telligence within the larger context of an en- terprise. The need to generate competitive intelligence (CI) is certainly not new. Sun Tzu plainly stated the rationale for intelli- gence over two thousand years ago. He wrote, "Now the reason the enlightened prince and the wise general conquer the en- emy whenever they move, and their achievements surpass those of ordinary

men, is foreknowledge."6

Intelligence processes in business organiza- tions have received significant attention in recent decades. The benefits gained by suc- cessfully anticipating a competitor's future plans and strategies are generally self-

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evident. The consequences of making de- cisions based on information that is incom- plete, inaccurate, or late are as severe. CI often engenders images of fictional secret agents such as James Bond using an im- pressive array of sophisticated gadgetry to eavesdrop on their business competition. In reality, CI can be exhilarating, but not be- cause of illegal skullduggery. Modern CI practitioners are stimulated by using their unique set of skills, knowledge, abilities, and instincts to uncover relationships that enable their organizations to compete more effect- ively. Most CI practice includes a heavy dose of analytical capabilities. Analysts are prom- inent, central members of CI functions in today's successful, global enterprises. There are numerous definitions of CI in con- temporary practice and scholarship. Our cur- rent sense is that no single definition of CI is likely to be precise and universally accepted. As such, CI is generally viewed as the process

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by which organizations gather actionable information about competitors and the com- petitive environment and, ideally, apply it to their planning processes and decision- making in order to improve their enterprise's performance. CI links signals, events, perceptions, and data into discern- ible patterns and trends concerning the busi- ness and competitive environment. CI can be simple scanning, such as analyzing a company's annual report and other public documents, or elaborate, such as performing

a fully digitized war gaming exercise.7

CI is not business espionage; it is ethical, leg- al, legitimate, and essential. Business espion- age develops intelligence by illegal or cloak- and-dagger means such as breaking and en- tering, bribery, coercion, deliberate decep- tion or advertising "phantom" job vacancies, electronic eavesdropping, bugging or tap- ping, network infiltration, or systems hack-

ing.8 CI practitioners use public, but not

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necessarily published, information. In other words, the information the CI practitioner seeks is readily available and identified through legal means of open sources such as public documents, interviews, and in-house expertise. It does not involve the theft of trade secrets. One way to understand CI is to view it as a progression from raw inputs to finished out- puts. In this perspective, CI begins with scattered bits of raw, basic data. This raw material is then organized by CI practition- ers and becomes information. Information becomes intelligence when it is placed into a format useful to a decision-maker's unique or critical intelligence needs (CINs). Intelli- gence is therefore information that is ana- lyzed, interpreted, and infused with de- veloped implications—the basic focus of this book. Using this lens, CI is the refined intelli- gence product produced by an analyst that meets a decision-maker's unique needs for

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understanding a competitive aspect of the in- ternal and/or external environment. Effect- ive CI helps the decision-maker make a bet- ter decision! CI can also be viewed as an organizational function ranging in scope between the broader area of business intelligence (BI) and the narrower version practiced as com- petitor analysis (CA). A CI function provides the foundation on which strategy and tactics are built, assessed, and modified. As a mostly staff-oriented function, CI will cut across and overlap other functions, in particular, those associated with marketing, planning, and strategy. Competitive Intelligence Programs (CIPs) have goals such as proactively detecting op- portunities or threats; eliminating or redu- cing blindspots, risks, and/or surprises; and reducing reaction time to competitor and marketplace changes. CIPs attempt to ensure that decision makers have accurate, current

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information about the organization's com- petitive environment, and a plan for using

that information.9

Analysis as a Component in the Intelligence Cycle

Analysis is arguably that portion of the larger intelligence process in which the greatest

value is generated.10 Much organizational experience suggests it can also be more diffi- cult to do than the resource-draining data and information collection efforts that most organizations have emphasized in recent years. Nevertheless, there is a long series of research and publications that suggests that business and competitive analysis serves a variety of important, longstanding needs for

organizations.11 Although we intend to ex- plore this context in much greater detail in

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other parts of this section, here we will briefly describe how analysis fits within the intelligence process. Analysis is just one step of a larger process for developing intelligence for an organiza- tion. Most depictions of the so-called "intelli- gence cycle" show a series of 4 to 6 steps in a stripped-down form. These steps describe the functions of an intelligence operation in an enterprise and are illustrated in Figure 1.1. Figure 1.1 A generic intelligence cycle

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The analysis step in this cycle involves its own set of sub-tasks that need to be conduc- ted in order to generate effective outputs and outcomes. Analysis works interactively with all the sub-processes of data classification and synthesis to produce a finished product such as a chart, graph, table, text, summary, visual, or other communicative aids appro- priate for dissemination.

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Analysis involves the skillful application of a variety of techniques. We are sharing many good ones in the upcoming chapters of this book. All of these will help decision makers make sense of intelligence. Intelligence analysis is always context-specif- ic in that it does not occur within a vacuum, a static condition, or under experimental conditions. Because analysis is performed by practitioners in active organizational and competitive conditions, it is important to identify the nature of competition that ana- lysts examine as a part of their work task.

Competitive Analysis and Decision Making

Most organizations today are not structured or organized properly to make good de- cisions that will help them outperform their

competition in the marketplace.12

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It is commonplace for this book's authors to hear from decisions makers who lament in retrospect: "If only I'd known that, I'd never have made that decision or taken that ac- tion." Such comments reflect an absence of intelligence supporting the decision maker and the lack of greater insight behind their decisions and subsequent actions. There is no shortage of examples where poor decisions have adversely affected many stakeholders. Read the business section of your local paper, and you will hear of bankruptcies, down-sizing because of poor sales, over-optimistic new product revenue/ volume predictions, wasted R&D efforts, or plant closures due to outdated technology or cheap imports. Intelligence failures relative to national decision making are also well publicized and again point to decision makers who were not properly prepared to

make optimal decisions.13

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Although it is often difficult to find decision makers who will publicly take the responsib- ility for having made poor choices, we all know of individuals who, with hindsight, would have done things differently. Unfortu- nately, we are unaware of anyone who has figured out how to either roll back the clock

or to reverse time!14 Making better choices and decisions the first time creates a greater need for effective analysis and intelligence. Today's managers face an abundance of in- formation in their decision-making contexts, and sometimes this information abundance causes them to be paralyzed. Benjamin Gilad notes how information arriving to top man- agers is invariably biased, subjective, filtered, and/or late. Analysts have the means for helping reduce both the volume and rate of this information flow while sim- ultaneously assuring the quality of the product being delivered. They can then

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greatly enhance the executive's actual ability and confidence in effective decision making. Analysis has been revitalized in the "know- ledge" era, or the era of intellectual capital. Whatever we should call it, knowledge is in- creasingly recognized as a key organizational asset that can distinguish between the win- ners and losers in many competitive market-

places.15 Organizations that can effectively generate, capture, disseminate, and apply knowledge better and faster than their com- petitors stand a higher probability of achiev- ing successful performance. Analysts are a critical part of this knowledge-oriented pro- cess as they are among the primary directors of knowledge in an organization. One thing we hope to emphasize in this book is that analysts must provide direction and guid- ance to those individuals responsible for col- lecting data and information. They are the link to gathered data and the organization's key decisions.

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Analysis is just as important because of the increased recognition and value on good thinking skills. Analysis cannot be conducted in the absence of thinking. Without it, we would have random choice and luck. This is not the best foundation for a considered out- come and is increasingly likely to suffer from "extinction by instinct." The other end of the continuum is from "paralysis by analysis." That is not to summarily discount the value of instinct, but it has to be measured along- side more reliable and tested methods of analysis. As access to data or information has in- creased, the highest value is now placed on not just obtaining appropriate data, but more importantly, to making good sense of it. That's analysis!

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The Competitive Context Facing Contemporary Enterprises

Beating competitors, in many industries, has become a necessity rather than a desirable goal. More insightful strategy development and execution has been needed since even a decade ago. We would suggest the following reasons are among the most critical ones un- derlying increased competition, all of which produce a greater need for improved busi- ness and competitive analysis. Explosion of access to cheap and fast in- formation: Whether it is employee mobility, greater access to higher education in both traditional and online formats, companies showing less loyalty to their employees, or those same employees showing less loyalty to their employers, the window on competition and competitive opportunities has grown wider and more transparent. Because of changing information and communication

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technology, as well as changing socio-cultur- al value systems, keeping key competitive in- formation proprietary and out of the sight or hands of competitors has become more diffi- cult than ever before. Maturation of industries and businesses: Many industries that were prominent in the twentieth century were resource-based in- dustries, such as forest products, manufac- turing, steel, and so on. These have rapidly matured or have seen a dramatic slowdown compared to past rates of growth. Many have struggled to institutionalize innovation cap- abilities, resources, strategies, new resource inputs, new production processes, new product development challenges, new em- ployee skill recruitment and integration, new distribution channels, and/or understanding new customer needs. These are quite differ- ent challenges to simply trying to build mar- ket share in an existing static and simple market space, and the potential for them to

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miss the disruptive forms of activity that may be occurring on the fringes of their still-luc-

rative markets is high.16

Loss of traditional means of competitive structuring and advantage: Traditionally, companies could achieve competitive ad- vantage through scale economies, segment entrenchment, first-mover advantages, and other such industry level gains. While still existing in some sectors, these approaches are now so quickly and easily imitated that they no longer deliver sustainable advantage. While the generic strategies of cost, differen- tiation, and focus described by Michael Port- er are still conceptually fruitful, they are hard to achieve and sustain in practice. In a later paper, Porter himself reconsidered the traditional approaches and concluded that the achievement of advantage is positioning, rather than resource-based. Sophisticated and better-informed con- sumers: Customers are better informed than

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ever before and have access to significantly more information on which to base their purchasing decisions. As with B2B markets, buying habits are less ingrained, and pur- chases are increasingly based on specifica- tion, cost, and value. Today's consumer is less likely to be swayed by an emotional ap- peal and will do hard-nosed research before striking a deal, especially with big ticket items. Companies that still think they can sell any- thing they like, at any price, to a gullible cus- tomer may well do so once, but not again. Bad news travels fast, and the presence of customer pressure groups, Internet blogs, and vociferous word-of-mouth channels will quickly damage a brand. Dynamic and rapidly evolving technology: Physical strengths are being replaced by in- tangible assets such as intellectual property, knowledge, intelligence, brands, R&D teams, and market position, resulting in volume-

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based advantages being less prominent.17

Even in industries where scale-based advant- ages still exist, typically manufacturing, the continual push by businesses across the globe to improve operational efficiency has

made it harder to sustain such advantages.18

This has made the development of effectiveness-based strategy and execution more critical than ever. There is little doubt that competition com- pels organizations to respond, preferably in a proactive manner. Designing these responses and assessing their impact are the primary task of the business and competitive analyst. The context within which the analysis is un- dertaken and the organization within which the analyst is working, will, inevitably, pro- duce unique demands. The following section elaborates on the unique contextual factors impacting business and competitive analysts.

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Contemporary Context Facing the Analyst

Being an analyst in an enterprise facing a high degree of competitive rivalry is difficult, especially when inexperienced and/or lack- ing appreciation of analysis science. Analysts have always had to satisfy decision makers who want and need their assistance. If any- thing, the challenge for the analyst today is more daunting than in the past. We think there are several prominent reasons why this state of affairs exists, such as the following: Lack of recognition that analysts are mission-critical: It is rare to find a student coming onto a business degree program who claims that he or she wants to be a competit- ive analyst. In contrast, hundreds, if not thousands, will say that they want to be a management accountant, financial analyst, a sales specialist, or a brand manager. Simil- arly, it is rare to hear a CEO or a CFO claim

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that their competitive advantage came from their analytical team or their capabilities. We know that analysis underlies many company's competitive advantages, but it is often called something else, or the process is embedded among other functional activities. Enlightened organizations recognize the unique value that analysis generates, and as a result, then put significant resources be- hind it to ensure that they continue to derive competitive advantage. Decision makers cannot always articulate their decision needs: Analysis requires prop- er direction at the outset for the process to produce a satisfactory output. Unfortunately, decision makers may not ask the right ques- tions of the analyst. They may not even know what the questions are. So it is up to the ana- lyst to focus their decision-maker on the "must know," as opposed to the all embra- cing "like to know" style that we witness too frequently.

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Pressure for a quick judgment: Competitors are moving fast, investors and shareholders want the quarterly performance targets on time, customers want solutions yesterday, and nobody is willing to wait. Time is the most precious resource for an analyst; con- sequently, time will always be in short sup- ply. Decisions are often made on the basis of "what we know now" because the situation simply will not allow for more delay. As such, analysts need to constantly seek established data collection and classification systems that can provide reliable outputs quickly. They need to provide intelligence despite that being at a lower level of confidence than usually expected. Analysts and decision makers need to address the increasingly time-starved context within which they both work and assess its ramifications. Highly ambiguous situations: Ambiguity comes in many forms for both the decision itself and the analyst. It can emanate from

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the nature of competition, the range of com- petitive tactics employed, key stakeholders' responses in a competitive arena, product and/or process enhancements, consumer re- sponses to competitive tactics, and so on. These types of interjections have been stud- ied by researchers who have recognized that ambiguity can be a potent barrier to compet-

itive imitation19 and allow for a competitor to sustain their advantage for a longer period. Incrementally received/processed informa- tion: Rarely will an analyst get the informa- tion he or she needs, in time and in the format they require. The inability of tradi- tional executive information systems to cap- ture, classify, and rank rumors, gossip, grapevine data, and knowledge held by em- ployees out in the field means that analysts lack the kind of primary source information that has always been the "jewel in the crown"

element that makes analysis so valuable.20

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Shifting Organizational Priorities for Analysts and Analysis

We know there has been a fundamental shift in the nature and sequence of organizational priorities for analysts. Though change is not uniform across sectors, it is possible to de- cipher the outline of a transformation toward improved analytical capabilities through the following principles. Adding Value to Intelligence: A priority for analysts is to deliver a product that adds con- text and meaning to raw data and informa- tion. In today's information-overloaded en- vironment, intelligence competes for the at- tention of the decision maker. John Gannon, former Deputy Director of the Central Intel- ligence Agency, commented, "It is our

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challenging but rewarding job to keep telling these smart but overworked folks, de- cision or policy makers, what's happening in a complicated world." Keeping ahead of the competition and keeping the attention of intelligence users cannot be taken for gran- ted. Some commentators consider that the insufficient and poor training of analysts has been a primary reason for the low effective-

ness of intelligence programs.21

One of the ways to stay relevant is to build and maintain subject matter expertise, con- tinuity, and depth within the organization's analytical ranks. Information alone will not be useful to the consumer if it is not inter- preted correctly and presented in a credible way by a recognized expert. This issue has been addressed in some organizations through the creation of a senior-level council that is responsible for strategic planning and addresses the areas of CI recruitment, as- signments, core skills, standards, and

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training. Others have relied upon the con- tinuous delivery of learning opportunities, through apprenticeships, traditional classroom, and virtual means, by which ana- lysts can upgrade their capabilities. Finally, some organizations have outsourced to spe- cialist companies who they believe can provide the needed services better than in- ternal resources. The variety of ways that best practice CI organizations have attemp- ted to address this need has been catalogued

in several studies.22

Answering Questions in Real Time: Analysts have traditionally met intelligence needs through the regular briefings and overviews, usually tailored to the client's needs. These deliveries can also be supplemented with personalized electronic or paper memos that respond to incidental or supplementary questions. Analysts may provide daily or, when a crisis erupts, minute-by-minute sup- port. While the vast majority of an

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organization's analytical tasks will be carried out in response to specific questions, over the course of a typical year, an analyst or analytical team will provide hundreds of ad- hoc briefings on virtually every aspect of the enterprise. Concentrating Resources: Analysts must be vigilant about prioritization, and they are ex- pected to use all the latest technology to stay ahead of the competition without wasting scarce resources. Consequently, there is a need to continually press for clarification of a critical intelligence need. Organizations have to find innovative ways to build in flexibility within their collection and analysis efforts so that new priorities can be addressed on as as-needed basis. This flexibility is seldom considered when devising a competitive ana- lysis or intelligence system, but has become increasingly important in a resource-con- strained context.

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Forging Partnerships: Another priority is how the organization, its data collectors, and analysts relate with the broader community. Partnership is a concept that has taken hold as organizations seek to take advantage of others' specialized expertise and resources. Cooperative efforts between CI and other de- partments have built formal and informal networks of functional and subject experts throughout the organization. Rarely does all the expertise on any particular issue reside in one part of an organization or a single unit. Tapping into analytic expertise across the firm is important to overcome commonly ex- perienced budget and personnel constraints. Looking Over the Horizon: The focus on decision-tailored support helps make analys- is more relevant and useful to the client. It also ensures that intelligence resources are going where they need to be. Providing such high-level support makes an enormous claim on resources, particular staffing and time. At

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worst, analysts risk becoming prisoners of their inboxes and unable to put daily events in a broader context, which is essential if they are to provide timely warning of emer- ging opportunities or threats. The challenge is to step back and consider what the organ- ization might face tomorrow, next week, or next year. Analysts have to look beyond the immediate and the obvious, toward those forces that might be moving slowly but inex- orably toward their organization. Giving de- cision makers a sense of the possible, rather than the probable, must be a key priority for analysts, and it is precisely this that sets them apart from others in the organization. Providing Timely Support: Analysis is most relevant when it is provided directly to the decision maker. Analysts are at their best when deployed on-site and in regular contact with the organization's managers, negotiat- ing teams, and front-line decision makers. This ensures a better understanding of

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shifting agendas, prime movers, and quick feedback on their outputs. This all helps to better target the intelligence effort. As men- tioned already in this section, time is a lux- ury that few decision makers enjoy, so any- thing that puts the analyst closer to the prob- lem can only speed up the solution identific- ation process.

Summary

Excellent analysis is the key to successful in- sights and/or intelligence and can provide high-value strategic decision support capab- ility in contemporary enterprises. Intelli- gence about customers, competitors, poten- tial partners, suppliers, and other influential stakeholders is a company's first, and often only, line of offense/defense. Maintaining this capability into the future requires ana- lysts and competitive intelligence

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practitioners to exploit every opportunity to provide their decision makers with analysis that is persuasive, relevant, timely, percept- ive, and actionable. Analysts must provide their decision makers with the essential in- sight needed to preserve their organization's competitiveness and provide early warnings of market changes. Contemporary analysts are expected to offer direct and immediate support to resolve dif- ferent types of queries, work more closely with their counterparts responsible for hu- man and technical collection, package their analyses in a variety of new forms, and deliv- er them through whatever means are best suited to the recipient. In fulfilling this mission for the future, competitive intelligence-driven organiza- tions and members of the analytical com- munity face many fresh challenges. Success will be determined, at least in part, by how well these individuals and functions manage

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their scarce resources, balance frequently conflicting demands, produce longer-term analysis, continue to develop both broad and deep analytic expertise, and forge new rela- tionships with others both inside and outside their organizations. This is not the time for analysts to be resting on their laurels. New ways of working and critical issues are ap- pearing at a far greater pace than in the past. Analysts need all the help they can get to rise to the challenge of tomorrow's demands.

References

American Productivity and Quality Council (APQC) (2000). Developing a Successful CI Program: Enabling Action, Realizing Res- ults. Houston, TX: APQC. Chender, M. (2006). Comments from his speech given to the KMWorld webinar,

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"Creating a Predictable Advantage," January 19, found at www.kmworld.com. Christensen, C.M. (2000). "Meeting the chal- lenge of disruptive change," Harvard Busi- ness Review, 78(2), pp. 66–78. Clark, R.M. (2004). Intelligence Analysis: A Target-Centric Approach. Washington, DC: CQ Press. Dierickx, I., and K. Cool (1989). "Asset stock accumulation and sustainability of competit- ive advantage," Management Science, 35, pp. 1504–1511. Dishman, P., Fleisher, C.S., and V. Knip (2003). "A chronological and categorized bibliography of key competitive intelligence scholarship: Part 1 1996-2003," Journal of Competitive Intelligence and Management, 1(1), pp. 13–79. Fleisher, C.S., Knip, V., and P. Dishman (2003). "A chronological and categorized bibliography of key competitive intelligence scholarship: Part 2 1990-1996," Journal of

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Competitive Intelligence and Management, 1(2), pp. 11–86. Fleisher, C.S. (2001). "An introduction to the management and practice of competitive in- telligence," pp. 3–18 in Fleisher, C.S., and D.L. Blenkhorn [eds.], Managing Frontiers in Competitive Intelligence. Westport, CT: Quorum Books. Fortune Magazine (2005). Global 500 list- ing retrieved from the web on February 20, 2006 at http://money.cnn.com/magazines/ fortune/global500/. Fuld, L.M. (1995). The New Competitor In- telligence. New York, NY: John Wiley & Sons. Gannon, J. (1996). "Intelligence analysis for the 21st century," excerpted from an address delivered November 18 to the Fletcher School of Law and Diplomacy at Tufts University. Source: http://www.cia.gov/cia/ di/speeches/42826397.html.

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Gilad, B. (1996). Business Blindspots: Repla- cing Myths, Beliefs and Assumptions with Market Realities. London, UK: Infonortics. Hall, R. (1993). "A Framework Linking Intangible Resources and Capabilities to Sustainable Competitive Advantage," Stra- tegic Management Journal, 14 (November), pp. 607–618. Halliman, C. (2003). "A Look at How a Number of Business and Competitive Intelli- gence Professionals View or Define the Ana- lysis Process," retrieved April 28, 2003 from http://www.InformationUncover.com/ new.htm. IALEA (2001). Starting an Analytic Unit for Intelligence Led Policing. Lawrenceville, NJ: International Association of Law Enforce- ment Intelligence Analysts, Inc. (IALEA). Johnston, R. (2005). Analytic Culture in the U.S. Intelligence Community. Washington, DC: The Center for the Study of Intelligence.

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Knip, V., Dishman, P., and C.S. Fleisher (2003). "A chronological and categorized bibliography of key competitive intelligence scholarship: Part 3 pre-1990," Journal of Competitive Intelligence and Management, 1(3), pp. 11–80. Lackman, C., Saban, K., and J. Lanasa (2000). "Organizing the competitive intelli- gence function: A benchmarking study," Competitive Intelligence Review, 11(1), pp. 17–27. Mathams, R.H. (1995). "The Intelligence Analyst's Notebook," in Strategic Intelli- gence: Theory and Application, 2d. ed., Washington, DC: Joint Military Intelligence Training Center, pp. 77–96. McGonagle, J.J., and C.M. Vella (1990). Out- smarting the Competition: Practical Ap- proaches to Finding and Using Competitive Information. Naperville, IL: Sourcebooks.

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Porter, M.E. (1996). "What is strategy?," Harvard Business Review, 74(6), Nov/Dec., pp. 61–78. Porter, M.E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, NY: Free Press. Prescott, J.E., and P.T. Gibbons (1993). "Global competitive intelligence: An over- view," pp. 1–27 in Prescott, J.E., and P.T. Gibbons [eds.], Global Perspective on Com- petitive Intelligence, Alexandria, VA: Society of Competitive Intelligence Professionals. Prescott, J.E., Herring, J., and P. Panefly (1998). "Leveraging information for action: A look into the competitive and business in- telligence consortium benchmarking study," Competitive Intelligence Review, 9(1), pp. 4–12. Procyshyn, T.W. (1998). "The coming intelli- gence failure," a white paper found at ht- tp://bib.cfc.dnd.ca/irc/nh/nh9798/

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0069.html, Ottawa Canada: Department of National Defense (DND) Canada. Rogers, P., and M. Blenko (2005). "The decision-driven organization: Making good decisions and making them happen," A white paper produced for Bain and Company, found at www.bain.com. Shaker, S., and M. Gembicki (1999). The WarRoom Guide to Competitive Intelli- gence. New York, NY: McGraw Hill. Tzu, S. (1988). The Art of War. Oxford, UK: Oxford University Press. Waltz, E. (2003). Knowledge Management in the Intelligence Enterprise. Boston, MA: Artech House. Werther, G. (2001). "Building an 'Analysis Age' for Competitive Intelligence in the 21st Century," Competitive Intelligence Review, 12(1), pp. 41–47. Zahra, S., and S. Chaples (1993). "Blind spots in competitive analysis," Academy of Man- agement Executive, 7(2), pp. 7–28.

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Endnotes

1 The field of strategy and strategic manage- ment is frequently covered in most uni- versity business or management curricula. The books used in these courses do a fine job in covering the processes and content of strategy. This book assumes some knowledge of these concepts, but does not require high levels of prior strategy knowledge to be applicable. 2 Fleisher, C.S., and B. Bensoussan (2003). Strategic and Competitive Analysis: Meth- ods and Techniques for Analyzing Business Competition. Upper Saddle River, NJ: Prentice Hall. 3 We will distinguish between strategic, tac- tical, and operational decisions types in later chapters. This book's methods will be at least somewhat applicable to all three types,

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although admittedly it will disproportion- ately be focused on strategic decisions. 4 Zahra and Chaples, 1993. 5 Clark, 2004. 6 Tzu, 1988. 7 Shaker and Gembicki, 1999. 8 Fleisher, 2001. 9 McGonagle and Vella, 1990; Prescott & Gibbons, 1993. 10 We recognize that there are likely key con- ceptual if not practical differences between the terms "business" and "competitive" intel- ligence. As explaining these differences would require far more detail than we can provide here, we refer readers to Fleisher's discussion of these terms in greater depth in Chapter 5 of the edited book (with D. Blenk- horn) entitled Controversies in Competitive Intelligence: The Enduring Issues, Westport, CT: Praeger Publishers (2003).

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11 Dishman, Fleisher, and Knip, 2003; Fleisher, Knip, and Dishman, 2003; Knip, Fleisher, and Dishman, 2003. 12 Rogers and Blenko, 2005. 13 For a poignant example of these, Robert Steele does a nice job of identifying the vary- ing nature of the failures that occurred asso- ciated with the 9-11 events that dramatically affected the United States. See "What went wrong and why," pp. 3–10 in Steele, Robert David (2002). The New Craft of Intelli- gence: Personal, Public & Political, Oakton, VA: OSS International Press. 14 This fact won't stop people from trying! This is another reason why strategic de- cisions need to be made correctly the first time, every time. 15 Waltz, 2003. 16 Christensen, 2000. 17 Hall, 1993. 18 Porter, 1996.

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19 Dierickx and Cool, 1989. 20 Chender, 2006. 21 Werther, 2001. 22 Namely, APQC (2000), Lackman et al (2000), and Prescott et al (1998).

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2

Performing the Analysis Process

Analysis is, arguably, the most important process underlying how decision makers make sense of their competitive and strategic environment. For analysis to achieve its aims and potential, analysts must be cognizant of this and appreciate how they can best con- tribute to meeting the organization's needs. In this chapter, we explore the analysis step that is part of the larger intelligence process, as illustrated in Figure 2.1. Figure 2.1 Analysis as a function of the lar- ger intelligence project cycle

It is difficult to master the task of performing business and competitive analysis (BCA). Few actually can do it well without substan- tial development and experience. Even those who declare that they have been trained to

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do it may not be as skilled as they think they are at producing good output. In light of the many business decision-making failures we witness, the only conclusion that can be reached is that relatively few organizations have a well-developed analytical capability. Fewer still leverage that capability over time into achieving competitive advantage. This chapter looks at the key success factors of performing BCA well. It is designed to help analysts better understand their tasks, their customers, the impact of their output, and the relationships they must build in or- der to get the job done. Due to their unique importance as part of the larger sense-mak- ing process, we discuss common analytical pitfalls in Chapter 3, "Avoiding Analytical Pitfalls," and how to communicate analysis results in Chapter 4, "Communicating Ana- lysis Results."

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Understanding the Customers of Analysis

"Basically, the work that we do for our customers, which are our executive leadership, our sales forces, our product managers, and our strategy people, should help them with their cus- tomers . . . our approach is very customer-focused; how are we going to help our customers help their customers?" —Bret Breeding, former Global Corpor- ate Competitive Intelligence Manager for Compaq Computer

The first questions any analyst must answer are "Who are my analysis customers?" and "What are their critical needs?" These can sometimes be difficult to answer, especially if the customers themselves cannot effectively articulate what they want or there are mul- tiple customers with differing agendas. The

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answers must at least be attempted because without those, the analyst cannot select the right methods. To be truly effective, analysts must understand how their outputs will

eventually be used by the decision makers.1

These individuals may well be one or more steps removed from the analyst's immediate customer.

An analyst's customers or clients2 are those individuals in the enterprise who are in need of advice and guidance in advance of making an identified decision. We make no distinc- tion here between the level at which a cus- tomer may be situated in the enterprise, as we know that analysts provide many decision makers with advice, whether they are work- ing on a strategic, tactical, or operational problem. The analysis process has a clear starting point when either the analyst identifies an is- sue himself or a customer makes a request. The process also has an end point when the

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satisfactory product is delivered to the cus- tomer. Having said that, good analysts will communicate with their customers throughout the entire process and will en- gage in many iterations to improve the final product. An open-minded attitude to the task is essential, as is the recognition that improvement can always be achieved. A del- icate ego is a distinct hindrance to improving one's analysis.

Defining the Analysis Problem

Customer needs have to be interpreted be- fore they can be acted upon. This is often the foundation to a successful analysis process. Analyst-customer interaction is critical at all stages of the process, but no more so than at the outset; consequently, time spent here will pay dividends later on. A genuine dialog is needed, as experience has shown us that

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the issuing of instructions in a one-way man- ner just does not produce effective results. Most enterprises attempt to identify, relate to, and then satisfy market-place customers' needs and employ customer needs identifica- tion processes and (internal) customer rela- tionship management (CRM) techniques. The relationship that an analyst has with his customer and/or decision maker is no less important. Symmetric, two-way communica- tion is needed to identify an enterprise's ac- tual, as opposed to perceived, intelligence needs. Helping business and competitive analysts are government intelligence models for identifying national-level intelligence re- quirements, which have been adapted for commercial use. A popular adaptation is the Key Intelligence Topics (KITs) approach ad- vocated by Jan P. Herring or using Key Intel- ligence Questions (KIQs). Essentially the

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same activity, this is a semantic terminology change that is preferred by some firms. Although Herring suggests that KITs are not a simple management tool or a panacea for analysis efforts, the KIT process delivers three essential benefits:

• It facilitates the identification of le- gitimate intelligence needs and dis- tinguishes between "need-to-know" and "fishing expedition" projects.

• An initial set of KITs provides a prop- er foundation for an intelligence pro- gram, eventually guiding the determ- ination of CI resources, capabilities, and skills required.

• Being a user-driven model, the KIT process provides a foundation for op- erational planning to meet and un- derstand both organizational and de- cision makers' dynamic intelligence needs.

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In line with our suggestions in the previous paragraphs, the KIT/KIQ process centers on an interactive dialog between analysts and decision makers. A successful senior intelli- gence practitioner, Dr. Wayne Rosenkrans, Global Intelligence Director at AstraZeneca Pharmaceuticals, supported this view when he said: "My advice usually is to spend whatever time is necessary on that KIT-KIQ process at the very beginning. That is so im- portant, and if you get off on the wrong foot, or on a wild goose chase, you'll have wasted all kinds of time." Herring classified decision makers' intelli- gence needs into one of three, not mutually exclusive, categories:

1. 1. Strategic decisions and actions 2. 2. Early-warning topics 3. 3. Descriptions of key marketplace

players

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The KIT process requires a high-level under- standing of the intelligence needs as well as the various types of operations necessary to address them. Herring noted that when done effectively, analysts' use of the KIT process should result not only in identifying the organization's key intelligence needs, but also in creating the critical communication channel necessary to produce credible in- sight. It also helps to manage expectations. Fiora, Kalinowski, and others offer help here by suggesting that the analyst assesses each task by addressing each of the following issues:

• Why is this project being proposed? • Has anyone attempted it before? • Are there any barriers I should know

about? • What data or information has already

been gathered on this topic? • What analysis process will be

needed?

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• Who has a stake in the outcome? • What decisions will be made based

on my work? • How quickly is an answer needed or

wanted? • What are the customer's expectations

of me? • What does the customer want or not

want to hear? • What resources are available to sup-

port me? • Can I do it? • Is the potential decision worth more

than the effort needed?

By managing expectations, analysts can de- velop mutual respect and trust with their de- cision makers, and each can better under- stand the inherent difficulties in the task. Any disconnect that exists between the intel- ligence analysis planning process and sub- sequent decision maker could be disastrous for the enterprise.

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Identifying the Scope of the Analysis

In the field of BCA, it is crucial to understand

the scope of the analysis effort.3 We suggest that the following four main categories are relevant to the vast majority of analytical ef- forts conducted within profit-seeking enter- prises (see Table 2.1). Table 2.1 Categories of Analysis

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Competitors

Talking of his group's analysis work, Wayne Rosenkrans, Global Intelligence Director at AstraZeneca Pharmaceuticals, said: "It's all about predicting competitors, either com- petitor behavior or competitive environ- ment behavior." The focus of most BCA pro- jects will be on the type of competition and actual competitors present, which requires

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both art and science. Many new analysts will choose the easy route of letting others tell them what or who the competition is or will use industry and sector classification codes. Although these methods are convenient, they are not necessarily insightful. Here we adapt the four areas identified by Donald Lehmann and Russell Winer:

• Product/brand level is the narrowest perspective an analyst can take of competition and focuses only on rivals pursuing the same segment with essentially the same offering. An analyst employed by Coca Cola using only this perspective would only look at competing cola brands such as Pepsi, RC Cola, and Virgin Cola.

• Product category level improves this situation by looking at products/ser- vices with similar features and attrib- utes. Using our previous example, this would include not only cola

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brand drinks but other soft drinks such as cherry-flavored colas (Dr. Pepper, Cheerwine), lemon-lime flavored drinks (7-Up, Sprite, Fresca), diet colas, high-caffeine colas, and other varieties of soft drinks.

• Needs-based/generic-level competit- ors seek to satisfy the same function- al need of a customer. Again, using our previous example, this would be the generic need to quench a thirst. Many beverages would be in this cat- egory, ranging from water, juice, tea, and coffee to beer, wine, and spirits.

• Share of wallet level is probably the broadest category of competition and considers any other product that a customer might choose to buy in- stead of ours.

There are many aspects of a competitor's activity that will attract the attention of a

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passionate analyst, but it is important to al- ways be mindful of the task in hand and the time scale within which it has to be accom- plished. While deconstructing a competitor's quarterly/annual report might be fascinat- ing, if it does not help to answer the KIT/ KIQ, then that is valuable time wasted.

Environment

Although we provided a detailed chapter in our last book on macro-environmental

(STEEP) analysis,4 David Montgomery and Charles Weinberg suggest that competitive analysis systems should ideally focus on the following main environmental sectors:

• Competitive—Both current and prospective competitors and the means by which they compete

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• Customer—The firm's current cus- tomers, potential customers, and competitor's customers

• Economic—Issues such as GNP, in- flation, financial markets, interest rates, price regulations, raw material sourcing, fiscal and monetary policy, and exchange rate volatility

• Political, legal, and regulat- ory—Institutions, governments, pressure group, and stakeholders that influence the "rules of the game"

• Social—Demographics, wealth dis- tribution, attitudes, and social and cultural characteristics that determ- ine the firm's purchasers

• Technological—Current and emer- ging technologies, product and pro- cess innovations, and basic and ap- plied R&D efforts

Analysts often segment the competitive en- vironment into two layers. The macro-

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environment embraces the largely uncon- trollable STEEP factors, and the operational/ internal or micro-environment includes the individual, sometimes unique, strengths and weaknesses of the enterprise.

Technology

Technology analysis is principally concerned with the technological base of new or emer-

ging technological capacity.5 Much technolo- gical analysis focuses on evolution of science and scientific activity, such as basic and ap- plied research conducted within government laboratories, hospitals, innovation parks, and universities. One specialized area of competitive analysis falls under the rubric of Competitive Technology Intelligence (CTI). Brad Ashton and Gary Stacey identified three focal areas for CTI:

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• Innovation—Identifying innovation and in particular, disruptive innova- tion. Decision makers in technologic- ally driven industries experience rap- id change. Consequently, new or dif- ferent technologies will be needed within a short- to medium-term time period to compete.

• Product/process—Attempts to un- derstand the nature and potential results of process improvements. For companies with technology intensive products and/or processes, techno- logy is an important differentiating factor in product features, production steps, or pricing strategy. Those in- dustries that are characterized by fre- quent product introductions must keep ahead of relevant emerging technologies.

• R&D—Many industries have a high proportion of companies with high

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R&D intensity. As such, they display higher-than-average ratios of R&D expenditures to sales. They are also firms whose R&D portfolio may con- tain a high proportion of large, long- range products and that are most act- ive in developing innovation, as well as product and process improvements.

The intelligence needs of decision makers in technology environments will vary by in- dustry and position. Ashton and Stacey also noted that scientists and engineers require detailed technical intelligence on technical objectives, manufacturing methods, R&D ap- proaches, and technical contacts. Technical managers often need analysis related to com- petitors' program funding plans, IP portfoli- os, partnership approaches and arrange- ments, R&D strategies, and technology ac- quisition or transfer strategies. Senior de- cision makers are frequently concerned with

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the nature of emerging or potential business alliances, new product introductions, and technical breakthroughs. Marketing decision makers care about competitive product fea- tures, product sales, product benefits, and cost/performance/price insights. Last but certainly not least, public policy makers and regulators require analysis to help them es- tablish reasonable policy and regulatory re- quirements. A flexible approach is therefore needed to respond to the needs of each and every customer.

Decision Location and Decision Maker

Management decisions differ depending on the level of responsibility on which they are made and who makes them. A brief overview is helpful here to put this into context:

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• Strategic decisions have significant resource allocation impact, set the precedents or tone for decisions fur- ther down the organization, and have a potentially material effect on the organization's competitiveness with- in its marketplace. They are made by top managers and affect the business direction of an organization.

• Tactical decisions are less pervasive than strategic ones and involve for- mulating and implementing policies for the organization. They are usually made by mid-level managers and of- ten materially affect functions such as marketing, accounting, produc- tion, a business unit, or product, as opposed to the entire organization. Tactical decisions generally have lower resource implications than strategic decisions and are typically semi-structured.

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• Operational decisions support the day-to-day decisions needed to oper- ate the organization and take effect for a few days or weeks. Typically made by a lower-level manager, oper- ational decisions are distinct from tactical and strategic decisions in that they are made frequently and often "on the fly." Operational decisions tend to be highly structured, often with well-defined procedure manuals.

Analysts must remain focused on the critical intelligence needs (CINs) of the decision maker, whatever their hierarchical level. Whether they are senior executives at the business unit or corporate level, middle managers from functional areas, or front- line personnel, each has different needs for the outputs the analyst provides. The entire issue of geographic complexities can also be added here. In the past, the key

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focus of analysis would be constrained with- in national or nation-state boundaries. Today's enterprises increasingly compete in environments that require the analyst to consider all forms of geographical levels of competition, including national, multi-na- tional, and global formats. Multi-point competition, where a diversified company will compete across a variety of market sectors, is increasingly common- place. Consequently, the analyst will need to examine how a business can best prepare to simultaneously compete against dozens of other businesses, across multiple segments, and in multiple countries. If a firm competes in fifteen different countries, there may be fifteen separate sets of competitive contexts and rules to which it must conform. When considering all these perspectives, it is per- haps not surprising that the analysis process is seen as a highly skilled and highly complex undertaking.

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Intelligence Analysis at Differing Organizational Levels

Intelligence analysis takes place at multiple levels within an organization. The three most common are strategic, tactical, and opera- tional. These match the decision location and decision-maker components discussed previ- ously and as such, Table 2.2 gives guidance on the typical techniques used for intelli- gence analysis at each level. Table 2.2 Levels of Intelligence Analysis

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Strategic Intelligence Analysis (SIA)

SIA is arguably the most vital form of intelli- gence because it provides a framework with- in which other forms of intelligence collec- tion and analysis take place. It helps to dis- cern and make sense of important trends, to identify and extract patterns that would oth- erwise not be visible, and to provide an

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overall picture of the evolving opportunity and threat environment. SIA also provides guidance for tactical and operational assess- ments, and work done at these levels in turn helps to shape the strategic intelligence fo- cus. As strategic analytic methodologies ma- ture, they will also offer the basis for predict- ive or anticipatory assessments that can serve to provide warning of potential high- impact activities. Treatments on the kind of specific tech- niques and tools that the business analyst

might use exist,6 but generic analytical initi- atives that would fall under the rubric of strategic intelligence analysis include the following:

• Opportunity and Threat (O&T) Assessments—Used to assess the levels of dependence and vulnerabil- ities of critical issues, competitive changes that could cause significant

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impact, and the likelihood of such activities taking place.

• Sector/Competitor Assess- ments—Focus on emerging or threatening competitors that provide strong potential for impacting the competitive terrain.

• Trend Analyses—Baseline assess- ments to better recognize departures from current practice, especially those that shape the industry's future.

• Anomaly Detection—Requires systematic "environmental scan- ning," as well as the coalescing of tac- tical and operational intelligence re- ports that identify and highlight spe- cific deviations from the norm.

• Impact Assessments—The macro- level view taken in SIA offers a good approach for assessing probable

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cascade effects of threatening com- petitive action and activity.

Tactical Intelligence Analysis (TIA)

TIA is a necessary and important comple- ment to work done at the strategic level. It is the natural link between macro- and micro- level analysis. Although SIA provides the framework for TIA, these assessments in turn feed SIA. With a dynamic symbiotic re- lationship between the two, mutual strength is derived. Typical techniques used in TIA are the following:

• Cluster and Pattern Analys- is—Identifies the use of particular marketplace attack methods,

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commonalities of targets, and at- tempts to build profiles of competitors.

• Stimulus-Response Analys- is—Identifies actions that could be taken by competitors in response to specific events. This analysis could be used both proactively to develop warnings or reactively to design fu- ture tactics.

• Value Constellation Analys- is—Identifies the key stakeholders, important partners, allies, joint ven- ture prospects, outsourcing potential, and agents that a company could utilize.

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Operational Intelligence Analysis (OIA)

Unlike its two more broadly based IA cous- ins, OIA is often event-centric and single- case-oriented. It provides more immediate but lesser-lasting benefits and typically in- volves technological assessments of methods used for marketplace battles or investiga- tions of competitive threats. It is frequently focused on helping the analyst understand in real-time a particular event; such as a com- petitor who is attempting to perform com- petitive intelligence efforts of your enter- prise. This can be especially helpful for counter-intelligence and can keep your company's efforts from being prematurely disclosed. An important component of OIA is vulnerab- ility analysis and recommending how these can be minimized or eliminated. Vulnerabil- ity analysis can be used to look both at the

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enterprise's marketplace vulnerabilities as well as, more tactically, the competitive in- telligence process being employed.

Evaluating the Inputs to Analysis

It is critical that analysts can credibly evalu- ate their data and information. In weighing the credibility of inputs, they have to con- sider the nature of their sources and reliabil- ity. In the intelligence community, this is of- ten described as the process of determining "bona fides." There are a series of questions that should be kept in mind when examining sources, as follows:

• Reliability—Can the source of the information be trusted to deliver reli- able information to the analyst? Does

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the source have a "track record" for delivering credible inputs? The U.S. military uses the following informa- tion evaluation scale to assess reliab-

ility:7

◦ "A" Completely reliable ◦ "B" Usually reliable ◦ "C" Fairly reliable ◦ "D" Not usually reliable ◦ "E" Unreliable ◦ "F" Reliability unknown

• Accuracy—Have the data inputs been captured "first hand," or have they been filtered? Is there any reas- on to think that there might be any deception involved? Is the source able to communicate the data pre- cisely? Is the source truly competent and knowledgeable about the inform- ation they provide? Do they have a known vested interest, hidden agenda, or other bias that might

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impact the information's accuracy? Can the source's data be verified by other sources or otherwise triangulated?

• Availability—Unavailable data is not going to help the analyst do his or her work. It is critical that the analyst does not rely solely on one source. Are there credible substitutes that can be used? Can sources be accessed quickly?

• Ease of access—What is the finan- cial opportunity and time cost to ac- cess the source? Is this the best use of limited resources, or can equivalent data be gained with lesser expendit- ure? Does the source speak the right language, or will translation be needed? If so, what are the dangers of misunderstanding and/or incor- rect reporting?

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Once analysts have addressed their sources, they need to make sense of what has been gathered. The next section talks about the preliminary stage in sense-making—that of qualifying the raw data and information be- fore it is subjected to analytical processing.

Making Sense of the Analysis

Analysts ultimately respond to decision makers' needs for knowledge. This brings up the key question of what we mean by the word "knowledge." In this book, we concep- tualize knowledge as that which people in the enterprise either know they know or perceive that they know. Knowledge is definitely an asset of the enterprise and is referred to by analysts as evidence, the basis upon which they can perform further assessment.

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Knowledge can be further broken down into five interrelated elements, all of which are important for analysts to understand in car-

rying out their responsibilities.8

Facts

Verified information, something known to exist or to have occurred. These are unam- biguously true statements and are known to be so. Facts come in any form and will be found among virtually any source of data that enters an employee's awareness, or the enterprise's communication and information systems. It is surprising how few enterprises subject their collected data and information to fact checking and verification processes. This becomes even more important for strategy decision-making purposes because many of the facts about competitors and competition are time-sensitive. What may be

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accurate today may be dangerously incorrect tomorrow.

Perceptions

Perceptions are impressions or opinions that fall short of being facts, but which are sup- ported to some extent by underlying data or logic. These are often expressed as thoughts or opinions in language such as: "I think that . . ." or "My view is . . ." It is important for the analyst to subject these thoughts and opinions to tests to establish which can be converted into facts and which have to re- main as perceptions for the time being. There is nothing wrong in factoring percep- tions into the analysis process, just as long as everybody knows that this is what they are. The error comes when perceptions are mis- takenly regarded and treated as facts when they are not. The use of perceptions is

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perhaps the most exciting element to subject to subsequent analysis, especially when us- ing scenario analysis, war-gaming, what-if analysis, and other such future-oriented techniques.

Beliefs

Beliefs are often drawn from a mix of facts and perceptions and commonly describe cause-effect relationships. They can be either explicit or implicit, but they too need to be subjected to verification and justification. Beliefs often color the way individuals un- derstand their world and the way in which they think about the future. Therefore, it be- comes critical in the analysis process for be- liefs to be aired and made transparent to those individuals who are key parts of the process, whether these individuals are data gatherers, analysts, or decision makers.

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Assumptions

This is the knowledge that individuals take for granted. These can come in the form of any of the previously described categories and may refer to things that have occurred in the past, present, or can be fairly safely pre- dicted as going to happen in the future. Ex- plicit assumptions are those that are con- sciously adopted by the analyst, are well un- derstood, and are shared. Implicit assump- tions are those that individuals in the analys- is process do not consciously elicit, share, or articulate and may not even be aware of. Valuable as they are, as with perceptions and beliefs, assumptions need to be consistently and constantly challenged to reflect changing situations and a shifting competitive landscape.

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Projections

Projections are composed of a mixture of facts, perceptions, beliefs, and assumptions. They are justified or substantiated judg- ments about the future. It is again important that the analyst be able to powerfully defend or justify their projections as they become a critical part of the knowledge base underly- ing the decisions made.

Synthesis

Having identified the type of knowledge in place, the analyst can proceed with greater confidence toward a high-quality output. Qu- alified inputs are then subjected to the real heart of analysis—the thinking processes, sifting, synthesis, induction, deduction, ab- duction, experimentation, mathematical conceptualization, experimentation,

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research, application of methods, tech- niques, and a vast array of other activities all designed to generate unique and actionable insights. An important element to the analysis process is that of infrastructure support, or those technological parts of the analysis process that are complementary to the analysis and analysis process itself. The following section provides an overview of the key facets of ana- lysis infrastructure that can encourage and permit the analyst to produce their best work.

Infrastructure to Support the Analysis Process

One facet of analysis infrastructure that has become more prominent in recent years is the growth of information systems support. When we refer to information systems in this

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book, we are specifically referring to combin- ations of software and hardware that are util- ized to support information gathering, classi- fication, synthesis, and dissemination. These are often referred to under alternative rub- rics such as management information sys- tems (MIS), decision support systems (DSS), enterprise information systems (EIS), enter- prise resource planning systems (ERP), exec- utive information systems (ExIS), business intelligence systems (BI), marketing inform- ation systems (MkIS), and knowledge man- agement systems (KM), among others. Firms have also developed information support systems to which they refer by their own unique names. The function of each remains the same—providing support for the analysis process and enhancing sense-making. The entire subject of system support would require book-length treatments to properly describe what we know and their ability to support the business and competitive

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analysis process. This book focuses on carry- ing out business and competitive analysis, and as such, we highlight what we deem to be the key elements that analysts should con- sider as they use these systems to support them in their work.

Intelligence Solutions

Unfortunately for most of the readers of this book, competitive analysts generally have not been well supported by the information systems introduced by organizations. Most were not purpose-designed to support BCA tasks, and as such, they have not and maybe cannot replace or substitute for the human cognitive and mental processes that analysts

uniquely develop and employ.9

Successful analysts require the support of dedicated information systems, both formal, informal, human, and technical. These

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systems can, among other things, allow the manipulation of data for multi-dimensional visualization of phenomena and for mapping relationships. Effective systems also operate in real-time and have filters to make sure that the data and information the analyst works with is traceable, to provide the ability to assess validity and reliability. Analysts are ordinarily uninvolved in the se- lection of management information systems and usually have to work with what is already there in the larger enterprise or what can be afforded. Fortunately, there has been an upswing in the nature and number of in- telligence software solutions. Intelligence solutions have become one of the hotter top- ics in today's boardrooms. Recognizing their needs in this area, corporations have ener- gized a burgeoning market for intelligence consulting, software, and services solutions.

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Limitations of Intelligence Solutions

Essentially, decision makers want concise in- formation they can act on. Typically, they get bits and pieces of data or stacks of undiges- ted reports, leaving them to fill in the blanks. Effective intelligence solutions are designed not to create more information, but to create better information. Used properly, intelli- gence solutions can reduce the amount of in- formation being transmitted; nevertheless, it is wise to be aware of their limitations. Some commercial intelligence solutions have attempted to provide the "holy grail" of intel- ligence with artificial intelligence, knowledge trees, or executive decision support systems, which take the inputted information and perform a number of "tests" on it to alert the analyst to when certain data parameters have been triggered. Virtually all intelligence-related software provides the

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basic means for organizing and categorizing information, but precious few take it to the next step to where inferences can be drawn or insight achieved. Nearly all commercial intelligence solutions fall short in the qualitative arena, which is what intelligence analysis has traditionally been about. There is little evidence of intelli- gence software that provides the kind of dis- covery through spatial, timeline, and rela- tionship analysis that trained analysts

routinely perform.10 Analysis of soft data means seeing just around the corner, appre- ciating why a rival made certain visits to dif- ferent competitors or provincial officials, or the competitor's CEO has voiced certain views. Few intelligence solutions are able to look around the corner, especially when that corner is on a different street or in a country where the written and spoken language dif- fers markedly from the analyst's enterprise.

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What the software industry generally has not grasped is that competitive intelligence is traditionally defined as information that has been analyzed to the point where a person can make a decision. Software generally does not analyze. It can perform rudimentary and even sophisticated statistical analysis on convenient data, but still requires interpreta- tion. Reality dictates that most analysis is done on the less convenient data that em- ployees encounter but mostly do not recog- nize to be an important piece of the intelli- gence puzzle. This highlights the importance of combining human/expert knowledge and organizational data with a sophisticated, purpose written, software product, to form an effective intelligence solution. These things can rarely be bought "off-the-shelf." Organizations also use groupware or intranet-based technologies to organize and categorize the internal expertise of a com- pany. These packages generally do an

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unsatisfactory job of relating one source to another and providing additional leads to the analyst who needs to locate another bit of data. Most packages fail to organize the data and simply generate long lists, crudely rank- ing the inputs by relevancy.

Managing the Internal Network

For the analysis process to succeed, analysts must be part of established networks aimed at facilitating intelligence sharing throughout the organization. This allows the analyst to access individuals who can provide bits of data or information that can often be the "missing piece" in their emergent analyt- ic puzzles. Even if individuals in the internal network do not have the critical information, they can often point out those individuals who may have it. Other functions, such as human resources management, public

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relations, business development, and mar- keting and sales, also obtain important pieces of intelligence that needs to be shared. For analysts in smaller enterprises or organ- izations that are lacking the financial re- sources to set up a dedicated analysis func- tion, networks can be the most powerful way to accomplish their roles. Many smaller com- panies have established their intelligence networks with the purpose of providing a source for best practices, a repository of par- ticular forms or types of data, or for helping

to identify other key sources.11Figure 2.2 il- lustrates how an internal network can begin to take shape and the functions from where network participants are frequently drawn. Figure 2.2 Participants of internal networks

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Analysts use their network partners to bounce their ideas, to test their insights, or to communicate initial findings. This helps to provide preliminary feedback on how the decision maker may react to the news. It is critical that these contacts take place in a mutually beneficial fashion, as the creation of "two-way" communication among mem- bers of a network is one of the best ways for ensuring that the network can be used for

maximal benefit.12

When internal networks are created elec- tronically and exist primarily in a digital

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format, it is critical that participation and contributions can be made conveniently and quickly. If they are not, then members will

not use it.13

Managing the External Network

External networks are also a key part of the analyst's contact universe. It is vital that ana- lysts establish, maintain, and constantly qualify and update a set of contacts outside the firm, as certain types of research cannot be accomplished without them. Analysts must be able to access industry experts, in- dustry associations, industry commentators, stock analysts, government experts, govern- ment departments, civil servants, respected journalists, subject specialists, and broad- casters to obtain needed data or access to other important stakeholders. Analysts that network with professionals from other non-

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competing or consulting firms can gain in-

sight into effective practices.14 It is import- ant to note here that networks may not be viewed as providing immediate and obvious benefits. John Shumadine, Director of Com- petitive Intelligence for Deloitte and Touche, states it clearly when he says: "But it some- times takes years to develop a Rolodex with- in your own industry, a repository of in- formation and a collection of individuals that you can network with. There's not an immediate payback." Nevertheless, these networks are typically essential to long-term business and competitive analysis success.

Proactivity, Efficiency, and Perpetual Learning

Analysts need to be highly proactive, not only delivering the needed intelligence for their decision makers today, but also figuring

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out ways by which they can augment their organization's analysis capabilities for the future. Developing increased expertise at searching, classifying, qualifying, and organizing data can be a very beneficial time saver for ana- lysts. They also need to develop the ability to cut through the "noise" and get to the heart of an issue. They need to be able to remove the unnecessary trappings and keep only the essential bits that make the difference. The Pareto principle, whereby 20% of the in- formation will provide 80% of the insight, nearly always rings true in analysis work. Better analysts also hone their project and time management skills over time. We know of few long-term analysts who are poor at this, and, in reality, it is one of the key com- petencies that effective analysts must even- tually display. Another key task for the analyst is to learn how to quickly deal with the flood of data

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and information that comes in on a daily basis. An analogy is considering how a quick keyword entry using any one of the many search engines available on the World Wide Web generates thousands of "hits" and how only a few of these will actually be relevant to the searcher's goals. By systematically cap- turing learning from prior projects, integrat- ing their efforts across projects, building the capabilities of their supporting information systems, leveraging their networks more ef- fectively, and last but not least, by educating their customers in ways that improves their mutual relationship, significant advances in business and competitive analysis can be made.

Summary

L.M. Fuld noted that three elements were part of the successful competitive

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intelligence operations that he had examined:

• Constancy—Information is gathered and analyzed constantly, not just during the traditional stra- tegic planning cycle or on a just-in- time basis.

• Longevity—Intelligence program investments were for the longer term. Six months, one year, or even two years may not be enough to prove the worth of a program. The most suc- cessful and enduring intelligence sys- tems had taken three to five years to mature.

• Involvement—The more people saw the development and use of in- telligence as a key component of their jobs, the more readily available the intelligence was and the more it was used.

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These three facets of success are not com- monly experienced by competitive analysts. Most claim that they are not properly sup- ported in terms of information systems, ac- cess to key decision makers, access to data or information, or most importantly, the time needed to effectively perform their tasks. Properly allocating resources is critical if the analysis function and individuals doing it are to be effective. In examining analysis practiced in a number of organizations in the last twenty years, we have identified a set of characteristics that are present in those organizations that have maintained the greatest longevity. These are reflected in Fleisher and Bensoussan's 10 Commandments for Business and Competit- ive Analysis, and they provide a beneficial summary to the lessons that should be cap- tured by analysts and their superiors from reading this chapter.

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Fleisher and Bensoussan's 10 Commandments for Business and Competitive Analysis

1. 1. Analysis should underlie and be an integral part underlying every one of your organization's important com- petitive and strategic decisions.

2. 2. Decision-making customers shall use only analyzed data to direct competitive decision-making, plan- ning, and subsequent actions.

3. 3. Analytic processes should be per- formed in a timely manner and products delivered to clients well in advance of their need to use them in decision-making.

4. 4. Analytic products must contain conclusions and recommendations effectively presented in the optimal format to customers for their consideration.

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5. 5. Analysts shall not confuse data compilations, digests, newsletters, static portals, or summaries with analysis.

6. 6. Analysis must be FAROUT© and able to be relied upon to strike the best balance among these elements.

7. 7. Analysis outputs (products, advice, services, etc.) will be negotiated based on the client's specification to ensure that the KIT is achievable.

8. 8. Analysis should reflect all relevant data available, from all legitimate/ legal means and sources.

9. 9. Analysis should utilize the best and most current methods, tools, and techniques available (like the ones in- cluded in this book and beyond).

10. 10. Analysis must be regularly evalu- ated by both its producers as well as consumers for its contribution to

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your organization's mission and goals.

References

Ashton, W.B., and G.S. Stacey (1995). "Tech- nical intelligence in business: Understanding technology threats and opportunities," Inter- national Journal of Technology Manage- ment, 10(1), pp. 79–104. Belkine, M. (1996). "Intelligence analysis as part of collection and reporting," pp.151–164 of Part B. in Gilad, B., and J. Herring [eds.], The Art and Science of Business Intelligence Analysis. Greenwich, CT: JAI Press. Bouthillier, F., and K. Shearer (2003). Assessing Competitive Intelligence Soft- ware: A Guide to Evaluating CI Technology. Medford, NJ: Information Today, Inc.

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Carr, M.M. (2003). Super Searchers on Competitive Intelligence: The Online and Offline Secrets of Top CI Researchers. Med- ford, NJ: Cyberage Books. Chender, M. (2006). Comments from his speech given to the KM World webinar, "Creating a Predictable Advantage," January 19, found at www.kmworld.com. Clark, R.M. (2004). Intelligence Analysis: A Target-Centric Approach. Washington, DC: CQ Press. Fiora, B. (2003). "Applying consulting skills to CI projects—Part 1," Competitive Intelli- gence Magazine, 6(3), pp. 53–54. Fleisher, C.S., and B. Bensoussan (2003). Strategic and Competitive Analysis: Meth- ods and Techniques for Analyzing Business Competition. Upper Saddle River, NJ: Prentice Hall. Fuld, L.M. (2003). Intelligence Software Re- port 2003: Leveraging the Web. Private

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report by Fuld & Company, Boston, Massachusetts. Fuld, L.M. (1995). The New Competitor In- telligence. New York, NY: John Wiley & Sons. Fuld, L.M., and K. Sawka (2000). "Money can't buy you smarts," CIO Magazine, 1 October. Herring, J. (2002). "KITs revisited—their use and problems," SCIP Online, 1(8), May 2. Herring, J. (1999). "Key intelligence topics: A process to identify and define intelligence needs," Competitive Intelligence Review, 10(2), pp. 4–14. Kalinowski, D.J. (2003). "Managing expecta- tions: Will clients ever fully understand?" Competitive Intelligence Magazine, 6(6), pp. 25–29. Lehmann, D.R., and R.S. Winer (2002). Analysis for Marketing Planning, 5th ed. New York, NY: McGraw-Hill Irwin.

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McGonagle, J., and C. Vella (2003). The Manager's Guide to Competitive Intelli- gence. Greenwich, CT: Praeger Books. Montgomery, D.B., and C.B. Weinberg (1998). "Toward strategic intelligence sys- tems," Marketing Management, 6 (Winter), pp. 44–52. Nikkel, P. (2003), "How can we determine which CI software is most effective: A frame- work for evaluation," pp. 163–175 in Fleish- er, C., and D. Blenkhorn [eds.], Controver- sies in Competitive Intelligence: The Endur- ing Issues. Westport, CT: Praeger. O'Connor, T.R. (2003). "The skills of an in- telligence analyst," North Carolina Wesleyan College, http://faculty.ncwc.edu/toconnor/ 392/spy/analskills.htm, March. Page, A.M. (1996). "The art and science of collection management," pp. 181–206 of Part B. in Gilad, B., and J. Herring [eds.], The Art and Science of Business Intelligence Analys- is. Greenwich, CT: JAI Press.

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Ringdahl, B. (2001). "The need for business intelligence tools to provide business intelli- gence solutions," pp. 173–184 in Fleisher, C., and D. Blenkhorn [eds.], Managing Fronti- ers in Competitive Intelligence. Westport, CT: Quorum Books. Senge, P. (1990). The Fifth Discipline: The Art and Practice of the Learning Organiza- tion. New York, NY: Currency Doubleday. Skryzowski, L. (2003). "Building a CI net- work from scratch," Competitive Intelligence Magazine, 6(3), pp. 39–41.

Endnotes

1 McGonagle and Vella, 2003. 2 Similar to actual practice, we will use these terms interchangeably in this book, recogniz- ing that there are subtle differences between the two terms. 3 Clark, 2004.

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4 See Fleisher and Bensoussan, 2003, Chapter 17. 5 See, in particular, Chapters 21 through 25 of this book, which focus on technological phenomena. 6 Fleisher and Bensoussan, 2003. 7 Page, 1996. 8 Belkine, 1996; Fahey, 1999; O'Connor, 2003; Senge, 1990. 9 Fuld, 2003. 10 Bouthillier and Shearer, 2003; Fuld and Sawka, 2000; Nikkel, 2002; Ringdahl, 2001. 11 Skryzowski, 2003. 12 Skryzowski, 2003. 13 Chender, 2006. 14 McGonagle and Vella, 2003.

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3

Avoiding Analysis Pitfalls

This chapter illustrates the common barriers or obstacles to business and competitive ana- lysis (BCA) effectiveness in contemporary enterprises. Analysis of failure is an elusive concept, and research of analysts about their understanding and experiences of these terms have produced little, if any, con-

sensus.1 We, the book's authors, are typically uncomfortable when we hear analysts or their clients claim that, "I'll know it when I see it." It hardly needs to be said that organizations and managers can learn from failures if indi- viduals thoughtfully talk about and examine them, something that is rarely done except in cases of catastrophic, publicly visible fail-

ures2 that cannot escape the media's glare. Unfortunately, by their very nature, adverse

results and failures are rarely, if ever, dis- cussed in the normal course of organization- al affairs. Our premise in identifying the pos- sibility and causes of analytical failure is that we believe that much can be learned by man- agers and practitioners from studying fail- ures and that this learning can ultimately contribute to creating a more successful ana- lysis function. As such, we begin with a dis- cussion about what constitutes analysis of failure.

Analysis of Failure

Although analysis of failure is an accepted part of contemporary industry practice, its application to an enterprise's intelligence, planning, and decision-making functions is comparatively rare. There is a hierarchy of failure, though, and we examine this now.

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Failure Location

We would regard the highest level of analysis failure to be that of business failure, whereby a business is no longer able to continue as a viable commercial entity. If failure is defined as "discontinuance of business," the percent- age is likely around two-thirds of all start-

ups will fail within their first ten years,3 and at even higher rates in some particularly dif- ficult sectors such as retailing and restaur- ants. Most of these business failures are commonly attributed to a general lack of ef- fective planning and management skills ex- hibited by these firms' executives. Beneath the level of the firm, we encounter planning, decision-making, and implementa- tion failures. Because we are concerned in this book with the BCA function in contem- porary enterprises, we recognize planning and decision-making failures as being at least partly composed of intelligence failures.

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These can be further disaggregated into fail- ures along the traditional "intelligence cycle" functions of planning, data collection, ana- lysis, and dissemination/communication. Intelligence failures are distinguishable from more task-oriented intelligence errors, which are viewed as factual inaccuracies in analysis resulting from poor or missing data. Intelli- gence failure is defined by R. Johnston as "systemic organizational surprise resulting from incorrect, missing, discarded, or inad- equate hypotheses." These failures may be due, at least in part, to failed analysis, but they can also be caused by other factors that interact with the analysis process. Attempt- ing to disentangle or disaggregate the analys- is portion of the process from other related processes is never an easy or straight-for- ward task. At a minimum, it is important that analysts and their decision makers al- ways carry out a postmortem on major

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projects to try and determine any areas for improvement. Having suggested the need for post-task as- sessment of the analysis process, we recog- nize that there are a variety of problems as- sociated with the evaluation of intelligence analysis and reporting that make this task

more challenging.4 For example, the range of cognitive biases impacting this process is outlined in greater depth in J.R. Heuer Jr.'s excellent book entitled Psychology of Intelli- gence Analysis. Briefly summarized, he notes that

• Analysts normally overestimate the accuracy of their past judgments.

• Intelligence clients or consumers normally underestimate how much they learned from analysis products such as reports or briefs.

• Overseers of intelligence production who conduct post-mortem analyses

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of an intelligence failure normally judge that events were more readily foreseeable than was, in fact, the case.

Suffice it to say, a variety of assessment methods must be used in evaluating the ana- lysis and its complementary/supplementary processes to reduce the presence and impact of bias.

Sources of Failure

When analysis is ineffective, both the analyst and the decision maker often don't recognize it in time and frequently cannot identify the root cause(s) of the errors, problems, or fail- ure. They must consider the following ques- tions underlying the potential errors, some of which may also be causes of failure. Errors that we recognize as commonly occurring in

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performing the analysis task include the following:

• Analysis problem defini- tion—Was the analysis problem, the key intelligence topic, or key intelli- gence question (KIT, KIQ) properly specified at the outset? Did the ana- lysis process allow for any sub- sequent redefinitions of the problem?

• Analysis project planning—Did the analyst develop a project man- agement plan or statement of work to perform the analysis process? Did they actually implement the process according to their plan or veer away from it mid-course?

• Data-gathering error—Was the appropriate data available to the ana- lyst? If not, could the data have been efficiently acquired? Did the analyst properly account for data or informa- tion gaps? Was the analysis the cause

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of the failure, or was data collection the primary cause?

• Tool- and technique-related er- ror—Did the analyst use the best available tools, techniques, and/or analysis methods? Were the right tools used and in the right sequence and combination?

• Synthesis error—Did the analyst arrive at the optimal conclusion or insight? Did they "connect the dots" in a logical and defensible manner? Would other experienced and suc- cessful analysts have connected them differently?

• Communication transmission or channel error—Did the analyst communicate their insights to their decision maker throughout the pro- ject in an optimal fashion? Was the analysis failure really a communica- tion failure?

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• Communication reception er- ror—Did the decision maker have a complete and accurate understand- ing of the analyst's conclusions be- fore the decision needed to be made?

• Unsystematic development er- ror—Did (uncontrollable) events arise during the course of the process that derailed the analysis or analyst? What impact did unexplained vari- ance or random factors have on the outcome of the analysis task?

Four-Level Hierarchical Model of Analysis Failures

Whatever the outcomes experienced for ana- lysis errors or failures, it is valuable to identify the reasons why these happen. We have developed a four-leveled taxonomy for

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identifying the barriers to generating effect-

ive competitive analysis.5 The four levels are as follows:

1. 1. The individual analyst 2. 2. The analysis task itself 3. 3. The organizational context within

which the task is conducted 4. 4. The external environment in which

the organization is ensconced

These four levels and the primary factors as- sociated with each are illustrated in Table 3.1. Table 3.1 Four-Level Hierarchical Model of Analysis Failures

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In the section that follows, we identify the most common problems we have found in our research at each of these four levels. We recognize that some of the factors may not be present in only the single category we

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ascribed it, but may also be present in one or more of the other levels. We have placed the factor at the level where we have most fre- quently observed it being an obstacle to ef- fective analysis, recognizing that it may have secondary or tertiary impacts at another level.

Individual Analyst-Level Failures

The BCA task is fundamentally performed by individual analysts, although these analysts also need to cooperate and collaborate with others in their firm to get their tasks accom- plished. We see the following hindrance factors as being primarily present at the level of the individual analyst. They are not listed in the order of occurrence or of perceived importance, but these are the half-dozen dis- tinct items we have identified as being most commonly present.

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Different natural analytical abilities: People rely on a limited set of mental models, have preconceptions on issues, and exhibit a wide range of cognitive bias when reviewing in- formation. People also think differently. Some predominate cognitively in a right- brained linear fashion; others in a left- brained lateral fashion. This is important when viewed in light of analysis being a mix- ture of both scientific and nonscientific techniques. Naturally limited mental capacities: The content and context facing most analysts has become more complicated, complex, and fast moving in recent years. Having said that, our brain's natural abilities to effectively process additional information hasn't evolved corres- pondingly to match this. The popular view that we only use 10% of our brain's ability is a well-worn myth, and one could argue with the figure, but we are confident that human beings still only use a limited percentage of

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their brain capacity, although scientific re- cord still does not have a sense of what that

true percentage might be.6

G.A. Miller suggested that the magical num- ber describing our natural information pro- cessing capabilities is seven things at one time plus or minus two. This could be a ma- jor problem for analysts who often have a far higher number of issues to keep in their mental calculus at any one time. Although we now have better information technology systems to assist in the analysis task, we still mainly use our brains in the same ways as we have always done. Natural motivation: Given a choice between a more difficult and a less difficult task with identical outcomes, the majority of people opt for the easier task. As we hope is already patently obvious by now, analysis is not an easy task. It can require the use or expendit- ure of tremendous cognitive, intellectual, or- ganizational, and social resources to properly

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accomplish. One reason it is so difficult is be- cause we have far fewer published heuristics or "rules of thumb" to use in performing ana- lysis than we do in many other fields of or- ganizational endeavor. Some analysts think that volume of analysis outputs is the an- swer, not their value. This form of sufficing behavior will probably fail to meet the needs of today's demanding decision-making clients. Cognitive biases and perceptual distortion: In spite of the presence of the broad range of analytical techniques, some organizations still adopt poor strategies, and their decision-making processes are vulnerable to individual cognitive biases or "groupthink." Researchers have identified a variety of com- mon cognitive biases that can enter into an

individual's or group's process of analysis.7

These include the following:

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Estimation Bias—Over or under es- timation of the magnitude of future events. Escalating Commitment—The com- mitment of more and more resources such as time, effort, data, and funds to an idea, course of action, project, or pro- gram, even after there is growing evid- ence that it is failing. Groupthink—This occurs when a group of decision makers embarks on a poorly determined course of action without thoroughly questioning the un- derlying assumptions of the decision. This is most prevalent in organizations with entrenched leadership, engrained cultures, and senior executives who dis- like being challenged. Illusion of Control—An individual with misplaced confidence in his or her ability to "always get it right" and to control things. Often found among

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senior executives who have been fortu- nate enough to get it right so far. Illu- sion of control and groupthink are common bed-fellows. The Prior Hypothesis Bias—Beliefs about the relationships between vari- ables, even when presented with contra- dictory analytical evidence. Individuals prone to this bias use data only when it confirms their beliefs while ignoring data that does not. Reasoning by Analogy—Individuals will use simple analogies to make sense out of challenging problems. Oversim- plifying complex problems is dangerous and can mislead an analyst to offer a detrimental judgment. Representativeness—A bias that viol- ates statistical law in individuals who tend to generalize from small samples to explain larger phenomena. Analysts are at risk of this when they hear from one

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or two influential individuals that an in- cident or action is taking place, and they immediately accept this as truth without further investigation.

The existence of cognitive biases and group- think raises issues of how to bring critical in- telligence to bear on organizational decision- making mechanisms so that the decisions made are realistic. It is important to under- stand the range of motives behind it. M.S. Feldman and J.G. March pointed out that people in organizations often tend to collect more information than strictly necessary for decision making, partly to influence others and partly to be seen as "rational." In other words, analysis is often used not just for objective decision-making but also for polit- ical or symbolic purposes. Insufficient understanding and application of analysis tools and techniques: Studies on the use of analysis tools and techniques by business practitioners have consistently

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demonstrated that the individuals respons- ible will use only a very limited set of tools and techniques, usually those they know the best and have previously applied with some

perceived success.8 We previously illustrated

this problem as a "tool rut."9 Even when ana- lysts are willing to acquire and then use an enlarged tool box and attempt tools and techniques outside their ordinary fare, they often lack the knowledge, understanding, and experience to apply it effectively. It is no surprise therefore, that they will stick to the safe but well-worn path of familiarity.

Analysis Task-Level Failures

A number of factors associated with the ana- lysis task itself can be responsible for per- formance problems. Part of larger task: In Chapters 1, "Business and Competitive Analysis: Definition,

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Context, and Benefits," and 2, "Performing the Analysis Process," we discussed how ana- lysis was part of a larger number of processes that impact an organization's decision-mak- ing, policy development, and associated activities. We have seen many examples where the analysis process was short-cir- cuited in favor of other activities, leading to the diminishment of the decisions made, as well as a reduced market performance. Re- search done on competitive intelligence pro- cesses have consistently found that more time should be spent on analysis and signi- ficantly less on data collection and gather-

ing.10

Task discontinuity: Analysts can ordinarily go from task to task in the course of their day. They will frequently be working on any number of critical intelligence needs, ques- tions, or topics at any single point in time. As such, benefits derived from the learning curve, which suggests that the efficiency if

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not the effectiveness of analysis performance should grow and accelerate over time, are seldom achieved. The learning curve is one reason why analysts in the public sector are often assigned to specific focal areas (e.g., country or regional "desks") for substantial periods of time, often between five to seven years. These long-term assignments allow for the analyst and their organizations to cap- ture learning curve effects as experience is developed. Unfortunately, we find that most business or commercial enterprises do not have the defined internal career paths, the patience, or the plans to help analysts obtain the learning curve benefits of depth, breadth, and length of experience. Unsatisfactory data inputs: The GIGO prin- ciple of "garbage in, garbage out" holds true in BCA. Many times, analysts will use data that is merely convenient, such as that gen- erated by internal management information systems, which can be easily found on the

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World Wide Web, or that can be quickly gathered through discussions with col- leagues. "Convenient" data seldom provides the analyst with critical insight or the "golden nugget" being sought. Convenience- based data gathering is an arch-enemy of ef- fective analysis. There are a number of reas- ons why this state of affairs exists, including but not limited to the following prominent examples:

1. 1. Need to justify investments made in systems designed for other purposes—Organizations make substantial investments in data-gathering systems and require evidence to justify their very exist- ence. The problem with this is that most of the information systems es- tablished in enterprises today are not tasked to support competitive analys- is and intelligence generation. They are good at gathering customer data,

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accounting data, production data, and financial data, but bad at gather-

ing competitive and strategic data.11

2. 2. Differences in gathering versus analyzing/synthesizing information—Many executives as- sume that web-based, electronic data subscriptions or media clipping ser- vices can generate intelligence. These things certainly generate volumes of data or information, but they do not, cannot, and are unlikely to perform the analysis and synthesis tasks that

a human analyst can perform.12 As we have noted previously, there are no systems of which we are aware that can perform analysis at a level anywhere near that of a successful analyst. Although systems can accel- erate the reorganization, reclassifica- tion, or restructuring of data, they can do little beyond that. The

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continuing development of artificial intelligence (AI)-based collection sys- tems will assist the analysis process in the future, but even these are typ- ically only focused on a minor subset of typical business and competitive analysis problems.

3. 3. Extracting needed data from the heads of colleagues—Some- times the critical missing data the analyst needs can be found only with- in the heads of individuals either

within or outside the organization.13

It can be difficult to identify those parties that are likely to be the best sources for needed information, and even if they could be readily identi- fied, they would also have to be ac- cessible and amenable to providing this on a "just-in-time" basis. Most organizations lack the systems to en- able them to capture the critical

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information known by their own em- ployees. Even though organizations have become more sophisticated in the application of knowledge man- agement (KM) systems, these still re- quire heavy investment, ongoing training, and constant human inter- action to be effective.

4. 4. Separating the wheat from the chaff—Many existing systems do not have the appropriate means for filtering or "grading" informa- tional inputs as they enter the sys- tems. As such, "bad" data, which may be corrupt for a bewildering variety of reasons, lives happily alongside the "good" data, and the analyst must still assess its suitability for the ana- lysis tasks ahead.

Disconnects from decision making: The cli- ents or customers of analysts are the ones who have the ultimate responsibility to use

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intelligence or not. Analysts do not make de- cisions, nor do they manage the processes by which an organization might implement their findings. As such, decision makers might simply choose not to use the intelli- gence, to ignore it, or to dismiss it for any variety of reasons. It is one thing for a de- cision maker to dismiss analysis because it is ineffective or unsatisfactory, but entirely an- other when it was indeed performed effectively. This dilemma points out the difference between analysis and policy-making. Ana- lysts can study the targets and potential out- comes of specific policy actions and can develop well-conceived rationales for de- cisions. At the end of the day, though, they are but one input among others in the client's decision-making calculus. We hope that the analyst's work will be a critical, if not the most critical, input. Nevertheless, we re- cognize that achieving the highest levels of

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trust from decision makers can only genu- inely take place over time, supported with collaboration, regular interaction, achieve- ment of successes, and a significant degree of mutual trust and understanding. Imbalance among key task facets: Analysts must be ever-cognizant of and always striv- ing toward maintaining any number of bal- ances at any point in time. The ability to achieve this balance usually occurs after a number of years of analytical experience. The authors have seen and heard from some experienced analysts who have been doing the job for some time, and they still fail to properly balance the many conflicts that are associated with performing the analysis task. There are no simple solutions to this.

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Internal Organizational-Level Failures

The internal organizational environment within which the analyst performs their task is also responsible for less effective analysis outcomes. The major organizational factors we see contributing to unfavorable outcomes are described next. Some decision makers don't understand and appreciate analysis: In many organizations, decision makers neither understand the role or place of intelligence analysis nor recognize the value it can generate in improving decision-making quality. As more companies focus their attention and resources on under- standing competition and the competitive environment, they are realizing that they are unsure of how to properly utilize the intelli-

gence collected.14 Insufficient understanding of the intelligence function leads to a deluge of poorly translated data, as departments

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request information, without filtering out the

most relevant issues.15 By churning out vast quantities of purposeless information, the analysts and their departments are unable to properly apportion their time to the accurate analysis and assembly of useable intelligence. Clients cannot specify their critical intelli- gence needs or questions: The first critical step in the analysis process requires that the decision maker clearly articulate his or her needs to the analyst. This is frequently easier said than done. Many decision makers have difficulties briefing their analysts, struggle with explaining the decision that they are fa- cing, or actually ask for the wrong thing. During the course of a project, the analyst will often uncover information that suggests the initial question needs to be modified. Unless the decision maker is fully familiar with the decision they are facing, they are

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unlikely to know if this new information has relevance. Under-resourcing the analysis function: Be- cause it is invariably a part of some larger or- ganizational processes, analysis is typically under-resourced. The lack of resources in the form of data, information, databases, sys- tems, people, and most commonly, time, are always mentioned in surveys of analysts. Indeed, time is seen as one of the primary barriers keeping them from being more ef-

fective in their organizational roles.16 A large element of this problem is that it is difficult for those managing the analysis process to communicate the benefits derived from their activity in the format that executives ordin- arily use in making their resource allocation decisions. Executives typically allocate finan- cial and human resources on the basis of ex- pected return on investment, net present value, or quantitative cost/benefit calcula- tions. Putting a comparative quantitative

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calculation on the benefits of analysis has typically eluded most analysis managers and

their clients.17

Lack of analysis-specific IT support: Organ- izations now have a plethora of information systems available for management, control, and planning purposes. Unfortunately, most of these systems are not designed to support the business and competitive analyst's roles and responsibilities in their organizations. Even when companies do employ so-called "intelligence solutions" or systems, these are mainly focused on facilitating the collection facet of the larger intelligence process rather

than the analysis/synthesis tasks.18

Lack of thinking time: Thinking is a key component in producing analysis. It is rare for analysts to experience "blinding flashes"

of insight19 or to quickly obtain the essential and previously missing pieces of data that helps them arrive at confident conclusions. Instead, analysts spend substantial time

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thinking about their clients, data, models, networks, projections, targets, and work plans. There are times when this thinking just cannot be rushed, despite the perception held by many analysts that they need to pro- duce ever more tangible products to more

demanding clients.20 This perception some- times leads analysts to generate a lot of activ- ity at the expense of insight. Organizational culture and politics: In some organizations, the deliverers of "bad" or un- desirable news to decision makers are pun- ished. These punishments can range from admonishments, to the withdrawal of co- operation or resources, or ultimately, the elimination of the analyst's position. Unfor- tunately for analysts who find themselves re- porting to easily offended decision makers in such organizational contexts, there is prob- ably little they can do about it, except to hope for a change in those who act in this manner. If that behavioral change is not in the offing,

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analysts will often have to find more en- lightened employing organizations. Time and trust: Analysts and decision makers operate most effectively in an envir- onment of mutual, shared trust. Unfortu- nately for some participants in the analysis process, trust usually takes some time to de- velop. Organizational realities demonstrate that many analysts or their decision makers are not in their posts long enough to allow for confidence, mutual respect, and trust to develop. In the absence of an appropriate level of trust, the analyst has to hope that they can develop this asset by carrying out effective analysis and convincing their clients that they can be relied upon to deliver the goods when asked. Invisibility and mystery: Although analysis work is increasingly a social and network- oriented task, analysts frequently work in the background of organizations. They are not necessarily on the "front line" facing

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customers and can sometimes be invisible to the larger organization. Their work is also of- ten part of larger research-related processes, so they are rarely singled out for attention. Analysts are not frequently in the organiza- tional limelight for what they do, except in those cases where analysis failure was blamed for organizational mishap. Because an analyst's work and their function is some- times viewed as mysterious or intellectually demanding, analysts are generally left to get on with their task without managerial inter- ference. Unfortunately, this "invisibility and mystery" problem, at times, can be perpetu- ated by analysts themselves. Misconception that everyone can do analys- is: Randomly ask any recent MBA graduate whether they developed good analytical skills in their programs, and the answer you'll nearly always get will be "Yes." Most people do not recognize the differences between the process of analysis and their ordinary ability

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to think or "connect the dots." By this point in the book, it should go without saying that everyday thinking is not analysis, although an individual who does not think clearly can- not perform analysis. Analysis requires a unique and differentiated form of thinking and is encapsulated in the evolving analysis body of knowledge. Most individuals have neither been formally trained nor have the natural ability to per- form the rigorous and systematic type of spe- cific thinking tasks that constitute competit- ive, enterprise, or strategic analysis as we know it. We know that analytical capability can be improved and enhanced through formal training, self-learning, mentoring, and coaching, as well as through regular re- view and evaluation of analysis processes and products.

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External Environment-Level Failures

The external environment within which the organization operates can also be partially responsible for less-effective analysis out- comes. The major environmental factors we see contributing to these unfavorable out- comes are described next. Growing range of competitive factors: The weapons used by enterprises in market- based competition have become more varied and better developed over time. Competition has historically occurred using the tradition- al marketing mix tactics along the "7Ps" di- mensions of product, price, place, promo- tion, participants/people, physical evidence,

and process.21

Today, competitive weapons can be found outside marketing in places such as the sup- ply chain, human resources management, corporate culture, leadership, information

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systems, research and development, finance, operations, and production, among others. The growth of new knowledge, technological advances, and emerging public policies can all play a major factor in determining if an enterprise wins or loses in its marketplace. Complexity and turbulence: Complexity has increased because there are more competit- ors and stakeholders, interacting in a variety of ways and in greater quantities, to produce more unpredictable and turbulent situations. Turbulence means that the competitive en- vironment is subject to continuous or near continuous change. Emerging concepts such as chaos theory have been applied to the business context in both the popular and

scholarly presses.22 This further reinforces the point that the environment being ana- lyzed today may well be more dynamic than it was yesterday. Data overload: Because of the virtual explo- sion of resources that have been unleashed

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over the World Wide Web, the Internet, and in corporate intranets, analysts have more data and information than at any other peri- od in history. Analysts commonly view this explosion of information as being akin to "drinking out of a fire hose." Unfortunately, much of this data is redundant, comes from dubious sources, is in foreign languages, lacks a paper trail, can be expensive to ac- cess, and/or turns out to be irrelevant to the analysts' concerns. Software engineers are recognizing this problem and are beginning to develop effective programs to assist or- ganizations in filtering, organizing, and clas- sifying incoming information into databases that better serve the organization's manage- ment information needs. Despite this, most analysts feel that they are drowning in in- formation, yet starved of knowledge. Globalization: This describes the nature of changes in societies and the world's economy from dramatically increased trade among

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different nation-states and increasing levels of socio-cultural exchange and interaction. Despite these sectors being intertwined and the blurring that occurs between markets, in- dustries, and geographic boundaries, it is useful to distinguish economic, political, and cultural aspects of globalization. Globaliza- tion has also driven changes in technology, particularly in the transportation and com- munications sectors, where it is claimed there exists a global village with no recog- nized borders. Educational deficiencies: Although there has been a natural and healthy evolution in the nature of BCA offerings available to indi- viduals' intent on a formal education in the processes and competencies of analysis, not all educational developments in this area have been positive. We suggest that there are a number of prominent factors that have kept the number of offerings from mush-

rooming,23 including:

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1. 1. Lack of experienced faculty staff—There is a dearth of experi- enced BCA staff in universities, col- leges, and at the post-secondary level. Consequently, there are few programs offered in the subject. While being highly practical and of considerable value in a business management program, the area is not established as a major academic dis- cipline. Few business or management schools have competitive intelligence or analysis courses, and it is mostly absent among the top-rated business schools.

2. 2. Scarcity of research—The area of BCA lacks an agreed-upon body of knowledge, core texts, and case stud- ies, all of which are the needed pub- lished record that helps professional- ize a field. The larger area of compet- itive intelligence is served by few

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major journals, has virtually no chaired professorships, has a handful of disparate research centers, and has only a few programs dedicated to its study. A small number of institutions around the globe have the capability to offer doctoral level training in the field, so new researchers and scholars interested in BCA are produced only occasionally or drift into the area from an overlapping field.

3. 3. Scope ambiguity—Ongoing struggles have occurred within a few universities about where to put a business or competitive analysis course—in business and manage- ment, library and information sci- ences, information systems, journal- ism, international studies, or military science/studies. Even within a busi- ness or management program, there are questions as to whether

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competitive analysis belongs in mar- keting, management information sys- tems, or business policy/strategy. If they are asked at all, senior business or management administrators ques- tion whether business and competit- ive analysis or competitive intelli- gence is a legitimate discipline, prac- tice, profession, field, or area of study. Nobody has yet produced a definitive answer.

4. 4. Economic trends—Competitive intelligence appeared to be taking off in the 1990s as represented by a ma- jor growth in membership of the in- ternational Society of Competitive In- telligence Professionals (SCIP—www.scip.org). Since then, even this organization has experi- enced occasional periods of declining numbers. Similarly, past studies have demonstrated declines in the area

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during recessionary periods, when organizations reduce staff numbers of what they deem less-essential functions. Paradoxically, those work- ing in analysis know that this is pre- cisely the time when investment in such activity should increase, in or- der to better prepare the firm for the challenges ahead.

Despite the difficulties encountered in com- petitive analysis and intelligence gaining ac- ceptance within the university context, CI and BCA education have had some positive developments, particularly in the offerings developed by consultancies and individuals. Fortunately, courses in business and com- petitive analysis can be found in most parts of the globe if individuals know where to look.

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Overcoming the Barriers and Improving Analysis Performance

Besides employing simple and straightfor- ward lists like Fleisher and Bensoussan's 10 Commandments for Business and Competit- ive Analysis described in Chapter 2 of this book, there are a number of additional things that can be done. To improve the per- formance and quality of BCA performed in contemporary enterprises, we recognize the following will help.

Provide Empowerment

Intelligence produced by effective analysis should be and is empowering to decision makers. A popular saying in the intelligence community is, "Without intelligence, a

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decision maker cannot take responsibility. With it, he or she cannot avoid taking re- sponsibility." Clearly, the more that decision makers are equipped with insight, the better they will perform. This is why the import- ance of intelligence analysis needs to be re- cognized in its own right. Both analysts and executives need to promote the reality and truth that analysis is critical to an organization's competitive market success. Analysts and their clients should be comfort- able with and publicize to others, that real benefit which emanates from analysis, that it is an evolving discipline in its own right, and that analysts are professionals in exactly the same way as others in the organization.

Realize the Value of Analysis

Even if the benefits and value of the process cannot be easily quantified by existing

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performance measurement systems, execut- ives need to realize that effective analysis cannot be achieved through "quick fixes" or by the introduction of new software or hard- ware applications. The value of analysis comes from the insight it provides decision makers, which ultimately benefits their en- terprise. When done well, analysis will be- come recognized implicitly, if not explicitly by decision makers for the value it provides.

Value the Link Between Analysis and Success

Providing managers with case studies and examples of good and bad analytical outputs can help powerfully demonstrate this rela- tionship between analysis quality and decision-making effectiveness. Using analys- is insights will significantly lower the

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number of controllable or perceived risks as- sociated with decisions.

Ask the Right Questions

Consumers of analysis products must also be educated to know what to ask for from ana- lysts and helped to understand what they can expect to receive. Executives and depart- mental managers, like many other employ- ees within the organization, often misunder- stand the true functions and proper opera- tions of analysts or intelligence specialists. Decision makers will often ask for the wrong information and will then have difficulty in making sense of the analytical products they receive. What matters to executives is "fact-based in- telligence that makes a difference to their agendas, priorities, and needs as they per- ceive them," criteria that are important at

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the planning and directing phase of the

decision-making process.24 For intelligence to be useful and effective, managers should ask for and expect the items shown in the following list (adapted from Self [2003]). In general, analysts must provide products that are tailored not only to decision makers' spe- cific information requirements but also presented or disseminated in their "language" and conform to their unique

frames of reference.25

• Products that resolve their critical in- telligence needs, questions, or topics.

• Analysis that utilizes the full and comprehensive range of available data within specified (budget, ethics, time, etc.) constraints.

• Analyzed data, information, and con- clusions, not trivia or so-called "nice to knows."

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• Timely delivery of products well in advance of the decision to which the analysis was targeted.

• Analysis findings that can play a central and vital role in their decision-making process.

• Conclusions that can enhance the positive effects of a chosen strategy or that can be used to diminish the adverse effects of competitor's actions.

• Recommendations that will enable the decision maker to make better decisions or more effective imple- mentation of a chosen strategy or course of action.

• Logical, reasonable, and defensible support and explanations for why certain phenomena will occur and what future contingencies may arise.

• Feedback and post-mortems to im- prove future product quality.

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Develop Recognized Analysis Training

Universities, employers, professional associ- ations, and CI educators must develop dedic- ated courses and programs on analysis, not

just the larger or broader CI process.26

These courses should include, at a minimum, the following items:

• Coverage of the techniques and methods of strategic, business, and

competitive analysis.27

• Opportunities to practice performing analysis through case studies or su- pervised "on the job" experience.

• Processes to be used by analysts for helping their clients to clarify and ar- ticulate their KITs.

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• Coverage of a range of philosophies and thinking styles such as those that would be gained through exposure to the basic tenets of epistemological science.

• Communication processes to deliver analytical outputs to the client.

• Exposure to methods of understand- ing the research on analytical failure, the pitfalls of analysis, and its associ- ated psychological, social, and cog- nitive origins.

Courses can and arguably should be offered both in classrooms and through electronic and self-paced learning formats. Some courses should be designed to reinforce ex- isting knowledge about the analysis process, while others should be designed to impart knowledge of newly emerged processes, tools, and techniques as they develop. Ana- lysts should be encouraged to take these courses on a regular basis and be given

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incentives and recognitions for successfully upgrading their capabilities and knowledge.

Measure Performance Appropriately

The competencies, skills, and capabilities of an analyst can be measured, and what can be measured can be both managed and im- proved. The development of capability meas- urement tools and metrics to demonstrate improvement should be strongly encour- aged. There is also a need to measure analys- is products and processes against bench- marks. Best practices in the analytic field need to be identified and emulated.

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Position the Analyst Correctly

Executives must place analysts in organiza- tional positions where they can make a genu- ine difference and are secure. Analysts need to be actively involved in the networks of in- formation collectors and their clients, but also be given the time needed to properly do their work. Also the longer that analysts can focus their efforts on particular specialties needed by the decision makers, the quicker they will move up the learning curve in terms of producing quality outputs. As even the most effective analysts can provide inaccurate insight at times, decision- making clients need to give their analysts op- portunities to fail and to demonstrate that they have learned from these undesirable ex- periences. This opportunity leads to the de- velopment of shared trust between an ana- lyst and a decision maker. With security and

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the trust of their clients, analysts are at their most effective.

Provide the Right Tools

Enterprises need to provide analysts with the proper tools of their craft: analytic applica- tions, proper data inputs, access to sources, time to think, advanced information and communication infrastructure, and so on. Analysts cannot be expected to provide in- sight without having access to rich sources of data, enabling technology, the open door of their organizational colleagues, and clearly articulated KITs/KIQs. The outputs must be focused to capture the client's imagination and provide assistance on complex issues quickly, yet in a comprehensive way. The analyst's job must not be to intimidate cli- ents with information, but rather to entice them with it.

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Differentiate the Task

Last but certainly not least, business and competitive analysts must differentiate the nature of analysis they perform from other forms of analysis concurrently being done within their enterprises. Business and com- petitive analysts and their decision-making clients should be careful not to overrate or overemphasize the analysis of organizations, industries, and markets that is provided by economists, financial analysts, or marketing researchers/analysts. These individuals are primarily concerned with short-term finan- cial gains, customer satisfaction, product placement, and related concerns, not neces- sarily with long-term competitiveness and effective business or corporate strategy de- velopment. Executives who understand the reasons these functions vary and the

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respective benefits each generates will be far better served in their decision making.

Summary

Analysis is a critical component in aiding ex- ecutives in their decision making. This chapter has identified much of what is wrong with analysis today, but it also suggests that there is much more that can be done to im- prove analysis. These problems can be fixed, although it will require the efforts of many stakeholders and institutions, some of which have been reluctant to-date to changing in the manner we have identified. CI scholar Ben Gilad notes that intelligence is an insight about externally motivated change and future developments and their implications to the organization. Done well, analysis and the intelligence developed from it helps the organization to reduce its risk

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level in dealing with both threats and oppor- tunities that exist outside. The absence of ef- fective analysis will produce little insight to underlying key decisions. Without a good analysis capability, an enterprise is increas- ingly vulnerable to attack and will miss prof- itable opportunities in the dynamic, global- ized, world economy of today.

References

Bazerman, M.H. (2002). Judgment in Ma-

nagerial Decision Making, 5th edition. Hoboken, NJ: John Wiley & Sons. Bernhardt, D. (1999). "Consumer versus pro- ducer: Overcoming the disconnect between management and competitive intelligence," Competitive Intelligence Review, 10(1), pp. 19–26.

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Cohen, A. (1998). "The misuse of competitive intelligence," Sales and Marketing Manage- ment, 150(3), 13. Edmonson, A., and M. Cannon (2005). "Fail- ing to learn and learning to fail (intelligently): How great organizations put failure to work to improve and innovate," Long Range Planning Journal, 38(3), June. Feldman, M.S., and J.G. March (1981). "In- formation in organizations as signal and symbol," Administrative Science Quarterly, 26(2), pp.171–186. Fleisher, C.S. (2004). "Competitive intelli- gence education: Competencies, sources, and trends," Information Management Journal, 2004, 38(2), pp. 56–63. Fleisher, C.S., and B. Bensoussan (2003a). Strategic and Competitive Analysis: Meth- ods and Techniques for Analyzing Business Competition. Upper Saddle River, NJ: Prentice Hall.

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Fleisher, C.S., and B. Bensoussan (2003b). "Why is analysis performed so poorly and what can be done about it?," pp. 110–122 in Fleisher, C., and D. Blenkhorn [eds.], Con- troversies in Competitive Intelligence: The Enduring Issues. Westport, CT: Praeger Publishers. Fleisher, C.S., and D.L. Blenkhorn (2001). "Effective approaches to assessing competit- ive intelligence," pp. 110–123 in Fleisher, C.S. and D.L. Blenkhorn [eds.], Managing Frontiers in Competitive Intelligence. West- port, CT: Quorum Books. Fuld, L.M. (2001). "Intelligence software: Reality or still virtual reality?," Competitive Intelligence Magazine, 4(2), pp. 22–27. Gib, A., and R. Gooding (1998). "CI tool time: What's missing from your toolbag?," pp. 25–39 in the Proceedings of the 1998 in- ternational conference of the Society of Competitive Intelligence Professionals, Ch- icago, IL.

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Gilad, B. (1994). Business Blindspots: Repla- cing Your Company's Entrenched and Out- dated Myths, Beliefs, and Assumptions with the Realities of Today's Markets. Chicago: Probus. Gladwell, M. (2000). The Tipping Point: How Little Things Can Make a Big Differ- ence. Boston, MA: Little Brown. Heuer Jr., J.R. (1999). The Psychology of In- telligence Analysis. Washington, DC: Center for the Study of Intelligence. Johnston, R. (2005). Analytic Culture in the U.S. Intelligence Community. Washington, DC: The Center for the Study of Intelligence. Kahneman, D., Slovic, P., and A. Tversky (1982). Judgment under Uncertainty: Heur- istics and Biases. Cambridge, UK: Cam- bridge University Press. Kalat, J.W. (1998). Biological Psychology, sixth edition. Pacific Grove: Brooks/Cole Publishing Co.

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Kiel, L.D., and E.W. Elliott (1997). Chaos Theory in the Social Sciences: Foundations and Applications. Ann Arbor, MI: University of Michigan Press. Marteniuk, J. (2003). "How do companies find the best balance between the technical and personal in effective competitive intelli- gence systems?," pp. 176–189 in Fleisher, C., and D. Blenkhorn [eds.], Controversies in Competitive Intelligence: The Enduring Is- sues. Westport, CT: Praeger Publishers. McGonagle, J.J., and C.M. Vella (2003). The Manager's Guide to Competitive Intelli- gence. Greenwich, CT: Praeger Books. Miller, G.A. (1956). "The magical number seven, plus or minus two: Some limits on our capacity for processing information," Psy- chological Review, 63, pp. 81–97. Nikkel, P. (2003). "How can we determine which competitive intelligence software is most effective?," pp. 163–175 in Fleisher, C., and D. Blenkhorn [eds.], Controversies in

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Competitive Intelligence: The Enduring Is- sues. Westport, CT: Praeger Publishers. Rafiq, M., and P.K. Ahmed (1995). "Using the 7Ps as a generic marketing mix," Market- ing Intelligence & Planning, 13(9), pp. 4–15. Rigby, D.K. (2003). Management Tools 2003. White Paper. Boston, MA: Bain & Company, Inc. Rigby, D.K. (2001). "Putting the tools to the test: Senior executives rate 25 top manage- ment tools," Strategy & Leadership, 29(3), pp. 4–12. Sawyer, D.C. (1999). Getting It Right—Avoiding the High Cost of Wrong Decision. Boca Raton, FL: St. Lucie Press. Self, K. (2003). "Why do so many firms fail at competitive intelligence?," pp. 190–202 in Fleisher, C., and D. Blenkhorn [eds.], Con- troversies in Competitive Intelligence: The Enduring Issues. Westport, CT: Praeger Publishers.

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Tversky, A., and D. Kahneman (1986). "Ra- tional choice and the framing of decisions," Journal of Business, 59, pp. 251–294. Waldrop, M. (1992). Complexity: The Emer- ging Science at the Edge of Order and Chaos. New York, NY: Touchstone. Watson, J., and J. Everett (1996). "Do small businesses have high failure rates?," Journal of Small Business Management, 34(4), pp. 45–62, October. Windle, G. (2003). "How can competitive in- telligence practitioners avoid over-relying on the Internet," pp. 85–97 in Fleisher, C., and D. Blenkhorn [eds.], Controversies in Com- petitive Intelligence: The Enduring Issues. Westport, CT: Praeger Publishers.

Endnotes

1 Johnston, 2005. 2 Edmonson and Cannon, 2005.

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3 Watson and Everett, 1996. 4 Fleisher and Blenkhorn, 2001. 5 Fleisher and Bensoussan, 2003b. 6 Kalat, 1998. 7 Bazerman, 2002; Kahneman et al, 1982; Sawyer, 1999; Tversky and Kahneman, 1986. 8 Fleisher and Bensoussan, 2003b; Gib and Gooding, 1998; Rigby, 2001; Rigby, 2003. 9 Fleisher and Bensoussan, 2003b. 10 McGonagle & Vella, 2003. 11 Nikkel, 2003. 12 Windle, 2003. 13 Marteniuk, 2003. 14 Cohen, 1998. 15 Cohen, 1998. 16 Johnston, 2005. 17 Fleisher and Blenkhorn, 2001. 18 Nikkel, 2003; Fuld, 2001.

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19 Achieving the elusive "a-ha" findings is sometimes known as the process of "abduc- tion" in analysis circles. 20 Johnston, 2005. 21 Rafiq and Ahmed, 1995. 22 Gladwell, 2000; Kiel and Elliott, 1997; Waldrop, 1992. 23 Fleisher, 2004. 24 Bernhardt, 1999. 25 Bernhardt, 1999. 26 Fleisher, 2004. 27 Fleisher, 2004.

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4

Communicating Analysis Results

One of the most difficult challenges facing analysts in organizations is effectively com- municating the results of their work on a timely basis to their decision makers. This is important because analysis often underlies decisions, and decision makers cannot al- ways wait for the analyst to complete their work. Also many of the decisions that are made about competitive business matters rely on data inputs that have a short shelf life. In other words, the intelligence gener- ated about competitive actions is only useful to the enterprise for a short time period be- fore it becomes out of date, at which point, it no longer has the ability to deliver competit- ive advantage. Analysts must place consider- able attention on delivering their findings to,

and gaining the attention, understanding, confidence, and ultimately trust, of their de- cision makers. Presenting results to decision- making clients is one of the vulnerable areas where intelligence and other strategy-related processes can fail.

The Art of Effective Communication

Individuals new to the field or those who re- main ignorant of the art and science of com- munication will do their best to avoid the challenge of this element of the analyst's task. It is important to realize that the analyst's job is not over when the formal analysis process itself is concluded. Delivery of the findings to the decision makers, gauging their understanding of the analyst's recommendations, making sure that no crit- ical intelligence was lost in the exchange of

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ideas, and understanding how the analysis product will be used are among the analyst's key communication task responsibilities. Failures in these final stages of the analysis process can devalue the analyst's work and can ultimately be a prime contributor to bad decisions and inappropriate actions taken by an enterprise in the marketplace. Addition- ally, the communication stage is a vital feed- back mechanism for the analyst to under- stand how well he has done the job in hand. It also provides pointers on how he might improve his performance on the next one. Within each enterprise, there will be estab- lished procedures for communicating with decision-making clients, writing a report, and presenting results. Many of these are generic across business or management pro- fessions, while others will be more specific to an enterprise and its particular culture. A major responsibility of analysts is to learn these procedures, particularly those

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associated with demonstrated and proven communication performance, and to pay close attention to them when communicating their own findings and insights. A common theme regarding the relationship between communication and audience satis- faction is that the more confidence that the audience (decision maker) has in the ability of the communicator (analyst), then the more satisfied they are likely to be with what is being communicated (analysis product). Distortion, ambiguity, and incongruence in communication can all act to increase a de- cision maker's discomfort or uncertainty. Analysts who are able to lessen the amount of distortion in their communication will re- duce their client's levels of discomfort and uncertainty, and ceteris paribus, achieve higher levels of satisfaction, and receive bet- ter feedback. These communication results are all beneficial in achieving successful ana- lytical outcomes over time.

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We want to state, for the record, that you will have difficulty becoming an effective analyst in an enterprise unless you demonstrate ef- fective communication skills, knowledge, and abilities. Resources spent in supporting analysis efforts are wasted if the analyst's re- commendations are not used. This is even more serious if the reason for non- or misuse is that the decision makers did not under- stand what was being provided to them, that the conclusions were not clear, or that the analysis product was delivered in an incom- prehensible or inappropriate manner. Inef- fective communication of results will negate what might otherwise have been outstanding work in all the other phases of the analysis process. Over the past 20 years or more, the form in which competitive analysis is delivered has been dramatically altered. In the 1980s, most analysts' outputs were communicated through either occasional written reports,

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regularly written reports, and in a passive manner by making the contents of files avail- able in a centralized location or database on

an as-needed basis to decision makers.1

Today, more active and regular delivery of results occurs through reporting, presenting, and pushing reports through electronic

means to users.2 What used to be contained in manila folders in large filing cabinets has now been shifted over to internal electronic databases or custom-developed intranet portals. Intranets have become a common means for communicating intelligence in most large organizations.

Packaging the Results of Your Analysis

How intelligence is presented and packaged

affects the client's perception of its validity.3

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One thing the analyst must always consider is the need to inform versus the need to pro- tect critical information from being shared beyond the persons for whom it was origin- ally intended. Some analysis results are de- livered through automated electronic means, while others are offered in face-to-face group settings or in-person. Regardless of the man- ner in which the analysis product is delivered to decision makers, the analyst must also address trade-offs between depth, breadth, speed, security, and convenience. Similar to most forms of communication, analysts must always consider how each out- put format is likely to create the conditions necessary to influence the client of the im- portance of their insights. Analysts must also be cognizant of their own predisposition to particular formats. Properly factoring in these two considerations on the analyst and decision maker's communication preferences and taking account of these before

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communication takes place will strengthen the likelihood that the client will accept their recommendations. Analysts who develop recognized levels of communication effectiveness are more likely to present results that

• are future-oriented with detailed pre- dictions of the evolution of the phe- nomena of interest.

• contain well-articulated conclusions that are developed through compre- hensive research and logical reasoning.

• include clear explanations of subjects that go beyond the reasonable tech- nical grasp of their decision-making

clients.4

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Delivering the Message

By what methods does the analyst deliver these results? It should be reiterated here that the method(s) used should be mainly

based on the decision maker's needs.5 That premise does suggest, though, that the de- cision makers actually know what they need to know, and as previously mentioned in this book, that is not always the case. It is in these situations that the analyst has an even greater responsibility, not only to meet the decision maker's perceived needs, but to pro- duce a back-up set of additional analysis product, recommendations, and/or commu- nication channels. This added-value back-up set is where the analyst's communication skills, knowledge, and abilities become highly visible as it will address what the de- cision maker might have asked for, if only they had known what to ask for. It is in this role that the analyst acts more proactively, as

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a subject expert or an internal consultant, rather than as a reactive employee simply completing a task. At the end of every report- ing event, the decision maker should always ask three questions of the analyst:

• "Is there anything else I should have asked you to do?"

• "Is there anything else you think you should have done?"

• "Is there anything else you want to tell me?"

The appropriate communication packaging of analytical outputs is essential. Analysts typically provide their outputs to decision-

making clients in the following forms.6

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Face-to-Face Briefings

One of the most effective two-way models of communication, face-to-face briefings allow the analyst to physically and orally present their findings to a client. This not only en- courages discussion and exchange of under- standing to take place in real-time, but it minimizes second-hand distortion or the ef- fects that a time lag can have on the acquired understanding.

Written Reports and Briefings

Printed outputs are a cost-effective way of distributing results. Some executives still prefer to read items from the printed page rather than from a screen, particularly if a screen is not readily available or inconveni- ent (i.e., the decision maker is traveling on an airplane or his e-mail networks are not

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easily accessible). A problem with this form of communication is that there are many more pages of materials printed than are ever read, and much of the information that is read is not fully understood by its readers. It is not unknown, quite common even, for the readers of paper-based intelligence re- ports to be overlooked. Additionally, the re- port itself has the potential to fall into the hands of an unintended audience and can create undesirable vulnerabilities.

Presentations in Meetings, Seminars, and Workshops

These are a very effective way to deliver res- ults to a group of decision makers and are a good way of gaining a group's attention. The main advantage in this format is that it provides opportunities for the analysts to discuss their findings in real-time, not only

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with those who may have initiated the task in the first place, but also more importantly with those individuals to whom it was de- signed to inform. It is important that the ap- propriate decision makers are available to observe and interact with the presenter, and this scheduling aspect is often an overlooked part of the analysis communication process. One criticism of this method is that many times, analysts prepare PowerPoint slide decks whereby the aesthetics of their slides, the fanciness of their presentations, or the structure of their slide organization over- powers the important content or message, which then gets lost or missed because of the

high reliance on the presenting technology.7

Analysts need to be wary of spending too much time thinking about how snazzily they can present reports, at the expense of worry- ing about the robustness of content. Seminars and workshops are two other forms of presentation-based communication.

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They can allow the analysts to present their ideas more formally while still allowing for the collective benefits of quality question and answer time. This encourages discussion among the collected group of executives in an audience and aids the exploration of solu- tions to competitive and strategic problems.

E-Mail/Instant Messaging

Digital communication is probably the most commonly used means for analysts to com- municate with their decision-making clients. The major benefit of this format is the al- most immediate attention and quick replies. E-mail and instant messaging are good ways to disseminate "alerts," regularly published newsletters, and other forms of analytical results that need to be acted upon in a quick manner. A drawback of this form of commu- nication is that it makes it difficult to

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communicate the "richness" of the recom- mendation context and can limit the format of the results to mostly, if not entirely, text.

Intelligence Systems

Customized systems offered by specialized competitive intelligence vendors, or systems tailored for analytical use within the larger corporate communication system, are be- coming more commonplace. These allow analysts' clients to either see their findings in refined and finished formats, which can in- clude digital links to other materials, and/or in their original input such as documents, in- terview notes, articles, and so forth. Such systems nearly always allow for selective ac- cess and viewing by clients on a need-to- know basis, or they can be designed to send out various forms of information in the form of e-mails, instant messages, or fax to a

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selected numbers of recipients. The draw- back to these systems is that they can be cumbersome, costly, complex, and do not al- ways allow for two-way communication to take place.

Exercises and Planning Sessions

Many analytical tools require two-way inter- action between analysts and their decision- making clients. Some of the tools in this book are best practiced in this way, including techniques such as war gaming (see Chapter

23, "War Gaming"), scenario analysis,8 or shadowing (see Chapter 13, "Shadowing"). These frequently involve the analyst or des- ignated individuals playing the role of one or more competitors. These techniques require a vast amount of data before anything is at- tempted and can be conducted in a one-off session, over an extended period of time in a

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person-to-person format, or can be conduc- ted in teams in tightly planned and sched-

uled sessions aided by expert facilitators.9

Common Products and Reports Used by Analysts

Analysts ordinarily generate outputs in a variety of forms for use by their decision- making clients. Each of these has a typical audience, for which they are designed, are produced on a particular frequency, and are viewed to hold a certain level of perceived value in the eyes of the report recipients. They should always be tailored for the known and unique needs of the decision makers. The most common types of analyst reports are given next and are discussed in greater detail with respect to their relative advant- ages and disadvantages.

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News Bulletins and Newsletters

Targeted most frequently to field sales per- sonnel, marketing, managers, sales man- agers, or other decision makers, these ana- lysis outputs contain largely tactical and/or operational information and utilize data gathered from all sources. They can include both publicly available and internally avail- able information. They frequently focus on current or immediate past events. They are rarely oriented toward the future. Newsletters are typically of lower strategic

value relative to other types of outputs.10 Al- though these items may be seen as less valu- able than other products in a comparative sense, their cumulative value can be higher and strategic in nature. This can be espe- cially true if they raise the level of competit- ive awareness over time in the enterprise.

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When done well, newsletters and news bul- letins can be catalysts for not only conversa- tions and discussions between analysts, ana- lyst groups, and their clients, but encourage new questions to be asked of the analyst group. One way of achieving this catalyzing effect is to ensure that newsletters do indeed include analysts' interpretations and insight, along with the informative "news" aspects of

the bulletins.11

Assessments

These are fairly brief and regularly generated products that look at particular business de- cisions, providing an assessment of the cur- rent situation facing the decision maker, identifying the critical success factors associ- ated with the situation, and suggesting likely outcomes in terms of probabilities. The con- tent can range from a very general overview

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of broad issues to detailed answers to highly specific questions.

Competitor Profiles

Competitor profiles are produced as needed but are constantly updated and contain gen- eral information about the enterprise's com- petitors in the marketplace. They are valu- able for field sales personnel, marketing, and sales managers, as well as other functional decision makers who not only benefit from their existence, but contribute to their aug- mentation and evolution. Seldom actionable in their own right, they are of lower strategic value relative to other types of analytic out- puts, but can be combined with other types of outputs that have higher overall decision- making value. Done well, competitor profiling is carried out at many different layers of the enterprise,

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addressing the competitive landscape and associated activities right across the value chain. Passive competitor profiles are simple historical commentaries, compiled from publicly available documents and as such, carry little or no analytical value or original- ity. Active competitor profiles are future driven, contain identification and assess- ments of critical success factors, deconstruc- tion of published financial reports, qualitat- ive and quantitative judgments on current/ future capabilities, probabilities of competit- or action taking place, and recommendations on how best to react to each and every one should it occur.

Strategic Impact Worksheets

Strategic impact worksheets are closely re- lated to competitor profiles and are used to identify specific events that may potentially

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impact the enterprise. They are usually tar- geted at those individuals in the enterprise who will be most affected by the events, pos- sibly including Strategic Business Unit or functional managers. Ordinarily issued on a regular basis, they are usually of moderate value to decision makers. However, if the analyst uses these with competitor profiles to develop an early-warning system, then they can take on increased value. Anything that helps the organization to avoid being sur- prised by competitor action, market shifts, or hitherto unforeseen events, can only be of great value.

Intelligence Briefings

Usually issued on a regular basis, in a highly condensed manner, these are reports to seni- or and other managers about strategic news. They are rarely used to address specific

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issues, but they do ensure that all concerned are kept as "aware" as possible of the shifting competitive landscape. Intelligence briefings are increasingly offered electronically in broadcast formats over se- cure intranets, in webinar formats, or via secure video-teleconferencing facilities. They are typically of moderate value to the analyst's clients.

Situation Analysis

These are one of the more unique products produced by analysts on an as-needed or as- requested basis for key decision makers. The situation analysis report summarizes emer- ging and rising strategic issues. They usually provide background in the form of the de- tailed thinking and synthesis actually per- formed to generate the recommendations.

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Relative to other products, their shelf lives are short.

Special Intelligence Summaries

Special intelligence summaries are usually brief in length, not much more than one or two pages, and most frequently generated on an as-requested basis. They identify situ- ations, summarize the key supporting ana- lyses, and offer recommendations on desired actions to senior decision makers. They are among the most valuable outputs regularly generated by analysts and are often the most visible influencers of an enterprise's decisions.

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Creating the Report

When creating reports, analysts should em-

phasize the following items:12

• Strategic versus tactical or operation- al information

• Decision-oriented information • Inclusion of only relevant supporting

data • Distribution of reports to clients on a

timely, need-to-know basis • Multiple reports versus one large re-

port for lower to middle levels of management

Analysts can enhance their decision makers' receptivity by using a variety of analysis outputs. M. Dugal developed the idea of an analyst's portfolio, which comprised 10 key products. Each of these "products" differ in terms of

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shelf life, intended audience, processes used to generate them, sources underlying their development, analytical tools most com- monly applied to generating them, their modes of dissemination, and the resources required to produce them.

1. 1. Current Intelligence provides cli- ents with the first identification of developments in the organization's competitive arena. This is typically light on analytical manipulation and, in cases where it is warranted, will later be assessed more thoroughly.

2. 2. Basic Intelligence reports on ana- lytical research that provides the up- to-date, systematic facts and under- standing about the organization's en- vironment, industry, and competitors.

3. 3. Technical Intelligence helps the decision maker understand develop- ments in both the scientific and

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technical areas that affect, or may po- tentially impact, their organization's competitive environment.

4. 4. Early Warning Intelligence provides advanced warning of poten- tial marketplace disruptions and en- vironmental opportunities and threats.

5. 5. Estimated Intelligence provides forecasts, scenarios, and likely devel- opments relative to competitor's products, markets, customers, pro- cesses, and/or industry composition.

6. 6. Work Group Intelligence is used in support of internal projects and teams especially those relative to possible merger and acquisition can- didates, patent purchases, or acquisi- tion of specialist expertise.

7. 7. Targeted Intelligence offers one- time intelligence that targets narrow,

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specific, and focused needs of an in- telligence client.

8. 8. Crisis Intelligence is designed to assist the organization in managing its way through crisis events.

9. 9. Foreign Intelligence focuses on competitors, industries, and compan- ies that operate outside the nation- state domicile of the organization.

10. 10. Counterintelligence assists the organization in addressing the intelli- gence threats posed by competitors.

Communication Difficulties Faced by Analysts

Despite the increased use of technology in communication between analysts and their

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decision-making clients,13 the analyst's com- munication of their findings continues to be a trouble spot for decision support. Why is the effective communication of analysis res- ults so difficult? In our experiences, and through observation and surveys of hundreds of business and competitive analysts, their work context, and their organizations, we have identified a number of reasons that can be frequently as- sociated with lower levels of analytical effectiveness. Although we were tempted to prioritize these items, either by the frequency in which they occur or by their relative importance to the analysis process, we do not have access to systematic research in this field that would allow us to achieve this. We think that fur- ther examination and research of these reas- ons is warranted, and we usually suggest to managers that they audit their own opera- tions to assess the prevalence of these

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problems in their context. In no particular order, we have observed that most analysts

• Don't understand or think through basic communication transmission models that impact their daily work. A basic model developed by C.E. Shannon and W. Weaver looked like this: Figure 4.1 Communication trans- mission model

Shannon and Weaver argued that there were three levels of problems in communication:

1. 1. The technical problem: How accurately can the mes- sage be transmitted?

2. 2. The semantic problem: How precisely is the meaning "conveyed"?

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3. 3. The effectiveness problem: How effectively does the re- ceived meaning affect behavior?

Subsequent research in human com- munication, most notably by Harold

Lasswell,14 was closely allied to beha- viorist approaches, and this resulted in a verbal version of the former Source-Message-Channel-Receiver transmission model that essentially asked, "Who says what in which channel to whom with what effect?" Most analysts do not ask these ques- tions of their communication products, and because of this, often misfire on achieving their aims of in- fluencing the decision maker. Although these models are far too simplistic to accurately reflect com- munication reality in today's complex world, having a communication

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model in mind such as these, at least provides an initial basis from which to think through the communication challenge. A widely known notion in physics that analysts should know about suggests that chaos or random- ness always increases with time. This results in communication being in- creasingly distorted the more times it is passed along and through a chan- nel. It would be seen as added noise or complexity and can occur at any stage or at multiple stages of the ana- lysis process.

• Have not received training and devel- opment in becoming effective communicators. You cannot be an analyst and be a poor communicator, and you cannot be a successful analyst unless you are also an effective communicator. Un- fortunately, reporting and

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presentation skills are not a focus of most business professionals' formal

education or training.15 Yes, compan- ies will send graduate trainees on an "Introduction to Public Speaking" or "How to Use PowerPoint" type train- ing course in their first year of em- ployment, and in that respect, they can be useful. Functional managers and analysts at all other levels are generally assumed to have attained highly developed communication skills through some form of osmosis. The evidence contradicts this. Good analysts and good managers can sometimes be spectacularly bad at making presentations and delivering information, so much so, that the audience feels distinctly embarrassed and uncomfortable at their perform- ance. This does not assist in the

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communication process and is an ele- ment that is entirely correctable. Analysts use communication skills to negotiate with their clients for choices, time to decide, time to act, understanding, and to agree on how each can help to achieve better de- cisions. Analysts actually accomplish their jobs indirectly through the com- munication that is exchanged between the analyst and their clients. What is important for the analyst to know is that communication can be exercised and improved. It can be broken down into its component parts and practiced. Analysts also need to know how and when to keep quiet. This is a highly developed tal- ent used during information acquisi- tion and most effectively by skilled negotiators.

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Far from being seen as a one-off in- troductory type course for new- comers, advanced communication skills training should be a mandatory and ongoing requirement for all em- ployees. Communication is a complex business, and it really is much more than talking.

• Rely upon the communication tech- niques that they are experienced and comfortable with, not necessarily those that are appropriate for a par- ticular client and/or situation. Analysts, who were trained to write reports in their earlier career re- sponsibilities, will ordinarily contin- ue to write them until someone sug- gests they stop. It is human nature for the analyst to fall back on what they know, but often what they need to know can be far more vital to them in achieving successful outcomes.

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This will require many analysts to undergo additional training, to learn new skills, to practice them, and to continuously develop their capabilit- ies. Much of this will require an or- ganizational and personal investment in time and money but will typically reap rewards in the form of more ap- propriate and effective delivery of the analysis product. Many professionals, such as sur- geons, pilots, engineers, and scient- ists, embrace the philosophy that they will never know all there is to know about their jobs. They also re- cognize that new developments are occurring every day. As such, they are legally required to learn about these and demonstrate their continued competence in order to remain em- ployable. While not suggesting that this should be the case for analysts

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and their decision makers, it is per- haps a little strange that those in- volved in vital decisions about the fu- ture of an enterprise should be deemed as the "finished product" from day one in their job.

• Have not learned to pick up "silent cues" in communication. Most analysts rely far too heavily on written data and information and discount or downplay other forms of inputs, including conversations, ob- servations, and behavioral cues. This can be a critical skill for analysts since they need not only to commu- nicate with the eventual recipients of their work, but also the gatherers of the data and information they are us- ing. Much of this work will require the analyst to make judgments about the credibility of sources, the clarity of the gathered data, and/or the

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possible motivations of those in- volved. Better analysts will use not only the so-called obvious, published cues to conduct their work, but will also be cognizant of the informal, be- havioral cues that are given off by in- dividuals during communication.

• Lack a clear understanding of their client's (or sometimes their own) ex- pectations and requirements. Many analysts operate with a fuzzy understanding of how their clients will use their outputs and recom- mendations. A major problem is that many analysts work without an or- ganized KIT/KIQ process and fail to do systematic debriefs and assess-

ments with their decision makers.16

If the analyst does not recognize when and why a client is dissatisfied with their work, they will have

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difficulties in identifying the means by which to improve it. One means for avoiding this problem is to utilize the previously discussed KIT/KIQ process, supplemented by a "statement of work." D.S. Mockus has suggested that a statement of work should encompass, at a minim- um, the following elements:

◦ Prioritized list of deliverables ◦ Primary contact and distribu-

tion list ◦ Anticipated timeframe of fi-

nal report ◦ Format of final results

1. i. Written (paper copy, digital, e-mail, instant message)

2. ii. Verbal (face to face, over the phone, in meeting format)

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◦ Anticipated frequency of status reports/updates

◦ Format of status reports/ updates

1. i. Written (hard copy, digital, e-mail)

2. ii. Verbal (in person, over the phone)

◦ Anticipated audience (titles, positions)

Analysts also need to understand their own communication styles, tendencies, and biases. For example, many analysts will filter the results of their analyses by manipulating in- formation in ways that they perceive it will be seen more favorably by the receiver. For analysts who have not rigorously determined their client's needs or requirements, this is likely to get them into trouble. The client may realize what has happened, and

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as a consequence, not believe, or trust, the recommendations offered. Because intelligence is communic- ated via language, analysts need to recognize how important their choice of words, visuals, or voice will be, particularly if their decision-making clients are from different nationalit- ies, cultures, genders, or experiential backgrounds. Words mean different things to different people. Cultural or social nuances need to be known and properly addressed. To one analyst's client, a "threat" may mean something imminent and urgent, while to another it may be viewed as something that is long-term, long distance, and unlikely to be problematic.

• Do not develop a plan or strategy for communication or think through the choice of communication vehicles

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with the same level of rigor that they may think through the choice of ana- lytical tools and techniques. In far too many enterprises that we have advised, communication is treated as an afterthought. Strangely enough, executives frequently point to the communication process as be- ing both important and yet a frequent source of organizational difficulties or failures. These facts point to the importance for analysts to consider communication as rigorously as they would any other key facet of their work. A facilitator of this is the devel- opment of communication plans and communication audits/reviews on a regular basis. These can then be linked to the overall strategic plan, group's analysis plans, or individuals' project plans.

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Just like the analysis techniques we describe in this book, communication vehicles or modes all have different attributes. It is imperative that ana- lysts think these matters through early in the process so that they can integrate the development of the final products into the intended delivery method. Communication, like most of the rest of the processes described in this book, can and should be planned, managed, measured, and improved.

• Do not make their recommendations "actionable." By "actionable," the analyst's recom- mendations must relate directly and obviously to the KIT/KIQ of the de- cision maker, the enterprise's relev- ant strategic, tactical, and/or opera- tional plans, as well as the decision- making process itself. Actionable

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means that the analyst has made re- commendations that walk the client through not only the decision itself but the likely organizational and competitive manifestations (i.e., con- tingencies) that would occur as a res- ult of it being acted upon. Last but not least, actionable analysis usually includes an implementation plan, which can be scoped out in the form of a timeline, GANTT chart, project plan, or the like.

• Need to develop the synthesis skills to take volumes of complex data and information and convert them into brief and easy-to-understand outputs. A common reason many analysts fail is that they do not know how to sum- marize their thoughts and commu- nicate them succinctly. One reason this occurs is that analysts may lack a

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deep understanding of the analytical techniques they are using. This book is intended to help put that situation right. Many decision makers have neither the time, patience, or desire to read through lengthy tomes or book-length backgrounders about a topic. This is one reason why we

think the "Occam's Razor" rule17

should always be applied to commu- nication. This suggests that the ana- lyst should communicate using the simplest and most parsimonious ex- planation that can fit the facts. All else being equal, it is better to com- municate findings using simple and shorter formats as opposed to longer and more complex ways. Another related communication er- ror made by analysts is not "cutting to the chase" or knowing how to dif- ferentiate between the "must have"

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and the "nice to have" intelligence. As one expert in the competitive intelli- gence field stated, "effective analysts learn not to summarize but rather to

synthesize."18 It is far too easy to pro- duce volume, whereas synthesizing analytical findings down to their es- sential core messages is a skill that will always be valued by today's har- ried decision makers.

• Have not thoroughly examined the communication expectations, chan- nel, and format needs/preferences of their decision makers. Some decision makers prefer to re- ceive their intelligence via particular channels or in specific formats. Some will prefer to hear results in a private face-to-face, in-person manner; some will prefer a formal presentation; some will prefer to receive e-mails or access a special web area designed

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for the purposes; and some will prefer to receive written reports sent via the internal mail. It is common for analysis clients to exhibit selective hearing based on their own needs, motivations, experi- ence, background, and other personal characteristics. Analysts should take account of and be sensitive to a client's work habits, personality, and schedule. If the client has an ex- tremely busy day, it would be futile to try and arrange a 90 minute in-depth briefing for something that can wait until tomorrow. If an analyst really does have to demand a client's atten- tion, then the subject matter and scenario had better be of sufficient gravity to warrant such an intrusion. Part of "managing a client's expecta- tions" also compels analysts to profile themselves and their clients. D.J.

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Kalinowski suggests that clients have one of four basic communication styles—the first as a primary style and another exhibited less frequently as a secondary style, each of which indicates that the analyst should do specific things. This notion is expan- ded next.

Style 1: Analytical Problem solvers, organized, lo- gical, somewhat impersonal, typ- ically cautious, and nearly al- ways consistent. As such, it is important for the analyst to have done their homework. They should strive to communicate as accurately as possible, providing the level of background detail the client needs to gain confid- ence in the rigor and logic of their recommendations. Style 2: Driver

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Goal-driven, action-oriented, competitive, serious, strong- willed, controlling, and self-reli- ant. Analysts communicating with these clients must be effi- cient in their communication, cutting confidently and quickly "to the chase" and not providing much "fluff" or side-tracking in the presentation of their find- ings. It is important to stress the "bottom-line" implications of the findings, make clear recom- mendations, and answer these clients' questions quickly and directly. Style 3: Amiable Sympathetic, nurturing, cooper- ative, personal, adaptable, toler- ant, patient, good listeners, and thoughtful. Analysts delivering their findings to these clients try

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and involve them in the commu- nication, keep an open mind, are agreeable, and are willing to ex- plore the many options they went through before coming to their actionable insight. Last but not least, they should be clear about the multiple types of bene- fits that can be generated from the recommendation. Style 4: Expressive Enthusiastic, intuitive, creative, inspirational, spontaneous, mo- tivators, friendly, group-ori- ented, and energetic. Analysts delivering their findings to ex- pressive clients should commu- nicate with them often, be enga- ging, use multi-media, and be able to weave a captivating "story" together.

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In a similar fashion, analysts need to look inwardly at their own personal- ity and preferences to make sure that they are operating optimally in the communication process. Effective analysts recognize the different pref- erences and personalities and align them between the communicating parties.

• Do not even know whether the right people are getting communicated to with the right results. A surprising waste of analysis re- sources is common in those enter- prises where analysts produce re- ports, develop web-sites, write brief- ings or newsletters, and distribute these items to readers who may never even know, or care, about receiving these items. We are aware of a great many firms where briefings would sit for weeks or months at a time before

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being read by the recipient, often rendering the content useless. We find this communication error is made most commonly where analysts do not have regular, active meetings with their decision makers and be- come too heavily reliant on one-way methods such as newsletters, web- sites, intranet portals, or even bullet- in boards. It is highly dangerous to assume that material disseminated in this fashion will actually be absorbed at all, let alone shortly after dispatch. Such a "scatter-gun" approach to communicating results ensures that little cross-fertilization of knowledge takes place—a vital ingredient in the rich mix of an analyst's appreciation of how information can impact in many ways, on more than one activ- ity at any one time.

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Effective Listening and Answering the Questions of Decision Makers

Analysts should also be competent in an- swering their client's questions and manage Q&A sessions effectively. One of the best things the analyst can do is to establish, up front, the guidelines and deadlines under which their presentation will operate. Some other tips analysts should demonstrate mas- tery of are the following:

• Never get into a debate, argue with, or criticize a questioner. Analysts who view every question as an attack on the integrity of their work or their personal integrity typic- ally respond in defensive ways to questions. They will then attack the questioner, and this is unlikely to

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help them to become a trusted ally of the decision maker. Although some decision makers will commonly be argumentative with analysts, it will be important for the analyst to identify something the two parties can agree on, thank the arguer for their input, and move on to other fa- cets of their dialogue.

• Answer questions succinctly. Most executives will quickly lose pa- tience with an analyst who drones on and on about things without bother- ing to take a breath and assessing whether the client is still interested. Long-winded answers usually raise more questions than they answer. Short, concise, and "to the point" re- sponses are generally favored by de- cision makers, and it is these that the analyst should aim to provide.

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• Being able to admit they don't know something. Analysts cannot be afraid to say, "I don't know." It is surprising just how many people simply cannot say those three words when their client asks them a question. There is no way that you can have pre-empted and pre- pared for all the likely questions that can come from so many different per- spectives. What they don't want to hear, though, after a dynamic presentation, is 30 seconds of mind- less drivel while you try to make up a good answer to an unexpected ques- tion. Offer to find out the answer and get back to them by the end of the day. If you haven't found the answer by then, tell them so and keep look- ing unless, or until, you're told to stop.

• Start and end any meetings on time.

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Decision-making executives are well paid, and their time is highly valu- able. One of the worst things an ana- lyst can do in a communication activ- ity is to either start a meeting after the appointed time or to end it late. Analysts should not let their poor at- tention to time management be the main thing their decision makers re- member about their performance.

Conduct Communication Follow-Up and Gather Feedback

An element of most communication pro- cesses that is commonly overlooked is the gathering of feedback and subsequent meas- urement of the communication and client engagement process. Whenever possible, the

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analyst should take the opportunity to gain feedback from the audience, as close as pos- sible to the event. Informal questions that can be asked might be:

• "Was that useful?" • "Was there anything you'd like me to

clarify or elaborate upon?" • "Did I miss anything you would like

me to have covered?" • "Did you get what you needed?" • "Was this information valuable?" • "Did you feel confident about acting

on my recommendations?" • "Was there anything you'd suggest I

do differently next time?"

It is essential, though, that this does not come across as the actions of a less than con- fident analyst, engaging in "approval-seek- ing" or "compliment-fishing" behavior that normally delivers only platitudes and not a

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truthful opinion on an individual's performance. One thing that is often valuable to competit- ive analysts is to maintain a rolling audit of their outputs, their effectiveness in commu- nicating these to their audience, and an ac- count of any actions taken as a consequence. This will help them shape the overall process and enable all parties to identify any deficiencies.

Pragmatic Considerations

There are a variety of considerations that should always be taken into account when communicating across cultures or geograph-

ies.19 This topic has received considerable treatment from many authors, but as a means of re-sensitizing analysts to the whole issue of cultural awareness and sensitivities when communicating, we offer a brief

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summary of the key points to consider in Table 4.1. Table 4.1 Key Considerations When Communicating

Across Cultures and Countries20

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Summary

Just as analysts try to reduce the surprises experienced by their decision-making cli- ents, they also need to apply the same prin- ciple to their own communication of results. M. Sperger put it succinctly when he said:

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"How can we communicate intelligence so that it does indeed make a difference? We have to begin with a commitment: We will deliver intelligence at the right time, in the right form, with a message that compels action." Analysts should have ongoing communica- tion with their clients while they are engaged in the analysis process. This doesn't require them to report every small event, but it does require them to keep their clients informed of their progress, or equally importantly, lack of progress. Maintaining open lines of com- munication and being able to give the client a "preview" of your findings before they are formally offered can minimize any adverse surprises. This also allows the decision maker to raise potential issues that the ana- lyst may not have thought of and still has time to address before the analysis process and project is brought to its conclusion.

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Knowing when to begin the formal commu- nication of results is also a delicate balancing act that the analyst must master. Releasing results prematurely, possibly before the ana- lyst achieves a high enough degree of confid- ence in their findings, can result in poor de- cisions. Communicating one's results too late, possibly because the analyst wanted to be very certain of their insights, may render the findings obsolete and useless if the ac- tions that needed to be taken were delayed unnecessarily by the analyst's reluctance to

finish.21

Last, but certainly not least, in order to de- velop and keep their clients' trust, analysts must constantly acquire and enhance an in- depth understanding of their enterprise's business, industry, and markets. Addition- ally, they must always relate their key con- clusions and recommendations back to what is important to their business. If they do not, they will have little ability to persuade their

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customers, build their influence, or impact business decisions.

References

Buchwitz, L. (1998). "Monitoring Competit- ive Intelligence Using Internet Push Techno- logy," available from http://home.eol.ca/ ~lillyb/CI_paper.html. Clark, R.M. (2004). Intelligence Analysis: A Target-Centric Approach. Washington, DC: CQ Press. DeSouza, K. (2001). "The communication of intelligence: Three lessons," Competitive In- telligence Magazine, 6(5), pp. 42–44. Dugal, M. (1998). "CI product line: A tool for enhancing user acceptance of CI," Competit- ive Intelligence Review, 9(2), pp. 17–25. Fehringer, D. (2001). "Hot off the wires: Im- prove the effectiveness of your CI

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Newsletter," Competitive Intelligence Magazine, 4(3), May–June, pp. 11, 14. Herring, J.P. (1999). "Key intelligence topics: A process to identify and define intelligence needs," Competitive Intelligence Review, 10(4), pp. 10–19. Kalinowski, D.J. (2003). "Managing expecta- tions: Will clients ever fully understand?," Competitive Intelligence Magazine, 6(6), pp. 25–29. Kopec, J.A. (1982). "The communication audit," Public Relations Journal, 38(5), May, p. 24. Laalo, A.T. (2000). "Intranets and competit- ive intelligence: Creating access to know- ledge," Competitive Intelligence Review, 9(4), pp. 63–72. McGonagle, J.J., and C.M. Vella (2002). Bot- tom Line Competitive Intelligence. West- port, CT: Quorum Books.

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Mockus, D.S. (2001). "Avoid the intelligence disconnect," Competitive Intelligence Magazine, 2001, 4(6), pp. 9–12. Parker, D.A. (2003). Confident Communica- tion: Speaking Tips for Educators. Thou- sand Oaks, CA: Corwin Press, Inc. Sawka, K. (2000). The analyst's corner: Keep your messages short and sweet," Competitive Intelligence Magazine, 3(1), Jan–Mar, pp. 54–55. Severin, W., and J. Tankard (1997). Commu-

nication Theories. 4th ed. New York, NY: Longman. Shaker, M., and S. Gembicki (1999). The WarRoom Guide to Competitive Intelli- gence. New York, NY: McGraw-Hill. Shannon, C.E., and W. Weaver (1949). A Mathematical Model of Communication. Urbana, IL: University of Illinois Press. Sperger, M. (2005). "Managing the message: Communicating intelligence that makes a

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difference," Competitive Intelligence Magazine, 8(1), pp. 12–17. Stanat, R. (1998). Global Gold: Panning for Profits in Foreign Markets. New York, NY: AMACOM. Tyson, K.W.M. (2002). The Complete Guide to Competitive Intelligence. 2nd edition. Ch- icago, IL: Leading Edge Publications. Waters Jr., T. (2001). "Special delivery: High impact presentation tactics for CI profes- sionals," Competitive Intelligence Magazine, 4(6), Nov–Dec pp. 13–17.

Endnotes

1 McGonagle and Vella, 2002. 2 Buchwitz, 1998. 3 DeSouza, 2001. 4 Clark, 2004.

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5 Thanks to Melanie Wing for raising the im- portance of this premise in the communica- tion of intelligence. 6 See McGonagle and Vella, 2002; Tyson, 2002. 7 Sawka, 2000. 8 See Chapter 18 in Fleisher and Bensoussan, 2003. 9 Shaker and Gembicki, 1999. 10 Fehringer, 2001. 11 A special note of thanks to Timothy Kind- ler for reminding us of the cumulative im- portance of communicating with decision makers. 12 Tyson, 2002. 13 Laalo, 2000. 14 Severin and Tankard, 1997. 15 Waters, 2001. 16 Herring, 1999. 17 Parker, 2003.

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18 Tyson, 2002. 19 Sperger, 2005; Stanat, 1998. 20 These factors were adapted from the cul- tural awareness data presented in Communi- caid (www.communicaid.com), Sperger, 2005; Stanat, 1998; and www.WorldBiz.com. 21 De Souza, 2001.

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5

Applying the FAROUT Method

Choosing from an increasing array of tech- niques can be one of the most difficult tasks facing an analyst. Research of the use of con- ceptual tools and techniques suggests that executives heavily support the idea that exec- utives who use the right tools will succeed, while simultaneously recognizing that most tools over-promise and under-deliver res-

ults.1 We think one of the reasons this is be- lieved is that the tools selected and used by analysts are frequently incorrect and inap- propriate to their needs. There are hundreds of analytical tools and

techniques identified in the literature.2 Some techniques are briefly referred to, while oth- ers are treated through book length treatises.

Many more are applied in unique or propri- etary ways by analysts in addressing their challenges. We are not surprised that "tools" are seen as over-ambitious and under-per- forming. The well-worn analogy that a work- er with only a hammer sees every task as simply a decision on how many nails to use holds true in the case of competitive analysis. We might also suggest that just because a worker has hundreds of different tools, it does not mean that he can apply them all ef- fectively. Most specialists have a handful that they prefer and can apply most effectively. Fortunately, we believe that there are some considerations that analysts can make to lessen the likelihood of using the wrong tool for the job. Techniques have an important role to play in the larger competitive and strategic analysis process. Individuals who study for a Master of Business Administration degree (MBA) or other higher-level business program will be

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exposed to some of these techniques in their marketing or strategy courses. Among the benefits that analysts and their organizations gain from using techniques correctly are the following:

1. 1. Greater understanding of re- lationships and situations—Vir- tually every technique and combina- tion of techniques requires the ana- lyst to ask numerous questions in- cluding "what?," "how?," "when?," "who?," "where?," and most import- antly, "why?." These questions lessen the likelihood that they will miss or overlook important facets of the ana- lysis being undertaken.

2. 2. Initially focus the analyst on data and facts—Most techniques require data and facts first and dis- courage the use of unqualified opin- ions, beliefs, rumors, or feelings. Al- though some techniques are highly

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qualitative, and others highly quant- itative, nearly all of them require the analyst to maintain a keen under- standing of the soundness of data input.

3. 3. Guide efficient data collection efforts—On agreeing which ques- tions are to be answered, the analyst can then consider which techniques will be of most use. This then drives the data collection effort and lessens the likelihood that time and re- sources will be spent on collecting unnecessary or redundant information.

4. 4. Encourages analysts to be rig- orous—Most techniques compel the analysts to consider a wider and deeper range of possibilities than they would normally accomplish alone. This is exemplified by the pro- cesses we outline in this book that

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can require multiple steps, which in turn require many checks and bal- ances between these steps. Hasty analyses, badly organized informa- tion, and only using convenient data always leads to dissatisfied decision makers and short careers for the ana- lysts who operate in this fashion.

5. 5. Forces analysts to think critic- ally—Analysts should consider the benefits and limitations inherent in looking at data and information in specific ways. Most of the techniques presented here, along with the in- formation we urge analysts to con- sider, should help them to prepare defensible and well-reasoned insights that will stand up to the critical scru- tiny of demanding decision makers. Many of these techniques are sub- sequently modified for particular proprietary applications in

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enterprises, which often then become part of the enterprise's analytical repertoire.

6. 6. Promotes a proactive attitude to analysis—Most techniques re- quire the analyst to consider the op- tions and think through the relative value of each before use. Utilizing se- lection criteria to choose the best technique(s) for particular challenges causes analysts to think ahead in terms of the data they will need to operate each and the type of outcome each will deliver. This helps to de- termine their suitability to address the question(s) being asked.

Studies of the use of competitive analysis tools and techniques have demonstrated the extent of their use, as well as perceived judg- ments of their effectiveness. According to A. Gib and R. Gooding's survey of competitive analysts, the most-utilized tools included

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competitor profiling, product/market analys- is, industry analysis, qualitative research methods, and customer satisfaction surveys. These tools all tended to be rated highly in terms of their perceived effectiveness, along with management profiling. The least-util- ized tools included spire analysis, dialectic inquiry/devil's advocacy, gaming theory, force field analysis, and experience curve analysis. As advisors and consultants in the area of competitive and strategic analysis, we are not surprised by the finding that a tool's ex- tensive use and its perceived effectiveness would be highly correlated. Analysts will use tools they perceive to be effective and will shy away from ones they perceive to be inef- fective. Having said that, we have no know- ledge of how well trained the analysts were in applying the thirty tools that were rated, the nature of the questions or topics that their decision-making clients had asked

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them to address, the context in which they applied the tools, or the quality of the data/ information used in employing the techniques.

Applying the Techniques

There is a process to properly identify ana- lysis techniques, and analysts should think through a series of questions before they make their choice:

1. 1. What is the full range of techniques that can be used to respond to the question asked?

2. 2. What is the focus and scope of the competitive phenomenon being analyzed?

3. 3. What are the con- straints—personal, informational, or- ganizational, resources, and

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contextual—that might affect the analysis process?

Every technique we detail in this book deliv- ers certain things very well, but most also have drawbacks of which the astute analyst must be aware, and we draw attention to these individually. In the "Background" section of each tech- nique, we provide our readers with the con- text in which the tool was originally de- veloped. A good number of the tools presen-

ted in this and our prior book3 were de- veloped decades ago by individuals who re- cognized problems at the time and sought a conceptual and/or methodological means for solving it. They often become popularized through a management guru or large con-

sultancy practice.4 Many of these tools have been in use, taught, and improved through the years to the point where they are now viewed as standard models for use by an

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analyst. These tools are also the most likely to have been customized or adapted for use by an enterprise, especially as they are more likely to be well understood and regularly employed in analysis work. Other techniques have been developed more recently, often in response to new phenom- ena being encountered. These tools have not had the benefit of decades of critical schol- arly scrutiny or improvement through prac- tice and teaching and may yet still evolve dramatically. This does not make them more or less useful to the analyst, and time will be the best arbiter over whether they too be- come part of the standard competencies of the competitive analyst. We try to point out the "strategic rationale" for the tool's development, and we demon- strate the important links the tool has to oth- er strategic concepts. We also suggest what implications the analyst's application of the tool and the results that are generated from

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its application will have for the specific de- cisions being made. In each section, we look at both the "strengths and advantages" and "weaknesses and limitations" of each tool identified. We caution readers against reading too much in- to the length or the number of strengths or weaknesses identified. It was not our goal to be exhaustive but to highlight the more prominent items that the analyst must con- sider. Readers should critically consider each of the points made in this section independ- ently and factor them into their application of the tool. This will help to guide the level of confidence by which they communicate their findings. Very few questions can be satisfactorily answered through the application of a single analytical technique. If it were that easy, then there would be no need for this book. Most strategic, business, and competitive questions are complex, dynamic, and

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cognitively challenging. This requires the analyst to identify the sequence and range of techniques that need to be applied, and every time that this is done, a different answer will emerge. Some application sequences will be more efficient and effective than others, sometimes, but not always. The analyst also needs to identify the nature and range of data that is already available or can be ac- quired before making a decision. Some tech- niques will have to be discarded simply be- cause it is impossible to obtain the required information in a timely manner.

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An Evaluation Scheme for Assessing the Adequacy of Tools and Techniques: FAROUT

Any form of intelligence generated must ulti- mately satisfy a decision maker and the organization's needs. An effective analyst needs to know how the intelligence gener- ated by the application of a technique will be used. Although these principles may appear simple to apply on the surface, there are a variety of objective considerations that make the execution of an analyst's responsibilities far more difficult in practice. After years of conducting strategic and com- petitive analysis projects, some authors real- ized that there were a limited number of key considerations common to all high-value

analysis.5

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A unique concept we have developed for ana- lysts is the FAROUT approach. The FAROUT profile we developed for every technique can be beneficial in helping analysts make choices from the techniques we detail in this book. Applying FAROUT to their selection process will support analysts in selecting the particular technique or combination of tech- niques to best meet their unique situations. Having said that, we want to be clear that FAROUT is only a guide, and, as such, is only one input among many others that an ana- lyst needs to consider in developing their craft. It is designed to assist analysts in knowing which techniques are appropriate for any given situation. FAROUT is based on the premise that for analytical output to be insightful, intelligent, and valuable to business decision makers, it needs to meet a number of common charac- teristics. The output needs to be

Future-oriented

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Accurate Resource efficient Objective Useful and Timely

Failure to meet all these criteria to a satis- factory level will result in the analytical out- put being less than optimal and of lesser value to the decision maker. The six components of FAROUT are de- scribed next. Future-orientation: Relying on the past as predictor of the future can be dangerous. This is particularly true when innovation, science, and technology factors can quickly disrupt a market. This has been very evident in the rapid adoption and development of e- commerce causing disintermediation of en- tire industries. By definition, the intelligence resulting from an analyst's work must be future-oriented, looking both deeply and broadly at what might happen. They must be

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willing to take risks to some degree by being both inventive and predictive. Early warning, foresight, prescience, or prevision cannot be adequately generated by using historical data that are focused entirely on the past. The better analytical methods for developing in- telligence are indeed future-oriented. Accuracy: The effective analyst should de- velop outputs that aim for high levels of ac- curacy. This means that the insights gained are precise. Accuracy also means that the analyst's insights are as closely matched as possible to the actual conditions of the phe- nomena being analyzed. High levels of accur- acy are difficult to attain in practice when the data underlying the analysis

• has come from only one source; • has not been cross-validated against

both hard and soft information; • is collected under time constraints

that restrict the comprehensiveness of the collection process;

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• needs to be converted from sources in ways that it was not originally de- signed for; and/or

• comes from sources filled with high levels of bias in the first place.

Although achieving the highest levels of ac- curacy is theoretically desirable, the analyst usually has to trade-off against other concep- tual and pragmatic considerations. Experi- enced practitioners have suggested that in a good proportion of competitive marketplace contexts, accuracy or precision may often be much less important than developing an en- hanced understanding or perspective. Resource efficiency: To produce effective analysis, data needs to come from sources that cost less than the resultant output is worth. This equation refers to the marginal value of gathering the additional information required. At the margin, the subsequent use of a tool is valuable to the extent that it will increase the value of the insights more than

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the resources expended by the enterprise's analyst in applying it. Executives commonly lament that their organizations gather enormous amounts of data, with the thought that it eventually may be needed. Their ex- periences suggest that much, if not most, of the data will likely lay dormant for years in- side contemporary, high volume, digital stor- age devices. Although an Internet search may conveniently produce volumes of appar- ent "hits," one phone call to a well-placed and knowledgeable contact would most likely have produced far superior informa- tion in a fraction of the time. Objectivity: The application of a given method affects the degree of bias held by the analyst, analyst groups, and/or organiza-

tions.6 Too many otherwise "good" analyses can be clouded by cognitive or social biases ranging from prior hypothesis bias through recentness and availability to groupthink, all of which provide comfort in dealing with

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risk or uncertainty.7 To minimize the poten- tially destructive nature of these common bi- ases, data or information should be viewed by analysts in a dispassionate, impersonal, rational, and systematic manner. In other words, objectivity helps to minimize the de- structive potential of analytical and decision- oriented biases. It is also essential for ana- lysts to recognize the potential for and avoid the selective use of facts to provide support for pre-ordained or desirous conclusions. Experienced analysts recognize that deliver- ing bad news is just as much a part of their job as delivering good news, and they will tackle each with equal skill and objectivity. Usefulness: Almost by definition, valuable analytical outputs will meet the critical intel- ligence needs specified by a particular de- cision maker. The output of some techniques and models can be quickly understood, whereas others may be less easily digested and can require the decision maker to

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further engage with the analyst before they are confident of making decisions. It helps if the analyst and the decision maker can design a process that helps each of them to develop a clear understanding of the prob- lems and intelligence needs, as well as a deep and broad appreciation of the decision con- text. This understanding does not always come easily, and for many, will only emerge over a lengthy period of time, which en- genders trust and respect for the tasks and responsibilities of each. Ultimately, effective analysts strive to produce outputs that meet, or surpass, the requirements of the decision maker. Timeliness: Strategic business information or competitive data frequently has a limited "shelf life," especially where those decisions are being made in dynamic, hyper-competit- ive, or turbulent environmental contexts. Consequently, raw data loses its value the longer it remains excluded from the

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decisions underlying organizational action. Some methods of analysis may provide the intelligence required by clients for decisions but take far too long to develop. This could happen when there is a need to subject the data to multiple phases of analysis, the need to gather a certain volume or variety of data that is not quickly accessible, or to employ other, less readily available individuals in the process. On the other hand, some methods of analysis may require little time to perform but do not deliver the other required features of objectivity, accuracy, utility, and resource efficiencies. Valuable analysis will provide decision makers with enough time to imple- ment the course of action recommended by the analysis.

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Using the FAROUT Rating System

Managing the analysis of business and com- petitive data is a challenging task, and we are not aware of any Analysis for Dummies books or magic software that can replace an analyst who knows how to employ a good balance of both science and creativity. We do know from experience, it is highly unlikely that good analytical output will be based on just one analytical method or tool. Rather, a combination of several techniques will be required. Each analytical method has unique limita- tions, and these limitations multiply when placed in specific organizational contexts. The FAROUT system will enable the analyst to mix the appropriate tools to be applied in analysis tasks so as to maximize the insights generated for their decision makers. It is our view that the more successful analysts recog- nize and are sensitive to the limitations

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associated with any particular analytical method or technique. The sensitized analyst can address these issues throughout the whole of the competitive and strategy analys- is process to overcome such limitations. We utilize a five-point rating scale to assess each analytical technique contained in Part Two. The five-point scale ranges from low (1) to high (5) and is expanded in Table 5.1. Every technique is assessed against the six FAROUT elements. Our objective in offering the FAROUT framework is to assist analysts in assessing the outputs of different analytic- al methods to ensure high intelligence value. If the analysis delivers on all six characterist- ics, analysts and decision makers can be reasonably confident that the output will make a difference. All the techniques and their ratings are summarized for easy refer- ence in Table 5.2. Table 5.1

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Assessment of Analysis Techniques Using the FAROUT Scheme

Table 5.2 FAROUT Summary of Methods

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References

Clark, D.N. (1997). "Strategic management tool usage: A comparative study," Strategic Change, 6(7), 417–427. Fahey, L. (1999). Competitors: Outwitting, Outmaneuvering, and Outperforming. New York, NY: John Wiley & Sons. Fleisher, C.S., and B.E. Bensoussan (2003). Strategic and Competitive Analysis: Meth- ods and Techniques for Analyzing Business

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Competition. Upper Saddle River, NJ: Prentice Hall. Gib, A., and R. Gooding (1998). "CI tool time: What's missing from your toolbag?," pp. 25–39 in the Proceedings of the 1998 in- ternational conference of the Society of Competitive Intelligence Professionals, Ch- icago, IL. Harris, S.G. (1994). "Organizational culture and individual sense making: A schema- based perspective," Organization Science, 5(3), 309–321. Hawkins, S., and R Hastie (1990). "Hind- sight: Biased judgments of past events after the outcomes are known," Psychological Bulletin, 10(3), 311–327. Hogarth, R.M. (1980). Judgment and Choice: The Psychology of Decision. New York, NY: John Wiley & Sons. Hogarth, R.M., and S. Makridakis (1981). "Forecasting and planning: An evaluation," Management Science, 27(2), 115–138.

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Mathey, C.J. (1990). "Competitive analysis mapping," Competitive Intelligence Review, 1(2), Fall, 16–17. McGonagle, J.J. (2004). "Analytical tech- niques," Competitive Intelligence Magazine, 7(4), 51, 54. Prescott, J.E. (1986). "A process for applying analytic models in competitive analysis," pp. 222–251 in King, W. and D. Cleland [eds.], Strategic Planning and Management Hand- book. New York, NY: Van Nostrand Reinhold and Company. Rigby, D.K. (2003). Management Tools 2003. White Paper. Boston, MA: Bain & Company, Inc. Rigby, D.K. (2001). "Putting the tools to the test: Senior executives rate 25 top manage- ment tools," Strategy and Leadership, 29(3), 4–12. Sandman, M.A. (2000). "Analytical models and techniques," pp. 69–98 in Miller, J. [ed.], Millennium Intelligence:

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Understanding and Conducting Intelligence in the Digital Age. Medford, NJ: Information Today. Webster, J., Reif, W.E., and J.S. Bracker (1989). "The manager's guide to strategic planning tools and techniques," Planning Review, 17(6), Nov/Dec., 4–13.

Endnotes

1 Rigby, 2001. 2 For example—Clark, 1997;Fahey, 1999; Fleisher and Bensoussan, 2003; Mathey, 1990; McGonagle, 2004; Prescott, 1986; Sandman, 2000; Webster et al., 1989. 3 See Fleisher and Bensoussan, 2003. 4 Rigby, 2003. 5 Fleisher and Bensoussan, 2003. 6 Harris, 1994; Hawkins and Hastie, 1990.

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7 Hogarth, 1980; Hogarth and Makridakis, 1981.

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6

Industry Analysis (The Nine Forces)

Short Description

This chapter combines the two substantial topic areas of macro-environmental analysis with industry analysis and demonstrates the unique creativity that is part of the world of business and competitive analysis. Organizations and the industries in which they operate are embedded in a broad envir- onment, which can significantly impact the competitiveness of both industries and organizations. The starting point then of any strategic ana- lysis is some form of environmental

analysis—generally STEEP/PEST analys-

is1—followed by Industry Analysis or Porter's

Five Forces,2 which together provide a struc- tural framework outlining an industry and a unique and perhaps more holistic perspect- ive on a firm's competitiveness. Uniting these two techniques creates a powerful framework for not only identifying the forces operating in a particular industry, but the impact of environmental factors on these very forces. These two techniques com- bined provide a much broader approach to business and competitive analysis. The tech- nique is called "The Nine Forces."

Background

A firm's environment is defined generally as the broad set of forces coming or operating from outside the firm that can affect its com- petitive performance. Firms are open

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systems subject to a range of external inputs and influences. They all "import" outside re- sources like finances, people, raw materials, and most "export" products or services back out into that environment. Because the en- vironment influences the form and behavior of a firm, competitively successful firms must effectively evaluate that environment. Most environmental analysis is based on the assumption that industry forces are not the sole explanation of all that occurs within the industry. The environment beyond an industry's boundaries can be a primary de- terminant or will in some way influence what actually takes place within that industry. Ex- ternal factors for change can be among the primary determinants of competition and competitiveness in a global marketplace or economy. On the other hand, with industry analysis, the dominant aspects of a firm's environ- ment are assumed to exist in and around the

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industry or industries in which the firm com- pletes. An industry environment would con- sist of a particular set of competitive forces that create both threats and opportunities. Porter's Five Forces model addresses this perspective and is shown in Figure 6.1. Figure 6.1 Generic framework of industry analysis

The definition of a firm's environment and the approach by which it may be strategically and competitively analyzed will often differ depending on the perspective the firm's members choose to pursue. By combining both analytical techniques, differing organiz- ational perspectives can be taken into

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account through the broader analysis of nine forces. To perform the Nine Forces analysis, an ana- lyst needs to address the three basic levels of organizational environments: the general en- vironment, the operating or industry envir- onment, and the internal environment. Fig- ure 6.2 illustrates the relationship of each of these levels with each other and with the firm at large. Figure 6.2 Three levels of the environment

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General Environment

The general environment is that level of a firm's environment that is broad in scope and has long-term implications for man- agers, firms, and strategies. These are usu- ally understood to be beyond the direct influ- ence or primary control of any single organ- ization. STEEP/PEST analysis is one way of addressing and studying the broader issues that affect the general environment in which a firm operates. The acronym STEEP stands for social, tech- nological, economic, ecological, and political/legal sectors. PEST represents the same approach and stands for political/legal, economic, social, and technological sectors (see Figure 6.3). Each sector operates over a large geographic area (e.g., global, interna- tional, multinational, regional, national, pro- vincial/state, and local) and over time (i.e., past, present, and future).

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Figure 6.3 STEEP/PEST factors

Note: In PEST, ecological issues are often in- cluded across the other four sectors. These sectors are described as follows: Political/Legal—The political component of the general environment relates to govern- ment and public attitudes toward various in- dustries, lobbying efforts by interest groups, the regulatory climate, platforms of political parties, and (sometimes) the predisposition of politicians. The legal component consists of laws that members of society are expected to follow. In most nation-states, legal con- straints in the form of public policies and regulations affect an organization's discre- tionary ability to act. Besides being a large

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consumer and producer in their own right, governments can legislate for greater or less- er competition and therefore become a critic- al focus of the competitive and strategy analyst's efforts in this sector. For companies such as defense contractors, educational in- stitutions, health care organizations, and not-for-profits, the actions and mood of pub- lic policy makers are vital inputs to their competitive strategy development process. Economic—The economic component of the general environment indicates the distri- bution and uses of resources within an entire society. By an entire society, we also mean the impact of the global economy on any market where international factors play an influencing role. This is important because consumption patterns are largely influenced by economic trends such as employment rates, exchange rates, interest rates, inflation rates, credit availability, fiscal and monetary policies, spending patterns, and levels of

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disposable income both locally and internationally. In a rapidly changing global environment, events and economic issues that occur out- side of one's market or country can still greatly impact the ability of a firm to remain competitive locally. Analytical tasks include the identification, monitoring, and forecast- ing of those economic variables to which the firm's strategic competitive efforts are most sensitive. Ecological—This encompasses both the physical and biological environments within which firms operate. "Greening" of the envir- onment illustrates the power that this factor can now exert on a firm's performance. Aspects of the ecological environment to in- clude in this analysis are review of the global climate (e.g., effects of greenhouse gases), sustainable development (e.g., forestry practices), cradle-to-grave product life cycles, recycling, pollution, and

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biotechnological advances (e.g., genetic ad- vances in agricultural products), among others. Social—Characteristics of the societal con- text includes demographics, cultural atti- tudes, literacy rates, education levels, cus- toms, beliefs, values, lifestyles, age distribu- tion, geographic distribution, and population mobility. While the pace of change in this sector may be slow, its effects are quite pro- found and inescapable. Technological—Digital communication, biotechnology, chemicals, energy, and medi- cine are only a few of the fields in which ma- jor technological changes have opened new areas to commercial competition. The tech- nological component of the general environ- ment is compounded by the impact of sci- ence and technology in product and process innovation as well. This includes new ap- proaches to producing goods and services such as new procedures and new equipment.

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The analytical task is to identify and monitor the effects of technological change as it af- fects competitive strategy. This can be seen not only in the final goods and services mar- ket, but also in new product and process in- novation, and even communication, human resource attraction, and marketing methods. Interfacing with the organization's R&D functions is an obvious requirement for busi- ness and competitive analysts. It is important to monitor and evaluate each of these nonmarket factors and their impact in terms of a firm's overall strategic directions.

Operating Environment/Industry Analysis

The operating environment, sometimes termed the competitive or market environ- ment, is that level of the firm's external

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environment with components that normally have relatively specific and immediate im- plications for managing the firm. The three main components of the operating environment are customers, suppliers, and competitors. Unlike the general environ- ment, the operating environment can be in- fluenced by individual firms. The Customer component of the operating environment describes characteristics and behavior of those who buy or could buy the firm's goods and services. Customers are those who buy direct from a firm. They may not, however, be the final consumers of par- ticular products or services. The customer component may therefore include direct buyers all the way to the end consumers. Analysts may want to break this group down into actual buyers (sometimes referred to as clients or customers) to retailers, whole- salers, or distributors, to end consumers.

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The Supplier component refers to the role of external resources on the firm. Firms pur- chase and transform resources during pro- duction into goods and services, so issues like how many vendors offer specialized re- sources for sale, relative quality of material offered, reliability of deliveries, credit terms offered, and the potential for strategic link- ages all affect managing the supplier component. The Competitor component consists of rivals, present and prospective, that an or- ganization must overcome in order to reach its objectives. Analysis and understanding of competitors is critical to developing an ef- fective strategy. Competitor analysis should assist management appreciate the strengths, weaknesses, and capabilities of existing and potential competitors and predict their re- sponses to both strategic and tactical initiatives.

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The structure of key relationships in this op- erating environment, or environments when the firm operates in multiple industries, af- fects both profit potential and prospects for achieving competitive advantage.

Internal Environment

The firm's internal environment includes forces that operate inside the firm with spe- cific implications for managing a firm's per- formance. Unlike externally derived com- ponents of the general and operating envir- onments, components of the internal envir- onment derive from the firm itself. The as- pects of a firm's internal environment (pro- duction, marketing, and so on) include both trouble spots that need strengthening and core competencies that the firm can nurture and build. By systematically examining its internal activities, a firm can better

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appreciate how each activity might add value or contribute significantly to shaping an ef- fective strategy. Michael Porter has proposed value chain analysis as a method for such an

evaluation.3 Value chain analysis can help identify internal core competencies, which in concert with an external industry structure, are seen as the critical elements of competit- ive advantage and profitability.

Strategic Rationale and Implications

Macro-environmental and industry condi- tions affect the entire strategic management process. Effective strategic management is about making organizational decisions that correspond positively with the entire busi- ness environment. While a firm may be able to shape elements of the environment to its advantage, it will also have to adapt and

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react in ways that disadvantage it less than its competitors. Hence, the key purpose of the Nine Forces model is to provide an accurate, objective in- sight into the significant issues and forces that surround and impact on a firm, as shown in Figure 6.4. The Nine Forces lead executive thinking beyond current activities and short-time horizons. It provides sensible links to current and near-term activities while maintaining an appropriate balance between short- and long-term issues. However, unless a filtering process is de- veloped, the abundant environmental and industry information available can weaken a firm's strategy formulation process. Figure 6.4 The Nine Forces

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The Nine Forces technique provides a struc- tured and systematic approach to the identi- fication and analysis of relevant trends, events, and the influence and/or impact of each of the nine factors not only within themselves but across the other forces. Fur- thermore, this framework addresses the as- sumptions underlying strategy, which may lead to ineffective planning. Success or fail- ure can depend on the accuracy and effect- iveness of decision makers reading and re- sponding to this more realistic environment. Combining analysis of the broader business environment, with Porter's Five Forces, this technique enables the analyst to identify and

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analyze those major forces that will influence an industry's profit potential. Identifying the profit potential or attractiveness of an in- dustry provides the foundation for building the strategy that bridges the gap between the firm's external environment and its resources. Analysts can, within this framework, address

Porter's "rules of competition,"4 which are as follows:

• Threat of New Entrants—Entry barriers define the level of difficulty facing those firms considering com- petitive entry into the industry. When barriers are low, new competi- tion will add capacity to the industry and increase demand and prices for inputs, resulting in lower industry profitability.

• Bargaining Power of Suppli- ers—This force refers to the ability of

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the suppliers to influence the cost, availability, and quality of input ma- terials to firms in the industry.

• Bargaining Power of Buy- ers—The firm's customers have a major role in defining industry struc- ture by virtue of their ability to force down prices via comparison shop- ping or by raising quality expectations.

• Threat of Substitute Products or Services—This force describes the risk of market displacement by exist- ing or potential substitutes.

• Rivalry Among Existing Com- petitors—Intensity of competition within an industry. This force has been empirically demonstrated in a large number of instances to be the most influential of the five forces.

By combining STEEP/PEST and Porter's Five Forces, the Nine Forces technique

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provides a robustness to any industry and environmental analysis and delivers a unique combination of insights that are not appar- ent when doing either of these analytical techniques in isolation. The purpose then of this analytical technique is to help analysts to answer the following two questions: Based on this environment, how attractive is the in- dustry? How can your firm best compete?

Strengths and Advantages

Research has demonstrated that companies in some environments can gain an advantage over their competition based on the quality

of their environmental analysis.5 Using the Nine Forces provides one way of integrating key personnel and cross-functional informa- tion into some facet of environmental and industry analysis. Further, this framework implies that managers should focus on

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broader environmental characteristics, and it encourages investment in understanding in- fluencing industry factors and structure. This analysis can additionally identify existing and potential strengths, weaknesses, oppor- tunities, and threats suggested by compon- ents of the firm's environment. Throughout the firm, people can contribute to this analytical process. Various contribu- tions can be important in and of themselves as they can create an evergreen forum for sharing and debating divergent views on rel- evant general environmental changes. The more individuals involved, the greater the opportunity to identify and challenge oppor- tunities or threats in the environment. However, as the firm must gather and act on diverse information in a timely manner, cross-functional teams of internal specialists can often perform the Nine Forces analysis most effectively.

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The Nine Forces analysis can assist in devel- oping a firm's positioning strategy by match- ing a firm's strength and weaknesses within the current environment. Competitive forces analysis identifies sources and strengths of competitive pressures whether they be from within the industry or from the broader en- vironment. To be successful, strategy must be designed to cope effectively with key com- petitive pressures to build a strong market position based on competitive advantage. Unattractive competitive environments may exist when government plays a strong role, rivalry is intense, entry barriers are low, competition from substitutes is strong, and suppliers and customers have stronger bar- gaining power. Attractive competitive envir- onments may exist when entry barriers are relatively high, no good substitutes exist, and both suppliers and customers have weak bar- gaining positions. In general, weak competit- ive forces mean greater firm profits. A

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company whose strategy and market posi- tion provides a good defense against these forces can earn better profits despite some or all of these forces being strong. The Nine Forces model provides us with a broad analytical tool to develop strategies that will protect the company from competit- ive forces, provide a strong position from which "to play the game" of competition, and help create competitive advantage. This technique can also be used to develop a proactive strategy influencing industry dy- namics in a firm's favor. Industry evolution is an important component of the Nine Forces model since it allows us to identify windows of opportunity to capitalize on changes in force of industry structure or the influencing factors from the general environment. The Nine Forces are interrelated to such an extent that a change in one force may impact

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the other forces. The essential tasks in this analysis are to identify the following:

• Forecasted changes in each of the nine competitive forces.

• How these changes impact other forces.

• How results of interrelated changes will impact future profitability of the industry.

• The predicted strength of the firm's position in this future scenario when employing the current strategy.

• How strategy might be changed to exploit changing industry structure and environmental factors by either reacting to competitor actions or by proactively seeking to secure compet- itive advantage through strategic change.

Because both the STEEP/PEST and Five Forces models place a strong emphasis on

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environmental and industry evolution re- spectively, they provide strong foundations for scenario analysis. By first examining each of the Nine Forces and then understanding the mutual dependency between the various forces, analysts can establish the proper mindset for long-range analysis. The Nine Forces uniquely combines the strengths of both STEEP/PEST and the Five Forces analysis, while addressing some of the more common weaknesses of each technique.

Weaknesses and Limitations

Nine Forces analysis is not an easy analytical task because differing perceptions of the en- vironmental context come into play. Apart from the identified weaknesses and limita- tions of both STEEP/PEST and the Five

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Forces, analysts may find that decision makers often have difficulty in defining what their environment is and in placing limits around it. Difficulties may also exist in inter- preting the results and specific impacts, which in turn will affect choosing effective responses. Potential interpretation weak- nesses include: structuring robust studies; showing financial impact; understanding both short- and long-term implications; in- sufficient senior management involvement in the analysis; difficulties in translating po- tential opportunities into action plans; and the time and resources required to do accur- ate analysis. As a result, the analytical output can be inaccurate. With many firms also focused on the short- term perspective, executives may forestall the environmental analysis process. Many decision makers dislike spending "real" money today for speculative actions about tomorrow. Many firms also cut back their

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resources for in-depth analysis during tough economic times, viewing it as a luxury rather than a necessity. However, this is often when the analysis is most needed. Many companies do not accept the value of the Nine Forces analysis and therefore do not take the time to do it well. It can be poorly understood and thus under-valued by management. The failure to link the Nine Forces analysis to competitive implications is common. The key goal of this process is the identification of competitive implications for the firm based on this broader environment analysis. In his book, The Fifth Discipline, Peter

Senge6 stated, "More specifically, new in- sights fail to get put into practice because they conflict with deeply held internal im- ages about how the world works, images that limit us to familiar ways of thinking and act- ing." Many decision makers hold narrow, limited, or invalid perceptions about the

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world in which they operate. For example, they think in local terms as opposed to global terms, or since this type of analysis was not covered in their formal training, it must be of lesser importance. Finally, diversified businesses can bring great complexity for analysts, as they seek to grasp the implications of many environment- al and organizational dynamics. Biases, prior experience, and human limitations will affect their approach. Particularly in multinational environments, home-country biases and atti- tudes often lead organizations to assume and superimpose their own experiences, views, and understandings on variables operating in other countries.

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Process for Applying the Technique

Begin with the firm's decision makers defin- ing environmental and industry boundaries to limit the breadth, depth, and forecasting horizon of the analysis. Breadth refers to the topical coverage of the environmental data that are collected. Depth determines the amount of detailed data sought and analyzed in the Nine Forces. Forecasting horizons span short, medium, and long terms, as dic- tated within the firm's specific environment. To establish the boundaries of the firm, man- agement may look at the organization's stra- tegic posture with respect to its geographic diversity (i.e., where it does and does not compete), its product or service market scope, its return horizon on its fixed resource commitments, technology and innovation, sources of its resources (capital, human,

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other financial, and raw materials), regulat- ory mandate, and flexibility. Once definition and delimitation have oc- curred, the process essentially involved three key steps. First, collect information to identi- fy the characteristics of each force (refer to Figure 6.4). The objective is to understand each force being analyzed and its relation- ship to the other forces. Questions that may be addressed include: What are the interrelationships between trends? This requires the analyst to use his or her creative capacity in identifying inter- relationships between environmental and in- dustry segments. The analyst should be look- ing for areas where trends are suggesting re- definitions or changes from the expected evolutionary path or where trends are rein- forcing one another. What are the conflicts between trends? Trends often push in opposite directions. For example, people are becoming more

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committed to their work at the same time that they are seeking more family time out- side of the workplace. Not all trends are of equal importance to a firm or an industry. Some will have a direct impact, while others may have only tangen- tial impact depending on how the trend in- teracts with the firm's strategy. It is crucial that the analyst identify those trends and trend combinations that are likely to have the highest impact on the firm's goal pur- suits. Critical trends are "issues" for the organization. Forecasting the future evolution of a trend or set of trends within the issue requires analys- is of the driving forces behind the issue. It is critical to distinguish between symptoms and causes, but it may be very difficult. Often driving forces work against one another and push simultaneously in multiple directions. Once the causes are accurately identified, the

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analyst can then develop alternative projec- tions of the issue's evolution. The objective is to examine and assess the impact of all Nine Forces on the industry and/or firm. Secondary sources can provide much of the information in this step; however, primary sources should be consul- ted to improve objectivity. The process for analyzing the nine competit- ive forces looks to identifying the main sources of power or competitive pressures among each force. For the next step, the analyst needs to de- termine the relative strength of each force by ascribing a value to each, indicating if it is strong, moderate, or weak. Another way is to rank the forces using a scale of 1 to 10, with 10 indicating a strong force and 1 a weak force. Again, important to the analytical pro- cess is the need to determine a logical ex- planation of how each competitive force

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works and understand its role in the overall competitive picture. Next, collectively assess and evaluate the nine forces in light of your firm's competitive ability. The ultimate goal is to identify the ability of your firm to successfully compete within this industry and environment, given the collective strength of these forces. Fur- ther, making a comparison between the firm's resources and strengths against the "fit," or gaps, with the Nine Forces will provide valuable insights to the firm's oppor- tunities and threats. The need here is to in- tegrate the entire analysis within the broader context of corporate strategy—find the tight- est fit between the firm's resources and cap- abilities and the broad external environment. This involves three types of strategic analys- is: reactive strategy against likely competitor moves; proactive strategy to manipulate changing forces already in motion; and

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proactive strategy to explicitly force change in one or all of the Nine Forces. To improve the usefulness of this technique, identify long-term environmental and in- dustry trends and determine whether in- dustry profitability is sustainable. Further, determine effects of long-term trends on your firm's competitive position. Each competitive force should be constantly monitored for its impact on the current strategy and the opportunities it represents for extending competitive advantage. Finally, not all industries are alike. Therefore, for companies with product portfolios across numerous industries, this model must be re- peated for each unique industry served.

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Case Study: Rating the Nine Forces Model in the Australian Airline Industry

(10 = strong, 1 = weak)

Barriers to Entry—Weighting 9

• While deregulation reduced legislat- ive barriers, the small size of the Aus- tralian market means great efficien- cies must be achieved to make this a viable market for any player.

• Capital intensity offset to some ex- tent by ability to lease aircraft and hire ground crews on contract.

• Limited availability of terminal slots in major capital cities.

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Bargaining Power of Buyers—Weighting 6

• The Internet has made air travel a readily accessible commodity (i.e., price driven).

• Price sensitivity of consumers has not been significantly offset by loyalty programs.

• Market share warfare is the industry norm.

• Domestic travel within Australia al- most always involves long distances.

Bargaining Power of Suppliers—Weighting 6

• Airport authorities, pilot, flight at- tendants, and other aviation unions

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have eroded economic rent associ- ated with producer surplus.

• Aircraft manufacturing companies compete heavily for new sales provid- ing alternative financing.

Government—Weighting 6

• Government ownership of many in- ternational airlines makes exit or ca- pacity reduction unlikely due to con- flicting sociopolitical considerations.

• Government protection policies im- pact the level of new entrants and their local operational effectiveness.

• Competition Commission, on the other hand, forces the establishment and maintenance of a competitive choice for travelers.

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• Privatization of airport infrastructure management and services.

Social—Weighting 5

• Total growth is limited to the size of the Australian market and interna- tional tourism to Australia. Main growth appears to be in price- sensitive, low-cost economy travel class.

• The combined impact of terrorism, viruses, wars, and the heightened need for security has increased the reticence of travelers for particular destinations.

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Competitors—Weighting 9

• Predominantly a duopoly—Qantas and Virgin.

• Majority of costs are fixed regardless of load. Resulting variable cost pri- cing through heavy discounting to maximize contribution margin from excess capacity.

• Growth in low-cost airlines results in substantial capacity increases and lower margins.

• Long history of Qantas as the major airline in Australia for both domestic and international travel.

Technology—Weighting 8

• The business travel market is being impacted by video conferencing and

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other technology, reducing the need for physical face-to-face communication.

• New airplane technology allows for greater load capacity, better fuel con- sumption, and longer distances, re- ducing requirements for airlines to operate through hubs.

Substitutes—Weighting 3

• Ships, trains, buses, and cars—with the time-pressed individuals of today, these substitutes have a weakened competitive position when it comes to travel across long dis- tances. There is presently minimal loss of industry revenue to substitutes.

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International—Weighting 6

• Competitive international airfares and a strong Australian dollar has encouraged strong growth in out- bound travel by Australians.

• Australia is seen as a "safe" holiday destination increasing inbound travelers.

• Conflicts in the Middle East and North Africa impact on the cost of airline fuel.

Conclusion: Competitive forces are strong and evolving. Profitability of the airline in- dustry in Australia is not bad as a result of the duopoly and Qantas' long previous his- tory as a government-owned entity. This analysis can be represented diagram- matically, as shown in Figure 6.5. Figure 6.5 Australian airline industry

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FAROUT Summary

Figure 6.6 Nine Forces FAROUT Summary

Future orientation—Medium to high. Fo- cuses on trends and driving forces. Their

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evolutionary development ensures that it is a highly anticipatory method. Because the forces are not static, analysis must be re- viewed regularly. Accuracy—Medium. The method requires understanding and tracking of a wide variety of interacting qualitative and quantitative elements. Accuracy depends upon sources of information used. Cross validation with in- dustry experts will increase accuracy of the analysis. Resource efficiency—Medium to high. Much information can be gleaned from secondary sources such as government agencies, spe- cialist publications, consulting firms, and census data. There may also be some inform- ation already available in the firm. Cost of analysis will depend on the number and pos- itions of analysts employed. Objectivity—Low to medium. Depends on the information used. Use of subjective data reduces objectivity. There is also a high

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emphasis placed on qualitative analysis. Understanding of trend interactions and driving forces requires insight combined with useful and reliable data. Usefulness—Medium. Valuable technique. Provides an overview of an industry and its environment; highlights key competitive factors and elements that require close mon- itoring for strategies to be successfully im- plemented. If effectively undertaken can provide opportunities to achieve strategic advantage. Timeliness—Medium. Method requires firm to collect and track data. Time is required to undertake a close analysis of each of the forces, particularly if primary sources are addressed.

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Related Tools and Techniques

• Competitor analysis • Experience curve analysis • Financial analysis • Issue analysis • Product life cycle analysis • Scenario analysis • S-curve analysis • Stakeholder analysis • Strategic group analysis • SWOT analysis • Technology forecasting • Value chain analysis

References

Ackoff, R. (1981). Creating the Corporate Future. New York, NY: John Wiley & Sons.

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Aguilar, F. (1967). Scanning the Business Environment. New York, NY: Macmillan. Arrington, C., and R. Sawaya (1984). "Issues management in an uncertain environment," Long Range Planning, 17(6), pp. 17–24. Bain, J.S. (1956). Barriers to New Competi- tion. Cambridge, MA: Harvard University Press. Bates, D., and D. Eldridge (1984). Strategy and Policy: Analysis, Formulation, and Im- plementation, 2nd edition. Dubuque, IA: Brown. Black, J.A., and K.B. Boal (1994). "Strategic resources: Traits, configurations, and paths to sustainable competitive advantage," Stra- tegic Management Journal, [Special sum- mer issue], 15, pp. 131–148. Black and Boal (1994), paraphrasing Porter, M.E. (1991). "Towards a dynamic theory of strategy," Strategic Management Journal, [Special summer issue], 12, pp. 95–117.

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Carr, C. (1993). "Global, national, and resource-based strategies: An examination of strategic choice and performance in the vehicle components industry," Strategic Management Journal, 14(7), pp. 551–568. Diffenbach, J. (1983). "Corporate environ- mental analysis in large U.S. corporations," Long Range Planning, 16(3), pp. 107–116. Dill, W. (1958). "Environment as an influ- ence on managerial autonomy," Adminis- trative Science Quarterly, 2(2), pp. 409–443. Fahey, L. (1989). "Understanding the mac- roenvironment: A framework for analysis," In L. Fahey, (ed.), The Strategic Planning Management Reader, Englewood Cliffs, NJ: Prentice Hall, pp. 38–43. Fahey, L., King, W., and V. Narayanan (1981). "Environmental scanning and fore- casting in strategic planning—The state of the art." Long Range Planning, 14(1), pp. 32–39.

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Fleisher, C.S, and Bensoussan, B. E. (2003), 'Strategic and Competitive Analysis', Prentice Hall, Upper Saddle River, N.J Grinyer, P.H., and D. Norburn (1977/1978). "Planning for existing markets: An empirical study," International Studies in Manage- ment and Organization, Vol 7, pp. 99–122. Lenz, R., and J. Engledow (1986). "Environ- mental analysis: The applicability of current theory." Strategic Management Journal, 7, pp. 329–346. McWilliams, A., and D.L. Smart (1993). "Ef- ficiency v. structure conduct performance: Implications for strategy and practice," Journal of Management, 19, pp. 63–79. Miller, D., and P. Friesen (1977). "Strategy making in context: Ten empirical arche- types," Journal of Management Studies, 14(3), pp. 253–280. Porter, M.E. (1979). "How competitive forces shape strategy," Harvard Business Review, 57(2), pp. 137–145.

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Porter, M.E. (1979). "The Structure within Industries and Companies Performance," The Review of Economics and Statistics, 61(2), pp. 214–227. Porter, M.E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. London: Collier Macmillan Publishers. Porter, M.E. (1980). "Industry structure and competitive strategy: Keys to profitability," Financial Analysts Journal, 36(4), pp. 30–41. Porter, M.E. (1985). Competitive Advantage : Creating and Sustaining Superior Per- formance. London: Collier Macmillan Publishers. Roquebert, J., Phillips, R., and C. Duran (1993). "How much does strategic manage- ment matter?," Presentation at the meeting of the National Academy of Management, At- lanta, GA.

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Rumelt, R.P. (1991). "How much does in- dustry matter?," Strategic Management Journal, 12(3), pp. 167–185. Scherer, F.M. (1970). Industrial Market Structure and Economic Performance. Ch- icago, IL: Rand McNally. Schumpeter, J.A. (1943). Capitalism, Social- ism, and Democracy. London: George Allen and Unwin Ltd. Senge, P. (1992). The Fifth Discipline. New York, NY: Currency DoubleDay. Starbuck, W. (1976). "Organizations and their environments." In M. Dunnette (ed.), Handbook of Industrial and Organizational Psychology. Chicago, IL: Rand McNally. Stubbart, C. (1982). "Are environmental scanning units effective?," Long Range Plan- ning, 15(3), pp. 139–145. Suutari, R. (2000). "Understanding industry structure," CMA Management, 73(10), pp. 34–37.

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Thompson, J. (1967). Organizations in Ac- tion. New York, NY: McGraw-Hill. Wilson, I. (1982). "Environmental scanning and strategic planning." In G. Steiner et al. (eds.) Management Policy and Strategy (Reading 7). New York, NY: Macmillan.

Endnotes

1 See Fleisher and Bensoussan (2003), Chapter 17. 2 See Fleisher and Bensoussan (2003), Chapter 6. 3 See Fleisher and Bensoussan (2003), Chapter 9. 4 See Fleisher and Bensoussan (2003), Chapter 6. 5 Miller and Friesen, 1977; Grinyer and Nor- burn, 1977/78. 6 Senge, P. (1992).

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7

Competitive Positioning Analysis

Short Description

Competitive positioning analysis is conduc- ted to enable a firm to make strategic plans in relation to its current competitive posi- tion: These may be to preserve an advantage, attempt an improvement, or withdraw from a market. The analysis assesses market share, client perception of products and ser- vice, current marketing strategies, prices, and costs. It also provides information about the relative market positions and strengths and weaknesses of a firm's competitors. The process identifies opportunities and points to

strategies to exploit these opportunities in an industry or market.

Background

A firm's competitive position refers to its place in an industry or market in comparison with its competitors. The concept of "posi- tioning" appears to have come from Jack

Trout's 1969 paper,1 "Positioning' is a game people play in today's me-too marketplace." At the time, it revolutionized the idea of communication with a market. Where tradi- tional marketing had been based on the idea of telling clients about the benefits of your product in comparison with your competit- ors, positioning attempts to change the per- ception of your product in the mind of a tar- get audience by giving your product a unique position.

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Competitive positioning explores an industry in part by researching the perceptions of the clients serviced by it and looks for ways to improve perceptions of your firm overall. It also extends the positioning concept beyond product marketing and feeds information in- to the firm's strategic planning and strategic management. Strategic planning and strategic manage- ment evolved around the same time as posi-

tioning. Linden Brown2 notes that "corpor- ate planning" employed by firms up to the 1960s was founded on reasonably steady ex- pansion in a relatively stable financial envir- onment. Corporate planning could not guide firms through the turbulent economic condi- tions and rapidly changing markets of the late 1960s and early 1970s. Strategic plan- ning and strategic management evolved to provide firms with tools to review their per- formance and plan for the future in order to

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cope with increasingly competitive and volat- ile markets. Competitive positioning is an umbrella term for a variety of different tools and processes designed to apprise a firm of its competitive position and inform strategic decisions made in relation to it. Competitive positioning is also the name given to the action of stra- tegically changing a firm's position in the marketplace. Competitive positioning analysis provides in- formation with direct importance to the de- velopment of a strategic plan by giving a firm an overview of its industry and enabling it to apprise its own competitive position. Essen- tially, it assesses factors that impact on mar- ket performance and profit performance. It examines a particular industry and the parti- cipants within it to provide an understanding of the industry and the competition. It looks at who is competing and how, what market share they have, how clients perceive the

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participants in the industry, how the various participants operate in the marketplace, and their strengths and weaknesses.

Strategic Rationale and Implications

Competitive positioning is based on the tru- ism that business is characterized by com- petition. Where more than one participant is involved in an industry, competition exists not only to win the business of clients by convincing them that they need your product, but to do so better than your com- petitors. This necessitates a marketing strategy for your products and/or services and also a competitive marketing strategy to differentiate your firm from its competitors. Undertaking an analysis of your competitive position compares your firm's position in an industry or market with that of its

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competitors. Such an analysis should include information about the structure of the in- dustry and the participants; outline their op- erating practices; cover customer satisfaction and profitability issues; and provide an over- all appraisal of your firm's position. The competitive positioning process requires a detailed analysis of a firm's own business and the various markets (or market seg- ments) in which it competes. Competitive positioning analysis is designed to give you an understanding of your firm's competitive position within its industry and an overview of the industry as a whole. This is funda- mentally important to developing an effect- ive competitive marketing strategy as it broadens your outlook beyond your own rev- enue, products, and services, and gives an industry-wide perspective of your firm's per- formance and opportunities. The most common structure found in a mar- ket is for there to be one clear market leader;

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a second major player differentiated from the leader; a substantial amount of lower- priced competition; and then niche special- ists, who generally charge a price premium and cater to specific needs. One variation on this structure is the situation where a market is dominated by two firms of roughly the same size, which hold a large majority of market share (that is, a duopoly). Using a variety of different tools and pro- cesses, a firm can address its current com- petitive position and inform strategic de- cisions made in relation to it. The key out- come of the analysis is some action of stra- tegically changing a firm's position in the marketplace. Porter's Five Forces Industry analysis and the Nine Forces Industry analysis, for ex- ample, are all sophisticated tools for identify- ing a firm's competitive position (see Chapter 6, "Industry Analysis (The Nine Forces)").

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A variety of modeling concepts are also use- ful in analyzing competitive position. These include the BCG matrix, McKinsey matrix, and perceptual maps. By feeding the relevant information into one of these analytical models, a firm's competitive position may be readily visualized. There are four basic directions for any com- petitive strategy, as follows:

• To develop and build on a firm's position

• To maintain and hold a firm's strong market position

• To defend a dominant position • To withdraw from a market with

minimal loss

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Develop and Build on the Firm's Position

There are three broad situations where a firm may wish to develop and build its posi- tion. These are the following:

1. 1. A niche firm looking to expand its business

2. 2. A minor competitor seeking to be- come a dominant force

3. 3. A firm in a position of joint domin- ance wishing to move to sole dominance

These three competitive positions may also be viewed as a progression of strategic posi- tion from niche to broad market dominance. A firm in any one of these positions will be looking for weaknesses in its competitors, which can be easily exploited to its own ad- vantage. A niche firm may be looking for

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unfulfilled segments in the market. These may be segments viewed as not profitable enough for the dominant firm to pursue but may be worthwhile for a niche firm seeking to consolidate its position as a force in the marketplace. A minor competitor may try to focus on gaps in the market not properly serviced by the dominant firm. Where a market is dominated by two or more major firms, competitive positioning analysis may give insight into how one of these may differentiate itself from its com- petitors or reposition its product/service within the market in order to gain a compet- itive advantage and market dominance.

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Maintain and Hold the Firm's Strong Market Position

In this situation, a firm is not seeking domin- ance within a market, but wishes to hold onto its share of the market against all in- cumbents. Where a market is mature and no longer expanding, it is unlikely that there will be interest to invest in expanding market share. The ideal position for a firm in this market would be to preserve its market share (and revenue) for as long as the market re- mains profitable with minimal outlay of resources.

Defend a Dominant Position

A position of dominance in a market has ad- vantages going beyond the immediate reven- ue stream and economies of scale that come with size. Market dominance allows a firm to

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manage the market and control competition to some extent. Often the dominant product in a market can be perceived as the standard by clients. Apart from consolidating its position against its major competitors, the dominant firm should also be aware of any developing "third force" coming between it and its tradi- tional competitors. The emergence of signi- ficant new competition can undercut profits for all existing players by siphoning away market share. The dominant firm in the market generally has a variety of strategies available to it to fend off competition. It may choose to follow a price-cutting strategy, although this is costly and may have a negative affect on cli- ents by changing cost expectations or per- ceptions of product quality. A dominant firm may launch new products in direct competi- tion with any competitor that tries to fill in gaps in the market. These new products may

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trade on the high esteem in which clients hold the dominant firm or may simply dilute the profitability of new products for smaller firms, leading them to withdraw from the market.

Withdraw from a Market

There are times when it may be best for a firm's overall competitive position to with- draw completely from a particular market, leaving the firm to concentrate on more prof- itable markets. This may occur where the market itself is declining—for example, be- cause technology is rendering it obsolete. A declining market is one where profits are falling and the costs of doing business will eventually outweigh possible revenue, even for the market leader. Ideally, where a mar- ket is declining, a firm should aim to get its clients to substitute the product being

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withdrawn with another product from the same firm or at least to withdraw the product with as little inconvenience to clients as possible. Unsuccessful expansion or diversification by a firm into a new market may also leave the firm in an unprofitable position and thereby needing to withdraw. Additionally analysis of competitors may point to the likelihood of a market player being able to sustain the in- vestment necessary to support the expan- sion/diversification in the face of defensive strategies from existing market players. Once you have a detailed understanding of your firm's competitive position and the in- dustry it is situated in, you are then equipped to design and implement strategic plans to defend or improve your competitive position or even to cut your losses and withdraw from the market.

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Strengths and Advantages

Competitive positioning analysis provides detailed and practical information about the industry and markets in which a firm com- petes. It generates practical strategic inform- ation to improve competitive position that may be immediately incorporated into the firm's strategic plan. The process will provide useful information to firms of all sizes and in many different competitive positions. Major firms with mar- ket dominance may use the results to consol- idate their positions. Minor players in an in- dustry may use the results to increase market share and expand the markets in which they participate. Established firms may use the results to keep up with changes in their in- dustry or markets. New firms may get valu- able information about how to go about es- tablishing themselves within an industry or market. Gaps uncovered in a market may

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point to a need or desire in a marketplace for particular new products or styles of products or services. Competitive positioning analysis may also provide information about the viability of particular products or markets within an in- dustry, allowing informed decisions about developing or discontinuing products. It may further be used to provide information about competition in new markets and give guid- ance about how to best enter a particular new market. Improving your firm's competitive position additionally puts it in a better position to at- tract investment and enter strategically de- sirable alliances.

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Weaknesses and Limitations

The quality of the information obtained by conducting a competitive positioning analys- is will depend on the design of the process. Care must be taken when defining the in- dustry or markets you wish to study. The analysis will be compromised where the in- dustry examined is defined too narrowly (and important or potentially important competitors are omitted), and where the in- dustry is defined too widely (and meaning- less comparisons are made with firms that are not relevant competitors). It is important to take care in accurately and comprehensively identifying relevant mar- kets and products for the same reasons. Another limitation of competitive position- ing analysis is its reliance on information about competitors. In some industries, com- petitor information is not readily available.

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In other industries, there may be individual firms that do make particular information available. It is also possible that a firm will not be able to gather meaningfully detailed information about the new products in de- velopment with competitors. It is also pos- sible to find that competitors have been cir- culating misinformation specifically to con- found any competitive positioning analysis undertaken by their market rivals. Gaps in the information you are able to gather may compromise the reliability of the analysis you conduct. A firm that chooses to carry out its own com- petitive positioning analysis and draw its own strategic conclusions may find the final strategies are limited by internal biases. In- complete briefing of a third-party analyst may result in a misdirected analysis and missing important nuances in the industry and/or market.

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Process for Applying the Technique

Competitive positioning can be understood as a broad three-step process:

1. 1. Identify the focus of your firm's current strategy and identify analysis parameters such as market or products to be assessed.

2. 2. Conduct analysis with the following:

1. (a) Undertake market seg- mentation to gain a better un- derstanding of competitors and the breakdown of your industry.

2. (b) Undertake industry ana- lysis to get a more detailed understanding of the compet- itive environment.

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3. (c) Conduct market research to gain insight into client per- ceptions of the market, products, and competitors (including your own firm).

3. 3. Derive insights from the preceding analysis and formulate a positioning strategy for your firm.

Both primary information (focusing on the needs and perceptions of clients) and sec- ondary information (which looks at facts and trends) are used throughout the competitive positioning analytical process. Secondary research should provide you with objective information about market share, market size, expected growth, and general economic conditions in the marketplace. Although this information is available from publicly available sources, such as online databases and industry publications, it may be more expedient to get a professional re- searcher to undertake this part of the project,

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even if the rest of the project is being run in- house. Unless you have internal staff who regularly monitor this sort of information, tracking all the background information can be time-consuming. A particularly interesting source of second- ary information for competitive positioning may be the PIMS database, which provides market and competitive profiles and busi- ness results from some 3,000 firms arranged by industry category. The PIMS (profit im- pact of market strategy) project has been col- lating information since 1972 and aims to pool collective business experience for the benefit of other firms in similar industries. Although PIMS data has no accurate predict- ive power, it can give insight into how the structural attributes of a business may have an impact on its competitive position. The database may be accessed at www.pimson- line.com. It is a subscription service.

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Identify Current Strategy and Market/Product/Project Parameters

Assessing your current business and market- ing strategies will provide you a background to your firm's current position in the market and a starting point from which to plan the strategies arising from the competitive posi- tioning project. This is also the step in the process when you will be defining the scope of the project and what you hope to gain out of it. One of the issues then to be addressed in this step is how you plan to use the information you obtain. This will have an impact on the depth of analysis you undertake throughout this process. For example, a project that is looking for competitive positioning strategies relating to distribution has a much narrower focus than a complete competitive position- ing analysis. Whatever level of detail you are

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aiming for, you need to make early decisions about categories of information you will need to gather. The division of information into categories is arbitrary and is a fundamental part of the project design. Another point that needs to be considered is the level of detail you plan to go into with your research itself. The level of analysis will depend on the size of any investment likely to flow from the competitive positioning pro- cess. For example, if a multi-million dollar refit of a manufacturing plant is contem- plated, then a more expensive and detailed analysis is not only justified but advisable. Linden Brown observes that the factors con- sidered in appraising competitive position are basically all the factors that have an im- pact on market performance—for example, market share, revenue, brand image, and profit performance, including costs, margins, prices, and productivity. These factors may be examined at the industry level or at the

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level of individual niche product markets within an industry. A preliminary investigation of your firm's current portfolio is often a useful place to start and might be typical of a product/mar- ket matrix, as shown in Figure 7.1. Figure 7.1 Product/market matrix

The Boston Consult Group (BCG) growth-

share matrix3 provides a graphic representa- tion of markets, products and services, which can be useful in judging where to focus

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resources. Looking at your product and/or service range plotted on a growth-share mat- rix can provide an indication of what strategies may be appropriate for your vari- ous products. Another method for assessing your own products and/or services is the GE/ McKinsey attractiveness-competitive posi-

tion matrix.4 Plotting the strength of a busi- ness/product/service against the attractive- ness of the industry for your firm will identi- fy a potential course of action. However, a note of caution: The BCG model vastly simplifies market conditions, which in reality can be very complex, and in some cir- cumstances, there may be strategic value in treating products differently. In addition, despite the relative complexity of the GE/ McKinsey model compared to the growth- share matrix, it can still miss some subtleties of a firm's business.

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Another preliminary issue is who will run the project. A project team, which crosses de- partments within the firm, will ensure that the learning experience of those involved is distributed throughout the firm. Keeping the project out of the control of just one depart- ment may also diminish the likelihood of the project outcomes being skewed by internal politics. It will also ensure that the time taken by staff in gathering information is not

all lost to one department. T.L. Louden5 ad- vises that while internal staff may gather most of the information used, independent third parties should be involved in the pro- cess of visualizing the final competitive posi- tioning strategies arising from the competit- ive positioning analysis. These people will have experience in the process of identifying strategies from analysis and will be inde- pendent of any internal biases that may com- promise the effectiveness of the final strategies.

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Conduct Analysis

(a) Market Segmentation

Market segmentation is a process that di- vides your market into distinct groups of cli- ents who share particular characteristics. A market segment is a way to conceptualize a target market. A market segment must be identifiable and measurable; accessible by communication/distribution channels; have unique needs (compared to other market segments); be relatively stable over time; and be large enough to be profitably targeted for its business. These segments may be made up of individu- al consumers or industry consumers, and the basis for dividing them into segments varies

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slightly between the two client groups. Indi- vidual consumers are divided into market segments on four broad bases: geography (which includes not only location, but also population density and growth); demograph- ics (age, gender, etc.); psychographic vari- ables (including values, lifestyle, and atti- tudes); and client behavior (including brand loyalty, usage made of product, and sensitiv- ity to price). An industry client segment will be identified by geography (concentration of clients, regional growth, and international considerations); client type (how big are cli- ent organizations, what industry are they part of); and how the clients behave (are they loyal to suppliers, and how big and/or fre- quent are their orders). Segmenting your markets in this way will narrow your client base into smaller groups and make it easy for you to identify the com- petitors who also compete for each segment's business.

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Segmentation is a valuable exercise from a planning point of view, as it will provide ob- vious categories of clients to target with spe- cific products and/or specific marketing strategies. As an alternative to market segmentation,

Pankaj Ghemawat6 suggests breaking your firm's activities into economically meaning- ful categories to allow close attention to the impact of costs and client willingness to pay for product. This can be done by undertaking

value chain analysis.7

Another approach might be to focus on key assets and skills you judge to be essential to competition in your industry or individual product markets within your industry. In Developing Business Strategies, David

Aaker8 suggests four broad areas to concen- trate on when you are determining what are the key assets and skills in your particular in- dustry (or within a market): reasons some firms are successful and some are not; major

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motivations for clients in deciding who to do business with; major component costs; and the ease with which firms may enter or re- position themselves within the industry (or market).

(b) Industry Analysis

Areas you may focus on include investigating current and potential products and markets of your competitors. Additionally, you will need to understand the structural character- istics of the industry. For example, is it very competitive? How many competitors exist in the field? Is it subject to regulation? Is own- ership of firms in the industry stable? Is the industry concentrated in one geographical area? Are there gaps in market coverage? Industry analysis provides a strategic assess- ment of the competitive position of each of your competitors within a given market. This

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analysis considers the existing rivalry between suppliers in the market; the threat posed by new entrants; the bargaining power of clients in the marketplace; the power of suppliers; and any threat to the market posed by substitute products. It can also ad- dress the broader industry framework to identify the trends that will impact the long- term direction of a market. (See Chapter 6 for detailed information about how to con- duct this type of analysis.)

A SWOT analysis9 or competitor analysis10

of your competitors may also be useful in identifying competitors' existing strengths and weaknesses and opportunities arising for your firm. It may also identify any threats to your competitors, which you may be able to utilize to your competitive advantage.

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(c) Market Research

Traditional market research will give valu- able insight into client perceptions of a mar- ketplace and the suppliers servicing it (these are your firm and your competitors). Feed- back may be sought on various product types, individual products, various services, various suppliers, and client desires in terms of improved product or service. Market research may be undertaken via tele- marketing or face-to-face interviews—prefer- ably by an independent third party to limit internal firm biases. It may also use detailed surveys designed and administered by spe- cialist researchers to generate statistically comparable empirical information. The scope of your competitive positioning project as identified in the first step will in- form your decision as to who and how to un- dertake this research.

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Review Results and Formulate Positioning Strategy

A great deal of detailed information will be obtained in undertaking competitive posi- tioning analysis. The simplest and most com- monly used way to get an overview of the results of your research may be to use per- ceptual maps to give a quick graphic sum- mary of the main findings. A perceptual map plots the position of a firm or product in space generally using two axes. Information may be plotted using more than one axis; however, this may be difficult to represent as a two-dimensional graphic. Perceptual maps plot perceptual information and may include vectors indicating the pre- ferred performance for a product/service/ firm across the two axes commonly attrib- uted by clients. These maps can be generated by software.

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Figure 7.2 shows a perceptual map address- ing the pain relief tablet market. The axes are based on key criteria as identified by clients. Figure 7.2 Perceptual map with ideal vec- tors in the pain relief market Source: http://en.wikipedia.org/wiki/Per- ceptual_map (last accessed October 2006).

However, these are not accurate reflections of reality, being based on perceptions to start with and then subject to possible distortion in the process of converting verbal opinions

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into a numerically generated graph. Percep- tual maps have attracted criticism for being no more than intuitive reflections of pre-ex- isting biases. It is important that perceptual maps should be interpreted in tandem with the detailed information from which they are drawn. Used with caution, perceptual maps can give a quick picture of competition in the market- place from the point of view of clients. Another way to conduct an appraisal of the analysis and to help formulate appropriate strategies is to compile evaluations of your firm's and each competitor's strengths and weaknesses in terms of a matrix. For each key business area or critical success factor, competitors can be evaluated in a matrix rel- ative to your own abilities. This provides an overview and understanding of your position against key competitive factors in your in- dustry. Figure 7.3 shows an example of a

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matrix relating to the quality of a marketing communications. Figure 7.3 Strength/weakness evaluation matrix

Compiling matrices or perceptual maps and referring back to the information gathered should enable the analyst and the project team to generate a list of opportunities avail- able to not only improve the firms competit- ive positioning but to address specific prob- lem areas for longer term competitive advantage.

T. L. Louden11 advises that while internal staff may competently gather most of the in- formation used, independent third parties

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should be involved in the process of visualiz- ing the final competitive positioning strategies arising from the competitive posi- tioning analysis. These people will have ex- perience in the process of identifying strategies from analysis and will be inde- pendent of any internal biases that may com- promise the effectiveness of the final strategies.

Summary

In essence, a complete competitive position- ing analysis will put together the following:

1. 1. A clear outline of your own firm's current and potential markets and products. Some options for manage- ment may start to be identified. The product/market matrix reproduced

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in Figure 7.1 may be a useful template.

2. 2. Identify competitive practices in the industry, covering such areas as the principal relationships between costs, revenue, and profits; who has competitive advantage in which areas; the level to which the industry is tradition bound; opportunities for innovation; advantages arising for differing geographical/environment- al factors; weaknesses to exploit; and strengths to overcome or avoid. Additionally, competitor profiles may expose an organization and manage- ment style; corporate goals; market- ing, sales, and customer support strategies and practice; production processes (particularly productively and costs); technical and support sys- tems; finance (including accounting and control systems); investment

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management (portfolio and perform- ance); and staff (including turnover, level of remuneration, and personnel policies).

3. 3. Review general and specific factors contributing to client satisfaction with their current suppliers (your firm and your competitors) includ- ing: quality of product (including whether products are perceived as meeting needs); client ability to un- derstand value of purchases; whether the market prefers one-stop suppliers or specialist sources; availability and convenience of products; quality of service; tendency to be loyal to their supplier or to shop around; whether short- or long-term performance of products will reflect on reputation of supplier; and effort required to change suppliers. Any customer dis- satisfaction suggests an opportunity

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for your firm to step in and meet the unmet need.

4. 4. Undertake an overall appraisal of the competitive environment to identify any strategies or tactics, which may improve your firm's com- petitive position and identified a set of strategies to take the firm where it wishes to go in an industry.

The detailed information gathered during the competitive positioning project give a comprehensive picture of the industry, mar- kets, and products on which it focuses. Any gaps in market coverage, or potential weak points in the position of the dominant firm in the market, should be obvious. This in- formation can be used to inform decisions about directions for new product develop- ment or provide clues as to what strategy might successfully attack the dominance of the market leader and steal away some mar- ket share.

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The satisfaction or otherwise of clients served by any particular market or unmet needs perceived by clients should be appar- ent. This analysis may also give clues for strategic development of a new product or for more effective marketing and sales ap- proaches in the market.

Case Study: Financial Services

Increasing competition and a slowdown in the economy prompted the capital mortgage division of a very large financial services firm to seek feedback from the market. In particular, the division wanted some dir- ect information of client perceptions of it and its key competitors. It also wanted to check the progress of its strategic plans and mar- keting in the marketplace and from that get

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an indication of how it was traveling in im- plementing its strategic vision. It engaged a third party to conduct a compet- itive positioning study. The first step in the process was a telephone survey developed and designed to hone in on the perceptions of intermediaries and bor- rowers as two key segments of the firm's market. The survey was presented to a sample of both existing and potential clients from various asset groups. The interview began with a qualitative blind study. The questions asked respondents to do the following:

• Identify the most important factors in deciding where to borrow.

• Define selection criteria in terms of behavior and the consequences of the decision.

• Nominate which lender they con- sidered to be the market leader in terms of each selection criteria.

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The second half of the interview asked each respondent for their perceptions of the client firm, addressing both the factors discussed in the first half of the interview and the stra- tegic marketing undertaken by the firm. There were some surprise results from the survey, which showed that no one lender met all the criteria for choosing a lender. While the client firm came out as leading the market in terms of the most important selec- tion criteria, it was viewed much less favor- ably against other important factors. The firm received very favorable feedback about brand image and service; however, these factors were relatively unimportant to poten- tial clients when deciding who to approach for finance. The two segments of the market addressed in the study seemed unaware of the firm's cur- rent focus in the marketplace, possibly due to a series of recent acquisitions and some resulting restructuring.

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The analysis pointed to opportunity to build on the firm's reputation by improving com- munication with the market. As a result, the firm adopted a strategy, which saw a single point of contact model adopted. A follow-up study one year later indicated

significant progress had been made.12

FAROUT Summary

Figure 7.4 Competitive positioning analysis FAROUT summary

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Future orientation—Medium to high. Com- petitive positioning analysis identifies future strategies to improve competitive position. Accuracy—Medium to high. Accuracy of the final strategies drawn from the analysis will depend on the accuracy and comprehensive- ness of the information gathered. This may range from medium to high, depending on circumstances. Statistical research and pub- licly available financial information should increase accuracy. Primary information or word of mouth sources may be less accurate. Resource efficiency—Medium to high. Where the work of gathering information is divided up into manageable portions, the process should not be a drain on the firm's resources. Objectivity—Medium to high. The objectivity of the final strategies drawn from the analys- is may be compromised by internal biases if carried out by firm staff. Objectivity should

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be higher where a third party is involved in the analysis. Usefulness—High. Competitive positioning analysis should provide practical insights about the nature of an industry or market and opportunities available in it. Timeliness—Medium. The implementation of competitive positioning analysis should be a simple process once the project has been designed.

Related Tools and Techniques

• BCG growth/share portfolio matrix • Benchmarking • Competitor analysis • Customer segmentation analysis • Financial ratio and statement

analysis • GE business screen

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• Industry analysis • Product line analysis • Supply chain analysis • SWOT analysis • Value chain analysis

References

Aaker, D. (2001). Developing Business Strategies, 6th edition. New York, NY: Wiley. Brown, L. (1990). Competitive Marketing Strategy. Melbourne: Nelson. Fleisher, C.S, and Bensoussan, B. E. (2003). Strategic and Competitive Analysis. Prentice Hall, Upper Saddle River, N.J. Gantz Wiley Research. "Competitive Posi- tioning Study Capital Mortgage Lender," www.gantzwiley.com. Accessed June, 2006.

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Ghemawat, P. (1999). Strategy and the Busi- ness Landscape: Text and Cases. Reading, MA: Addison-Wesley. Louden, T.L (1991). "Take time out for com- petitive positioning," Health Industry Today, March issue. Trout, J. (1969). "'Positioning' is a game people play in today's me-too marketplace," Industrial Marketing, 54(6), pp. 51–55.

Endnotes

1 Trout, J. (1969). 2 Brown, L. (1990). 3 See Fleisher and Bensoussan (2003), Chapter 4. 4 See Fleisher and Bensoussan (2003), Chapter 5. 5 Louden, T.L. (1991). 6 Ghemawat, P. (1999).

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7 See Fleisher and Bensoussan (2003), Chapter 9. 8 Aaker, D. (2001). 9 See Fleisher and Bensoussan (2003), Chapter 8. 10 See Fleisher and Bensoussan (2003), Chapter 11. 11 Louden, T.L. (1991). 12 Adapted from "Competitive Positioning Study Capital Mortgage Lender," published by Gantz Wiley Research.

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8

Business Model Analysis

Short Description

A business model has been defined as the "core logic by which a firm creates customer value." Organizations that take leadership positions in their industries succeed by hav- ing an outstanding business model and ex- ecuting it masterfully. Business model analysis (BMA) provides the tools to quantify the relative strength of an organization's business model to generate economic rents from a product or service. It acts as the link between the social domain, where economic rents are generated, and the creative domain, where products and ser- vices are conceptualized. With a detailed

examination of the components of the busi- ness model, the analyst can determine what in particular makes one business model su- perior to another, thus creating an effective understanding of the linkage between rents and the raw product or service. However, a business model cannot exist in isolation and must be viewed thorough the lens of compet- ition; it is in this analysis that the superiority of one model over another may be established. The elements of the business model for com- panies to consider are the following:

• The value proposition in the posi- tions it adopts.

• The market segments it chooses to serve or avoid.

• Its value chain and the resulting costs from the activities it performs or the resources it employs.

• Its revenue model (or models) and the resulting profit potential.

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• Its position and strength in the larger upstream and downstream value net- work, including competitors and complementors.

• Its competitive strategy and how it seeks to gain a sustainable competit- ive advantage.

Understanding the elements of a model at a detailed level allows a firm to change it to potentially generate larger economic rents, disrupt competitors, or to use it to competit- ive advantage. This analysis integrates the concepts of the value proposition, market segments, value and extended value chains, revenue models, value migration, disruptive innovation, com- petitive strategy, and economic value.

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Background

Business models have existed since humans first traded goods in barter and have evolved to provide the means to deliver and capture superior customer value. The oldest model still used today is the shopkeeper model. It involves setting up shop where customers are likely to be and displaying a good or ser- vice for sale. Business models evolved from the "single- celled" shopkeeper model to more readily de- liver customer value and capture revenue. Such "multi-celled organisms" can be ob- served with tied products, such as the razor and blades model attributed to King C. Gil- lette, where the razor is sold at a low price and the blade is sold at a significant premi- um. This model is used today to sell not only razors and blades, but also items such as ink jet printers/cartridges and cell phones/air time. Other models leverage consumer

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density to deliver value—the telephone is an example of a network efficiency model where the value provided to customers increases with the number of subscribers. Other well- known models include a subscription busi- ness model, trade associations, co-operat- ives, and franchises, which all may be classi- fied as "collective" business models. The old style auction has embraced techno- logy and is now conducted online with pro- viders like eBay, resulting in an immense in- crease in the number of potential buyers. But these models, if carefully considered, de- scribe more how a firm will generate reven- ue—there is no market segmentation inher- ent in them. Other examples of recent business model in- novations are: McDonald's in the 1950s with their "Speedee Service System" for ham- burgers; Toyota with its introduction of a sub compact, the Datsun, to the North American market at a time when American cars were

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big; and Wal-Mart in the 1960s, which provided branded high-quality products at discount prices in small towns. The 1970s saw new models from Toys "R" Us, which disrupted existing toy departments and dis- count department stores. The 1980s saw Dell and Intel introduce their business models, and in the 1990s, we had eBay and Amazon. New business models are being introduced with great frequency, such as the technology of voice over Internet protocol (VOIP or voice over IP), which delivers telephone calls using the Internet, and threatens traditional telephone companies and their associated business models. Numerous carriers are competing for VOIP business offering to carry voice calls across the Internet for a fraction of the cost of the traditional switched networks. However, as magical as this technology seems, its widespread imple- mentation will only succeed when a firm leveraging this technology as a disruptive

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force adopts a viable model. These introduc- tions represent more than just the emer- gence of new competitors—the new concepts and new technologies embodied in these models will disrupt existing business. The examples discussed previously represent only a small sample of well-known business models and represent a fraction of those in use today. Each successful new model has found a way to deliver greater value to cus- tomers and, equally importantly, successfully capture that value for the firm. Business models are not static constructs but undergo frequent changes in response to competition, the macro environment, and the introduc- tion of new models. The end of the twentieth century saw the rise of business models that leveraged technology offered by the Internet. These dot-coms were virtual companies, many existing only in cy- berspace. Others followed what was known as a "bricks and clicks" model. Companies

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that used the bricks and clicks model had a physical location but looked to the Internet as another channel to generate sales. The twenty-first century ushered in the "dot- com bust," where thousands of companies that described their business model as being "Internet-based" simply ceased to exist, in turn losing billions of dollars in venture cap- ital. The pundits and the media told us that the old rules did not apply to these dot-coms. Stock valuations with price to earnings mul- tiples that were unheard of 10 years previ- ously were okay because of the rules of the "new economy." Critical examination of the models of "Internet" companies was often poor, with attempts at separating the "model" from "strategy." In fact, there was no alchemical transmutation to change the laws of business. The pundits were wrong! Until the dot-com bust of 2000/2001, the term "business model" was poorly under- stood and poorly applied.

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Since then, academics and researchers have worked to understand, analyze, and clarify the definition of business models and study their respective components.

Strategic Rationale and Implications

The dynamism of the business world must be translated to the model for a firm to remain in a leadership position. Technology disrupts existing businesses, markets, and the macro environment. New business models are a source of disruption as well. These disrup- tions can be harmful not only to existing firms, but to entire industries and even na- tions. The model a firm uses must adapt to meet the challenge of competition and the opportunities and threats posed. It must also provide the means for a firm to act on oppor- tunities and leverage strengths. A superior

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business model will allow the firm to main- tain or gain a leadership position in its in- dustry, while an inferior model can spell dis- aster—hence, it is imperative to understand the relative strengths and weaknesses of the firm's own business model through the lens of competition. This analysis allows the firm to determine its value proposition, targeted market segments, value chain, relative position in the value network, and revenue model and place it in a superior position to deliver value to the cus- tomer. The firm can determine if it has a temporary or sustainable competitive ad- vantage with its model and if the model lends itself to delivering factors critical to the firm's success. Moreover, the same analysis applied to a competitor's model will provide a broad understanding of the competition's strengths that can be neutralized and weak- nesses that can be leveraged.

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The Business Model

Definitions of business models range from "an organization's core logic for creating value" to "a story that explains how an enter- prise works." Some researchers consider how the pieces of a business fit together, but these approaches typically lack the critical aspects of strategy, which considers competi- tion. Others view the business model as the missing link between strategy and business

processes. Alan Afuah1 provides a more com- plete definition of a business model, as follows:

"A business model is the set of which activities a firm performs, how it per- forms them, and when it performs them, as it uses its resources to perform activ- ities, given its industry to create superi- or customer value and put itself in a po- sition to appropriate that value."

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There is, however, no real consensus of what a business model and its components are. The purpose of every business is to satisfy a customer's need. This can only be done by looking at the business from the out- side—from the point of view of the customer and the market.

Chesborough and Rosenbloom2 proposed the definition of a business model as a link between products, services, and economic rents earned by the firm utilizing the model. They propose that a business model incor- porates the following six elements:

1. 1. Value proposition—The value of the product or service from the customer's perspective and how the product addresses customer's needs.

2. 2. Market segment—With the re- cognition that consumers in different segments have diverse needs and will value the product or service in

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distinct ways, the value may only be unlocked if the right segment is targeted.

3. 3. Value chain and cost mod- els—This is the structure required to create and distribute the product or service and the resulting cost models from performing activities and utiliz- ing resources to deliver its value pro- position to its target market.

4. 4. Revenue models—The revenue model and resulting profit potential.

5. 5. Value network—This is the firm's position in the chain linking upstream and downstream activities to the final consumer of the product. It should include suppliers, competit- ors, complementors, and other downstream activities.

6. 6. Competitive strategy—How the firm seeks to gain a sustainable com- petitive advantage.

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Figure 8.1 defines the various elements of a business model and how they fit together. It considers competition, or the relative ability and activities of the firm to create and deliv- er superior value in satisfying a customer need or want, and it should justify the finan- cial capital needed to realize the model. Figure 8.1 The Business model Source: Adapted from Chesborough and Rosenbloom. "The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin- off companies," Industrial and Corporate Change, Volume 11, Number 3, pp. 529–555.

Chesborough and Rosenbloom contrast the business model to strategy and suggest that there are three distinctions, as follows:

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1. 1. A business model's focus is on cre- ating and capturing value. It seeks to define how that value will be created and the structure and method by which it will be captured. The stra- tegic layer goes further by attempting to define how a firm seeks to gener- ate a competitive advantage.

2. 2. A business model is a construct for converting the product or service into economic value, but it does not con- sider how to deliver that value to the shareholders that must be considered by the strategic layer.

3. 3. Strategy depends on knowledge of the wider environment the firm is to operate in. The business model does not require such knowledge and re- quires only a limited understanding of its surroundings. From a practical perspective, the business model needs to understand its target market

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and the web that makes up its value network.

Classification of Business Models

Business models occur in an inestimable variety of shapes and sizes: One small dis- parity between two models—for example, with the target market and the value propos- ition—and they become substantially differ- ent. Extensive research has been directed at classifying the vast array of existing business models. With the boom of the Internet eco- nomy, one focus has been classifying models that use the Internet; another has attempted to determine if one business model sharing a set of common characteristics is superior to another.

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Two general approaches to model classifica- tion can be found. The first approach at- tempts to group like models based on a set of shared characteristics. The resulting struc- ture is most often a two-dimensional con- struct: with position in the value chain, source of revenue, core profit-making activit- ies, pricing policy, value integration, degree of economic control, and others being con- sidered along x and y axes. Following are two examples of such schemes.

Timmer's3 11 e-business models use the de- gree of innovation and the degree of integra- tion as the characterizing dimensions, de- scribing architecture for the product, service, and information flows.

Linder and Cantrell4 propose a classification scheme based on a model's core profit-mak- ing activity and its relative position on the value chain. Linder and Cantrell's scheme is broader in scope and does not limit itself to e-models.

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In determining the superiority of one busi- ness model concept over another, Linder and Cantrell concluded there is "no silver bullet," and one model in their classification system was not superior to another. Researchers from MIT classified models based on the type of asset and the rights to the asset being sold. Their classification and analysis of the 1000 largest U.S. firms along those dimen- sions state, "some business models do in- deed perform better than others." The results from researchers are mixed; however, we do know some firms consistently produce better results than others in the same industry—for example, Southwest in the airline industry and Bristol Meyers Squibb in the pharma- ceutical industry. In general, the profitability of a firm is determined by both firm- and industry-specific factors. Figure 8.2 E-business models Source: Adapted from Timmer's Classifica- tion Scheme (1998).

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Figure 8.3 Operating model framework Source: Adapted from Linder, J., and S. Can- trell (2000), "Changing Business Models: Surveying the Landscape," Accenture Insti- tute for Strategic Change.

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BMA provides a means for bridging the gap between a firm's prosperity and its products and services. For some firms, familiar busi- ness models cannot be applied, and new models must be devised. Adapting the mod- els themselves serves to change the economic value of the products or service. In fact, changing any one of the elements of a model serves to change the economic rent derived from the good or service. Take, for example, the segment served in the airline in- dustry—the business traveler versus the tourist. Consider the activities in that value

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chain and the costs and the revenue-genera- tion models. Continental and Southwest have different structures in their value chain, yet they basically start with the same raw material. Their revenue generation models differ. They occupy the same location in the value chain. The various parts of the value net have differing ability to generate eco- nomic rents; for example, suppliers of air- craft based on the forces at work in that seg- ment of the value net capture a differing level of economic rent from air travel than the airlines themselves. In order to generate superior rents, the organization must create superior value and avoid commoditization of its supply chain and distribution network to prevent value migration. Finally, competitive strategy determines how a firm creates a competitive strategic advantage over rivals. A superior business model will also ensure the value the firm appropriates from the cus- tomer is greater than the costs of the

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activities undertaken, resources employed, and positions adopted in delivering that value. BMA provides a holistic framework to com- bine all the activities of the firm in the pur- suit of competitive advantage and to maxim- ize the value delivered to the targeted cus- tomer. It then becomes possible to deliver superior value propositions to the target market and receive higher prices for the product or service delivered. The Dow Jones Industrial Average (DJIA) was introduced in 1896 to create an index from the leading firms of the day. Only one firm has survived to this day—General Elec- tric. The mortality of firms is well under- stood, estimates for first-year failure is an as- tonishing 70–80%; however, more interest- ing is the fall-out rate from the S&P 500 and the Fortune 500, which is estimated to be between 2–6%. This effectively means that between 10 and 30 companies depart their

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leadership positions every year. Innovative business model introductions have caused the disruption of established firms. Kmart, whose business models sustained it for 103 years, filed for Chapter 11 bankruptcy protec- tion early in 2002. Railroads, which were the basis of the Dow prior to the turn of the twentieth century, are minor players today. They saw their value migrate to other forms of transportation and their value proposition diminish along with their leadership positions. In 1994, Japan had 149 corporations listed in the Global 500 with $3.8 trillion in total rev- enue; this fell to 82 corporations with $2.2 trillion in total revenue in 2004. This indic- ated that the business models they employed no longer allowed them to occupy leadership positions. In the same timeframe, 1994 to 2004, the total revenue generated by the Global 500 increased from $10.3 trillion to $14.9 trillion. The inability to adapt business

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models to changing competitive and macro- economic conditions can spell disaster for firms, industries, and nations. As a result of this history, there are two subtly distinct philosophical directions re- garding business models. Christensen and

Raynor5 focus on technological evolution disrupting business models. Mitchell and

Coles6 suggest, "Improved business models will replace technology as the most frequent and most powerful source of business dis- ruptions." This is a powerful proposi- tion—where the business model itself be- comes a competitive weapon. It stands to reason that the ability to modify or construct a business model to disrupt competitors and avoid disruption can provide a significant advantage to a firm. BMA will determine the viability of any busi- ness model for any type of concern, includ- ing those organizations using multiple busi- ness models. Those organizations that do

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engage multiple models will benefit by un- derstanding which part of their business is driving revenue and which models need im- provement. Additionally, conducting a BMA will allow a firm to understand its weak- nesses and extend its advantages. BMA may also be used to disaggregate a competitor's position and understand where it is most vulnerable.

Strengths and Advantages

Comprehensive

BMA verifies the relationship of the firm's model—that is, its strategy, positions, activit- ies, and resources—to the larger macro-en- vironment, the industry, and its competitors. The value delivery mechanisms of the firm

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and their interaction with the customer and the environment are made evident with this analysis. BMA provides a comprehensive ap- proach beyond strategic and operational ef- fectiveness in describing why a firm is profit- able or unprofitable.

Detailed Understanding

BMA allows a detailed understanding of the advantages and disadvantages of the firm's value delivery systems. This understanding makes it possible to modify part or all of a business model to create a competitive ad- vantage. Those firms employing multiple models in multiple industries can quantify their relative strengths. As a corollary, it is possible to examine the relative position of competitors by using BMA and to use the insights from this ana- lysis to disrupt their business models.

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Integration of Value Delivery Mechanism

BMA delivers the ability to integrate the value delivery mechanism of the model and charge superior prices for the value de- livered. This in turn will lead to maximizing revenue generation and consequently in- creased profitability for the firm being analyzed.

Innovation

BMA can provide an impetus to innovate within the organization, either with the mod- el itself, the services and products that the firm provides to customers, or along any di- mension of the value delivery mechanisms of the firm. Identification of advantages at the

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target firm or identification of competitor weaknesses could enhance the innovation process.

Weaknesses and Limitations

Disruption from Outside the Industry

Firms may become blind to rivals offering in- novative solutions or to those companies that are not considered direct competit- ors—this is a position detailed by

Christensen and Raynor7 as the primary means of business disruption. Firms must then consider not only direct competitors, as emphasized in this analysis, but must also

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avoid being blindsided by firms and indus- tries that are not considered direct rivals.

Innovation

Although this technique may be used to cor- rect business model inconsistencies, it does not necessarily provide the means to innov- ate and consequently to provide additional value to customers. If a firm defines its lead- ership position too closely with that of cur- rent rivals, it may become a follower by ad- opting models that are easily duplicated.

Market Orientation

This technique will only be useful to a firm that has a market orientation. It is irrelevant for a firm that is producing a product and trying to sell it by targeting a heterogeneous

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market with a homogeneous marketing strategy.

Process for Applying the Technique

Step 1: Articulate the Value Proposition

Value is determined by the customer—the firm needs to define the product or service it will provide and the forms in which a cus- tomer may use it. The value proposition will change depending on the target market spe- cified, and there may be an iterative process between Steps 1 and 2, with a different pro- position specified for each target segment.

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The firm, through its value proposition, may choose to position its products or services as low cost, differentiated, or niche-focused. Low-cost provider strategies work best in cases where:

• Price competition is especially vigorous.

• Competitive products are essentially identical.

• There are few ways to achieve product differentiation that are meaningful to buyers.

• Buyers incur low switching costs. • Buyers are large and have significant

power to bargain down prices.

Differentiation allows a firm to command a premium price for its product and/or in- crease unit sales. A firm can employ several differentiation themes; these can be based on product features, although they are the easiest for competitors to copy.

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Differentiation themes that are difficult for competitors to copy can provide a sustain- able competitive advantage. Bases for differ- entiation that are more difficult to imitate in- clude the following:

• Brand name or reputation. Coke, for example, is the best-known brand in the world.

• Where the good or service is avail- able. An extensive and well-con- figured distribution network makes the product widely available to customers.

• Extreme positioning in levels of qual- ity or delivery—a six-sigma or beyond level of quality may be difficult to imitate.

The situation may be complicated by the fact that a firm supplies multiple products or ser- vices, and the question is whether the firm is operating multiple models or a single model.

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Consider the case of a bicycle shop: The basic business of this shop is to retail bicycles, ac- cessories such as clothing, and bicycle parts, and to service bicycles. Bicycle service may account for 35–50% of revenue. Should this bicycle shop be considered two distinct busi- nesses, a service business, and a retail busi- ness? Or is it a single business model with a sustainable competitive advantage in service over an online retailer who sells bicycles and accessories? What about General Electric, which is in the business of supplying power systems as well as aircraft engines? The tech- nology in these two industries may well be transferable, partially answering the ques- tion: "Why are we one business?" However, the question of disaggregating a business model is best answered from a customer's perspective. A customer for a bicycle would definitely consider how their bicycle would be serviced when making their purchase decision.

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The customer, in defining value, also provides guidance in the consideration of models. If the customer sees the business of- fering as a whole, the separate activities un- dertaken by a firm should be considered as sources of advantage, or where they are not offered, and should be, as sources of disadvantage.

Step 2: Specify the Target Segment

Unless the firm is a very specific niche play- er, it may serve multiple segments of the market, and it may need to specify the chan- ging propositions for each segment it chooses to serve and from whom it will de- rive economic rents. Quite often, a business provides more than one service or product; our bicycle shop, for example, provides bi- cycles, clothing, accessories, and service. For somebody seeking to purchase a new bicycle,

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these may be viewed as a bundle of services offered by the whole firm, and the proposi- tion presented to them may be quite differ- ent than to an individual already owning a bicycle who wishes to have it serviced. Segments can be broken down broadly by: (a) customer characteristics unrelated to the product, generally known as demographics (i.e., geographic span, socioeconomics, etc.); and (b) product and/or service-related ap- proaches that define user types, usage, and benefits generally known as psychographics. The analyst should pursue a detailed analysis of each market segments served by the firm—additional examples of segmentation

bases are widely available8—and tie the value proposition to customers who may desire different aspects of the product or service. The objective is that customers' needs must be understood, along with their growth po- tential; for example, with airline flights, business consumers demand frequent,

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inexpensive flights with minimal delays, no lost baggage, and polite courteous service. If a customer's needs are not well understood, analytical tools using customer focus groups, Kano model analysis, or quality function de- ployment (QFD) may be especially useful.

Step 3: Determine Competitors

A firm exists within its industry because it serves those customers who see its value pro- position as superior to its competitors. Typ- ically, firms serving the same customer seg- ments with the same product or service are perceived as "the competition." These firms will occupy a similar position along the in- dustry value chain and may have similar re- source characteristics. However, there may be firms that provide substitute products; companies that operate in niche markets; and suppliers or customers that have a

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credible threat of forward or backward integ- ration. Firms that cause companies to forfeit their leadership positions are rarely obvious and do not attempt to compete directly against established rivals; instead, they find new ways to deliver value to customers. Firms often surrender segments that have become unprofitable due to commoditization and later discover that those same competit- ors have moved up the experience and learn- ing curves and now threaten another seg- ment. Interviews with customers and sales staff and systematic, regular competitor ana- lysis conducted by the firm will help identify current and future competition. The analyst, after determining who the com- petitors are, will need to articulate the value propositions of those competitors and the target markets served by those firms.

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Step 4: Evaluate the Value Chain and the Cost Model

With the ultimate goal of delivering value to, and capturing economic value from, the cus- tomer, it is imperative that the value chain be understood. To deliver the right value to the appropriate market segments, price it correctly, and position itself properly, a firm must undertake a specific set of activities.

Using value chain analysis,9 these activities can be analyzed to identify which step or steps provide economic advantage. A value chain identifies a series of activities that must be undertaken to transform inputs into a product or service delivered to cus- tomers. Figure 8.4 identifies the activities of a classic value chain. Figure 8.4 Classic value chain

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On the other hand, a customer-focused activ- ity value chain (AVC) emphasizes the activit- ies that a firm engages in to learn about customer's needs and the work required with customers in design, development, delivery testing, and installation of the product or service. This type of value chain is better suited to firms that provide intangible products or services. The two value chains are complementary, and both may be used. Figure 8.5 Activity value chain

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Source: Adapted from Fahey, L. (1999). Competitors. New York, NY: John Wiley & Sons, p. 175.

The classic value chain facilitates an over- view of what a firm does to access suppliers, its manufacturing, and service. A firm will pursue activities and employ resources to achieve its desired position and, as a result, will incur costs. Value chain analysis allows the analyst to determine the current advant- age or disadvantage of the firm along each segment of the value chain and the resulting cost structure. The customer-focused AVC,

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on the other hand, identifies all the direct and indirect interaction with customers. Conduct a classic value chain and/or AVC analysis of the target firm. Compare the two value chains to the firm's direct competitors, as determined from competitive positioning analysis. Firms that are competing using radically different positions may not pursue similar activities. Add the dimension of time to the value chain and AVC for both direct competitors and the target firm if appropri- ate. Use this analysis to extract where the firm has a competitive advantage or a com- petitive disadvantage. The time dimension should also include an understanding of ex- perience curve effects. For the business model being analyzed, de- termine which resources a firm is leveraging to deliver value to the customer. The re- sources may be tangible, such as plant and equipment, or intangible, such as patents, brands, or copyrights. They can be human,

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structural, or based on R&D. A firm's ability to turn its assets into customer value for dif- ferent market segments is part of its compet- ence or capability. Using the six asset categories identified in Figure 8.6, evaluate the assets the firm is us- ing. The analyst should look beyond the firm's own assets; it is not necessary for a firm to control or own the assets it leverages in pursuit of its model. Alliances, relation- ships, and networks may provide an organiz- ation with a competitive advantage by using assets that are owned or controlled by anoth- er entity. Assets vary between the following five attributes: Figure 8.6 Asset categories Source: Adapted from Fahey, L. (1999). Competitors. New York, NY: John Wiley & Sons, p. 300.

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• Availability—Not all assets are equally available; capital, for ex- ample, is not available in unlimited quantities.

• Specificity—An asset is specific to place, time, and space. An asset phys- ically located in North America may provide little to no advantage in the Chinese environment. The range of application technology is typically limited; for example, technology de- signed to improve the hardness of

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rubber tires cannot suddenly be used in electronics.

• Sustainability—Performance, for example, can increase the stock of capital available, and poor quality may diminish the brand of the firm.

• Replicability—Organizational cul- ture, knowledge, and other attributes may be difficult to reproduce. These may provide a source of great com- petitive advantage.

• Substitutability—Can a given asset be trumped by another asset, thus re- ducing the value of that asset?

Step 5: Evaluate the Value Network

It is important to consider the value the firm is capable of capturing in its extended value

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chain or its relative position to its customers, suppliers, and rivals. The relative positioning of a product or service is critical. If a firm produces a product or service that it can sup- ply to only one customer, it will be in an in- ferior position as its customer will have sig- nificant bargaining power. A firm may have developed a value network that is capable of competing in dimensions where it has not been able to before; for ex- ample, Sony, to compete in the game console market, established relationships with both IBM and Toshiba to produce multi-core pro- cessor architecture for Playstation in order to compete with the Microsoft-Intel team, who had a clear lead in technical expertise. This value network analysis should include suppliers, customers, complementors, and competitors.

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Step 6: Determine the Revenue Model for the Firm

The ability to appropriate value will depend on the revenue model the business uses. Examples are: a subscription model com- monly used with magazines; fee for service commonly used by realtors and agents; dir- ect sales to end users; and so on. It is import- ant to ensure that revenues are greater than costs. Analysis of the firm's and competitors' financial statements over time will reveal if the target firm enjoys an advantage over its competitors. The revenue model should describe each rev- enue stream and how each stream brings in revenue; for example, a newspaper may have streams from direct newsstand sales, paper box sales, subscription, advertising, classi- fieds, and the Internet, and each of these rev- enue streams will incur a different cost. The evaluation of the revenue model should

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include an understanding of price compared to the competition, the value proposition, product quality, service, and the value cus- tomers perceive in the model. The analyst should also be able to determine if the revenue/cost model at this stage is su- perior to that of the competition and is likely to produce better profits. The key here is also profit potential, and this may be determined from actual financial results, although they can be misleading if viewed from a point in time—a firm may not have matured and may be in its startup stage; the more important measure then becomes profit potential.

Step 7: Determine the Critical Success Factors for the Industry

Critical success factors (CSFs) are a limited set of aspects that are necessary to secure and gain a competitive advantage. CSFs

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represent those areas that are critical to a firm's success, providing a direct link to or- ganizational performance (see Chapter 3, "Avoiding Analytical Pitfalls").

John F. Rockart10 defined four basic sources of CSFs, as follows:

• Specific industry characterist- ics—The airline industry, for ex- ample, must provide frequent, on- time flights to successfully target business customers.

• Those arising from the chosen strategy of the business—High level of technical service is an im- portant factor for companies seeking to differentiate themselves in the welding industry.

• Environmental characteristics or those resulting from eco- nomic or technological change—For example, a

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telecommunications firm taking ad- vantage of deregulation in the industry.

• Those arising from the internal needs of the firm—An organic structure may be critical to a firm that has to compete in a highly in- novative environment.

Critical success factors that relate to posi- tion, activities, resources, and costs will be used to determine the strength of the busi- ness model. Sources that may be useful in determining CSFs are management tools such as the balanced scorecard and bench- marking. Other tools, such as environmental analysis, industry structure analysis, internal analysis, competitor analysis, or using in- dustry and business experts, are other sources for determining CSFs.

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Step 8: Complete an Analysis Grid Detailing Each Element of the Business Model

The objective of this analysis is to detail where in its business model a firm is capable of producing a superior result. To complete the analysis, each element of the business model is placed in a grid, as shown in Table 8.1. Each element is ranked from 1 to 5 (su- perior) for the target firm and its competit- ors on an analysis grid. Table 8.1 Business Model Analysis Grid

This grid should, at a glance, allow the ana- lyst to determine which part of the business

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model is superior or inferior to its competitors. Ultimately, the strength of firm's business model will be determined by its ability to convert the product/service domain to eco- nomic rents for the firm. The true value of this analysis lies in the ability of the firm to achieve a detailed understanding of the com- ponents of its business model and to make improvements in components of the model design. The firm may find ways to innovate along its revenue model, its value chain, or some other element, or disrupt its competi- tion and generate greater economic rents. Because business models are not static con- structs, the analyst will find it useful to gen- erate both a current state and future state analysis and to review the analysis on a regu- lar basis.

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Case Study: Dell Computer and the Printer Market

Dell Computer has been the darling of the personal computer industry, gaining market share—reported at 18.2% of all units shipped worldwide in 2004—and reporting revenue growth in double digits, outstripping its rivals year after year. Dell is a competitor to IBM, HP, and other firms, not only in com- puters but also in areas such as printers, storage, handheld devices, and increasingly in consumer electronics. Dell has entered the low-end printer busi- ness using its direct model and threatens market leader HP. Can Dell's printer model propel it to success, allowing it to capture sufficient market share to disrupt HP? Dell's competitors in the printer market are HP (the market leader), Epson, Lexmark, and Canon. HP by far has the largest share, with 60% of the existing market, Epson has

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16% and Lexmark 12%. Dell has approxim- ately 3% of the current market, selling a small number of printers to businesses while its most active market is the home consumer market. HP excels at R&D, rolls out new product lines to remain competitive, and ex- pects to introduce digital printing, which could save corporations up to 30% in costs each year. HP earns 70% of its profits from sales of ink and printers. Low-cost, high-quality, easy to use, readily available products win in the marketplace, and printers are no exception. However, in- novative new printers that produce better pictures, use multimedia cards directly, and interface to other devices also sell. Highly differentiated products as a result of R&D, brand, and widespread distribution appear to be the driving CSFs for the printer in- dustry, and Dell's brand cannot compete with HP's and Lexmark's.

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Dell has adopted a low-cost direct sales ap- proach to target business customers, which comprises 80% of its personal computer sales. Dell has licensed products from Lex- mark, which it sells under its own brand name, that meet the needs of business cus- tomers. HP targets a larger spectrum of busi- ness printing with a broader range of products than Dell—for example, high-end color laser printers. Lexmark and Epson, while competing in the same range of products as Dell, offer customers dot matrix printers. HP and Lexmark have strong distri- bution networks and are readily available. Dell has a well understood, sustainable com- petitive advantage along its activity chain that it has utilized to dominate the personal computer industry. Its cash conversion cycle, because of efficiencies, especially in invent- ory, has improved from minus 18 days in 2000 to minus 36 days in 2004. HP, however, has an advantage in R&D and the

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ability to launch new innovative products far more quickly than Dell. Dell must work with Lexmark, who manufactures its product. However, Dell could match this R&D capab- ility by acquiring technology from a printer manufacturer and entering the market with product it manufactures directly and sustain its momentum by investing in R&D. Both companies use the razor and blades model to generate revenue. However, Dell sells using its electronic model, while HP uses conventional distribution, which is sig- nificantly more difficult to manage. The ad- vantage must go to Dell here. Using an abbreviated form of the BMA, ana- lysts can quickly determine where weak- nesses or advantages might lie by comparing each element of the Dell and HP printer business models, as follows:

• Value proposition—Dell is com- peting on price with limited high-end printers available to large business

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that allows centralized management. It does not provide large printers with robust duty cycles. Advantage: HP.

• Target markets—The result of the value proposition and the product of- fering is that Dell's active market seg- ment is the home consumer. In 2004, Dell sold some 31,000 laser printers, compared to over 2,000,000 for HP. Advantage: HP.

• Value chain analysis and cost structure—With Dell's value chain and cost structure and the complexity HP has in shipping product across the country for distribution, the ad- vantage lies with Dell here.

• Value network—Dell purchases a number of its printers from Lexmark; however, both have a PC business and make storage devices. Con- sequently, neither have an advantage.

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• Revenue model—Both companies use the razor and blades model, with neither having a significant advantage.

• Strategy—Dell has a sustainable competitive advantage with its reven- ue model; however, this does not seem to be well aligned in printers with the CSFs for the industry. HP printers are readily available for demonstration at stores and to dis- tributors. Printers, in fact, may not lend themselves to Internet selling or distribution. Advantage: HP.

In examining the BMA grid in Table 8.2, we can see that HP indeed has an overall ad- vantage with its business model, and Dell needs to seek a new value proposition, target market, and strategy if it is going to succeed. The printer market is extremely competitive, characterized by low prices and razor-thin margins. At this point in time, Dell has not

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been able to penetrate this market aggress- ively because of issues with its positioning, active market segments, and strategy. Table 8.2 Business Model Analysis Grid—Dell Versus HP

FAROUT Summary

Figure 8.7 Business model analysis FAROUT summary

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Future orientation—Medium. BMA provides a medium orientation, giving the target firm a comprehensive view of its own business model and its integration with the industry and macro environment. This integrated forward-looking view is mitigated by the erosion of customer value by potentially su- perior competitor offerings, or disruptive in- dustry forces. Accuracy—Medium. While the analysis is somewhat subjective, its accuracy is determ- ined by the accuracy and skill of the analyst. This has been rated as "medium" but, de- pending on the quality of the analyst, this can vary.

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Resource efficiency—Medium to high. Ana- lysis of a firm can be completed rapidly; the research required and the complexity of tools used are limited. Medium-high resource effi- ciency should be expected. Objectivity—Medium. The detailed nature of the analysis, while allowing for some sub- jectivity, forces structure on the analyst. Usefulness—Medium to high. The analysis provides a comprehensive view of the busi- ness model and an opportunity to correct model irregularities and attack competitor's weaknesses. Timeliness—Medium. Analysis can be com- pleted readily but contingent on the detail required; in contrast to other analysis tech- niques, this is high.

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Related Tools and Techniques

• Activity value chain analysis • Competitor profiling • Competitor segmentation analysis • Customer value analysis • Financial ratio analysis • Functional capability and resource

analysis • Industry analysis • Kano model analysis • Quality function deployment • STEEP analysis • Strategic funds programming • Strategic group maps • Value chain analysis

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References

Aaker, D. (2005). Strategic Market Manage- ment. Hoboken, NJ: John Wiley & Sons. Afuah, A. (2004). Business Models: A Stra- tegic Management Approach. New York, NY: McGraw-Hill Irwin, pp. 3, 5, 12, 173–209. Chesbrough, H., and R. Rosenbloom (2002). "The role of the business model in capturing value from innovation: Evidence from Xerox Corporation's technology spin-off compan- ies," Industrial and Corporate Change, Volume 11, Number 3, pp. 529–555. Christensen, C.M., and M.E. Raynor (2003). The Innovators Solution. Boston, MA: Har- vard Business School Press, pp. 56–65. Drucker, P.F. (2001). The Essential Drucker. New York, NY: Harper Collins. Fahey, L. (1999). Competitors. New York, NY: John Wiley & Sons, pp. 172–205.

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Fleisher, C.S., and B.E. Bensoussan (2003). Strategic and Competitive Analysis. Upper Saddle River, NJ: Prentice Hall, pp. 104–121, 216–219. Hjelet, P. (2004). "The Fortune Global 500," Fortune, July, p. 160. Langdon, M. (2003). "Business Model War- fare: A Strategy of Business Breakthroughs," Innovations Labs white paper, Ackoff Center for the Advancement of Systems Approaches, University of Pennsylvania. Linder, J., and S. Cantrell (2000). Changing Business Models: Surveying the Landscape, Accenture Institute for Strategic Change (www.accenture.com). Hermes Newsletter by ELTRUN (The eBusi- ness Center for the University of Athens), October–November 2002, http://www.el- trun.aueb.gr/newsletters/1/18.pdf, p. 1 (ref- erenced July 17, 2004). Mitchell, D., and C. Coles (2003). The Ul- timate Competitive Advantage. San

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Francisco, CA: Berett Koehler Publishers, Inc. National Bicycle Dealers Association, "In- dustry Overview," http://nbda.com/site/ page.cfm?PageID=34 (referenced July 13, 2004). Quick MBA, "The Business Model," ht- tp://www.quickmba.com/entre/business- model/ (referenced December 11, 2005). Osterwalder, A. (2004). "The Business Model Ontology" (PhD. thesis), ht- tp://www.hec.unil.ch/aosterwa/PhD/ (refer- enced October 19, 2004). Rockart, J.F. (1979). "Chief Executives Define Their Own Data Needs," Harvard Business Review, March–April, 52(2), pp. 81–93. Stalk Jr, G. (1988). "The Time Paradigm," Boston Consulting Group, ht- tp://www.bcg.com/publications/publica- tion_view.jsp?pubID=300 (July 13, 2004).

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Thompson, A., Gamble, J., and A.J. Strick- land (2004). Winning in the Marketplace. New York, NY: McGraw-Hill Irwin, pp. 121–123. Timmer, P. (1998). "Business models for electronic markets," Electronic Markets, 8(2), pp. 3–8. ht- tp://www.electronicmarkets.org/net- academy/publications.nsf/all_pk/949. Weil, P., Malone, T., D'Urso, V., and G. Her- man (2004). "Do Some Business Models Perform Better Than Others? A Study of the 1000 Largest U.S. Firms.," ht- tp://seeit.mit.edu/publications.asp (ac- cessed July 11, 2004). Wikipedia, the free encyclopedia. "Collective Business System," http://en.wikipedia.org/ wiki/Collective_business_system (refer- enced October 24, 2004).

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Endnotes

1 Afuah, A. (2004). 2 Chesbrough, H. and R. Rosenbloom (2002). 3 Timmer, P. (1998). 4 Linder, J., and S. Cantrell (2002). 5 Christensen, C.M., and M.E. Raynor (2003). 6 Mitchell, D., and C. Coles (2003). 7 Christensen, C.M., and M.E. Raynor (2003). 8 See Fleisher and Bensoussan (2003), Chapter 12. 9 See Fleisher and Bensoussan (2003), Chapter 9. 10 Rockart, J.F. (1979).

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9

SERVO Analysis

Short Description

The SERVO (an acronym for strategy, envir- onment, resources, values, organization) analysis framework model is a diagnostic management tool used to build and test a firm's strategic decisions and initiatives. Analysts examine the interactions and rela- tionships among five critical elements to test the degree of consistency or fit between the firm's current and proposed strategies, its organization, capabilities, management pref- erences, and environment. It is a manage- ment tool designed to assess and facilitate the process of strategy formulation and

implementation within the context of both market and organizational change.

Background

An analyst requires a way of organizing his or her thoughts, and conceptual models guide the analyst's thinking by focusing on the most relevant and important features of a phenomenon under consideration. Models are especially important in competitive and strategic analytical tasks because there are so many factors that need to be considered. The SERVO model detailed in this chapter is a broad, integrative framework that helps the analyst hone in on the primary factors that need to be addressed in competitive re- sponse and strategy development situations. In addition to being integrative, SERVO al- lows for a depth of analysis to address many strategy development situations. SERVO is

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similar to other strategy models in terms of content but differs from most of them in that it is structured to emphasize the relation- ships among actions or decisions. SERVO is useful for strategic analysis be- cause it can be applied to many different situations and yet does not imply that every firm in a specific industry needs to compete in an identical fashion or have identical strategies. It attempts to achieve a beneficial balance between both internal (the S, R, V, and O elements) and external (the E ele- ment) dimensions impacting strategy. Each of the five elements in the SERVO model consists of several components that can be analyzed separately and in their relation- ships with each other. The SERVO model explicitly addresses the need to build a tight, strategic fit between strategy, the environment, resources, values,

and organization.1 Successful formulation and implementation of strategy requires

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explicit management of the interrelation- ships among the five elements, of which structure and strategy—the main focus of much strategy advice during the early dec- ades of strategy literature and practice—are only two. "Fit" is a critical concept in the application of this model. It is a desirable and viable state that holds when all management decisions have produced consistency between the firm's resources and capabilities and the ex- ternal environment. In other words, better fit leads to better performance; correspond- ingly, bad fit results in bad performance. In seeking to produce better fit, analysts try to identify the managerial decisions that bring about the necessary alignment over both short and long time frames. This requires that analysts recognize both static and dy- namic dimensions of management decisions. See Figure 9.1 for a diagram of the "fit" concept.

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Figure 9.1 Illustration of the "fit" concept

The reality of most organizational situations is that some inconsistencies will nearly al- ways exist between the elements over time. This occurs because sometimes a firm will seek to pursue opportunities in the environ- ment that put undue strain on it or its re- sources. At other times, a strategy or value that worked for many years may not hold up to environmental changes. The key for the analyst is to decide which inconsistencies the firm must strategically address through re- commended actions and which ones it must overlook or accept. Each of the five SERVO elements is import- ant on its own and also in the corporate sense. These five elements are discussed in turn next.

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Strategy

Among the many formal definitions of strategy, several dominant themes are com- mon. Strategy is the set of competitive de- cisions and actions made in response to the firm's environment. Strategy aims to best po- sition the firm's current capabilities and re- sources to secure competitive advantage over time. Because the firm's environment is con- stantly in a state of flux, so too must strategy change in order to protect existing sources of competitive advantage. In addition, strategy must seek out new opportunities and acquire or develop the requisite resources and cap- abilities to turn ongoing environmental changes into new sources of competitive ad- vantage. In sum, an effective strategy will clearly identify the firm's goals and object- ives, the product/service and market spaces in which it will compete, the business activit- ies on which it will focus, the value it will

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offer to customers, and the approaches it will use to provide superior offerings to competitors. For the analyst's purposes, strategy within the SERVO model can best be characterized as composed of four elements: the executive team's goals, scope, competitive basis/ premise, and business model. These are dis- cussed in greater depth in the following section:

1. 1. Goals—What is the mission of the firm? What is the vision for the firm held by key decision makers and em- ployees? What does the firm intend to accomplish vis-à-vis its stakehold- ers' expectations? What are top management's expectations (both in quantitative and qualitative terms) with respect to revenue growth, in- novation, market share, quality, and profitability?

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2. 2. Scope—What products/services is the firm selling, and which ones would it like to sell? What customers is it aiming to provide value for? What markets will the firm compete in?

3. 3. Competitive basis/ premise—In what ways will the firm attempt to beat competitors? How will the firm build capabilities or re- sources to achieve competitive ad- vantage over time?

4. 4. Business model—Is the basic operating structure sound and re- flective of appropriate choices and priorities between in-house and out- sourced activities? Is there an eco- nomic explanation of how the firm can deliver value to customers at a price and cost that yields satisfactory profitability? Do the revenues and costs associated with the goals,

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scope, and competitive basis demon- strate viability over time?

The focus on strategy within the SERVO model is not necessarily on developing new strategies or protecting existing ones. Rath- er, its inclusion underscores a core theme demonstrated in many applications of the model that strategy conception and formula- tion is often done very well in most firms. However, inconsistency between strategy and the other more manageable elements (R, V, and O [resources, values, and organiza- tion]) are more often the cause of ineffective implementation and/or strategic failure.

Environment

Environment as a larger concept for compet- itive and strategic analysis is ordinarily clas- sified into several strata. This is done to help

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reduce the level of complexity facing the ana- lyst, as the environment can be simultan- eously expansive, complex, dynamic, and ambiguous. Though each component has the word "environment" in it, there is only one environment with the components being simply different stratifications of the larger concept. The first division of the environment is into the external and internal environment. The external environment includes all those things "outside" the legal boundaries of the firm; however, for the analyst's purposes, it is limited to those decisions (beyond the dir- ect control of executives) made by stakehold- ers outside the firm that may have a signific- ant impact on the firm's performance. The internal environment includes stakeholders, forces, and conditions within the firm. It will include, prominently, stakeholders such as the board of directors, decision makers, and employees, as well as the business functions,

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culture, organizational practices, processes, structure, and systems. The environment can also be segmented into several components ordered in terms of proximity to the daily activities of the busi- ness. The internal environment is closest to the business, next is task environment, fol- lowed by the industry environment, and, fi- nally, the macro-environment. The task environment typically impacts strategy on a day-to-day basis, involves the specific competitive situation facing the busi- ness, and is populated by those specific or- ganizations and groups that most directly in- fluence the organization's strategy, including customers, competitors, partners, and sup- pliers, but it can also include government regulators and labor unions. The industry environment deals with envir- onmental factors and forces, which have the most impact on the performance of the firm and its competitors. The value chain

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stretches all the way from the raw materials used to produce products/services through to after-sale services and includes connected commercial activities in which the industry is ensconced. The macro or general environment is the set of conditions and influences affecting eco- nomic activity and is ordinarily outside a typical firm's direct influence. One particu- larly valuable scheme for the analyst who needs to further classify the general environ-

ment is the PEST/STEEP method.2 Finally, some classifications of the external environ- ment also subdivide the first division geo- graphically, usually by international, trans- national, national, regional, and/or local boundaries.

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Resources

Resources are the assets and capabilities a firm uses to generate outputs (that is, goods and/or services) for the marketplace. One way of classifying resources is to use the

value chain,3 a concept that shows the linked set of value-creating activities a firm per- forms. Primary activities, such as raw mater- ials acquisition, operations, outbound logist- ics, marketing and sales, and service, are the value-adding pursuits that best explain the primary business role of the firm. Secondary activities, such as communications, human resource management, management inform- ation systems, and government and public affairs, facilitate and enhance the perform- ance of primary activities. Similar to the environment, analysts also need to reduce the complexity associated with classifications of "resources." Business

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resources can usefully be grouped under sev- eral categories, as follows:

Financial Resources

A strategy that requires significant invest- ment in new processes or products, distribu- tion channels, production capacity, and working capital can place strains on the firm's financial resources and needs careful financial management. An examination of financial resources should include an assess- ment of existing resources, such as bank overdrafts, bank loans, cash balances, credit- ors, other loans, shareholders' capital, work- ing capital, and the ability to raise new funds.

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Human Resources

A firm's human resources are its skills base. The raw material of competitive advantage frequently lies in the intangible core compet- encies and skills of its people. Environmental change (the "E") infers not only a change in strategy but also a change in the skill set of a firm's human resources that will act on a new set of key success factors. Successful or- ganizational change often requires increased investment to acquire or develop new skills along with reduced investment in the estab- lished skill set that was more closely attuned to the old business models. This transition toward new skill sets is a process that, if done poorly, will thwart the cultivation of conditions necessary to grow new organiza- tional skills. When assessing these skills, the analyst must consider the following types of questions:

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• What skills does the firm already possess?

• Are they sufficient to meet the object- ives of the desired strategy options?

• Could the skills base be enhanced, enlarged, or stretched to meet the new requirements?

Physical Resources

The category of physical resources covers a wide range of operational assets concerned with the firm's physical capability to deliver its strategy into the marketplace. Sometimes referred to as plant, property, and equip- ment (PP&E), they include, among others, the following:

• Information technology—Man- agement information systems,

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information technology assets, data- bases, and integration of systems across the firm.

• Production facilities—Location of existing production facilities, capa- city, investment and maintenance re- quirements, current production pro- cesses, and particularly their quality, method, and organization. Ul- timately, the analyst examining this area must consider the extent to which production requirements of the strategy can be delivered by exist- ing facilities.

Intangible Resources

It is easy to ignore the intangible resources of a business when assessing how to deliver a strategy—but they can be crucial. Prominent

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intangibles the analyst must consider include the following:

• Brands—Strong brands are often the key factor as to whether a growth strategy is a success or failure.

• Goodwill—The difference between the value of the tangible assets of the business and the actual value of the business (what someone would be prepared to pay for it).

• Intellectual assets (capital, property)—Key commercial rights protected by copyrights, patents, and trademarks may be an important factor in the firm's strategy.

• Reputation—The collective repres- entation of the firm's previous ac- tions and results that describe its ability to deliver valuable and valued outcomes to stakeholders.

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Values

To understand values, the analyst must at- tempt to capture the human as well as the social sides of the firm's leading decision makers. Decision makers do not make their decisions in a vacuum; indeed, one of the purposes of this book is to emphasize how the analyst can support these decision makers with beneficial insight. Executives' decisions are affected by person- al, positional, and situational factors. Per- sonal factors affect what the decision maker thinks, values, and prefers. Positional factors reflect what others expect of the decision maker as expressed through the demands they place personally on him or her. Situ- ational factors are relevant to the lead up and time of the executive making a decision. Values are reflected both in the posture and managerial style of the decision maker when making business decisions.

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Managerial preferences refer to the actions and behavior of (senior) executives rather than what they say. As such, the conduct of top management is an extremely valuable management tool that conveys and rein- forces strong messages to stakeholders and particularly employees throughout the or- ganization. One of the most important baro- meters of executives' behavior is the way in which they spend their time. By concentrat- ing their individual and collective attention on managing critical success factors, execut- ives can help their staff prioritize the essen- tial activities that the organization must per- form well. Another important barometer of executive leadership is symbolic or signaling behavior that can be seen as constantly reinforcing the fundamental value system of the firm. By fostering a firm-wide "strategic conversa- tion" composed of formal and informal

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symbols, executives can instill a positive cul- ture consistent with the firm's strategic intent. Sometimes also referred to as super-ordinate goals, shared values represent the collective value system that drives a firm's organiza- tional culture. Often, shared values are in- formal and go beyond the firm's mission statement by encompassing intangibles such as strategic intent, underlying beliefs, mental mindsets, and future direction. Shared val- ues are sometimes viewed as the most funda- mental building block of an organization, thereby providing a foundation for the other elements. Often, shared values are short ar- ticulations of the essential meaning or driv- ing force of the organization. The difficulty, and hence value, in creating strong shared values within an organization is exemplified by the observation that only exceptional firms are able to consistently leverage this

phenomenon over time.4

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Organization

The main components of organization in the SERVO model are culture, leadership, staff- ing, structure, and systems. Culture differs from firm to firm and refers to the character of a firm's work climate and personality. These are shaped by a firm's beliefs, history, modus operandi, stories, traditions, and val- ues. Once established, a firm's culture tends to be perpetuated in a number of ways and can be resistant in the short term to mana- gerial attempts to change it. Leadership is a highly visible organizational role that involves motivating people to best perform their responsibilities. It is most dir- ectly exemplified by the actions and behavi- ors of the firm's top executives and decision

makers.5

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Staffing involves the attraction, develop- ment, motivation, retention, and training of the individuals, which a business needs to operate. These tasks are ordinarily managed by a human resources department but have broader firm-wide implications that go far beyond the auspices of only one responsibil- ity center. Staffing can be among the most critical activities—explaining the strategic success of firms in the knowledge eco- nomy—and has clearly risen in prominence as a point of analytical focus since the 1980s. Structure involves the allocation and divi- sion of responsibilities and the configuration of reporting relationships within a firm; it is frequently represented by an organizational chart. The choice of structure involves a myriad of tradeoffs; for example, a firm's structure may be centralized or decentral- ized, hierarchical or flattened, or specialized or integrated. The focus on structure within the "O" element of the SERVO model,

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however, helps concentrate the analyst's mind on two key aspects of structure. First is the idea of coordination of all of the aspects of structure in the support of strategy. Se- cond, the SERVO model seeks to isolate those aspects of structure, which are critical to successfully negotiating change in light of industry evolution and new or revamped strategies. Systems encompass the flow of both primary and secondary activities that are important to the firm's daily functioning. These include core processes (for example, product devel- opment and operations management), as well as support activities (for example, in- formation systems, accounting, and human resources). An important distinction that the SERVO model offers is that changing sys- tems can be a less disruptive and more ef- fective route to enhanced organizational ef- fectiveness as opposed to the more

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traditional levers of manipulating strategy or structure. Figure 9.2 is a schematic representation of the SERVO model. True to the adage that "a picture is worth a thousand words," the dia- gram sheds insights not captured in the pre- vious discussion of the other elements of or- ganizational effectiveness. Figure 9.2 SERVO model diagram

The first insight from Figure 9.2 refers to the inclusion of three other elements comprising organizational effectiveness in addition to the traditional strategy and structure dual- ism—namely, environment, resources, and values.

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The second insight refers to the dual arrow lines connecting each element. Decisions made in one element lead to a decision in an- other element, which complements the first decision, and so on. For example, look at the strategy element (S). A decision about strategy has implications for decisions in the E, R, V, and O elements. Having made a de- cision about strategy, the decision made by executives in a particular environmental con- text (E) must accommodate the business's strategic decision. Executives will have to make simultaneous as well as subsequent de- cisions so that resources (R) are in place to support the strategic decision and propel the necessary actions over time. The leaders in the business also have to make personal choices based on their values (V), which sup- port and promote putting the strategy (S) in place. Finally, the strategic action/decision will dictate the nature and type of structure

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and systems of the organization (O) to per- form those actions. The third insight is the assertion that stra- tegic failure may well be attributable to any one of, or a combination of inattention to, the five elements of strategic fit. The SERVO model can offer a corrective lens for the stra- tegic myopia that often leads to bad structure or inappropriate strategy. The fourth insight comes from its shape. The cybernetic consistency of the model is inten- tional. This focuses your attention on the total absence of hierarchical dominance or priority. It encourages you to reach the con- clusion that no one element is more import- ant than another. Each element is a neces- sary but insufficient condition for organiza- tional effectiveness. This lack of precision and high level of abstraction makes the SERVO model quite flexible. Taken together, these four insights have made an enormous contribution to modern

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strategy theory in a couple of powerful ways. First, the SERVO model introduces the im- portance of the qualitative factors of organiz- ational effectiveness to counterbalance the almost exclusive focus on strategy and struc- ture that pervaded previous management thought around the management of organiz- ational change. Second, it rebalances the the- oretical plane of strategy by shifting the ful- crum of consideration. It pushes the concep- tual envelope away from an external envir- onmental preoccupation to a more holistic appraisal that includes a realistic appreci- ation of the whole system—that is, both the organization strategically acting on its envir- onment, as well as the environment acting on the organization and its strategy.

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Strengths and Advantages

The SERVO model is unique in that it was one of the first strategy models to emphasize the balance between internal and external factors. The need for internal alignment as part of the strategy equation was often given short shrift or even ignored in preceding management theory. The SERVO model filled this analytical vacuum by suggesting that strategic success is equally dependent on organizational effectiveness. This coun- teracted the disproportionate emphasis of previous models on external economic factors. The SERVO model laid the ground- work for the increasing prominence of or- ganizational dynamics in future models, such as core competency theory. Further, this model developed the concept that organizational effectiveness was not de- pendent on just strategy and organizational structure—a radical and much-needed

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departure from the confines of the "structure follows strategy" idea. The inclusion of the three other elements of strategic fit broaden the analyst's scope to consider the possibility that strategy follows structure, management preferences, and resources. It identified that organizational change requires management of the relationships among ALL five ele- ments of strategic fit, not just tinkering with only one or two of the elements (traditionally, strategy and structure). Another strength of this model is its inclus- iveness and holistic approach, which will do much to ensure that all possible variables are included in strategic analysis. Arbitrary dia- gnosis of organizational effectiveness in the absence of the SERVO model could lead to serious deficiencies in strategic analysis.

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Weaknesses and Limitations

The main weakness of the SERVO model is its high level of abstraction. It offers only diagnostic guidance regarding the identifica- tion of challenges and barriers to organiza- tional effectiveness. Methodological preci- sion is decidedly absent. Although the model can assist with both formulation and imple- mentation tasks, it does not provide specific guidance for either. Creative analysis is therefore important for the successful applic- ation of the model. There are also some limits in the definition and level of specificity associated with each of the five individual elements. For example, although resources and organization are os- tensibly separate in practice, there is bound to be some definitional overlap and confu- sion when trying to keep them distinctive. This is due, in part at least, to the way that

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firms are organized functionally and the ways they are structured to address work and marketplace tasks. Another weakness is the difficulty in apply- ing this model. Often, the subtle interrela- tionships between the five elements are ex- tremely difficult to discern. In order to man- age this complexity, managers are often pre- disposed to treat each variable separately, or only to look at two or three combinations that may lessen the influence of the other in- teractions present among all of the elements. This is more due to the difficulty in dealing with simultaneous multi-variable interactive complexity—one that is only exposed to the light of day through this model. Last but not least, the SERVO model tends to be a static model. It is useful for looking at a snapshot of an organization's fit at any one time, but can be difficult to use when making longitudinal changes—unless it is developed and applied on a regular basis or with

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specific time periods built into the analysis. The model's ability to address the challenges generated by dynamic firms and market- places is more limited than those models that expressly account for time as a critical variable.

Process for Applying the Technique

The process for applying the SERVO model is deceptively simple. It can be tempting at times to overestimate the firm's ability to achieve alignment among all five elements. The SERVO model is amenable to testing both current and proposed strategy and, as such, assumes that these strategies have already been conceptualized and formulated.

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Step 1: Evaluate the Current Performance of the Firm

The first step is to assess whether the firm's performance has met both internal and ex- ternal goals. This means understanding what decision makers seek to achieve as well as what other stakeholders, such as customers, suppliers, strategic partners, and employees hope the firm will do. Performance should also be compared to external references, such as market competitors and similarly fo- cused firms in related industries. These com- parisons must also be done over designated time periods, usually including the last few quarters and years, with projections of com- petitors' performance being made at least several quarters ahead. Many organizational analysts predominantly do these tasks by us-

ing financial ratio and statement analysis.6

If the analyst determines that the firm is not performing as well as it should against either

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internal or external references, then he must diagnose the potential causes of these per- formance problems. This diagnosis can be performed by working through a fuller SERVO analysis, as described in Step 2. If the analyst determines that the organization is performing well, his responsibility will shift to assessing risks and vulnerabilities and to identifying strategies that can exploit emerging opportunities.

Step 2: Assess the Current Strategy and Discern Whether Change Is Necessary

Relationships among the SERVO elements create the interdependencies that impact the firm's strategic and competitive actions. For the analyst serving a decision-making client, this means that in making one decision, an- other decision has to be made to

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complement the first, either by supporting the prior decision, by adding features to it, or by lessening any adverse effects. When ap- plying the SERVO model, the analyst must be mindful that the relationships among strategic actions or decisions are important because the actions/decisions should com- plement each other. Complementary action and decisions ordinarily work in conjunction with each other to produce desirable results. When actions are taken or decisions are made in isolation, there is a danger that they will not work together, sometimes even con- tradicting each other, and so produce inferi- or results. The number of relationships to consider is enormous because, theoretically, every stra- tegic action or decision needs to be con- sidered in light of every other decision. Where does the analyst begin this task? This dilemma is resolved partially by SERVO it- self. It deals with the "big" picture, thereby

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focusing the analyst on those relationships that are strategically important. If the rare, major, and direction setting (that is, stra- tegic) decisions are correctly made, then the operational and tactical decisions made in response to them should follow. This is why the diagnosis begins with the macro relation- ships among the five SERVO elements. When this has been completed, the analyst considers the details within each of the five elements. Even though there are only five elements in the SERVO model, 20 macro relationships exist if the actions and decisions in each ele- ment are related to actions/decisions in every other element. In addition to these macro relationships between the five ele- ments, there are relationships among the components within each element. Within the resource element, for example, we can un- cover relationships between financial and other functional decisions. The financial

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decisions made about the amount of equity and debt a firms uses to finance its opera- tions may limit the potential for raising new capital for investments, even in earnings en- hancing activities that are planned. The most common way that the analyst de- termines whether the relationships are ef- fective or not is to gauge their fit. The follow- ing section describes the nature and strength of various types of fit. These will help the analyst to determine where decisions first need to be made, as well as where executive attention must be focused. These are placed within SERVO grids to help the analyst or- ganize and visualize the relational diagnosis (see Figure 9.3). Figure 9.3 SERVO grid showing fits among elements

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Fit Types

There are a number of ways to characterize the nature and strength of the "fits" found to exist between elements. We recommend us- ing a two-stage process to characterize fits. The first stage looks at the strength of the fit.

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Strength can be characterized as "tight," "loose," and "medium." These are usually identified in a SERVO grid by being shown in capital letters:

• Tight fit—(Characterized as "T" in Figure 9.3.) This occurs when all de- cisions made in the related SERVO elements support and contribute to each other. This type of fit appears to be associated with the highest levels of firm effectiveness, and a good in- dication it exists can be found in the financial ratio and statement analysis evidence that a firm is demonstrating superior performance. Tight fit can be difficult to maintain over time be- cause a number of factors will always be, to some degree, outside of management's direct influence or control. It is also one of the reasons why few organizations, if any, can

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truly achieve decades-long sources of sustainable competitive advantages.

• Loose fit—(Characterized as "L" in Figure 9.3.) This occurs when de- cisions made in the related SERVO elements fail to support and contrib- ute to each other. This type of fit ap- pears to be associated with the lowest levels of effectiveness, and a good in- dication it exists can be found in the financial ratio and statement analysis evidence that a firm is performing in- adequately. A minimal form of loose fit exists when a firm has achieved the minimal degree of fit needed for its survival. Like tight fit, loose fit can also be difficult to maintain over time because decision makers, and their associated firms, seldom last long in this state. Loose-fitting organizations move from crisis to crisis and are al- ways in fire-fighting mode. Managing

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in a state of loose fit may require a different set of knowledge, skills, abilities, and experiences of a firm's decision makers than is required to manage a firm that is in a state of tight fit.

• Medium fit—(Characterized as "M" in Figure 9.3.) This occurs when some decisions made in the related SERVO elements support and con- tribute to one another, while others do not. This is the most common state of fit evidenced in firms at any one time. The goal for the analyst is to help decision makers make choices and decisions that will lead to actions that will tighten the "loose" fits. Some medium fits may be more "fragile" (how vulnerable they are to change; how much resilience the firm retains in dealing with other related ele- ments) than others, and this should

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be noted when characterizing the strength between elements as being a medium fit.

The second dimension to characterizing fit attempts to address the issue of time. In oth- er words, fits change over time—some more quickly and some more slowly than others. It is rare in an organizational strategy context for a relationship to remain in a steady state for extended periods. There are essentially three forms of temporal fit: early, normal, or late fits. These are usually identified in a SERVO grid by using small letters.

• Early fit—(Characterized as "e" in Figure 9.3.) This means that the firm has discovered and is creating a new pattern of fit between its SERVO ele- ments before any other business. It is ordinarily driven by the relationship of its strategy (S) and a number or se- quenced combination of the other

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elements. It can be a competitive ad- vantage for the firm, especially if the pattern is hard for its competitors to imitate.

• Delayed fit—(Characterized as "d" in Figure 9.3.) Achieving this tempor- al state means that the firm is/was among the slowest in a particular competitor comparison to respond to changing patterns among its SERVO elements. This particularly exists in the relationship of the other four ele- ments to the environment (E). For example, a firm that is very slow to market with a product/service re- flecting an accepted technological change would be characterized as having a "late fit" between its strategy (S) and environment (E) elements. A firm that was late to change its hu- man resources policies to adapt to changing standards, mores, or laws

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would have a late fit between its val- ues (V) or resources (R) and environ- mental (E) relationship.

• Normal fit—(Characterized as "n" in Figure 9.3.) This means that the firm was neither fast nor slow to re- spond to changes among its elements of SERVO. In other words, it adapts or changes at about the same time as a "typical" firm under consideration.

Empirical studies of these forms of fit face three major challenges: to determine the ideal profile to be used as a base; to work out relative position from the ideal profile; and to relate the type of fit to performance indicators.

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Step 3: Develop and Evaluate Strategic Options and Programs

After isolating the nature of fit and the stra- tegic distance between the five SERVO ele- ments, there are essentially three options. The firm can work to change the required components of each element so that they are consistent with strategy. Alternately, it may be wise to consider changing the strategy to fit the existing orientation of the other four elements of the model. Often, a compromise between each of these two options is the real- istic alternative. First, the analyst will generate a set of op- tions to consider and then attempt to identi- fy those options that will bring into best alignment the misfits among the five ele- ments. To do this, the analyst must consider the comparative feasibility of the various al- ternatives. One means for helping achieve this is to prepare performance projections of

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the various options to be recommended. Those that offer the best projected perform- ance should be considered the most attract- ive alternatives and be the options recom- mended to decision makers. After the policy actions have been decided on and the recommendations made, it is then useful to generate a projected new SERVO alignment. After the firm employs the re- commendations, the framework should re- flect an improved, or even better, ideal align- ment between each of the SERVO ele- ments—that is, strategy, resources, values, and organization should be moving together in the same direction to best support the de- sired match with the firm's environment. Figure 9.3 depicts two scenarios. The first grid, Figure A, depicts an optimal situation in which all of the five SERVO elements are aligned—creating a tight strategic fit. Figure B displays an organization whose strategic fit is in disarray; the five elements of strategic

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fit are not aligned, and hence the effective- ness of the strategy should be called into question. In this instance, the analyst will need to identify the specific causes of the re- lational misfits. The SERVO model is a general analytical framework that addresses what is important to strategic thinking. This means that the analyst will need to consider the key factors associated with the firm, its strategy, and the environment in terms of the five elements, and then assess the relationships among those elements. A strategic problem is present when the fit among the elements is loose, fragile, or broken. The analyst's object- ive is to generate recommendations to decision-making clients that will tighten the fit among the loose-relating elements.

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FAROUT Summary

Figure 9.4 SERVO analysis FAROUT summary

Future orientation—Medium to high. The SERVO model is forward looking in that it is oriented toward the future implementation of proposed strategy or the correction of ex- isting organizational configurations in order to maximize effectiveness of current strategy. Accuracy—Low to medium. Accuracy de- pends on the ability of the analyst to (a) cor- rectly diagnose the five elements and their interactions, (b) correctly diagnose the key success factors, and (c) implement the

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required changes to close the distance between (a) and (b). Resource efficiency—Medium. Depends on the depth of analysis and the number of ana- lysts engaged. Similarly, the comprehensive- ness of internal consulting will dictate re- source efficiency. Organizations with only a few elements out of alignment will achieve higher resource efficiency. Objectivity—Low. The requisite analysis is highly qualitative and subject to perception bias. Usefulness—Medium to high. The explicit purview of this model is exactly what many other models ignore. As such, the SERVO model is compatible with, and complement- ary to, a good number of other management tools and techniques. Timeliness—Low to medium. A comprehens- ive SERVO analysis is extremely compre- hensive and covers all facets of the firm. Ad- ditionally, correctly examining the intricate

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inter-relationships between the five elements can require a substantial amount of time.

Related Tools and Techniques

• 7S analysis • Competitive benchmarking • Customer segmentation and needs

analysis • Customer value analysis • Financial ratio and statement

analysis • Functional capability and resource

analysis • STEEP analysis • SWOT analysis • Value chain analysis

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References

Andrews, K. (1980). The Concept of Corpor- ate Strategy, rev. ed. Homewood, IL: Richard D. Irwin, Inc. Baker, D., and J. Cullen (1993). "Adminis- trative reorganization and configurational context: The contingent effects of age, size, and change in size." Academy of Manage- ment Journal, 36(6), pp. 1251–1277. Chandler, A.D. Jr. (1962). Strategy and Structure: Chapters in the History of the American Industrial Enterprise. Cambridge, MA: MIT Press. Collins, J., and J. Porras (2002). Built to Last: Successful Habits of Visionary Com- panies. New York, NY: Harper Collins. Darden Graduate Business School Sponsors (1983). American Telephone and Telegraph (A), Charlottesville, VA: University of Virginia.

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Fleisher, C., and B. Bensoussan (2003). Strategic and Competitive Analysis: Meth- ods and Techniques for Analyzing Business Competition. Upper Saddle River, NJ: Prentice Hall. Fry, L., and D. Smith (1987). "Congruence, contingency, and theory building," Academy of Management Review, 12(1), pp. 117–132. Harling, K. (1999). "Note on strategic man- agement," comments prepared for The Maple Leaf Conference, retrieved from ht- tp://info.wlu.ca/~wwwsbe/MapleLeaf/Stra- tegic_Management.html. Hax, A.C., and N.S. Majluf (1983). "Organiz- ation design: A case on matching strategy and structure," The Journal of Business Strategy, Fall, 4(2), pp. 72–86. Ketchen, D., Thomas, J., and C. Snow (1993). "Organizational configurations and perform- ance: A comparison of theoretical perspect- ives," Academy of Management Journal, 36(6), pp. 1278–1313.

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Meyer, A., Tsui, A., and C. Hinings (1993). "Configurational approaches to organization- al analysis," Academy of Management Journal, 36(6), pp. 1175–1195. Peters, T.J. (1984). "Strategy follows struc- ture: Developing distinctive skills," Califor- nia Management Review, Spring, 26(3), pp. 111–125. Powel, T.C. (1992). "Organizational align- ment as competitive advantage," Strategic Management Journal, February, 13(2), pp. 119–134. Waterman, R.H. Jr. (1982). "The Seven Ele- ments of Strategic Fit," The Journal of Busi- ness Strategy, 1982, 2(3), pp. 69–73. Waterman, R.H. Jr., Peters, T.J., and J.R. Phillips (1980). "Structure is not Organiza- tion," Business Horizons, June, pp. 14–26.

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Endnotes

1 Andrews, 1980; Harling, 1999. 2 See Fleisher and Bensoussan (2003), Chapter 17. 3 See Fleisher and Bensoussan (2003), Chapter 9. 4 Collins and Porras, 2002. 5 As thousands of studies and books have been written on the topic of leadership, we will not dwell on this area of SERVO, but will suggest the analyst refer to our explanation of management profiling that is captured in Chapter 15 of our prior book (Fleisher and Bensoussan, 2002). 6 See Fleisher and Bensoussan (2003), Chapter 25.

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10

Supply Chain Management (SCM) Analysis

Short Description

The supply chain can be defined as a net- work of suppliers, manufacturers, distribut- ors, retailers, and customers that are linked by information, wares, and capital that move

among the participants.1 Supply chain man- agement (SCM) is the conduct of the interre- lated elements among the supply chain's functions, like procurement, logistics, and inventory management, as well as the inter- actions between the firm and outside com-

panies within the supply chain.2 In a general context, SCM can be defined as

. . . the systematic, strategic coordina- tion of traditional business functions and the tactics across these business functions within a particular company and across these businesses within the supply chain, for the purposes of im- proving the long-term performance of the individual companies and the supply

chain as a whole.3

In short, an effective supply chain will en- sure that the right goods get to the right people, at the right time, at minimal cost,

and maximum efficiency to the company.4 It is important to note that this chapter will look at analyzing the management of supply chains. As such, analyzing their management will require the analyst to answer the follow- ing questions, among others:

• What is the relative bargaining power of suppliers to industry competitor's supply chains?

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• Do competitors or one's own enter- prise have too many different suppli- ers when a few well-managed rela- tionships could ably fill capacity?

• How effective are your own enter- prises, as well as competitors' supply chains, particularly compared to the analyst's enterprise?

• Where are the vulnerabilities and strengths in the management of a competitor's supply chain?

• How does your own supply chain compare to industry competitors' as well as benchmark practices?

Background

Throughout history, goods and the people who want them have been in different places. In the days before sophisticated

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transportation and refrigeration systems, communities sprung up close to food sources and abundant natural resources. Because people lacked a good way to bring resources to themselves, they brought themselves to the resources. However, as civilization ad- vanced, communication and mobility im- proved, and trade allowed people to develop tastes for faraway commodities. Individuals also quickly realized they could ship their ex- cess goods to people who otherwise would

not have had access to them.5 Over time, strong import and export markets began to develop among numerous nation-states. Compared to conditions only a century ago, communication and transportation mechan- isms have become easier, faster, and less ex- pensive. As a result, companies can source products from all corners of the globe, com- municate with partners in real time, and get sophisticated and specialized products to market in weeks—a task that would have

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been basically inconceivable only a genera-

tion ago.6 All the while, many average famil- ies have shrunk in size, and many women are working outside the home, raising the level of disposable income available to consumers. This phenomenon has fueled the desire for varieties of complex consumer goods to be available to whomever wants them, whenev- er they want them—a transition that the contemporary, well-managed supply chain will support and delivers value to. It natur- ally follows that how well a company man- ages all of the components that go into its fi- nal product can determine how successful the product will be in the marketplace. How well your enterprise and your competitors are managing their supply chain can mean big opportunities or big challenges for your company. The notion of supply chain management (SCM) emerged around the 1960s, with more attention being paid to the subject into the

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1980s, although the popularity of SCM did not really take off until the 1990s. Up until this time, the predominant model for a company's supply chain was very company- centric, with little involvement from suppli- ers and customers. A good example of this is the development of a model combining sup- ply chains understandings and operations research. In the mid 1990s, consultants at Pittiglio Rabin Todd & McGrath (PRTM) sensed the need for a model that would help illustrate, and thus improve, the way companies in a supply chain work together. The result of their efforts and input from more than 75 manufacturers and the Advanced Manufac- turing Research (AMR) firm was the Supply Chain Operations Research model (SCOR). Those 75 companies created an association called the Supply Chain Council (SCC) to fur-

ther these efforts.7

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Successful companies such as Wal-Mart, Dell, Best Buy, Procter & Gamble, and Volk- swagen are all managing their supply chains in ways that allow these companies to com- pete more effectively in their relevant mar- ketplaces. Supply chain management is in- creasingly seen as a source of competitive advantage for companies, and this area of competition is expected to be further lever-

aged in coming years.8

The field of SCM is still youthful and prom- ises to evolve further as more sources of competitive advantage are realized through effective supply chain management. Many companies are now realizing that the new opportunity to add value and increase profits cannot be undertaken alone—cooperation with other members in the supply chain can optimize capabilities. Ultimately, the part- ners that make up the chain will be more successful together than they could ever be

by themselves.9 Astute firms realize that in

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the future, the competitive arena will witness chains competing against chains rather than companies competing against compan-

ies.10Figure 10.1 stresses the myopic, dated view of some companies that they are stand- alones, competing against only others in their industry. Figure 10.1 Old model of competition

Figure 10.2 is a demonstration of the realiza- tion that an optimized value chain can be stronger than the sum of its parts. Gone are the days where companies can isolate them- selves and expect to be able to maintain a competitive advantage. Figure 10.2 New model of competition

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Strategic Rationale

As Henry Ford learned in the early 1900s, no company can operate completely independ- ently. Henry Ford made it his automotive company's sole mission to be totally self-suf- ficient. His procurement efforts involved owning glass factories, coal mines, forests, soybean fields, and even an entire Brazilian rubber plantation in order to guarantee sources for raw materials. He invested in shipping lines, railroads, and roadways, and constructed his own harbor to ensure that materials and inventory had reliable trans- portation. His reach extended globally, so he

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could control all of his operations, including plants, dealerships, and service operations, throughout all countries where Ford

products were produced and sold.11 However ambitious, Ford learned that the laws of competitive advantage don't discriminate, and at the height of his vertical integration initiative, he was consistently being outper- formed by smaller firms whose specialty could not be matched by his cumbersome re- gime. Ford learned a valuable lesson that is now part conventional business wisdom: "No

firm can be self-sufficient."12

The pace of information and technology has lead to a marketplace that is dynamic, with ever-increasing customer expectations. The "bull-whip effect" refers to increased costs and inefficiencies that travel along the sup- ply chain as a result of demand/supply in-

congruities and information disparities.13

The effect can be reduced by effective supply chain management. This requires a

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paradigm shift from that of a reactive, myopic, ledger-driven organization, to that of a fully-integrated future-oriented, proact- ive, and agile supply chain member. The per- spective is just the tip of the iceberg, however, and must be supported by techno- logy, adequate and talented staff, and company-wide support. A 2003 survey of over 500 manufacturers by Deloitte Consulting revealed the increasing complexities and challenges that companies are now facing in trying to optimize their supply chains. Although a majority of manu- facturers have operations overseas, some with more assets in foreign countries than their home or headquarters country, most supply chain optimization efforts are direc- ted at singular projects, facilities, and de- partments and tend to be local. Only about half of the surveyed manufacturers had a senior-level executive in charge of end-to- end SCM. Although many manufacturers cite

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flexibility as being very important, shorter cycle and lead times and pressure to reduce costs is making flexibility harder to attain. Managing supply chain risks is becoming more difficult as well, as many manufactur- ers say they continue to fragment their sup- ply chains. Less than 8% of the surveyed ex- ecutives said that they collaborate with cus- tomers on key initiatives. Fewer than 2% of respondents felt that they had a world-class supply chain, although more than 90% of re-

spondents thought it was important.14 These empirical findings highlight that effective supply-chain management is just now mov- ing to the forefront of companies' collective consciousness, although there still remains a long way to go until the typical company is effectively managing its supply chain to achieve competitive advantage.

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Strengths and Advantages

Effective Supply Chain Management analysis can ultimately lead to a competitive advant- age due to decreased costs, increased effi- ciency, better product availability, and in- creased sales. Many companies are using their supply chains to beat their competitors at cost control, which can result in more pri- cing flexibility at the point where the goods interface with end customers. It can also res- ult in higher profit margins if companies with effective SCM price their goods at relat- ively similar levels as their competitors with less effectively managed supply chains. As such, analyzing the management of supply chains can help the analyst pinpoint poten- tial sources of competitive advantage that many other business or competitive analysis models may miss. Effective supply chain management can translate to competitive advantage if the flow

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of information and products among the sup- ply chain participants are synchronized and all parties' interests are constructively aligned. Proper alignment and information sharing between parties leads to a "win-win" relationship and allow the supply chain-re- lated parties to minimize inefficiencies. Ad- ditionally, these sources of competitive ad- vantage are often hidden "below the surface," meaning that companies using their supply chains for advantage may build large leads in the marketplace before their competitors realize what is actually the source of the ad- vantage. These network-based advantages can also be difficult to spot using most other models of analysis, and SCM analysis allows for and encourages probing of resources, networks, and information sharing in ways that most other models do not consider. For companies competing on a cost basis, ef- fective SCM can be the difference between competitive success and failure. Many

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companies find that an analysis of their sup- ply chains lead to changes that help them better manage their assets, therefore de- creasing costs. In particular, accounts receiv- able, physical inventories, demand cycles, and infrastructure, including buildings, plants, warehousing, retail outlets, and transportation, can all be better managed. For example, Wal-Mart's asset turnover of 2.59 times in 2004 is a testament to the finely tuned supply chain for which they are famous. Target, a strong competitor in the competitive U.S. retailing market, struggled

to catch them at 1.54 times.15

Today, effective supply chain management means building a product and information flow that will ultimately benefit the custom- er. Combined with notions of customer cent- ricity that flow out of other approaches like product line analysis, customer segmenta- tion approaches, and marketing research, SCM can be a powerful weapon that resists

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competitor imitation, a fundamental recipe of resource-based strategic advantage. In- creased efficiencies and better asset manage- ment should lead to lower-cost goods without compromising quality. Information sharing and predictive modeling should mean that the product gets to market when the customer is looking for it. Principles like "Design for Supply" (where product design- ers understand the production costs and im- plications of their designs) utilize techniques like "postponement, commonality, and

standardization"16 to create products that are easier to customize to consumer group pref- erences without adding significant costs or steps in the supply chain. The result is a product that is more tailored to market groups. Ultimately, successfully analyzing a supply chain will reveal how in touch the supply chain is with customer needs and wants, a powerful equation for success in competitive marketplaces.

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Weaknesses and Limitations

Supply chain analysis of both one's own en- terprise, and more particularly of competit- ors, is not an easy task to accomplish. First of all, it requires a significant reservoir of com- prehensive, timely, and accurate supply chain-related data, for which many compan- ies will not have even for their own enter- prises. For those companies that have exper- ienced difficulties in analyzing the manage- ment of their own supply chains, imagine how difficult it will be for analysts trying to analyze the management of their competitor's chains. One of the stranger limitations of SCM ana- lysis is in how the analyst's decision-making clients may look at the evidence coming out of an SCM analysis. If supply chain

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management analysis reveals that a firm is missing opportunities and experiencing inef- ficiencies due to a lack of technology and in- tegration, the firm is potentially looking at a very large financial and time investment to bring them into line with their competitors. Many decision makers may intrinsically already know this and be unwilling to au- thorize either an analysis of SCM or the re- commendations that flow from one since it requires a risky, strategic decision. On the other hand, failing to improve one's own enterprise's SCM in the face of overwhelming evidence that competitors are using theirs to win in the marketplace is tantamount to ma- nagerial irresponsibility. Analysts also need to have an understanding of some facets of the organization that re- quire specialty expertise and knowledge. For example, the software that communicates supply chain dynamics to one's company uses complicated and sophisticated network

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modeling. Although they can add value and improve decision making, massive computer skill and programming are typically re- quired. This process can be costly and time consuming, and as no standard set of net- work modeling tools has developed, firms run the risk of running into compatibility is- sues with supply chain partners. Integrating network modeling tools with the SCOR mod- el could provide a framework for standardiz-

ation at some point in the future.17 Until or unless this standardization occurs, making "apples to apples" comparisons among the management of competitor's supply chains will remain a thorny issue among individuals performing SCM analysis. Another existing limitation of most SCM analysis models also is brought about by the realities of today's business environment. Rapid advances in technology now allow companies to create strategic alliances with other companies in their supply chain. These

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partnerships allow information to flow freely between the organizations in real time. When this process is repeated in multiple or- ganizations, networks are created. The cur- rent evolution of most SCM analysis frame- works or models have yet to allow for the comparative empirical illustration associated with how these supply chain networks com- pete against one another.

Process for Applying the Technique

We suggest that it is important to start this section with a look at the SCOR (Supply Chain Operations Reference) model de- veloped by the Supply Chain Council (SCC). The SCOR model looks at SCM from a stra- tegic, rather than operational or design per- spective and should therefore be more help- ful to analysts looking to analyze SCM for

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business and competitive purposes. Numeric and analytic modeling techniques, whose base is in engineering and day-to-day busi- ness principles can be used for operational and design decisions, but strategic decisions require that the supply chain be viewed as a

whole.18Figure 10.3 demonstrates the tradi- tional model for companies to view them- selves as sole entities, rather than links in a larger chain. Figure 10.3 Old supply chain configuration

The SCOR model helps executives see their part in the bigger chain by shifting the format away from the traditional supplier/ manufacturer/customer perspective to four processes that each company must undergo in each link of the chain. Planning is the first of the four processes and is central to man- aging the other three processes, which are

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source, make, and deliver. Every time there is an exchange of goods between parties, all four processes are utilized. The SCOR model identifies three levels of process detail. Level I is the top level and deals with process types (SCOR Version 7.0 overview). It outlines the SCOR model and sets performance targets. Level II deals with process categories. The process categories are the basis for the sup- ply chain to be custom configured, which in turn provides a format for the company to execute their operations strategy. Level III deals with process elements and is the level at which processes are developed, articu- lated, and translate into competencies. Best practices, performance metrics, and the ne- cessary systems for support are articulated at this level. The model emphasizes that all processes must be planned and gives a collaborative tool to aid communication because all com- ponents of the chain are visible, as is the flow

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of information and materials. Figure 10.4 demonstrates how partners in the chain are linked and the planning process is central to all supply chain activity. Figure 10.4 SCOR model of supply chain management Source: Loosely adapted from SCOR Version 7.0 overview.

It is with this perspective in mind that we turn to some emerging and governing prin- ciples of effective supply chain management, which can aid in the process of analyzing supply chain management. The process of

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benchmarking is an important first step. Al- though we provide a detailed description of how to conduct a benchmarking analysis in Chapter 11, "Benchmarking," for the pur- poses of this chapter, we will include a brief summary here. In short, the process of benchmarking involves five steps. These are as follows:

1. 1. Deciding what to benchmark 2. 2. Forming a team that is capable and

responsible to carry out the process 3. 3. Identifying benchmark partners 4. 4. Acquiring and analyzing bench-

marking information 5. 5. Implementing newly acquired best

practices

We will show an application of SCM analysis using benchmarking by applying it to ten es- sential rules of supply chain management. This example will show the process of SCM analysis in action relative to two different

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competitors in the consumer electronics market place. First, we'll illustrate the ten es- sential rules. Next, we'll apply the rules through benchmarking the different the management of the different competitors' supply chains

Rules and Tools19

Rule #1: Effective supply chain manage- ment requires utilizing supplier and custom- er relationships to take advantage of scale economies when facing tough competition. Tool: Create collaborative relationships that can create switching costs. Use incentives and align interests, share information with suppliers and customers, clearly define roles and areas of accountability for all parties, and apportion costs, risks, and rewards ac-

cordingly.20 Companies are inherently self- interest seeking and will maximize their own

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interests if not aligned with partners in the chain. When reconfiguring their supply chain, printer RR Donnelley asked suppliers for their input in how to improve efficiencies and products, all the while offering to share in savings that resulted from the suppliers' ideas, thus using incentives to align in-

terests.21

Rule #2: The supply chain network should allow access to global markets. Tool: Supply chain analysis should reveal if competitors are beating you on price or in- novation due to sources of supply or labor overseas. Additionally, moving operations overseas can open the supply chain to emer- ging markets. Rule #3: Successful supply chain manage- ment means meeting customer needs, wants, and expectations. Customers are increasingly savvy and demanding. They have come to ex- pect quality and features at competitive prices. Customers expect products to be in

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stock when they want them and are put off by having to make multiple trips for one purchase. Tool: Design the supply chain from the cus- tomer backward, rather than the other way around. Engage market research firms to identify customer needs if necessary. This approach is known as "customer-centricity" and takes a holistic approach to designing the organization to optimize the customers' experience. Rule #4: Global capacity and rapid turn- around times mean companies must drive costs out of chains and arrange access to supplies. Tool: Maintain a stock of small, non-perish- able parts whose absence could cause delays. For example, Spanish clothing manufacturer Zara keeps a supply of buttons and small fix- tures so that garments can be completed even if shipments get inexplicably delayed or

held up.22 Logistics systems should allow a

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company to rally in the event of unanticip- ated needs. Rather than invest in expensive systems, it is useful to partner with a third- party logistics supplier. Rule #5: While other companies are mer- ging for muscle and under-performing, focus on agility instead. Tool: Collaborative relationships are essen- tial to achieving agility. Supply and demand changes should be communicated to part- ners perpetually so they can react promptly. This can only happen, of course, where col- laboration and information sharing between partners is present. Lee illustrates the im- portance of having a supply chain that is agile, adaptable, and aligned. The agile sup- ply chain is adept at handling short-term supply/demand changes and responds to crises with minimal interruption. Design should only differentiate product at the latter stages of production—this is called "post- ponement" and promotes agility because the

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product is completed only when the firm has information about end-user preferences. Rule #6: Adopt a position pivotal to chain success in order to have visibility and aware- ness of changing integrations among partners. Tool: Take a pro-active role in chain devel- opment. Identify strong executive level lead- ership whose job this is, and make sure they have the resources they need. When Whirlpool's supply chain was in need of an overhaul, then COO Jeff Fettig gave two ex- ecutives—relative newcomer, Reuben Slone, and 25-year veteran, Paul Dittman—seven months and hundreds of man-hours to fix their supply chain problems. The result was a supply chain investment costing more than any supply chain initiative in Whirlpool's history. The payoff has been a drop of $100 million in working capital in just one year, a reduction in supply chain costs of $20 mil- lion, all the while realizing an order fill rate

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of 96% and product availability of over

95%.23

Rule #7: Technology creates challenges if adoption is piecemeal. Tool: The company's mindset must support a Digital Business Transformation (DBT), where every facet of every operation is ex- amined to determine if it supports brand or product success. In DBT, technology should support customer value-maximizing pro- cesses, information sharing in real time, and

customer-centric operations.24

Rule #8: Successful chains get products to market quickly. Tool: Support real-time information ex- change. Use time and cycles as metrics to which incentives are linked. Rule #9: Collaboration and integration blur organizational boundaries. Tool: Use supply chain risk management

best practices:25

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1. 1. Promote top-level awareness of ex- posure: an environment where in- formation can be shared at all levels will ensure that executives know which suppliers are struggling and why, creating an awareness of poten- tial commodity shortages and the ability to create a contingency plan.

2. 2. All suppliers should be continu- ously monitored. Companies with too many suppliers to monitor should consider overhauling the supply chain and focusing on relationships that can be leveraged.

3. 3. Supplier information collection should be future-oriented—monitor- ing financial well-being and current performance rather than past performance.

4. 4. Create an empowered culture: Benefits can be realized when those who operate closest to the suppliers

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have the ability to assess and inter- vene in cases where they may not be able to meet deadlines.

Rule #10: Pressure from stakeholders can mean conflict and little tolerance for growing pains. Tool: Wall Street measures market value, rather than absolute value. A "Triple-A sup- ply chain," one that is agile, aligned, and ad- aptable, will ultimately be successful. The following Case Study demonstrates how to use these rules and tools to analyze com- petitors supply chains, or alternately, exam- ine your own. When the ten areas are high- lighted as strengths or weaknesses, areas for improvement or potential competitive ad- vantage are easy to visualize. It is important to note that no amount of technology or re- sources will make a difference to supply chain performance without good leadership, good people, and a supportive corporate cul- ture to follow it through.

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Analysis of supply chain management is an- other effective technique in the tool-belt of the business and competitive analyst. Em- ployed effectively, it can enable the analyst to uncover otherwise hidden sources of com- petitive advantage. In a global marketplace that increasingly values the ability to get goods to customers as quickly, cheaply, and effectively as possible, the management of supply chains will remain an important com- petitive weapon that requires insightful ana- lysis for decades to come.

Case Study: A Tale of Two Supply Chains: Best Buy vs. Sears/Kmart

The retail market has become very competit- ive. The market is crowded with stores of all formats, catering to every segment, from

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broad to niche, all clamoring to capture a loyal clientele. Unfortunately for them, in the eyes of many customers, there is little other than price to differentiate one retail outlet from the next. Many retailers are now realiz- ing that a smart supply chain will leverage more in terms of profitability than increasing sales. Effective supply chain management presents opportunities to better serve cus- tomers, reduce markdowns, and respond to changing market conditions. Based in Richfield, Minnesota, Best Buy is the largest consumer electronics retailer in North America. When the company realized in the mid 1990s that mass market retailers Wal-Mart and Target were eating away at its customer base, and approximately one-third of their customers were leaving their stores unsatisfied, they knew something had to change. In 2004, its new CEO Brad Ander- son had authorized and supervised the intro- duction of a new competitive approach called

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Concept VII, which he viewed as a revolu- tionary change. Concept VII was based on a strategic model of customer centricity and was supported by three strategic pillars known as "efficient enterprise," "win the home with service," and "win entertain- ment." One result of Concept VII is a new supply chain management system that is tak- ing three years to implement and that has been designed from the customer back. Sears is a venerable, mass-market retailer with a 100+ year history in North America. It offers home appliances, tools, lawn and garden products, consumer (home) electron- ics, and automotive repair and maintenance products. Sears' SCM strategy has been quite different from the one newly employed by Best Buy. Sears merged with Kmart in March 2005, and the result, for the most part, has been confusing. Sears did not have strong asset turnover or return on assets (ROA) performance before

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the merger,26 and Kmart's frail inventory management and technology deficiencies helped put that discounter into bankruptcy in the first place. Since the merger, the retail behemoth has yet to determine how it will position itself in the marketplace or how to merge the 37 software applications operating in both companies. Currently, the company

seems focused on sales strategies27 pro- ductivity and capital expenditure reduction

rather than optimizing its supply chain.28

The following analysis of the two companies highlights the differences in supply chain management. The 10 rules of supply chain management are applied to current prac- tices, and strengths and weaknesses are highlighted. Table 10.1 Analyzing the Management of Competitors' Supply Chains

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FAROUT Summary

Figure 10.5 Supply chain management ana- lysis FAROUT summary

Future-oriented—Medium to High. Supply chain management structure cannot be changed quickly; thus, movement in a cer- tain direction will most likely remain stable. Accurate—Medium. Competitors' supply chains may not be visible at all stages, lead- ing to some speculation. Resource efficiency—Medium. The tech- nique is fairly simple to administer but re- quires substantial access to specialized

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supply chain knowledge and data to allow for comparisons. Objectivity—Medium to High. Supply chain management analysis relies very little on subjective data. Usefulness—High. Supply chain manage- ment is a big opportunity for many compan- ies and will be a necessary skill for firms go- ing forward. Timeliness—Medium. With access to recent data, timeliness is increased.

Related Tools and Techniques

• Benchmarking • Business process re-engineering • Financial resources and statement

analysis • Key success factors • Network analysis

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• Value chain analysis

References

Ballou, R.H. (2004). Business Logistics/Sup- ply Chain Management, 5th edition. Upper Saddle River, NJ: Pearson Education, Inc., pp. 1–789. Bowersox, D.J., and D.J. Closs (1996). Lo- gistical Management. New York, NY: McGraw-Hill, pp. 1–725. Bowersox, D.J., Closs, D.J., and R.W. Drayer (2005). "The digital transformation: Techno- logy and beyond," Supply Chain Manage- ment Review, 9, pp. 22–29. Brown, J.R., Dant, R.P., Ingene, C.A., and P.J. Kaufmann (2005). "Supply chain man- agement and the evolution of the "Big Middle," Journal of Retailing, 81, pp. 97–105.

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Cotrill, K. (2005). "Best Buy's customer fa- cing supply chain," Supply Chain Strategy, 2, Dec–Jan. Dewitt, W., Keebler, J.S., Min, S., Nix, N.W., Smith, C., and Z.G. Zacharia (2001). "Defin- ing supply chain management," Journal of Business Logistics, 22, pp. 1–25. Dignan, L. (2004). "Oh yeah, the com- puters," Baseline, 38, December, p. 24. Fawcett, S.E., and G. Magnan (2005). "Be- ware the forces that affect your supply chain," Supply Chain Strategy: A Newsletter from Harvard Business School Publishing and the MIT Center for Transportation and Logistics. Harvard Business School. Fiala, P. (2005). "Information sharing in supply chains," Omega, 33, pp. 419–423. "Global supply chain management study" (2003). Deloitte Touche Tohmatsu Global Homepage. (Accessed January 23, 2006): http://www.deloitte.com/dtt/research/ 0,1015,sid%253D%2526cid%253D18503,00.html.

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Huan, S.H., Sheoran, S.K., and G. Wang (2004). "A review and analysis of supply chain operations reference (SCOR) model," Supply Chain Management, 9, pp. 23–29. Jorgensen, B. (2006). "How healthy is your supply chain?," Electronic Business, 32, pp. 16–18. Kay, E. (2005). "Sears holding corp. faces massive supply chain," Frontline Solutions, 6, pp. 14–15. "Lampert defends Sears" (2005). Home Tex- tiles Today, 27, December 12, pp. 1–19, 2p. Lee, H.L. (2004). "The triple-A supply chain," Harvard Business Review, 82, Octo- ber, pp. 102–112. Liker, J.K., and T.Y. Choy (2004). "Building deep supplier relationships," Harvard Busi- ness Review, 82(12), December, pp. 104–113. Patterson, S. (2005). "Supply base optimiza- tion and integrated supply chain

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management," Contract Management Magazine, January, pp. 24–35. "Putting an end to islands of manufacturers" (1998). Modern Materials Handling: Spe- cial Report, 53, pp. 40–41. "SCOR version 7.0 overview" (2006). Supply-Chain Council, January 14: ht- tp://www.supply-chain.org/site/scor7book- let.jsp. Slone, R.E. (2004). "Leading a supply chain turnaround," Harvard Business Review, 82, October, pp. 114–121. Trunick, P.A. (2005). "Forecast 2006: In search of better practices," Logistics Today, 46, December, pp. 1–8.

Endnotes

1 Fiala, 2005. 2 Ballou, 2004.

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3 Mentzer, J.T., DeWitt, W., Keebler, J.S., Min, S., Nix, N.W., Smith, C., and Z.G. Zacharia (2001). "Defining Supply Chain Management," Journal of Business Logist- ics, Vol. 22, No. 2, pp. 1–25. 4 Ballou, 2004. 5 Ballou, 2004. 6 Brown, Dant, Ingene, and Kaufmann, 2005. 7 Modern Materials Handling, 1998. 8 Lee, 2004; Liker and Choy, 2004. 9 Bowersox, Closs, and Drayer, 2005. 10 Patterson, 2005. 11 Bowersox and Closs, 1996. 12 Bowersox and Closs, 1996, p. 89. 13 Fiala, 2005. 14 Deloitte Global Supply Chain Management Study, 2003. 15 Brown, Dant, Ingene, and Kaufmann, 2005.

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16 Lee, 2004, p. 9. 17 Huan, Sheoran, and Wang, 2004. 18 Ibid. 19 All rules adapted from: Fawcett, S.E., and G. Magnan (2005). "Beware the Forces that Affect Your Supply Chain." Supply Chain Strategy: A Newsletter from Harvard Busi- ness School Publishing and the MIT Center for Transportation and Logistics. Harvard Business School. 20 Lee, 2004. 21 Lee, 2004. 22 Lee, 2004. 23 Slone, 2004. 24 Lee, 2004. 25 Jorgensen, 2006. 26 Sears ROA was 8.4%, and asset turnover was 0.82 in 2002 (Brown, Dant, Ingene, and Kaufmann, 2005). By comparison, Best Buy

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had inventory turnover of 9.9 in 2002, rising to 10.1 in 2003. 27 "Sears Inside" strategy moves Sears brands into Kmart stores; Sears Essentials concept gives Sears off-mall locale. 28 Lee, 2004.

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11

Benchmarking Analysis

Short Description

Benchmarking is a method by which an or- ganization identifies and examines key facets of another entity and then implements the learning from the examination into its own operations. Almost anything can be bench- marked, such as a campaign, product, ser- vice, practice, process, or strategy, as long as it can be satisfactorily defined, measured, and compared to similar features in the com- parison organization. Properly used, bench- marking can be a powerful learning tool and help the benchmarking organization to gain advantages over competitors, such as redu- cing costs, increasing productivity, and

better aligning product/service features to customer needs.

Background

The first BCA application of benchmarking started in the mid-1950s through the prac- tice of competitive financial ratio comparis- on. Comparative ratio analysis was often used as a component of industry analysis in order to determine the firm's relative finan- cial performance as a gauge of the firm's competitive position. Comparing a financial ratio of the firm against that of its industry rivals, however, gives no indication regard- ing the underlying reasons for any perform- ance divergence. As such, the value of com- parative ratio analysis as a strategic tool proved to be limited. Benchmarking was developed to fill this ana- lytical vacuum offering a methodology to

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determine how and why some organizations achieve superior and sustained financial per- formance—the hallmark of competitive ad- vantage. It provided the link between the result of competitive advantage (i.e., out- standing profits) and its root cause (i.e., ex- cellent processes and practices). One of the first firms to use benchmarking, or "industry tours" as the Japanese called them, was Toyota. This occurred when Toyota sent a number of their key people to the U.S. to understand and monitor U.S. manufacturing processes after World War II. The Japanese executives took the ideas back to Japan and adapted and improved on them. In the 1970s, Xerox realized that in order to stay competitive with rapidly strengthening foreign competition in copier markets, it needed to improve its manufacturing pro- cess. The improvements it achieved through the application of benchmarking led it to

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adopt the method as a corporate-wide practice. Benchmarking involves examining firms with a world-class product/service, process, or strategy and incorporating the best ideas from them into your own business in order to gain a competitive advantage. Benchmark- ing is an ongoing process and should not be done as a one-off event to correct problems. Ideally, it should be employed as a proactive tool to stay one step ahead of the competition. The original focus of benchmarking in the 1980s and early 1990s was more at the product level—comparisons of competitor's products within the same industry. It then evolved into benchmarking business pro- cesses, practices, policies, and corporate strategies in unrelated industries. Benchmarking does not have to be done just on a competitor—it can also be done on an- other department or division within the

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same firm, or on the practices of a firm in a totally unrelated industry. For example, if a firm in the hotel industry has a billing pro- cedure that is world-class, a construction firm might use it to improve their own billing procedure. Benchmarking generally involves the support of the entity that has the better process; this differs from competitor analys- is, whereby the examining firm lacks the support of the entity. As mentioned, an issue, practice, policy, product/service, process, or strategy can be benchmarked. Benchmarking products or services usually involves examining factors such as price, technical quality, ancillary product or service features, speed, reliability, and other performance characteristics through direct product or service comparis- on. Process benchmarking involves closely examining specific work processes, such as billing systems or production line processes. Benchmarking strategies involves examining

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the successful long-range planning and im- plementation techniques other firms use to be successful in the marketplace. Strategic benchmarking provides long-term benefits and may take time for results to show, whereas with the other two benchmarking categories, the results may show up immediately.

Strategic Rationale and Implications

Benchmarking gives the analyst many stra- tegic benefits. The main advantage is that, properly employed, it can help a firm gain an advantage over its competition. It also allows for realistic targets and goals to be defined for an organization; for the validation of the strengths and weaknesses of a firm through hard numbers; and finally, the deciphering of future trends in the industry.

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Benchmarking can provide an efficient and effective means for a firm to take the best ideas from other firms, integrate them into their own, and take actions that may provide it with a strong advantage over their compet- itors. For example, if two firms are compet- ing fiercely with each other and one of them decides to benchmark an exceptional cus- tomer service model, it could win the battle for market share and leave its competitor scrambling to recover. Realistic targets and goals can be set by an organization through the use of benchmark- ing because another firm has already demon- strated that it is able to achieve a perform- ance level that is desired by the benchmark- ing organization, thereby giving it something tangible to work toward. Benchmarking ef- forts should focus on those projects that re- late directly to the firm's overall strategy and provide the greatest room for improvement. For example, Federal Express ships packages

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across the world everyday. One of its main strategies is to ensure each customer receives their package on time and in good condition. Therefore, Federal Express spends most of their benchmarking efforts on ensuring that

its customer service processes are the best.1

Another reason to use benchmarking is that it helps to validate an organization's strengths and weaknesses through the iden- tification and uncovering of empirical data in the form of hard numbers. Usually analysts have a good idea of their firm's strengths and weaknesses; however, having hard numbers to back this up rather than just opinions in- creases confidence in the process. It shows how strong a strength or weakness is over competitors in a particular area, as the benchmarking data shows the actual degree to which the firm is performing against a standard. Benchmarking can also assist the analyst to determine the future trends in the industry,

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which potentially can play a significant role in management's strategy. Management is constantly scanning the environment for trends five to 10 years in the future, and benchmarking gives managers another means for doing this. For example, when computers were becoming common in the workplace, an analyst who was benchmark- ing a firm with excellent response rates through direct mailing might have realized that one-to-one database marketing was go- ing to be the trend and build this into her strategy. This shows how benchmarking can allow a firm to be proactive rather than re- active to trends.

Taxonomy of Benchmarking

There are four different types of benchmark- ing, each with different applications but with

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significant crossover potential around the same purpose:

• Internal benchmarking—In- volves the measurement and compar- ison of best practices within the firm. For example, one division or strategic business unit may share information on best practices with another divi- sion in the same company. This is of- ten the type of benchmarking that firms start with for several reasons. First, it is relatively easy, as the ne- cessary data is in-house and coopera- tion is easier to attain than in extern- al benchmarking. Second, it can serve as a pilot study for future ex- ternal benchmarking projects provid- ing a low-risk learning environment and securing motivational early suc- cesses or "quick hits." Third, internal benchmarking is an excellent way to gain a solid understanding of the

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firm's own value chain providing the necessary base from which to com- pare against best practices of other organizations. Fourth, it also provides information with which to strengthen the reciprocal relation- ship with future benchmarking part- ners discussed next. Despite these benefits, it is important for the firm to move out of internal benchmark- ing fairly quickly, as it can rapidly de- generate into a close cousin of the traditional insularity it was designed to ameliorate.

• Competitive/external bench- marking—Refers to the benchmark- ing of competing firms in the same strategic group or in the same in- dustry. In contrast to internal bench- marking, this type is the most diffi- cult to perform because competitors are often understandably loath to

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share competitively sensitive inform- ation with direct competitors. Addi- tionally, certain forms of external benchmarking by direct market com- petitors may be considered by regu- lators as tantamount to collusion. Despite these obstacles, competitive benchmarking is extremely valuable because it provides information on similar processes that the firm is dir- ectly competing on. There are two ways to effectively supplement any competitive benchmarking data that is secured. The first is to supplement any "hard" competitive data with "softer" qualitative data gleaned from customers and suppliers of the benchmarked competitor. The second method is to use anonymous benchmarking studies conducted by industry associations or consultants, as they often provide much valuable

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information on best practices while protecting against competitive and legal sensitivities.

• Other industry benchmark- ing—Includes benchmarking organ- izations not in direct competition with the benchmarking firm. This type of benchmarking involves evalu- ating best practices of non-rival firms, evaluating best practices of po- tential rivals using similar processes in an unrelated industry, or evaluat- ing best practices of potential rivals using different processes in an unre- lated industry. The primary advant- age of this method is that non-com- peting firms are much more willing to share information offering much greater potential for an extensive benchmarking analysis. Of course, this benefit is countered by the pos- sibility that the processes of non-rival

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firms may not be applicable to the benchmarking firm.

• Global best practice bench- marking—Concerns benchmarking against recognized world leaders in the relevant parameter regardless of the industry in which they are oper- ating. For example, a restaurant chain seeking to increase customer satisfaction and dinner hour throughput may wish to benchmark the Disney Corporation, the recog- nized world leader in queue manage- ment. This type of benchmarking of- ten yields the most significant per- formance gains because it truly benchmarks against the "best" rather than settling for "good" as in the pre- vious methods. Additionally, global best practice benchmarking offers the highest chance of radical innovation as opposed to incremental

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improvement often associated with other types of benchmarking. Global best practice benchmarking is diffi- cult because it forces management to adopt lateral thinking outside of in- dustry best practices. However, this forced "out of the box" thinking alerts management to previously existing blindspots and discovers transferable innovation in the process.

Deciding on which type of benchmarking to use is often tempered by reality. Smaller firms may not be able to access global best practice firms to benchmark against or may not be able to afford the protracted time re- quirements and cost. Nonetheless, bench- marking against "good practice" or against firms that are relatively better at the chosen parameter process will still yield improve- ment opportunities. Another useful approach to deciding which type of benchmarking approach to use is to

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keep in mind the strategic purpose of the benchmarking effort. This prevents the ana- lysis from becoming clouded with tactical de- tails. Figure 11.1 offers a useful conceptual framework that divides the purpose of benchmarking into three distinct but interre- lated categories. Figure 11.1 The three strategic purposes of benchmarking

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First, customers are surveyed regarding which processes are important to their per- ception of value and which processes the

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firm is currently doing well. The firm's exist- ing customers that are not being delighted around important processes represent signi- ficant benchmarking opportunities to im- prove internal performance (i.e., the "bench- mark" quadrant in the Firm's Customer De- light Matrix). The strategic goal here is to move existing customers into the high prior- ity/high delight quadrant. Next, competitors are evaluated against the same criteria. Here, the ultimate goal to benchmark is to surpass competitors' pro- cess driven competitive advantage (hence, the location of the "benchmark" quadrant in the Competitor's Customer Delight Matrix). The ultimate strategic goal of benchmarking here is to eventually offer a higher degree of customer delight around high priority pro- cesses in order to steal customers away from competitors. Of course, only profitable cus- tomers as dictated by the firm's customer

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segmentation should be targeted with these benchmarking initiatives. Many of the internationally recognized qual- ity awards offer guidelines as to which core competencies can be effectively bench- marked. Within each category are many de- tailed supporting processes that have not been included in the exhibit. Not all of these competencies will need to be benchmarked. Only those that will directly impact customer retention within the firm and customer mi- gration from competitors will need to be benchmarked. Framing the benchmarking process in such a strategic framework will help decide which of the four benchmarking types will yield res- ults with the tightest application to the firm's strategy. It will also help the firm decide which parameter(s) to benchmark around. Benchmarking can be conducted at three dif- ferent levels in the firm's organizational hierarchy:

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• Strategic—Benchmarks around the critical success factors that the firm must perform well in order to sustain its competitive position within its in- dustry. Some examples include cus- tomer value monitors, hurdle rates of return, operational efficiency, market share, etc.

• Functional—Benchmarks around the processes specific to the various functional areas of the firm such as marketing, operations, finance, etc.

• Operational—Specific, tightly defined operational benchmarks that guide staff on the "shop floor" and the "front lines" to excellent opera- tional performance. For example, de- fects per hour on an assembly ma- chine or complaints per day in a ser- vice context may be chosen as opera- tional benchmarks.

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The three different purposes of benchmark- ing reflect the hierarchy that lies at the root of this management tool. At the top of the hierarchy are strategic benchmarks that cul- minate in firm-wide performance. The next lower benchmark level, functional bench- marks, support strategic benchmarks and are the culmination of the lowest level, the operational benchmarks. In this light, bench- marking can be seen as one way to opera- tionalize organizational change within a learning context. Often, top management is directly concerned with strategic bench- marks, middle management with functional benchmarks, and staff with operational benchmarks. Not only does this properly en- gage everyone in the benchmarking process, it also ensures that all of the context levers are being pulled in the same direction. Benchmarking is also often used as a vehicle for organizational change in concert with several other methods of organizational

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change; namely balanced scorecard, business process reengineering, and organizational learning. An extremely important aspect of the benchmarking philosophy is trust and open communication. As such, the integrity and ultimate success of benchmarking de- pends on adherence to the well-accepted bi- lateral codes of conduct. One of the best eth- ical codes has been developed by the Americ- an Quality and Productivity Center and can be found at http://www.apqc.org/free/con- duct.htm.

Strengths and Advantages

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Powerful Competitive Analysis Tool

Benchmarking offers an excellent tool for finding opportunities to maintain the relat- ive competitiveness of the firm. It provides the analyst a methodology that, at a minim- um, will offer a path to achieve competitive parity with rivals. Benchmarking results in increased self-knowledge of both the analyst's internal organizational strengths and weaknesses, as well as those of competit- ors. In today's turbulent competitive envir- onment, benchmarking offers an effective coping mechanism for the firm to adapt to change by leveraging the knowledge of others.

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Objective Stretch Goal Setting and Performance Measurement

Benchmarking heightens the firm's sensitiv- ity to the fact that absolute improvements from internal historical performance may not be sufficient for competitive success. Rather, the explicit outward-looking orienta- tion of benchmarking is an excellent pre- scription to correct strategic myopia. Often, benchmarking provides the motivation ne- cessary to achieve stretch goals.

Flexibility

Benchmarking is an extremely flexible man- agement tool in that it supports other equally important strategic change initiatives within the firm such as organizational learning and business process reengineering. It can be used to improve operations management,

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relative cost performance, and secure tem- porary competitive advantage.

Removal of Blindspots

Competitive benchmarking will alert the firm to at least two important elements that are commonly the source of blindspots. One, knowledge of rivals' process excellence and capabilities will help to prevent the firm from underestimating the potential compet- itive response to its own strategic initiatives. Two, knowledge of potential rivals' process excellence and capability will give the firm knowledge of the potential for industry mi- gration. This type of knowledge is becoming especially important as many value chains are being reconfigured as a result of the lib- erating economics of information.

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Improves Cost Efficiencies and Quality

By examining other firm's higher-performing processes, a firm will find better ways of per- forming their own processes. It could mean that it will find a better method of produc- tion that increases the number of items pro- duced in a given day, an enhanced way to make a product last longer, or a better meth- od of providing services to customers. The end result, however, will be a demonstrable improvement that can affect the firm's profitability.

Not Reinventing the Wheel but Redesigning It

The cost for any firm to develop a new product can be enormous, not to mention the level of risk associated with a particularly

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daring new product. Much research goes into developing original products and processes. Benchmarking has the advantage of examin- ing what someone else has already done and fine tuning it to fit the needs of the firm. This provides an opportunity to come through with an incremental gain rather than a significant, green-field product innovation just to remain competitive.

Media Recognition

The media recognizes firms that excel at spe- cific practices. Firms known to have "best practices" or outstanding practices often get these reported in industry publications, local media, or even in research papers, business cases, professional meetings, or through business school instructional channels. The media recognition that comes from bench- marking successes can help support

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improvement of the benchmarking firm's financial performance including share performance.

Requirement for Other Certifications

Firms are often required to employ bench- marking in order to achieve various forms of public certification, including many of the ISO series standards. For example, the Mal- colm Baldridge National Quality Award in the U.S. is awarded to firms that have a strong benchmarking program in place, and it is the highest honor offered in the U.S. for quality and performance excellence. Other countries' national awards also require or- ganizations to perform benchmarking in or- der to be eligible to receive their awards.

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Creates an Innovative Culture Open to New Ideas

Benchmarking has the tendency to create a workplace that is always open to new ideas. It requires analysts and managers to think about how something may be done better elsewhere, thereby driving out the "NIH" (not invented here) syndrome from a firm's practices. If management is always emphas- izing the importance of being the best, it re- quires frequent change to occur and results in employees devoted to always improving the firm.

Weaknesses and Limitations

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Copycat Syndrome

One of the strongest critics of the bench- marking approach has been Porter. His main opposition revolves around the fact that op- erational effectiveness is not strategy. As such, he asserts that benchmarking should not be elevated to the status of strategic management. It should only be considered as a tactical management tool that is a neces- sary but insufficient condition for strategic success. The underlying rationale of bench- marking refutes one of the main tenets of sustainable competitive advantage—inimit- ability. Simply put, best practices are easily copied, granting all rivals absolute gains along the productivity frontier at the expense of relative gains in strategic positioning. The core argument of Porter is that benchmark- ing only allows a firm to mimic the processes of rivals. Legitimate strategy, on the other hand, rests on the ability to do the same

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processes differently or to pursue entirely different processes and practices. In indus- tries where benchmarking is prevalent, strategy suffers two blows. First, to the effect that benchmarking often becomes an industry-wide obsession, the at- tractiveness of the industry structure de- clines as gains from productivity translate in- to consumer and supplier benefits rather than producer benefits. Second, the strategic vision of participating firms becomes in- creasingly blurred as they focus on opera- tional effectiveness to the exclusion of stra- tegic positioning. As a result, the industry structure erodes even more, causing yet an- other "race to the bottom" as firms once again push out the productivity frontier with no accruing individual benefit. This reinfor- cing cycle represents a decidedly contrarian viewpoint to the acclaim that has embraced benchmarking from other corners. This is not to discredit benchmarking, but rather, to

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cast a reality check on its strategic function. Benchmarking only represents table stakes. Walking away with the kitty remains wholly contingent upon creative strategic thinking, not imitation.

High Rate of Failure

Formal benchmarking projects often fail be- cause the proper amount of planning with regards to organizational readiness has not been done. Careful attention must be paid to such elements as forming a complementary mix of personnel composing the various benchmarking teams, psychological pur- chase, and demonstrable commitment of top management, reducing lead time before tan- gible results become visible, etc. Despite the fact that planning is the most critical success factor, it is often given short shrift as firms

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plunge headlong into the sexier aspects of the actual benchmarking process.

What Works Well in One Organization Might Not Work in Another

One of the weaknesses of benchmarking is that a firm may have a proven practice that works well for it, but its application may not produce similar results in another organiza- tion. Although a firm may be benchmarking a firm that is receiving extraordinary results through its best practice, the benchmarker may not be able to significantly improve its own process, if at all, due to a variety of factors. The firm's culture, history, markets, structure, leadership, or business model, among other things, may prevent the bench- marker from achieving desirable results. With benchmarking, it is particularly

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important not to merely copy the best prac- tices of the benchmarked firm but, rather, to adapt them to uniquely fit into the benchmarker's firm.

Benchmarking Is Resource Intensive

There are many costs involved in bench- marking. These can include the direct costs of sending people out to observe other organization's processes, training staff to conduct the benchmarking process, as well as the costs needed to implement the identi- fied changes throughout the firm. A multi- firm, cross-industry benchmarking consorti- um can require significant amounts of an analyst's or executive's time. It is therefore important to ensure that the organization has made the appropriate resource invest- ments in order to properly perform the

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benchmarking process. There must be sup- port from top management as well as the widely held belief of needing change in the organization. Benchmarking always works best when it is done over time and seldom delivers success when it is done as a one-off exercise or project.

No Firm Does Everything the Best

A firm may have a world-class process; however, that does not mean that all of its other processes are world class. Often, a benchmarking organization is tempted, usu- ally due to resource constraints, to bench- mark multiple processes of a single partner even though some of the target's processes may not have been demonstrated as out- standing. Therefore, it is recommended to find the best benchmarking partner for each practice needing significant improvement.

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Low-Performing Firms Have a Disadvantage

Low-performing firms have been shown in some studies to be negatively impacted from

benchmarking.2 The reasons for this could be that low-performing firms may not feel comfortable approaching higher-performing firms and therefore settle on a mediocre firm to benchmark. In these cases, the resources needed to implement the change and per- form the benchmarking end up being very costly for something that doesn't greatly im- prove performance.

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Some High-Performing Companies May Not Be Willing to Share Information

Benchmarking involves receiving a lot of in- formation from the benchmarking partner and, therefore, some firms may be unwilling to open their processes to scrutiny and share their sensitive information for fear it will be leaked to competitors. Also it may be hard to benchmark a competitor for obvious reasons, but if the competitor wants something in re- turn from the benchmarker, then it may be possible to proceed.

Process for Applying the Technique

The process for applying benchmarking is fairly generic. Although some firms employ a

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four-step model, others may use 10 to 12 steps or more; however, there is a fair degree of commonality of the activities that need to be undertaken to conduct a successful benchmarking process. In this chapter's dis- cussion, the benchmarking process we de- scribe consists of six steps, as follows:

1. 1. Identify the processes that need to be benchmarked.

2. 2. Identify performance measures. 3. 3. Evaluate your own firm's

capabilities. 4. 4. Identify firms to be benchmarked. 5. 5. Conduct research from selected

firms. 6. 6. Analyze the collected data and de-

velop an action plan.

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Step 1: Identify the Processes That Need to Be Benchmarked

Benchmarking is a process that requires con- tinuous monitoring of the environment for new and better practices, products, or ser- vices. Anything that can be observed or measured can be benchmarked. Areas of benchmarking include products or services, work processes, support functions, organiza- tional performance, and strategies. Table 11.1 shows some key areas that can be benchmarked. Table 11.1 Common Areas for an Analyst to Benchmark

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Some questions that managers should ask themselves are the following:

• Is the topic important to customers? • Is the topic consistent with the

mission? • Is the topic significant in terms of

costs or key non-financial information?

• What processes are critical to our success?

• What problems do we need to overcome?

• Is the process resource intensive? • What factors are causing the most

problems? • Does the project have a high poten-

tial for improvement? • What functions have the greatest ef-

fect or potential for differentiating the organization from its competitors?

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Benchmarking tasks should be prioritized for their importance to the overall mission of the firm, department, or unit seeking perform- ance improvement.

Step 2: Identify Performance Measures

Once the topic to be benchmarked has been identified, measures of how well the current process, service/product, or strategy are per- forming need to be defined. This allows for the establishment of indicators of how well a function is performing and for comparisons between it and the world-class function. In order to identify these measures, develop a detailed list of factors, then cut down the list to key steps for those that will have the greatest impact. It is important to identify key measurements and not to make the list too long, as it is very costly if there are too

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many factors. Furthermore, the benchmark- ing partner does not have a lot of time to provide large amounts of data. It is important to understand the critical suc- cess factors in the process that will help to identify key drivers and measures of per- formance. It is also important when defining key performance measures that the data can be obtained from the benchmark partner. Ensure that the data retrieved from compet- itors is in the same format so that apples can be compared to apples. Figure 11.2 outlines some measures that might be considered for the benchmarking topics outlined in Step 1. Figure 11.2 Key performance measures

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Step 3: Evaluate Your Own Firm's Capabilities

In order to be able to evaluate a benchmark- ing partner's capabilities, it is important that the benchmarker know its own processes first. There are three important reasons for this:

• The extent for improvement oppor- tunities may not be fully realized.

• Your own capabilities may be overes- timated or underestimated.

• It allows for greater productivity when conducting the collection of data from the benchmarking partner.

Opportunities may be missed if you do not know your own process, as you might not consider a factor when doing the bench- marking process that might have been evid- ent if you had first evaluated your own

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process. Also if you do not look at your own operations, you may not know how you com- pare on factors to the partner—you may feel you are strong in that certain function, when really, you are very weak. Finally, knowing your own operations allows you to easily identify performance gaps and therefore spend time on those areas that need to be corrected, rather than on those that are already strong.

Step 4: Identify Firms to Be Benchmarked

As it can be costly to perform the bench- marking process, it is important to select firms that are world-class leaders in a certain area. The benchmarking partners could be in the same industry or in a different industry. In order to select firms to benchmark, create a list of potential partners by looking at

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media releases, literature from professional associations, talking to consultants or ex- perts in the field, reading through company literature, or looking for special award win- ners such as the Malcolm Baldrige National Quality Award. When you have a long list of firms, you need to narrow it down to those with whom you would like to benchmark. Table 11.2 provides a list of some criteria that a firm may con- sider when searching for benchmarking partners. Table 11.2 Criteria to Select Benchmarking Partners

In order to select a firm, the analyst may use a pass/fail elimination system, whereby if

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the firm does not meet a certain criteria, then they are automatically eliminated; or by a weighting system, whereby each criterion is assigned a weighting and the firms with the most favorable ratings are selected. If the weighted rating system is used, the analyst must be aware of the halo effect, whereby if the firm rates favorably on one criterion, al- though it may not be the best in another, it is still given a high mark because it excels in one of the criteria. The weight that each firm is given for each criterion differs based on the goal of the benchmarking process and the type of benchmarking being done. For example, a firm with a similar product may be given a low-importance weight for its product if the item being benchmarked is the billing process. One of the most important criteria in select- ing a firm is that it is willing to provide you with the required information.

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Other factors that may help determine which firms to benchmark include the following:

• Process technology • Financial performance indicators • Distribution channels • Manufacturing approach and volume • Decision-making style of

management • Travel costs involved • Type of business

Step 5: Conduct Research of Selected Firms

Once you have determined the performance measures that will be researched from Step 2, the actual collection of data can begin. It is important to plan ahead for this stage in or- der to ensure that the collection of data flows

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smoothly. The major concern is for the data to be reliable, accurate, timely, cost efficient, useful, and usable. Data can be found from many sources and can be primary or secondary in nature. The collection of secondary data is the first source that should be used, as it is much cheaper than collecting primary data. Sec- ondary data may include, but is not limited to, newspaper or magazine publications, archival research, annual reports, industry journals, professional association reports, conference minutes, 10-K filings, experts, and universities. If the information that the firm is looking for is not found in this first step, then primary research can be done. In order to conduct primary research, the fol- lowing resources are valuable: personal or onsite visits, telephone interviews, surveys, and focus groups.

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Step 6: Analyze the Collected Data and Develop an Action Plan

This is the stage where a firm is able to identify the gaps between their performance and their benchmark partners. It also helps identify where a firm's strengths lie. Al- though the main goal is to identify the strengths and weaknesses of the process, it is also important to project what the world- class standard will be in the next five to 10 years in this stage as well. The data analysis method should already be decided on before it is collected, leaving this stage to the actual analysis of the data. Hav- ing the analysis methods in place will make the analysis go much smoother. One way to do this is to create a data matrix, as seen in Table 11.3. Table 11.3

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Benchmarking Data Organization Matrix Example: Factors Impacting Insurance Agent Productivity

This matrix should help the analyst to identi- fy patterns in the data for both similarities and differences. Once the gaps between the benchmarking processes have been identified, their causes need to be understood so that the analyst can find out what the two firms do that is similar and different. It is important that the analyst ensures that the data is accurate. There could be many

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errors in the data collection process that could dramatically affect results, such as dif- ferences in the makeup of a certain set of data or inaccuracies caused by different sources collecting the data. One of the most important components of this stage is to set a well-defined process to implement the improvement initiatives and to monitor projected vs. actual progress on gap closure over time. Often, the source of improvement comes from adapting the best practices of the benchmarked firm to the unique circumstances of the benchmarking firm. Despite the length of time and effort re- quired of benchmarking, it is critically im- portant to realize that benchmarking is a snapshot in time. Dynamic competition ne- cessitates constant monitoring of any changes in the competitive environment to determine any impact on the benchmarked parameters. In keeping with the continuous

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improvement ethos, future performance needs to be projected and existing bench- marks will have to be periodically adjusted and re-benchmarked in line with evolution- ary change or performance slippage. Perhaps more importantly, innovative revolution will necessitate new benchmarking around en- tirely new competitive processes.

Case Study: Delivery of Packages by Federal Express

Step 1: Identify the Process That Needs to Be Benchmarked

The question that must be answered in one area of FedEx's operations is, "How can we

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improve our customer service between Toronto and Ottawa?"

Step 2: Identify Performance Measures

• How many packages arrived at the wrong destination last year?

• How many packages arrived late last year?

• How many deliveries do we make each day from Toronto to Ottawa?

• How long on average does it take to request a delivery through a custom- er service agent?

• How many customers complained about the delivery of their package last year?

• How many packages were damaged last year?

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• How much revenue was generated from packages shipped between the two cities?

• What costs did we entail in shipping these packages?

Step 3: Evaluate Own Firm's Capabilities

See the matrix developed in Step 5. This matrix incorporates the firm's capabilities as part of the whole process of identifying the performance measures and benchmarks.

Step 4: Identify Firms to Be Benchmarked

• United Parcel Service • DHL

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• Canada Post • United States Postal Service • Purolator

Step 5: Conduct Research from Selected Firms

The following is a sample table demonstrat- ing hypothetical performance data collected for the period from November 1–30, of the prior year.

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Step 6: Analyze the Collected Data and Develop an Action Plan

The analyst would look at the matrix identi- fied in Step 5 and ask a number of questions, the answers to which can help focus his at- tention on the key facets of what differenti- ates the highest performers from the lesser performers:

• What system does Purolator have in place that allows it to achieve higher accuracy in delivery of their products to the correct destinations?

• Why do more FedEx packages arrive later compared to the others? How does the presence of the other per- formance data help us to explain this?

• Purolator takes longer to take a cus- tomer order, while UPS can do it quickly. Why is this? Could this be a

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reason for the level of customer com- plaints experienced? Maybe our competitor's order-taking processes contains more or less information that impacts delivery accuracy levels.

The number of damaged packages for FedEx is lower. This may support an internally held view that FedEx are the best among its direct competitors in this area. This information could be used for customer communication and marketing purposes. There are many other questions and issues that the analyst could address. This may lead to the gathering of additional data or to the "testing" of different propositions. No matter what the outcome of this particular exercise, the analyst must consider how to gain syner- gies from this benchmarking exercise and how it can create value for the organization both in the short and long term.

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FAROUT Summary

Figure 11.3 Benchmarking analysis FAROUT summary

Future orientation—Medium. Benchmarking is forward looking in that it is oriented to- ward the future implementation of a pro- posed best practice or the correction of exist- ing processes in order to gain a competitive advantage. However, benchmarks remain valid only for the duration of the productivity frontier function upon which it was based. Accuracy—Medium. Accuracy depends on the ability of the analyst to (a) correctly dia- gnose the processes to be benchmarked, (b)

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correctly diagnose the key performance measures, and (c) implement the required changes to close the distance between (a) and (b). Resource efficiency—Low to medium. Depends on the number of processes identi- fied, the depth of analysis and the number of personnel engaged in the benchmarking pro- cess. Resource efficiency depends in large part on the extent of data collection and analysis. Objectivity—Medium. The analysis and es- tablishment of performance measures is sub- ject to perception bias, particularly in defin- ing the process to be measured and the eval- uation criteria. Usefulness—High. Benchmarking provides not only improved costs efficiencies and quality for products and services, but also enhances the outward focus and innovation practices within organizational cultures.

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Timeliness—Low to medium. Benchmarking can be extremely comprehensive and covers all facets of the firm. Identifying the key pro- cesses that would benefit from benchmark- ing may take some time for a consensus to be established. Additionally, correctly examin- ing the intricate inter-relationships between different processes in an organization can take some time.

Related Tools and Techniques

• Blindspot analysis • Competitor analysis • Customer segmentation and needs

analysis • Customer value analysis • Comparative cost analysis • Functional capability and resource

analysis

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• Industry structure analysis • Strategic groups analysis • SWOT analysis • Value chain analysis

References

Aaker, D.A. (1998). Strategic Market Man- agement, 5th Edition. New York, NY: John Wiley and Sons. American Productivity and Quality Center (1994). The Best of Benchmarking: A Best Practices Guide. Houston, TX: American Productivity and Quality Center. Bhote, K.R. (1989). "Motorola's long march to the Malcolm Baldridge National Quality Award," National Productivity Review, Autumn. Bogan, C.E., and English, M.J. (1994). Benchmarking for Best Practices: Winning

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Through Innovative Adaptation. New York, NY: McGraw-Hill, Inc. Boxwell, R.J. (1995). Benchmarking for Competitive Advantage. New York, NY: McGraw-Hill. Camp, R. (1994). Business Process Bench- marking: Finding and Implementing Best Practices. Milwaukee, WI: ASQC Quality Press. Cook, S. (1995). Practical Benchmarking: A Manager's Guide to Creating a Competitive Advantage. London, UK: Kogan Page. Deming, E.W. (1982). Quality, Productivity and Competitive Position. Center for Ad- vanced Engineering Study, Cambridge, MA: Massachusetts Institute of Technology. The Economist Intelligence Unit (1993). Global Benchmarking for Competitive Edge. London, UK: The Economist Intelligence Unit.

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Fuld, L.M. (1989). Monitoring the Competi- tion: Find Out What Is Really Going on Out There. New York, NY: John Wiley and Sons. Garvin, D. (1991). "How the Baldridge Award really works," Harvard Business Review, November/December, pp. 80–93. Hammer, M. (1990). Reengineering Work: Don't Automate, Obliterate, July/August, 68(4), pp. 104–112. Harrington, H.J., and J.S. Harrington (1996). High Performance Benchmarking: 20 Steps to Success. New York, NY: McGraw-Hill. Jennings, K., and F. Westfall (1992). "Bench- marking for strategic action," Journal of Business Strategy, Fall, 13(3), pp. 22–25. Keehley, P., and S. Medlin, et al (1995). Benchmarking for Best Practices in the Public Sector. San Francisco, CA: Jossey- Bass, Inc.

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Main, J. (1992). "How to steal the best ideas around," Fortune, October, 126(8), pp. 102–106. National Institute of Standards and Techno- logy (2004). "President and Commerce Sec- retary announce recipients of nation's highest honour in quality and performance excellence," in the Award Recipients section at Baldridge National Quality Program Web site. Porter, M. (1996). "What is strategy?," Har- vard Business Review, 74(6), pp. 61–78. Spendolini, M.J. (1992). The Benchmarking Book. New York, NY: AMACOM. Society of Management Accountants of Canada (1993). Implementing Benchmark- ing. Hamilton: Canada. Society of Management Accountants of Canada (1995). Tools and Techniques for Ef- fective Benchmarking Studies. Hamilton: Canada.

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Thor, C.G. (1995). Practical Benchmarking for Mutual Improvement. Portland, OR: Productivity Press, Inc. Tucker, G.F., Zivian, S.M., and R.C. Camp (1987). "How to measure yourself against the best," Harvard Business Review, January/ February, 65(1). Watson, G.H. (1993). Strategic Benchmark- ing. New York, NY: John Wiley & Sons, Inc. Xerox Corporation (1988). Competitive Benchmarking: The Path to a Leadership Position. Stamford, Connecticut.

Endnotes

1 Bogan and English, 1994, p. 46. 2 Harrington and Harrington, 1996, p. 134.

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12

McKinsey 7S Analysis

Short Description

The McKinsey 7S framework model is a dia- gnostic management tool used to test the strength of the strategic degree of fit between a firm's current and proposed strategies. It is a management tool designed to facilitate the process of strategy implementation within the context of organizational change.

Background

Implementation has always been the difficult aspect of strategic management. Often the best-laid long-range plans have remained

unimplemented because the organizational structure and culture have been lacking. Al- though modern strategy theory offers the analyst a plethora of different models from which to choose, there is a dearth of imple- mentation methodology. The McKinsey 7S model was designed to fill this vacuum with a conceptual framework to guide the execu- tion of strategy. In 1978, several consultants at McKinsey &

Co.1 codeveloped the McKinsey 7S model. They recognized a circular problem central to their client's failure to effectively imple- ment strategy. The long-held conviction de- veloped by Alfred Chandler in 1962 that or- ganizational structure will follow strategy had been a prominent concept in modern strategy theory. Most strategies implicitly incorporate the as- sumption that structure follows strategy but offer no execution guidance with regard to organizational structure. Because

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implementation is equally important as con- ception, many strategies failed. The McKinsey 7S model challenged this im- plicit assumption by suggesting that the "structure follows strategy" paradigm was not that at all; rather, not only must struc- ture be actively managed, it must be supple- mented with equal concern for organization- al effectiveness as a whole. The McKinsey 7S model specially addresses the need to build a tight strategic fit between strategy, organizational structure, and five additional components of organizational ef- fectiveness. Successful implementation of strategy requires explicit management of the interrelationships between these seven ele- ments. These seven elements of organiza- tional design and effectiveness are discussed next:

1. 1. Structure—The familiar organiz- ational chart is a suitable proxy de- scription of structure. Structure

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involves the reporting of relation- ships within a firm as well as the divi- sion and integration of tasks. The choice of structure involves a myriad of tradeoffs. For example, a firm's structure may be centralized or de- centralized, hierarchical or flattened, specialized or integrated, or autonomous or outsourced. The fo- cus on structure within the McKinsey 7S model, however, concentrates es- pecially on two aspects of the realm of structure. First, the idea of the co- ordination of all the aspects of struc- ture in the support of strategy is prominent. Second is the need to isolate those aspects that are critical to successfully managing and negoti- ating change in industry evolution and new or revamped strategies.

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2. 2. Strategy—Among the many form- al definitions of strategy, there are several common, dominant themes. Strategy is the set of competitive re- sponses manifested through de- cisions and actions in response to the firm's environment. Strategy aims to best position the firm's current cap- abilities and resources in a competit- ive marketplace to secure competitive advantage over time. Because the firm's environment is constantly in a state of flux, so too must strategy change to protect and project existing sources of competitive advantage. In addition, strategy must be de- signed to seek out new external op- portunities and acquire or internally develop the requisite resources and capabilities to exploit these environ- mental changes into new sources of competitive advantage. The focus on

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strategy within the McKinsey 7S model is not on developing new strategies or protecting existing ones; rather, its inclusion underscores the core theme of the model that asserts that strategy conception and formu- lation has been well managed in many firms due to its emphasis through decades of reinforcement in business schools and in the now-vo- luminous strategy literature. Prob- lems in the other six elements are more often the cause of ineffective implementation.

3. 3. Systems—Systems encompass the flow of both primary and secondary activities that are important to the firm's daily functioning. These in- clude core processes (for example, product development and operations management), as well as support activities (for example, information

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systems, accounting, and human re- sources). The important distinction that the McKinsey 7S model makes with regard to systems is that chan- ging systems is often a much less dis- ruptive and more effective route to enhance organizational effectiveness, as opposed to the more traditional levers of manipulating strategy or structure.

4. 4. Style—Style refers to the actions and behavior of senior executives, rather than what they say. As such, the conduct of top management is an extremely valuable management tool that conveys and reinforces strong messages to stakeholders, and partic- ularly employees, throughout the or- ganization. One of the most import- ant barometers of executives' behavi- or is the way in which they spend their time. By concentrating their

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individual and collective attention on managing critical success factors, ex- ecutives can help their staff prioritize the essential activities that the organ- ization must perform well. Another important barometer of style is sym- bolic or signaling behavior that can be seen as constantly reinforcing the fundamental value system of the company. By fostering a firm-wide "strategic conversation" composed of formal and informal symbols, top ex- ecutives instill a positive culture con- sistent with the firm's strategic intent.

5. 5. Staff—The human resources of a firm are its most valuable strategic asset. The staff element includes both remuneration (compensation, incent- ives, and reward) and softer, more qualitative, motivational considera- tions. Specifically, in the 7S model,

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management attraction, recruitment, and development of employees are important to organizational effective- ness. Equipped with the organization's culture and core val- ues, managers will hopefully spend fruitful careers fostering these attrib- utes to staff located in all parts of the firm. In this regard, putting young managers in positions of authority close to the executive suite, with le- gitimate responsibility for some crit- ical aspect of the firm's business model and opportunities for ad- vancement, will positively impact long-term organizational effective- ness. By paying special attention to engaging the firm's future executives in all seven elements of the model, the firm's future organizational ef- fectiveness can be successfully propagated.

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6. 6. Skills—The raw material of sus- tainable competitive advantage often lies in the intangible core competen- cies or skills of its people. The McKinsey 7S model focuses on skills because environmental change infers not only a change in strategy, but also an accompanying change in the skill set of a firm's human resources. Suc- cessful organizational change often requires increased investment to ac- quire or develop new skills, along with reduced investment in the es- tablished skill set that was more closely attuned to the old business models. This transition toward new skills is a process that, if done poorly, will thwart the cultivation of condi- tions necessary to grow new organiz- ational skills.

7. 7. Shared values—Sometimes also referred to as "super-ordinate goals,"

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shared values represent the collective value system that drives a firm's or- ganizational culture. Often, shared values are informal and go beyond the company's mission statement by encompassing intangibles such as strategic intent, underlying beliefs, mental mindsets, and future direc- tion. Within the 7S model, shared values are commonly seen as the most fundamental building block of an organization, thereby providing a foundation for the other six elements. Often, shared values are short articu- lations of the essential meaning or driving force of the company. The difficulty, and hence value, of creat- ing strong shared values within an organization is exemplified by the ob- servation that only exceptional firms are able to consistently leverage this phenomenon over time.

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Figure 12.1 is a schematic representation of the McKinsey 7S framework. This diagram identifies the significant cross relationships of the seven elements of organizational effectiveness.

Figure 12.1 The 7S framework model2

There are four key insights that can be de- rived from this model. First, Figure 12.1 identifies the five other elements comprising organizational effectiveness in addition to

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the traditional strategy and structure dual- ism; namely, systems, style, staff, skills, and shared values. Second, the lines connecting each element identify the mutual dependency between each element of organizational effectiveness. Pulling one lever, as it were, will cause a ripple effect across the whole system. It is this concept of holistic interrelationships that runs through the most fundamental units of the organization. The third insight is the assertion that stra- tegic failure may well be attributable to inat- tention to any one, or a combination of, the seven elements of strategic fit. This frame- work provides a corrective lens for the stra- tegic myopia that often leads to inappropri- ate structure or poor strategy in the first place. The fourth insight comes from the shape of the diagram—the circular consistency of the model focuses the analyst's attention on the

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absence of hierarchical dominance. It en- courages the analyst to conclude that no one element is more important than the oth- ers—each element is a necessary but insuffi- cient condition for organizational effective- ness. However, in some scenarios, one factor may figure more prominently than the rest. This lack of precision and high level of ab- straction makes the McKinsey 7S model very flexible. Taken together, these four insights have made an enormous contribution to modern strategy theory in two powerful ways. First, the McKinsey 7S model introduced the im- portance of the qualitative factors of organiz- ational effectiveness to counterbalance the almost exclusive focus on strategy and struc- ture that pervaded previous thought around the management of organizational change. Second, it pushed the conceptual envelope away from an external environmental preoc- cupation to a more holistic appraisal that

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includes a more realistic appreciation of the whole system—that is, both the organization acting on its environment, as well as the en- vironment acting on the organization.

Strengths and Advantages

The 7S model pays particular emphasis to a firm's strategy implementation. This key fa- cet of the traditional strategic management model was often given short shrift or even ig- nored in many preceding management con- structs. The McKinsey 7S model filled this analytical vacuum by suggesting that stra- tegic success in the competitive marketplace is also dependent on organizational effective- ness. This counteracted the disproportionate emphasis of previous models on external, economic, and marketplace factors. The McKinsey 7S model laid the groundwork for the increasing prominence of organizational

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dynamics in future models, such as core competency and resource-based theories. Further, the 7S model developed the concept that organizational effectiveness was not de- pendent on just strategy and structure—a radical and much-needed departure from the confines of the decades-old (although admit- tedly still vibrant) "structure follows strategy" paradigm. The inclusion of the oth- er elements of strategic fit broaden the analyst's scope to consider the possibility that for select firms, the reality of their con- text will be that strategy follows structure. At any rate, the analyst will soon realize that or- ganizational change requires strategic man- agement of all seven elements of strategic fit, not just tinkering with one or two of the ele- ments (traditionally only strategy and structure). The greatest strength of the 7S model is in its comprehensiveness. Because the analysts must consider each of the seven broad-

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ranging constructs, as well as how each of them interacts with one another, they are unlikely to miss any potential gaps that may arise out of changed strategies or their im- plementation. This model is also one of the first to actually compel the analyst to con- sider strategy implementation simultan- eously with strategy development. These is- sues tended to be separated before the time of this model's introduction and popularization. The 7S model was also one of the first to meld consideration of the "hard" (e.g., strategy, structure, and systems) and "soft" (i.e., shared valued, skills, staff, and style) as- pects of the enterprise. Most models before this one tended to focus most heavily on one side or the other, to the exclusion of the ig- nored side of the equation. The 7S frame- work is valuable in supporting management thinking when implementing strategy and fa- cilitating needed organizational changes.

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The 7S model also emphasizes to the analysts and their managers the need to coordinate key tasks within the organization. The chal- lenge lies in focusing on those dimensions that are important to the organization's evol- ution. The organization must be able to refo- cus and reallocate efforts as crucial dimen- sions shift. The 7S model was also one of the first to help connect academic research with managerial practice. In particular, it emphasized how important shared values or corporate culture were in keeping the organization in synch and in driving the successful execution of smart strategies. A critical result of this mod- el was that enterprises could be viewed as in- dependent social systems—whose artifacts in the form of rituals, stories, symbols, and stated and exhibited values—create a power- ful influence on employee behavior and can be the difference between an organization operating in an empowered fashion versus

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one that requires additional layers of bureau- cracy to achieve its aims. This model would lead to a stream of subsequent academic re- search that has continued to inform consult- ants and managers to this day.

Weaknesses and Limitations

The primary weakness of the 7S is directly related to its greatest strength. Because the 7S requires the analyst to consider not only the seven independent constructs, but also their interrelationships, the analyst may miss some fine-grained areas in which gaps in strategy conception or execution can natur- ally arise. There is little empirical support for the mod-

el or of its originator's conclusions.3 Indeed, several years after the model was popular- ized by Peters and Waterman in their best-

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selling 1982 book In Search of Excellence, most of the companies that were highlighted had suffered from poor performance and were no longer the paragons of excellence that had been originally touted. Despite the model's clear emphasis on look- ing inward at organizational factors and fits, it remains difficult to properly assess the de- gree of fit, particularly between strategy and the other elements. Strategy is the clear link- ing pin that should align the other elements, but this is far more complex to achieve in practice than a single construct can suggest. It is also difficult for analysts to explain, in practical terms, just exactly what should be done for implementation in terms of using the model. The model encourages the ana- lysts to consider the many interactions, but does not require them to consider the many different options available for changing in- terrelationships among the seven concepts or most importantly, specify what order or

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sequence within which the needed changes should be made. The 7S is mostly a static model. It is useful for looking at a snapshot of the fit among the seven constructs at any single point in time; consequently, it can be difficult to use in re- commending changes to relationships among the constructs over time, unless the model is developed, analyzed, and applied on an ongoing basis—something that is rarely, if ever, done in practice due to the pragmatic considerations of time and effort required to effectively accomplish this outcome. As such, the model's ability to address the challenges generated by dynamic enterprises and mar- ketplaces is more limited than those models that expressly and explicitly account for time as a critical variable.

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Process for Applying the Technique

The process for applying the McKinsey 7S model can be quite simple. However, it is easy to overestimate the firm's ability to achieve alignment among all seven elements of organizational fit. The 7S model can also be used to test both current and proposed strategy and, as such, assumes that these strategies have already been conceptualized and formulated. The first step is to analyze the individual components of the McKinsey 7S model—that is, to closely examine each "S." The key suc- cess factors for each element as they pertain to the firm's current and/or future strategy need to be identified. Some experts recom- mend that a 7 x 2 matrix be composed, with the top row containing the critical features of each "S" that the company does extremely well. Correspondingly, the bottom row would

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contain the elements of each "S" in which the company is achieving subpar performance. This matrix can be extremely useful in or- ganizing the analysis. It forces the analyst to not only explicitly isolate key action variables but also to determine the distance between what the company is currently doing well and what it needs to do well in order to suc- cessfully implement the strategy. After isolating the strategic distance between the seven elements of strategic fit, there are essentially three options:

1. 1. The firm can work to change the required components of each "S" so that they are consistent with strategy.

2. 2. It can change the strategy to fit the existing orientation of the other six elements of the model.

3. 3. Often, a compromise between each option is the realistic alternative.

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After the choice of actions have been decided upon, the model should reflect an alignment between each of the seven elements of organ- izational effectiveness—that is, strategy, structure, style, skills, staff, systems, and shared values should be moving forward in the same direction. Figure 12.2 depicts a prototypical application of the 7S framework. The boxes that are shaded the darkest are ones in which the two common elements are in alignment. Boxes shaded in gray are ones in which there is a partial alignment between the two conjoined elements. Boxes that are unshaded (i.e., white) exhibit misalignment between the two elements. The McKinsey 7S model asserts that organizations should seek alignment between all of the elements, and the areas identified as being misaligned (i.e., the white and grey shaded boxes) become the prime targets for managerial intervention and cor- rection. The 7S model asserts that this

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alignment is a necessary condition for the successful implementation of strategy. Figure 12.2 Grid showing state of "fit" between seven "S" elements at one point in time

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Case Study: Privatization of Kenya Airways in the New Millennium

The 1960s were supposed to be a time of bet- terment and growth in Sub-Saharan Africa. The area was completing the decolonization process, and governments were creating new state-owned enterprises (SOEs) to lead their respective economies in major industrial, structural, and social improvement. However, these optimistic visions failed to materialize, as most SOEs were poorly run and almost never profitable. By the 1980s, problems stemming from massive state in- tervention and a lack of market forces led to economic disaster. Consequently, external pressures have forced these countries to fight against dictatorship and authoritarianism in favor of democracy and privatization.

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Kenya Airways was originally established in 1977 as a corporation owned by the Kenyan government. Senior management was ap- pointed by politicians and had virtually no airline experience. The company lacked structure and direction, had very little equip- ment (seven planes), and was burdened with high interest foreign currency loans. By 1991, the airline was losing market share due to poor service and unreliable flight schedules, and its debts were an enormous strain on the Kenyan government. The only way to turn the fledgling airline toward profitability, it seemed, was to privatize it. In 1991, the commercialization process began in order to prepare the airline for privatization. A new and capable manage- ment team was hired and given complete autonomy to restructure the company. Re- search was conducted to identify the needs of all stakeholders, and an IT department was created to introduce new, consistent systems

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and controls for accounting, scheduling, op- erations, management, and ticketing. By 1994, the airline recorded its first profits and in 1995 created a strategic alliance with KLM Royal Dutch Airlines. In 1996, the Kenyan Government sold 26% of its stock to KLM, and most of the remainder of its stock to the Nairobi Stock Exchange, leaving only a 22% minority ownership block held in the airline. Privatization had forced Kenya Airways to become a self-sustaining profit-generating firm. It could no longer rely on government

protection or bail-outs.4 To successfully ne- gotiate these challenges, Kenya Airways was required to assess threats and determine how to manipulate the seven elements of strategic fit to first survive the turmoil, and second to eventually prosper in a new com- petitive environment (see Table 12.1). Table 12.1 McKinsey 7S Comparison of Pre- and Postprivatized Kenya Airlines

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Source: Tiller, 1997; Debrah and Toroitich, 2005; Major Milestones: Kenya Airways Global Website, 2006.

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FAROUT Summary

Figure 12.3 McKinsey 7S analysis FAROUT summary

Future orientation—Medium to high. The McKinsey 7S model is forward looking in that it is oriented toward future implementa- tion of proposed strategy or correction of ex- isting organizational effectiveness to maxim- ize the effectiveness of current strategy. Accuracy—Low to medium. Accuracy de- pends on the ability of the analyst to: (a) cor- rectly diagnose the seven elements and their interactions; (b) correctly diagnose the key success factors; and (c) implement the

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required changes to close the distance between (a) and (b). Resource efficiency—Medium. This depends on the depth of analysis and the number of analysts engaged. Similarly, the compre- hensiveness of internal consulting will dic- tate resource efficiency. Objectivity—Low. The requisite analysis is highly qualitative and subject to perception bias. Usefulness—Medium. The explicit purview of this model draws attention to what many other models ignore. As such, the McKinsey 7S model is compatible with, and comple- mentary to, a good number of other manage- ment tools and techniques. Timeliness—Low to medium. A comprehens- ive McKinsey 7S model analysis is extremely comprehensive and covers all facets of the firm. Additionally, correctly examining the intricate interrelationships between the

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seven elements can require a substantial amount of time.

Related Tools and Techniques

• Competitive benchmarking • Customer segmentation and needs

analysis • Customer value analysis • Functional capability and resource

analysis • SERVO analysis • SWOT analysis • Value chain analysis

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References

Chandler, A.D. Jr. (1962). Strategy and Structure: Chapters in the History of the American Industrial Firm. Cambridge, MA: MIT Press. Darden Graduate Business School Sponsors (1983). American Telephone and Telegraph (A). Charlottesville, VA: University of Virginia. Debrah, Y.A. and O.K. Toroitich (2005). "The making of an African success story: The privitization of Kenya Airways," Thunder- bird International Business Review, 47(2), pp. 205-230. Hax, A.C., and N.S. Majluf (1983). "Organiz- ation design: A case on matching strategy and structure," The Journal of Business Strategy, Fall, 4(2), pp. 72–86. Major Milestones at a Glance, Kenya Airways Global Website, accessed September 28,

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2006 at http://www.kenya-airways.com/kq/ kqdispinfo.aspx?colm=69. Pascale, R. Managing on the Edge. London, UK: Penguin. Peters, T.J. (1984). "Strategy follows struc- ture: Developing distinctive skills," Califor- nia Management Review, Spring, 26(3), pp. 111–125. Peters, T.J., and R. Waterman (1982). In Search of Excellence. New York, NY: Harper and Row. Powel, T.C. (1992). "Organizational align- ment as competitive advantage," Strategic Management Journal, February, 13(2), pp. 119–134. "Privatization of Kenya Airways" (2005). Thunderbird International Business Review, March–April, 47(2), pp. 205–230. http://www.kenyaairways.com/root/pages/ English/Home.asp (September 8, 2005). Tiller, M. (1997). "A first for Africa: The privatization of Kenya Airways," Economic

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Perspectives: USIA Electronic Journals, 2(1), January, accessed September 28, 2006 at ht- tp://usinfo.state.gov/journals/ites/0197/ ijee/ej5case.htm. Waterman, R.H. Jr. (1982). "The seven ele- ments of strategic fit," The Journal of Busi- ness Strategy, Winter, 2(3), pp. 69–73. Waterman, R.H. Jr., Peters, T.J., and J.R. Phillips (1980). "Structure is not organiza- tion," Business Horizons, June, pp. 14–26.

Endnotes

1 Waterman, R.H., Peters, T.J., and J.R. Phillips. 2 Based on Peters and Waterman (1982). 3 Pascale, 1990. 4 Tiller, 1997; Debrah & Toroitich, 2005; Ma- jor Milestones: Kenya Airways Global Web- site, 2006.

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13

Shadowing

Short Description

Shadowing is one of the newer analytical techniques that monitors specific competit- ors or markets in a high degree of detail to learn how a specific competitor might think, reason, and react. It means learning as much as possible about a competing firm's man- agers in order to predict what they might do. The competitive knowledge afforded by shadowing will allow a firm to make reason- ably accurate inferences regarding the stra- tegic and tactical intentions of rivals.

Background

Shadowing is the commercial application of a concept long used by opposition politicians in the British parliamentary system and throughout the Commonwealth. Opposition members of legislative assemblies or Parlia- ments regularly form "shadow cabinets," wherein each member of the opposition party follows and/or forecasts policy devel- opments in each ministry or government de- partment. For example, one opposition member of Parliament might be assigned to "shadow" the Ministry of Finance. In this po- sition, he or she would be given responsibil- ity to do the following:

• Monitor all changes in relevant policies such as tax, deficits, debt, and spending

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• Track all changes in personnel within the Ministry of Finance, depart- ments, and bureaucracy

• Develop proprietary policy for her/ his affiliated party as an alternative to the party in power

• Offer rebuttals and critiques in re- sponse to recently developed initiat- ives to the party currently in power

• Forecast important issues in order to predict the government's response and to proactively develop opposition policy

• Be prepared to assume the portfolio in the event of a change in power

All of these individual shadow members working together are known as the "shadow cabinet." This strategic tactic has proved to be very effective in achieving the ultimate goals of opposition political parties. It has al- lowed political entrepreneurs to simultan- eously counter the strategies of the

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incumbent government, as well as prepare for a hopeful electoral victory in the future by capturing a majority of the political "market." Since the late 1980s, shadowing has become an increasingly popular technique within the competitive intelligence tactical toolkit. Many companies are now shadowing their competitors at a level of detail that is of an order of magnitude higher than traditional environmental scanning and even competit- or profiling. Shadow teams today provide a mechanism for accessing internal resources, scanning the competition and/or external environ- ment, and integrating the insights to create

new organizational learning. Fahey1 asserts that shadowing is useful when one or more of the following conditions prevail within a firm:

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• Managers have become complacent due to a firm's marketplace performance.

• A firm has become strongly commit- ted to a set of assumptions underly- ing its historic strategy (and appears unwilling to evaluate them even in the face of significant marketplace change).

• The strategy planning process has largely degenerated into a routine (to be completed as quickly as possible and reviewed maybe once a year).

• Little effort is being expended to search for new marketplace opportunities.

However, shadowing does not need to focus on existing direct competitors. One can ad- dress secondary or non-direct competitors or, even as Fahey suggests, one can create "invented" competitors. An invented com- petitor is a rival that could appear in the

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future but does not exist today. This ap- proach may serve to explore what strategies might be possible at some future time; anti- cipate potential new customer needs as well as the solutions required to satisfy them; identify possible marketplace opportunities that might otherwise be overlooked; and challenge your own firm to be more radical in thinking about its potential future strategies, both how they might be developed and executed. Today when a cross-functional team focuses specifically on information about a major competitor or market, a shadow team has formed. The objective of shadowing is then to learn everything possible about a compet- itor—its people, processes, networks, and services—or a market, so that a firm can be- gin to think, reason, and react like the competitor.

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Strategic Rationale and Implications

Shadow teams perform as a think tank, oper- ating between working on special projects and creating a storehouse of knowledge to draw from when special needs emerge. Using analytical, team dynamic and communica- tions techniques, shadow teams can evolve into smoothly operating entities with strong competitive and analytical skills. They collect and organize information and become an identified knowledge base. With strong analytical skills, shadow teams can prove to be one of the greatest assets for the power brokers in a firm. The fundamental premise underlying shad- owing comes from the belief that strategy is a result of organizational structure and design. By closely monitoring the organizational structure and design of rivals, it is suggested

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that a firm can gain valuable insights into their strategic intentions. In order to conduct this type of analysis, you must become intimate with every element of rival firm. Every minute detail, regardless of its apparent obscurity or immediate applic- ability, is taken into consideration. Often these details can be gleaned directly from your own firm's internal sources or by ana- lyzing publicly accessible information. In ad- dition, the actions and behaviors of rivals will often yield important information. More important than the detail, however, is the holistic interpretation and analysis of the sum of the detailed information gathered from shadowing. Shadowing yields import- ant clues as to the future plans of rival firms. Hence, the objective of shadowing is to be able to predict with reasonable accuracy the strategic intentions of competitors in order to develop proactive strategy.

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To facilitate this goal, two approaches to shadowing offer two distinct but related courses of action:

1. 1. Shadow planning—This tech- nique involves the continuous monit- oring of all of the relevant compon- ents of a rival's strategy. For ex- ample, the goal of shadow product planning is to equip the analyst with such an intimate knowledge of rival's product development plans so as to develop a reasonably accurate under- standing of its competitive mindset. This will allow you to analyze contin- gencies in your firm's own product planning. The analytical output is a continuous stream of market intelli- gence necessary to strategically nego- tiate dynamic markets and intense competition.

2. 2. Developing a shadow market plan—This technique differs from

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the previous one in that it is a one-off project with a limited timeframe for completion. Its objective is to develop an accurate proxy for the actual mar- keting plans of rivals. The analytical product is a document with a finite shelf life that closely resembles the formal marketing plan of a competitor.

These two approaches are not mutually ex- clusive, as shadow planning is used to build shadow market plans. The continuous stream of shadow planning information provides a solid intellectual foundation from which to develop actionable recommenda- tions and launch strategy—think of the shad- ow market plan as the intelligence vehicle, and shadow planning as the maintenance that tunes it up regularly, making the engine run more effectively. Not only are these two tactical manifesta- tions of shadowing closely integrated, but

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should be closely integrated into the firm's broader corporate strategy. A recurring de- bate in the field of strategy is the question of identifying the true source of the firm's com- petitive advantage. Does it lie inside the firm in the form of resources, core competencies, capabilities, organizational structure and business processes, or does it lie outside the firm in the form of superior competitive pos- ition within markets, strategic groups, and industries? As with many arguments that at- tempt to delineate ambiguous or circular constructs to their core, the answer to these questions is not black and white but, rather, several shades of gray. In reality, the location of the firm's competitive advantage is both internal and external. It is in this gray area where shadowing, if employed correctly, can shed much light onto the challenge of craft- ing strategy. In order to fully leverage the power of shad- owing within a firm, it is important to bridge

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the link between the internal and external sources of a firm's competitive advantage. By having a number of analysts explicitly charged with learning as much as possible about rivals, the firm incorporates several le- gitimate sources of strategic challenge inside itself. Shadow analysts with an accurate read on the competitive mindset of competitors, function in several ways to integrate the in- ternal and external view of corporate strategy by

• Testing the validity of the firm's own strategies

• Identifying potential weaknesses of rivals that the firm may exploit

• Protecting against weaknesses in the firm's current and future strategies

• Predicting the contingent reaction of competitors to the firm's planned marketing strategies

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• Identifying potential new competitive threats or opportunities in the broad- er market framework

Given that the goal of strategy is to find the best match between the firm's resources and opportunities to provide superior customer value, the knowledge that shadowing can bring to this process is extremely valuable. The competitive value of a firm's resources and the definition of superior customer value are contingent upon competitive response. Shadowing provides reasonable inferences regarding such contingent competitive re- sponse. Hence, shadowing is one of several effective methods to bridge internal and ex- ternal views of strategy. Often, the role of shadowing is seen as du- plicating the market research function. Cer- tainly there is an overlap, but shadowing is much more in-depth. A leading expert in this

area, Rothberg2 asserts that while traditional

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market research excels in securing know- ledge of consumer research and the "Four Ps" of the marketing mix, it stops short of se- curing the breadth of knowledge required for strategic success. Shadowing supplements market research by providing insights into the entire value chain of competitors. Shadowing is especially necessary for the heightened levels of competition that charac- terizes modern markets in which globaliza- tion is threatening once-secure markets. Similarly, technology is fostering market mi- gration by unraveling traditional linkages in many value chains.

Strengths and Advantages

A valuable benefit of shadowing is the re- moval of blindspots that commonly develop inside of the strategic decision-making pro- cess. Without shadowing, firms often make

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incorrect assumptions about the future dir- ection of rival strategies. Similarly, firms of- ten neglect to adequately consider the con- tingent competitive reaction to the firm's planned strategy. Adopting the competitive mindset of rivals through shadowing allows the firm to counter these two common blindspots. Shadow teams also become a firm's eyes and ears on a whole range of strategic and com- petitive matters. This means they are in a po- sition to help a firm adjust to changes in its environment by attending to such matters as (to name a few):

• Facilitating new product development

• Adjusting existing products and services

• Interpreting market signals • Investigating rumors • Identifying new technology

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A well-constructed and nurtured shadow team can become an invaluable organiza- tional asset. First, through sharing, collabor- ation, and analysis, the firm's knowledge as- sets increase. Second, a shadow team can op- erate as investigators of competitive rumors and market signals, or they can serve as gen- eral think tanks, providing unfiltered analys- is directly to the strategic players. As a result, shadowing allows for a firm's learning to im- prove, as well as enhancing its ability to re- spond to its competitive environment. The key contributions and value of shadow teams are identified in Table 13.1. Table 13.1 Characteristics and Contributions of Shadow Teams

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Source: Adapted from Rothberg, H.N. (1997). "Fortifying Competitive Intelligence with Shadow Teams," Competitive Intelli- gence Review, 8(2), p. 4.

Weaknesses and Limitations

Critics of shadowing argue that the strategy may not necessarily always follow structure. As such, shadowing may not be able to ad- equately predict new strategic directions un- dertaken by rivals, especially when past

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intelligence garnered from shadowing is premised on the structure and strategic in- frastructure of rivals. A new strategic direc- tion may blindside shadow team members who are myopically assuming that rivals are operating from a base of established re- sources and strategy. Often, when rivals are pursuing entirely new directions, strategy will precede structure. Like many other strategic tools, blind applic- ation of shadowing does not handle discon- tinuity very well. Shadow teams may also fail due to organiza- tional issues such as the firm's culture, polit- ics and role of senior management. Table 13.2 below identifies the issue and reason for the failure of competitive intelligence teams within a firm. Table 13.2 Reasons Why Shadow Teams Fail

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Source: Adapted from Rothberg, H.N. (1997). "Fortifying Competitive Intelligence with Shadow Teams," Competitive Intelli- gence Review, 8(2), p. 10. Shadow teams take time to develop and build rapport among themselves and senior management. They develop across circum- stances and with experience. Individual members bring with them their own specific weaknesses and blindspots, which may in turn impact the team dynamics. Without

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management's ongoing commitment and support, the output of shadowing can be littered with biases, blindspots, team con- flicts, and analytical naivety.

Process for Applying the Technique

Shadow Teams

Before the process of shadowing can com- mence, the establishment of a shadow team or teams that can operate outside the struc- tural confines of a firm needs to be put into place. The specific guidelines for the effective operation of a shadow team need to be expli- citly agreed to by senior management. The team needs to be able to report directly to senior management without editorial input

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from gatekeepers. They need to be relatively fearless. Members of shadow teams need to be cereb- ral independent thinkers, self-starters, and

tenacious.3 Recruiting individuals with the skills, knowledge, and guts to conduct invest- igations and generate reports based on real data is one of the keys to developing a high-

performance team.4

Teams will also require the following:

• A clear, unifying purpose • Challenging goals • Work that is meaningful with collect-

ive products and challenging per-

formance criteria5

• Ongoing training and coaching in such areas as team dynamics and analysis

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Special attention must be given to three key performance issues for shadow teams, as follows:

1. 1. Team composition 2. 2. Team structure 3. 3. Performance goals

Team Composition

The objective is to create a balanced group of individuals who bring a combination of skills, diversity, knowledge, networks, dis- position, personality mixed with creativity, out-of-the-box thinking, and analytical abil- ity. Rothberg suggests selection of team members could address the following criteria:

1. 1. Intellectual capability—The ability to secure relevant

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information; relate and compare data from different sources; identify is- sues and relationships; and to be conceptual, analytical, and creative

2. 2. Results-oriented—The ability to work toward outcomes and complete what one starts

3. 3. Interpersonal skills—The abil- ity to relate to the feelings and needs of others and to convey interest and respect

4. 4. Planning and organizing—The ability to schedule time and prioritize for one's self and/or others, to handle multiple activities, and to meet deadlines

5. 5. Team-oriented—The ability to work collaboratively within a com- plex organizational structure

6. 6. Maturity—The willingness to be open and act responsibly when deal- ing with people and situations

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7. 7. Presence—The ability to create a positive first impression and stand out tactfully (includes verbal and nonverbal communication)

Team Structure

High performance shadow teams are small yet provide a representation of the required skills. (Note: large teams tend to take on the characteristics of a group, which may impede a cohesive approach to the issue at hand and the timely delivery of the project goals and objectives.) Shadow teams are composed of the best and brightest in a firm and are made up of volun- teers who decide to take on this work in ad- dition to their usual work responsibilities. A facilitator needs to be identified to serve as an administrative and communication hub

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for team members and as a liaison point between management and the team.

Performance Goals

Without focused, measurable goals and a be- lief that the goal is worthwhile, teams never

achieve high performance.6 Without clearly defined goals, members can become un- focused, politicized, lose their urgency, or be- come irrelevant. In essence, when establishing a shadow team, the following guidelines should be ob- served. The teams operate within a learning climate. They have the opportunity to learn from each other. They also have some latit- ude for analysis to miss the mark as long as it is based on unfiltered information and demonstrates analytical thinking:

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• Teams are comprised of diverse and cross-functional people who reflect the texture of the company.

• There are clear, meaningful, and measurable goals.

• There is management support. • There is exposure to senior execut-

ives and executive strategic decision makers.

• Appropriate tools and training are available.

Shadowing

Once teams are in place, the process of shad- owing and developing a shadow market plan can be commenced; however, the process cannot be described adequately by a formal sequential or step-by-step procedure. In gen- eral, the process is characterized by

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collection, analysis, and dissemination of strategic recommendations. However, these general stages are usually performed simul- taneously and often become intertwined through a complex web of formal and in- formal iteration. The first step is for the shadow team to learn as much as possible about every aspect of the rival firms. The goal of this knowledge will be to enable the shadow team to think like the competition. In order to achieve this, several methods are offered by two experts in the

field of shadowing:7

• Personnel hiring—An examina- tion of the personnel changes in the executive suite, as well as the func- tional areas in the firm, will often yield valuable insights on the stra- tegic focus of rivals. For example, hir- ing marketing staff may indicate an expansion of marketing effort.

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Likewise, hiring research scientists may indicate that a rival is beefing up its innovation and internal product development capacity.

• Personnel departures—Monitor- ing the firings and resignations of key personnel can often shed insight into which functional areas are receiving the most attention at rival firms. For example, the resignation of an opera- tions manager and senior R&D per- sonnel may indicate that other areas of the firm are being pursued more aggressively. One may surmise that technical innovation may be taking a back seat at this particular rival; pos- sibly, the real decision-making power may now rest in the finance function with a strategic focus on cost cutting.

• Full text of news releases and speeches—The full text of relevant sources will often provide hints of

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strategic intent by allowing you to place the document in a fuller context and to search for meaning by "read- ing between the lines."

• Hometown media—Often minute but nonetheless significant, details are included in press coverage of the newspaper or local business magazine published in the rival's ho- metown. Local press digs deeper and provides more detail due to the im- portance of the company to the local economy. Other, more distant, press sources may leave out this detail due to detachment.

• Trade shows—Participants at trade shows involve members of the competitor's entire value chain (that is, suppliers, customers, and distrib- utors). Additionally, trade shows of- fer the chance to meet members of rival firms. Face-to-face contact may

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offer you the best opportunity to evaluate the human resource capabil- ity of rivals. Conversations with them may also yield clues as to their re- sources, industry outlook, priorities, or even veiled references to their cur- rent or planned strategies.

• Corporate literature—This in- cludes company newsletters, technic- al brochures, and product support material.

• Online databases—The Internet provides a cost-effective source of in- formation in the form of general press coverage, hometown press cov- erage, and online databases. Addi- tionally, the perceptions of the shad- ow team can be tested, and if needed objectified, by reading material writ- ten by a wide variety of sources from official security firm analysts to the

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meandering "off the cuff" unguarded comments in chat rooms and forums.

• Technological tracking—This is done through professional society pa- pers, industry trade association art- icles, and articles written by technical personnel of rivals.

• Background checks—This is done by assessing the totality of executive backgrounds including education, previous positions, career track, past successes and failures, and hiring tendencies.

• Management personality profil- ing—This provides an understanding of how decision makers at rival firms are psychologically hardwired (what makes them "tick").

• Debriefing—Talking to employees who have previously worked with rivals either directly through an em- ployment contract or indirectly

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through industry associations. Addi- tionally, other valuable sources of in- formation include members of a rival's value chain, including salespeople, distributors, customers, suppliers, and advertising agencies.

• Regulatory tracking—This in- volves monitoring regulatory proced- ures with which competitors are in- volved, such as patents pending, li- censing, consumer, or environmental regulation.

• Financial statement analys- is—Learning of the financial strength of rivals, as well as any financial con- straints facing rivals (for example, debt capacity, cash flow, and liquid- ity) may yield insights into the suc- cess of their past strategies, as well as their propensity to intensify or change strategies.

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Financial statement analysis is inten- tionally placed at the bottom of the list because the whole point of shad- owing is to determine the future stra- tegic plans of rivals before they ma- terialize into financial results. This placement underscores the ultimate goal of shadowing to function as a leading rather than lagging indicator. Nonetheless, a solid understanding of a rival's financial situation provides a necessary foundation for shadowing.

Once all of this information has been collec- ted, analyzed, and internalized, the shadow team should be ready to assume the role of strategic challenger. By functioning as a proxy for the competitor, shadow teams should be able to objectively filter any as- sumptions about rival firms that other de- cision makers in the firm may harbor. Simil- arly, shadow teams will be well placed within

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the firm to infer the future strategic de- cisions and directions that rival firms may pursue. In order to maintain the integrity of this strategic capacity, this process should be continuous, or at least updated regularly. Nothing stands still, and new forces may change the dynamics of the marketplace very quickly. Equally important, when conducting shad- owing, you must be able to consciously di- vorce yourself from the firm's own decision- making processes, frameworks, and biases/ blindspots; that is, in order to be an effective and legitimate strategic challenger, you must act as the rival firm in order to challenge the thinking within the firm. In the event that in- dividuals with these capabilities cannot be found within the firm, external analysts may be considered. Table 13.3 outlines the vari- ous pros and cons of outsourcing the shad- owing analysis to external experts. In

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general, the pros of developing shadowing capabilities in-house overpower arguments for outsourcing. Individual firm circum- stances may, however, refute this generalization. Table 13.3 Issues Around Outsourcing Shadowing Capability

Source: Adapted from Vella, C.M., and J.J. McGonagle, Jr. (1988). Improved Business Planning Using Competitive Intelligence. Westport, CT: Quorum Books.

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Developing a Shadow Market Plan

Intermittently, throughout the shadowing process, a shadow market plan is drawn up from the analysis. A shadow market plan is essentially a document that captures all of the knowledge obtained to date, which has been analyzed to derive some insight. Its purpose is to provide a proxy of the official marketing or business plans of rivals. Com- petitive analysis is essential in estimating the capability of rivals, and specific analytical tools appropriate to the team's objectives are used at this time as a foundation for strategic decisions yet to be made. This analysis may be the first level of iteration of the shadow plan, with ongoing analysis occurring as fur- ther information is collected. A shadow market plan views the resources, competencies, capabilities, processes, strategies, strengths, weaknesses, opportun- ities, and threats from the perspective of

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rivals. As such, it attempts to view all of the parameters of strategic decision making made by the rival. This detached perspective allows the firm to establish with reasonable accuracy the current marketing and business strategy of rivals. It will also enhance the firm's ability to project the future strategic direction of rivals or their likely reaction to strategic initiatives of the firm conducting the shadowing. An informal and qualitative sensitivity analysis is then conducted to pre- dict different outcomes to various competit- ive scenarios. A useful supplement to the shadow analysis plan is to conduct a reverse shadow market

plan. Vella and McGonagle8 suggest that firms may find it helpful to develop an ana- lysis of how the rival actually views your firm. Often the results can be quite disconcerting. The final step in the shadowing analysis pro- cess is to continuously monitor rivals and

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revise and adjust the shadow plans as re- quired. If substantial enough, these revisions and adjustments will then influence sub- sequent strategic decisions. In this respect, labeling this step as the final one is a mis- nomer, as the shadowing process is more cir- cular than linear in design and function.

Case Study: Illuminating Strategy by Shadowing

A hypothetical example is outlined next, which shows how the process of shadowing could improve strategic decision making at a large insurance firm. Suppose that the ob- jective of the shadow team was to develop a shadow market plan for a large competing insurer, Mega Insurance. Summarized here is an itemization of what each stage in the proposed shadowing process may look like:

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Specified objective—Delineate the analysis into the potential expansion of commercial lines by Mega Insurance in the Mid-Atlantic market.

Sources of Information

Insurance industry publications include the following:

• Mega filings with the Securities Commission

• Trade publications of industries to which Mega sells commercial insurance

• Commonly reported Mega press releases

• Full texts of Mega press releases • Regional business publications • Newspapers covering the city in

which Mega headquarters is located

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• Internet marketing and financial re- ports of Mega by securities analysts

• Coverage of Mega's new facilities in computer industry trade publications

• Interviews of Mega executives in loc- al business publications

• Evidence of zoning application or permissions for new Mega facilities at relevant municipalities

• Evidence of expansion from industri- al development authorities regarding public financing

• Mega's own Web site • Other Internet sources

Inferences

• Mega is planning to initiate a new commercial line starting in Ohio.

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• Mega has engaged a contractor to build a new office in New Jersey.

• Mega has recently recruited an exec- utive from a rival firm to manage the NJ office.

• Marketing materials distributed by Mega to target customers, agents, and brokers reveal current distribu- tion, target market, and sales of new commercial lines.

• Shadowing also uncovers the planned grand opening of the NJ office to co- incide with the market launch.

• Management profiling reveals back- ground, experience, and past suc- cesses and failures of the new NJ of- fice executive.

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Confirmation

These sources and inferences are then con- firmed and cross-referenced with existing in- formation of Mega's strategy, past affili- ations, and actions in the Mid-Atlantic mar- ket area. Next, these tentative conclusions are meshed with an environmental analysis of the market conditions in the relevant areas.

Tentative Conclusions

A shadow market plan is built consisting of several prominent strategies, including the following:

• Mega is planning a major expansion of its commercial lines.

• A regional marketing approach will initiate the product launch under the

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auspices of the new executive in the NJ office.

• The pioneering product will be the new commercial line.

Monitoring

The same sources discussed previously are used to monitor the progress of Mega's shad- ow market plan. In addition, several addi- tional sources are added, such as:

• Monitoring new policies and rates of the new commercial line via records at state insurance offices in Mid-At- lantic states

• Determining the target market from advertisements placed in regional

business publications9

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Mini Case Studies

Case 1—Deregulating Utility

A shadow team at a large utility company in the midst of deregulation warned senior management about activities indicating a key competitor's acquisition intentions that would result in shrinking the utility's current market and tilting market power in the competitor's direction.

Result

Senior management responded quickly by pre-empting the competitor's offer with one of their own. The threat of a loss in market share was thwarted and actual market power increased.

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Case 2—Packaged-Food Multinational

A new product development group in a mul- tinational packaged food corporation was planning to develop a challenger to a rival product category leader. The competitor shadow team was brought into the process to "war game" the potential rivalry with the group's new product offering. The shadow team knew the rival's operations down to product P&L, had profiles on senior manage- ment (one who had his corporate roots in the product category), and possessed a clear un- derstanding of their marketing mentality.

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Result

The two-day simulation revealed that the rival could and would retaliate against all market moves and had a cost structure en- abling it to win any ensuing price war. At the game's conclusion, the decision was made to abandon the product line before investing further in its development.

Case 3—Ready-to-Eat Foods

A leader in "ready-to-eat" foods was gearing up to produce a new product for test market- ing. While visiting a remote out-of-state fa- cility, a manufacturing employee noticed an unusual structure in a nearby town owned by a rival. An internal search by the shadow team identified a recently hired employee who had worked for the rival and was famili- ar with the facility. Apparently, the rival

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employed the site as a testing ground for the manufacture of new products that the mar- ket had not yet proven worthy of full-scale operations. The shadow team's comparative financial analysis of the firm's new product manufacturing process versus a flexible test- ing facility demonstrated that the rival was saving millions of dollars. The shadow team was also familiar with the rival's equipment engineers and suppliers.

Result

Information leveraged from these network contacts increased the shadow team's contri- bution by recommending a rudimentary test facility design of their own.

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Case 4—Pharmaceutical Firm

A medium-sized American pharmaceutical firm structured shadow teams around ail- ment classifications. During scanning activit- ies, a shadow member heard a rumor from a Federal Drug Administration (FDA) contact, which was corroborated by a field salesper- son, that a new drug positioned to rival the firm's market leader was close to receiving approval. An upcoming conference gave the shadow team the opportunity to gather intel- ligence and validate—or refute—the rumor. Network connections identified the academic institution conducting the competitor product trials. During an evening cocktail party, shadow team members independently engaged scientists in discussion about chem- istry and related topics. In time, they learned about the trials (although the product or sponsor was never noted by name), con- firmed the FDA rumor, and, importantly,

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identified the new procedures employed in clinical testing.

Result 1

The firm leveraged this information and launched a campaign to bolster its product's market share. During this time, the shadow team was charged with finding out why com- petitors were constantly beating the firm to market with new categorical drugs. The team's experience with competitor scientists at the conference influenced their decision to launch a counter-intelligence investigation of their own firm. They learned that their own scientists, both in-house and those contrac- ted to run clinical trials, behaved similarly.

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Result 2

A program was created to generate aware- ness for protecting intellectual property and competitive information throughout the or- ganization. The shadow team drove home the importance of not only learning, but also

of guarding knowledge.10

FAROUT Summary

Figure 13.1 Shadowing FAROUT summary

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Future orientation—Medium to high. One of the primary purposes of this model is to fore- cast with reasonable accuracy the future strategic plans and contingent reactions of rival firms. Accuracy—Medium. To the extent that strategy follows structure, this tool is reason- ably accurate. To the extent that strategy precedes structure, accuracy is comprom- ised. Additionally, qualitative inference is fraught with potential inaccuracies. Resource efficiency—Low to medium. Shad- owing requires a dedicated team of internal analysts conducting analysis on a daily or weekly basis. Outsourcing introduces painful and often costly tradeoffs. Objectivity—Medium. The idea that analysts can fully and objectively adopt the competit- ive mindset of rivals may be questionable in principle. Bias can be introduced by the analyst's internal affiliation and exposure to

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the firm's strategic decision-making pro- cesses and blindspots. Usefulness—High. Having an in-house team of strategic challengers is very useful in root- ing out blindspots. The usefulness of this strategic challenge is enhanced by the fact that the analytical ammunition of this model is externally sourced and cross-referenced. Timeliness—Medium to high. A shadow mar- ket plan can be drafted fairly quickly.

Related Tools and Techniques

• Blindspot analysis • Competitor profiling • Functional capability and resource

analysis • Growth vector analysis • Management personality and

profiling

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• Scenario analysis • Strategic group analysis • SWOT analysis • Value chain analysis

References

Fahey, L. (2002). "Invented competitors: a new competitor analysis methodology," Strategy & Leadership, 30(6), pp. 5–12. Fleisher, C.S., and D.L. Blenkhorn (2003). Controversies in Competitive Intelligence: The Enduring Issues. Westport, CT: Praeger Publishers. Gilad, B. (1994). Business Blindspots. Chica- go, IL: Probus Publishing Company. Gilad, B. (2003). Early Warning: Using Competitive Intelligence to Anticipate Mar- ket Shifts, Control Risk and Create Powerful Strategies, AMACOM.

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Katzenbach, J.R., and D.K. Smith (1993). The Wisdom of Teams. New York, NY: HarperCollins Publishers, Inc. McGonagle, J.J. Jr., and C.M. Vella (1996). A New Archetype for Competitive Intelligence. Westport, CT: Quorum Books. McGonagle, J.J. Jr., and C.M. Vella (1999). The Internet Age of Competitive Intelli- gence. Westport, CT: Quorum Books. Rothberg, H.N. (1997). "Fortifying competit- ive intelligence with shadow teams," Com- petitive Intelligence Review, 8(2), pp. 3–11. Rothberg, H.N. (1999). "Fortifying strategic decisions with shadow teams: A glance at product development," Competitive Intelli- gence Magazine, April/June, 2(2), pp. 9–11. Rothberg, H.N., and G.S. Erickson (2005). From Knowledge to Intelligence: Creating Competitive Advantage in the Next Economy. Elsevier, Inc. Vella, C.M., and McGonagle, J.J. Jr. (1987). "Shadowing markets: A new competitive

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intelligence technique," Planning Review, September/October, 15(5), pp. 36–38. Vella, C.M., and McGonagle, J.J. Jr. (1988). Improved Business Planning Using Compet- itive Intelligence. Westport, CT: Quorum Books. Young, G. (2004). "Using shadowing to build creativity and continuity," KM Review, July/ August, 7(3), pp. 20–23.

Endnotes

1 Fahey, 2002. 2 Rothberg, 1999. 3 Larson and LaFasto, 1989. 4 Rothberg, 1997. 5 Katzenbach and Smith, 1993. 6 Rothberg, 1997. 7 Vella and McGonagle, 1988. 8 Vella and McGonagle, 1988.

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9 Adapted from Vella, C.M., and J.J. McGonagle, Jr. (1988). 10 Rothberg, H.N. (1999).

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14

Product Line Analysis

Short Description

Product line analysis is the process of ex- amining a company's product line to determ- ine if the line is maximizing the company's use of resources and is able to meet its stra- tegic goals. The process involves assessing whether the correct volume and type of products are present in the line, an aware- ness of the life-cycle stages products are in, the manner in which product markets are segmented, the methods by which products are marketed to those segments, how the product is perceived by customers in the marketplace, and how a company allocates resources to products within its line.

Background

There were considerable advancements in products being made available in the mar- ketplace after the Second World War that made a difference in how people lived. All a company essentially had to do was present the products with their fabulous features to waiting customers, and the growing market- place would flock to purchase the item. Dis- posable razors and nylon pantyhose were products launched during this time and were readily adopted. However, by the 1960s, the competition had intensified, and managers became mindful of the fact that in order for a firm to prosper, a simple "build it and they will come" approach was not going to be suf- ficient. As competition for customers' favor intensified, the scope of managers' respons- ibilities—particularly marketing, brand, and

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product-related managers—started to in- clude understanding the needs and wants of the customer and designing products to meet their actual (and not just assumed) needs. By the 1970s, concepts like segmentation, per- ceptual mapping, consumer behavior, and the product life cycle had been formulated and generally accepted, and the constructs aided in the product line analysis process.

Strategic Rationale

For those enterprises competing in global markets, the world's population is only grow- ing at a little more than one percent per

year.1 Managers increasingly recognize in in- dustry after industry that market share will not grow unless it is being taken from com- petitors. Products can achieve sales growth by out-performing or under-pricing compet- itors' offerings. In order to do this, it is

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important for managers to understand a product's potential, as well as the potential of all products that the company has in the competitive marketplace. For example, dis- cerning managers will need to know where the product is in its life cycle, what market the product is in, how that market is seg- mented, and how profitable the product is to the firm. The reality of just-in-time delivery systems, efficient value chains, and shorter business cycles means that product line managers are under increasing pressure to get products to market faster and have fewer margins for er- ror with steadily empowered and newly en-

lightened customers.2 "Design for postpone- ment" strategies allow last-minute customiz-

ations to suit customers' preferences.3 These are among the reasons that customers' ex- pectations of products' abilities and features offered are at historically high levels, putting

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more pressure on managers to get the product mix right the first time. Product line analysis is a beneficial tool used in both business and competitive analysis. Decisions about whether or not to add or subtract products can have large con- sequences. Many apparently well thought- out new products have gone awry—wasting time, wasting money, and destroying careers along the way. Experiencing adverse con- sequences such as these leads many com- pany executives to adopt a fast follower strategy, thus avoiding the risks, and re- wards that are associated with new product

development.4

In a competitive sense, knowing where a competitor's products are vulnerable can be a key facet of understanding what tactics might be employed by your company in ex- ploiting these vulnerabilities. Turned on its head, knowing where your own company's products are vulnerable to competitive

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attacks allows you the opportunity to shore up the product's defenses or to employ cross- product or cross-line tactics and methods to maximize the return of the entire line of products in any given market space.

Strengths and Advantages

A critical tenet of economics suggests that competitive firms have limited resources. Product line analysis (PLA) is a valuable tool in determining where and which products should be the recipient of scarce, valuable or- ganizational resources. The product life cycle can help in the forecasting process and in the ability to compare firms' products in terms of past and future to other products in a company's product line, and to competitors'

products as well.5 Realistic expectations of profits, growth, and market share can be de- veloped for the firm if each product and

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brand is viewed objectively within the con- text of the entire product portfolio offering. This objectivity is important if the manager who is evaluating a products' viability is, in some way, emotionally attached to the product. If the manager helped develop a product or spent a great deal of time resur- recting or marketing it, s/he may be less likely to cut it loose or alter it without per- suasive empirical evidence of why the result- ing business decision is beneficial. Tools like the product life cycle (PLC), which are used in doing product line analysis, en- able marketers and managers to see product life stages for what they are. Profits can be forsaken for market share in the beginning stages, and profits will follow in later stages when managers see the "big picture." Profit maximization for the life cycle can be most effectively realized when managers are not focused on the myopia of profit realization

for the quarter or year.6

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The ability of PLA to help the analyst cat- egorize markets and position products ac- cording to segments ensures maximum effi- ciency in an overall product line. The process of analyzing the product line can reveal actu- al or potential cannibalization, duplications, met or unmet customer needs and wants, and availability or shortcomings of market size or structure. The overall strategy of a company's product line is improved when vi- able segments are identified, and resources are allocated with the intent of satisfying needs and communicating product attributes effectively.

Weaknesses and Limitations

A limitation of product line analysis is that the outlook tends to be limited to organiza- tional phenomena, and external, less

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organizationally controlled factors like eco- nomic, social, and political circumstances are not taken deeply into consideration. Potentially significant macro-environmental conditions like recessions, demographic shifts, exchange rate fluctuations, and other risk factors outside the immediate control of the firm are frequently neglected; con- sequently, contingency plans for maximizing profitability from a product line facing these conditions may not be put in place. From a business analysis perspective, there is a risk that product line analysis may lead to a too quick abandonment of some products or brands because they may appear to be at the end of their life cycle, even though they may have a loyal and still profit- able (albeit less so than in the product's hey- day) following for years to come. Product life cycles are not something that exists in abso- lution. They are metaphorical tools used to classify certain stages that many products or

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brands potentially pass through over a given period of time. If a manager views all products and brands through the product life cycle lens, there is a risk that some products' longevity will therefore be thwarted simply because the manager is looking for them to expire. Many classic products are simply ex- empt from the construct or run an atypical

cycle.7 For example, combinations of nostal- gia, technological developments, and/or good marketing have saved many toys from the scrap heap. Long-standing products like Hasbro's "My Little Pony," "Transformers," and "G.I. Joe" have all been resurrected from the PLC-prescribed phase-out in time to re- gain popularity with the original market's children. Mattel's "Barbie" line and Hasbro's "Monopoly" line of games use landmark an- niversaries to build momentum, rather than lose it. Another business-oriented risk inherent in product line analysis is that management

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become "product-focused" rather than "customer-focused." Entire industries have failed as a result of that very perspective. Theodore Levitt noted decades ago that had the railways seen themselves in the trans- portation industry (providing service that cli- ents were actually looking for) rather than the railway industry (in the business of oper- ating rail transportation), rail companies would be in a better position today. The result of the product line analysis is the risk that some managers will use these con- cepts as hard and fast rules to develop or eliminate strategies, without taking into con- sideration the many unquantifiable nuances that can result from product line changes. A good example of this was the elimination of 25-cent coffees at Nordstrom stores. The Seattle-based retailer has built a reputation for legendary customer service over its 100+ year history. For decades, coffee has been available in the Nordstrom Café for a

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quarter. Payment is based completely on the honor system, and the product is there for anyone who wants it, customers and employ- ees alike. In the late 1990s, Nordstrom share price was taking a beating in the stock mar- ket, and the company wanted to build a much more cost-conscious culture in order to help improve profitability. Some of the cost-cutting measures made a lot of sense—vastly reducing bloated inventories and speeding cycle times, as well as training employees to be more aware of the true cost of sales. One cost-cutting measure, however, was the elimination of the quarter coffee. Overnight, the cup of coffee was raised to a dollar! The outrage that resulted from the elimination of one little gesture, a coffee for 25 cents, and the nostalgia that was lost along the way, left a bitter taste with many loyal customers and employees, and may have ended up costing the company more money than it saved.

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Process for Applying the Technique

Ideally, at the time of analyzing a product line, the analyst (or product manager) has firmly defined the goals of the product(s) in questions, and these are checked for consist- ency with the overall corporate strategy. It is also worthwhile to identify whether the tar- get market has been identified and the mar- keting, pricing, and promotion strategies are consistent with the goals. The process of ana- lyzing the product line will identify if the products are able to meet these goals given their current position, if the products need to be replaced with newer options, improved, or if market opportunities are being missed because the firms lacks a certain offering.

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Step 1: Initial Product Audit

Volume of products in a line: The goal of maximizing profit over the long term is com- plicated when numerous products exist in a line. If a company is looking to exploit a low- cost strategy, they may choose to try and drive out costs by eliminating products that in any way duplicate or cannibalize sales of other products in the line. Alternatively, if a company is pursuing a differentiation strategy, they may seek to have more products in the line, which are tailored for and customized to different market seg- ments. In a perfect world, any company product would not cannibalize the sales of other products within the company; never- theless, cannibalization does occur to varying degrees where similar products are offered, and it is important for managers to be able to assess the impact of this phenomenon. Like- wise, they must be able to assess any

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potential cannibalization that may occur to existing products if a new product is being introduced. Customer information systems, like CRM software, can be used to track how many mature-product sales are being lost to

new products.8

However, cannibalization by itself, even if deemed at an intolerable level, is not a suffi- cient reason to eliminate products without properly evaluating alternatives. Data optim- ization techniques can use sophisticated mathematical modeling to generate revenue projection based on objectives and con- straints. Programs like Excel Solver, Crystal Ball, and others use programming tech- niques, like linear, non-linear, dynamic, and stochastic techniques to attach a fiscal value

to competing options.9 Ideally, these optim- ization techniques will identify a range where long-term goals and profits can both be real- ized, which helps managers decide how to apportion resources to different products.

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The process should aid in incremental ana- lysis. Basically, for each additional unit pro- duced, how much profit can the enterprise expect to realize? Raw data alone cannot be the full extent of this step of the analysis. Each product must be viewed within the context of where it is in its expected life. In the same way that we would not expect a five-year-old child to per- form the way we would expect a 15-year-old child to perform, organizations should have different expectations of products at differ- ent stages in the life cycle.

Step 2: Assess the Product Relative to Its Position in the Product Life Cycle

The product life cycle (PLC) is a marketing construct that applies a stylized life span to brands or products. The idea is that

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generally speaking, a product will experience four stages during its life, measured in terms of sales, profit, market share, or some com-

bination. 10

During Stage 1, the product will experience introductory minimal sales and slow growth in its infancy, while the product is still "catching on" and glitches are worked out. Depending on the product, marketers will choose a "price skimming" strategy with a very high introductory price to discourage demand that the company is unable to fulfill or a "penetration pricing" strategy, selling the item at a low price in order to gain mar- ket share and then slowly raising the price in the growth stage. In Stage 2, the product will start to gain momentum and experience the greatest sales growth of the cycle. Stage 3 will see maturity and saturation, reflected in consistent sales, followed by Stage 4, the period of sales decline. Figure 14.1 is a sum- mary of some of the trends that are

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represented in each stage of a traditional product life cycle. Figure 14.1 Traditional product life cycle framework

There are variations of this traditional cycle. As many as 11 different types of life cycle

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patterns have been identified in the literat- ure, and probably more exist than this num-

ber.11 Life cycle performance can partly be determined by market demand (external, outside the direct control of firm) and partly by marketing efforts (i.e., internal locus of control). Not only will managers want to know where their or their competitor's products are in a life cycle at any given time, they will also want to know what sort of cycle the product is likely to experience and how sensitive the product's market is to expan- sion efforts. It is important to note that products' fates are not necessarily at the whim of pre-determined cycles—many ele- ments will combine to determine products'

longevity.12

Once one is familiar with the product life cycle, product line analysis will include ex- amining data on all products, keeping in mind each product's holistic revenue and

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profit implications for each stage in the life

cycle.13

Cost and revenue projections should be de- veloped for the product at each stage of the product life cycle, particularly those in the future. Product success using this conceptual lens can be evaluated not based on comparis- ons between products, but how each product performs or has performed at the various stages. Product substitutions, extensions, se- quels, and improvements can also be planned or projected by stage. Last but not least, the product life cycle can highlight profit contribution of the product, sales trends, and customer migration patterns within a valid construct.

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Product Market Segmentation

A key to product line analysis is to develop an understanding of how the product is actu- ally segmented among customers in the mar- ket. After all, the customer has to see the product in terms of features that matter to them and meets their needs, be it on price, quality, service, or other attributes. Being able to segment the market means being able to identify relatively homogeneous groups of customers, understanding what matters to these groups and how they behave. Apart from understanding the groups, product line analysis is also aided by segmenting because the process can identify if the segment is big enough to be served in a cost-effective manner. Segments can be broken down into two types: customer-related and product-related. A segmentation perspective assumes that

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competition comes from other products in the same product category. For example, a company may see mint-flavored toothpaste products as competing against one another, but not competing against baking soda, a product that, aside from doing other things, can clean teeth. A customer segmentation approach, however, might see mint-flavored toothpastes as competition against baking soda, if the target group is being segmented based on their values and self-image. A cus- tomer may value baking soda over mint- flavored toothpastes if they see it as environ- mentally friendly, less expensive, creative, and/or it satisfies a customer segment's de- sire for a multi-use, all-natural product. Table 14.1 gives an example of how markets can be segmented within these categories. The answers to the product or customer- market questions in Table 14.1 can aid ana- lysts in developing an understanding of products' overall strategies, based on needs,

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wants, preferences, and motivations that are revealed by this process. The answers can also provide an idea of the proportion of products purchased by segments and shed light not only on the segment where market- ing may be directed, but how they are being communicated with and whether there are problems in the process that can be ad- dressed through insightful tactics or strategies. Table 14.1 Product- versus Customer-Related Perspect- ives on Segmentation

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Once this process is complete, managers should know if their or their competitors' strategic goals and product offerings are aligned. They should know if they are offer- ing too many or not enough products to cus- tomers and which of those products are meeting the needs of desirable segments.

Understanding Positioning

Along with product positioning comes the more elusive task of deciphering how cus- tomers relate to a product's image and how that image compares with competing brands in the marketplace. The key to successful po- sitioning is that a product delivers real

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desired benefits to the consumer in a form that they can easily understand and relate

to.15

An assumption underlying most businesses is that in order to be viable, the company's goal is to grow and prosper over time. The growth can occur in profits, market share, geographical reach, and the like, but funda- mentally, a company's overall product strategy in order to realize these goals will fall into the differentiation or low-cost strategy categories. Porter's Generic Strategies, as they are known, are attractive because they can be applied to one-product firms or multinational corporations. In short, the low-cost strategy seeks to gain competitive advantage by bringing a product to market, which is equivalent to competit- ors' in features and quality, at a lower price than the competitor. The differentiation strategy is where the company seeks to gain market share by offering a product that has

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superior features, quality, or services than the competitors. The low-cost and differenti- ation strategies can further be segmented by the scope of the product's market. The product's target can be broad (mass) or nar- row (niche). The result is four generic strategies that can be applied to companies, product lines, and products. In summary, these four strategies are discussed next.

Cost Leadership

This is where enterprises try to provide low- cost products that have a mass market ap- peal. This requires these enterprises to em- ploy very strict management controls and drive out costs at every level from production and distribution to sales and marketing. Examples of products in this category in- clude the so-called "house brands," which are found at nearly every major supermarket

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chain. Companies using this generic strategy use their lower-cost edge to under-price competitors and attract price-sensitive buy- ers in great numbers to their products as a means of increasing their total profits. Al- ternatively, they can avoid price reductions and maintain an average price in the market- place and use their lower cost edge to earn a higher profit margin on each unit of the product actually sold.

Differentiation

A product or business with a differentiation strategy appeals to the mass market but seeks to set it apart by offering a product that is better than the competitors in some way that matters to the customer, like features or quality. Procter & Gamble's Tide is an ex- ample of a product that appeals to a mass market and charges a premium based on its

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ability to fight stains, which is something that is important to people when they wash their clothes. This strategy has also pushed the Tide brand to develop innovative products like the Tide-to-Go Pen, Tide Cold- water, and Tide for High Efficiency washing machines. Consumers are typically willing to pay more for these products because of the convenience and effectiveness that they offer. What sets the two focused strategies, dis- cussed next, apart from cost leadership or differentiation strategies, is that the enterprise's focus is on products aimed at a narrow slice of the total market. The target segment or niche can be defined by geo- graphic uniqueness (e.g., a restaurant chain that focuses on only the major cities of the UK), by specialized requirements in using the product (e.g., portable game playing units like the Nintendo Game Boy or Sony PlayStation Portables that are able to be

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played anywhere by their owners), or by spe- cial product attributes that appeal only to niche members (e.g., banks that offer certain financial products and services only to their wealthiest customers). Generic focus strategies gain in their overall attraction as more of the following condi- tions are met:

• The industry has a wide variety of customers and different customer needs, thereby providing the oppor- tunity to target products at many dif- ferent segments.

• The focused segments are not being targeted by strong rivals.

• The focuser has built up unique cap- abilities or resources that allow it to serve the targeted niche in ways that are difficult for rivals to match.

• The niche targeted by the enterprise's products is large enough to be profit- able and may also grow over time.

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• The market share leaders in the lar- ger product category don't perceive the niche as one that is crucial to their profitability.

Cost Focus

This is a low-cost strategy that targets a particular pre-determined group of buyers. Companies employing a cost-focus strategy are focused on securing a competitive ad- vantage by serving customers in the targeted market niche at a lower price than rival com- petitors. An example of a company employ- ing this strategy is Motel 6, a provider of overnight lodging in the U.S., which caters to price-conscious travelers seeking a clean, no- frills room for a night.

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Differentiation Focus

A focused strategy based on differentiation aims at securing competitive advantage by offering the targeted niche customers something they perceive is more closely aligned to their own unique needs or prefer- ences compared to the products offered by rival sellers. This strategy focuses on a narrowly defined segment and seeks to differentiate the product based on product features, service, or convenience. The philosophy is that the focused strategy can serve the unique needs of the market better than any generalist. Local wineries often successfully employ this generic strategy. The number and type of products offered in a product line will depend on what category the product is in. If a category is dominated by value brands with little differentiation, a variety of product types with innovative

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features will not be appreciated in the mar- ketplace. Differentiation and innovative fea- tures should be saved for categories domin- ated by high-end niche markets where con- sumers are willing to pay more for product

quality and features.16

Categories dominated by house brands where products are hard to differentiate between one another should focus on cost re- duction and efficiencies, resulting in less SKUs and economies of scale. A perceptual map can be a useful tool to un- derstand where the consumers see firms in the market place in terms of image and product offerings. Not only can a perceptual map help managers understand where their product stands relative to other products in the marketplace, it can reveal holes or open- ings in the marketplace, where a company

may want to direct future efforts.17 In order to construct a perceptual map, we must know the following:

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1. 1. What criteria customers use to evaluate competitive product offerings

2. 2. How important this criterion is in the marketplace

3. 3. Where our product is perceived in the marketplace relative to competitors

Because positioning has an external locus of control (it is in the mind of the consumer), market research is a good way to obtain this information. Sometimes companies will con- duct surveys or focus groups as a way of un- derstanding customers' priorities and how well their product is performing in the areas that matter. Companies can also hire third- party market research firms to get unbiased feedback through surveys and data mining. Figure 14.2 is an example of a perceptual map for laundry detergents available to cus- tomers in North America. In this example, a company would have determined on their

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own, or by purchasing research, that price and innovative product offerings, like special detergents for dark colors, high-efficiency washers, or organic stains, are important to the majority of purchasers. Then the com- pany or researcher would determine how the product in question and those of the closest competitors are performing in meeting price and innovation expectations in the mind of the customer. In this example, Tide is per- ceived as more expensive than most compet- itors and most innovative as well. Persil products manufactured in Germany are the highest priced and are distributed in the U.S. by Miele, a high-end appliance company. For that reason, Persil targets a niche market of high-end customers and is not widely available. Figure 14.2 Perceptual map of laundry detergents

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Resource Allocation and the Product Line

Resource allocation is tantamount to product line success. Under-capitalization will choke a product before it is able to succeed, and over-capitalization can waste valuable re- sources if they are better spent elsewhere. At this point in the analysis, managers will know where their product is in the expected life cycle, how the market is segmented, what is important to consumers, and how well the product is positioned to meet the needs of the target segments. From here, three factors

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remain that are important in determining re- source allocation:

1. 1. What are the incremental sales and profits that can be realized per unit of capital injection?

2. 2. What are the inter-relations and dependencies that exist between products in the line?

3. 3. How cohesive are the cost and design structures that bring the product to market?

In its simplest form, modeling techniques can be used to create sales projections based on different levels of resources allocated to a product. Modeling programs are designed to determine the optimum combination of re- source allocation that is needed to maximize profits. Unfortunately, in all but the most straightforward cases, products in a line have relationships with one another that will cre- ate some sort of interdependence. For

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example, when a printer is discontinued, sales of cartridges that fit that printer will also be affected. If the product line was de- signed to minimize this affect, then multiple printers will use the same type of cartridge, and cartridge sales will be less affected. In order to maximize supply chain perform- ance, many companies design products that share common components. Where possible, products are also created that share the same assembly process and are made to be differ- ent at the latest possible stage. If a product is eliminated from the line, other products in the line may therefore become more expens- ive on a per-unit basis. Manufacturers may lose some advantage of economies of scale, like discounts on components bought in volume. It is important for the analyst and decision-making client to understand how profitability will be affected. On the other hand, the cost of bringing a new or replace- ment product to market can be reduced if it

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is designed to share the cost structure with existing products.

Case Study: eBay, Inc. in 2004

This case study provides an illustration of how you perform product line analysis along the lines just described. The analysis looks at online auctioneer eBay's product line and shows how the process described previously can answer key questions about its product lines. eBay is a person-to-person, business-to-per- son, and B2B online auction service pro- vider. eBay's mission is "to provide a global trading platform where practically anyone can trade practically anything." eBay has cre- ated the world's largest online auction com- munity where people buy and sell goods of all kinds, including collectibles, artwork,

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memorabilia, and increasingly larger ticket items like cars, boats, and real estate. eBay has some considerations in product line development:

1. 1. Should eBay continue to grow by securing a global presence?

2. 2. Should eBay grow their fixed price format and go toe to toe with e-tailers like Amazon.com and brick and mor- tar stores with online selling?

eBay will start with a product audit, examin- ing the products in their product line, look- ing at sales trends, and customer migration patterns. Currently, eBay's platform supports three formats, or products in their line:

1. 1. Online auction format, where buy- ers bid on items.

2. 2. Fixed price format, where buyers have the opportunity to submit a best

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offer or pay a fixed "Buy it Now" price.

3. 3. Store inventory format, where re- gistered users have their own store pages and can manage and showcase their inventory, combine shipping, and create their own marketing plan or incentives.

eBay's sales trends are tremendous. The company's 41,000 registered users in 1996 grew to 94,900,000 registered users by the beginning of 2004, realizing a compound an-

nual growth rate of 202%.18 In 1996, eBay reported $7 million in merchandise sales, which grew to $24 billion in 2003, repres- enting a compound annual growth rate of 220%. This seems to demonstrate that the value of merchandise sold is increasing even faster than the number of users, meaning that existing users are increasing their usage, while new users are being attracted. Since

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eBay's inception in 1996, the users have shif- ted in focus from collectors to bargain hunters. The fixed price format is increasing in popularity, and this could represent a mi- gration away from the auction format toward a general e-tailing format, changing the nature of eBay's competitive landscape. This shift would bring eBay into direct competi- tion with e-tailers and traditional retailers with online presence like Amazon.com, Staples, Best Buy, and Wal-Mart. However, eBay's CEO, Meg Whitman, is wary of abandoning the core business too soon. The online auction industry is in a tremend- ous growth stage, with eBay enjoying ap- proximately 88% market share. Figure 14.3 reveals that eBay's products have reached Stage 2, or the growth stage. Figure 14.3 eBay's sales growth

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eBay employed a first mover strategy in Stage 1. During that time, eBay avoided mass media in favor of careful PR and a com- munity building approach. The user-friendly format attracted users who then touted eBay's benefits, and the company is now en- joying the affects of being the first to many markets and accumulating the critical mass that is creating global dominance. During Stage 2, or the growth stage, eBay's revenue is soaring, and sales and marketing costs are decreasing on a per-user basis. eBay started

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to use more mass-marketing techniques after 2002 and acquired many more auction formats in international markets. Stage 2 is typically when competitors will adopt a fast follower strategy and is crucial for positioning. eBay's culture is unique in that the users have a sense of bonding with the company and other users. This phenomenon can translate to a core competence when the crit- ical mass has been accumulated and their needs are continually anticipated and met. Although switching costs to other platforms are low, the feeling of comfort with a differ- ent platform would be hard to replicate, and the credibility that users have gained over time through eBay's rating system is not transferable to other sites. eBay's position in the marketplace is consist- ent with the differentiation positioning strategy. The global Internet retail sector is very fragmented. Only 5.7% of the global

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sector value belongs to the top-five compan- ies. The nature of the Internet lends itself to segments that are niche—focusing on one in- dustry segment—but eBay has gone against the grain and resisted the urge to chase growth through traditional methods. Figure 14.4 demonstrates eBay's valuable position- ing in the marketplace on the perceptual map, being the brand with the most aware- ness and greatest geographical scope. Figure 14.4 Perceptual map positions

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eBay's first mover strategy meant that it beat Yahoo! Auctions and Amazon Auctions to many markets. Amazon.com is a competitor in the fixed price segment and may continue to be a closer competitor if the fixed price segment grows at eBay. Live auctions and

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flea markets cannot touch eBay's presence or scope, but the advantage that local outlets have is that they allow the purchaser to view the merchandise before buying. The company is fortunate to be in a good fin- ancial position, having close to $2 billion to fund growth as of 2005. Nonetheless, the in- cremental sales growth per investment unit in marketing dollars appears to be quite small. Currently, there is significant inter- dependence between the formats because three of them will turn up in a search for any given item. For example, if one searches for a Burberry handbag, some sellers will have lis- ted a fixed price, some will be auctioning the item, and some will have stores with other styles or brands of handbags for sale as well. The fact that all three are available to a buyer when they are considering making a pur- chase is a big part of what makes eBay at- tractive to many users.

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The wiser money would be spent continuing international expansion and executing the first mover strategy or acquiring existing on- line auction houses in new markets, particu- larly where Internet usage is increasing. Many cultures worldwide are much more comfortable with bargaining than North American culture and may be even more re- ceptive at first blush to eBay's platform. New markets also present opportunities to move into bigger ticket auctions, like cars and boats, which generate bigger fees, once the market is established. The fixed price format is attractive, but eBay would face fierce com- petition from traditional e-tailers and face a significant departure from its format and culture.

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FAROUT Summary

Figure 14.5 Product line analysis FAROUT summary

Future orientation—Medium. The focus of product line analysis is more current than future. Accuracy—Medium. There are many factors that influence product performance, some of which include social and political forces, and not within the scope of the technique. Resource efficiency—Medium. A lot of in- formation is required in order to do a thor- ough analysis of a product line.

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Objectivity—Medium to high. The process of analyzing the product line is meant to lessen some of the subjectivity that managers, par- ticularly those with a vested interest in see- ing certain results become a reality, project onto products. Usefulness—Medium. This normally needs to be done in addition to a variety of other analyses, and as such, in and of itself offers only moderate utility. Timeliness—Low to medium. It can take a while to conduct a very thorough product line analysis.

Related Tools and Techniques

• Customer segmentation analysis • GE Business Screen/portfolio

analysis • Porter's Five Forces

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• Product life cycle analysis • Strategic group analysis • SWOT analysis • Value chain analysis

References

Buchalter, A., and H. Sakhnini (2006). "Fighting cannibalization," McKinsey Quarterly, 1, pp. 12–13. Cox, W.E. (1967). "Product life cycles of mar- keting models," The Journal of Business (University of Chicago), 40, pp. 375–384. Dhalla, N.K., and S. Yuspeh (1976). "Forget the product life cycle concept!," Harvard Business Review, 54, pp. 102–111. "eBay Canada: About eBay: Company over- view." ebay.ca. Accessed Feb. 28, 2006: ht- tp://pages.ebay.ca/aboutebay/thecompany/ companyoverview.html.

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Fleisher, C.S., and B.E. Bensoussan (2003). Strategic and Competitive Analysis: Meth- ods and Techniques for Analyzing Business Competition. Upper Saddle River, NJ: Prentice Hall. Jones, M.C. (2004). "eBay lays its cards on the global table," Brand Strategy, Septem- ber, pp. 12–13. Lee, H.L. (2004). "The triple-A supply chain," Harvard Business Review, 82, Octo- ber, pp. 102–112. Lefton, L.A., Brannon, L., Boyes, M.C., and N.A. Ogden (2005). Psychology, 2nd edition. Toronto: Pearson Education Canada, pp. 1–757. Levitt, T. (1960). "Marketing myopia," Har- vard Business Review, 38, pp. 45–56. Levitt, T. (1965). "Exploit the product life cycle," Harvard Business Review, 43, pp. 81–94. Marino, L., and P. Kreiser (2006). "eBay: In a league by itself," pp. C322–C352 in

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Thompson, A., Gamble, J.E., and A.J. Strick- land III. Strategy: Winning in the Market- place, 2nd edition, New York, NY: McGraw- Hill Irwin. Porter, M.E. (1985). Competitive Advantage. New York, NY: Free Press, pp. 317–382. Quelch, J.A., Farris, P.W., and J. Olver (1987). "The product management audit: Design and survey findings," The Journal of Consumer Marketing, 4, pp. 45–58. Sellers, P. "eBay's secret." Fortune, Oct. 18, 2004, March 2, 2006: ht- tp://money.cnn.com/magazines/fortune/ fortune_archive/2004/10/18/8188091/in- dex.htm. Shewchuk, J. (1992). "Life cycle thinking," CMA Magazine, May, pp. 34–36. Swan, J.E., and D.R. Rink (1982). "Fitting market strategy to varying product life cycles," Business Horizons, 25, pp. 72–76. "The World Factbook: United States." CIA—The World Factbook. January 10,

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2006. February 21, 2006: ht- tp://www.odci.gov/cia/publications/fact- book/geos/us.html. Tractinsky, N., and O. Lowengart (2003). "E- retailers' competitive intensity: A positioning mapping analysis," Journal of Targeting, Measurement, and Analysis for Marketing, 12, pp. 114–136. Vishwanath, V., and J. Mark (1997). "Your brand's best strategy," Harvard Business Review, 75, pp. 123–129.

Endnotes

1 2005 estimate of 1.14% comes from the CIA World Factbook. 2 Quelch, Ferris, and Olver, 1987. 3 Lee, 2004, p. 105. 4 Levitt, 1965. 5 Cox, 1967.

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6 Shewchuk, 1992. 7 Dhalla and Yuspeh, 1976. 8 Buchalter and Sakhnini, 2006. 9 Buchalter and Sakhnini, 2006. 10 Cox, 1967; Fleisher and Bensoussan, 2003. 11 Swan and Rink, 1982. 12 Fleisher and Bensoussan, 2003. 13 Shewchuk, 1992. 14 Lefton, Brannon, Boyes, and Ogden, 2005. 15 Tractinsky and Lowengart, 2003. 16 Vishwanath and Mark, 1997. 17 Tractinsky and Lowengart, 2003. 18 Marino and Kreiser, 2006.

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15

Win/Loss Analysis

Short Description

Win/loss analysis (WLA) is a cost-effective, insightful, and ethical method for gathering and analyzing information about your mar- ket, customers, and competitors. WLA iden- tifies your customer's perceptions of specific sales situations and how you compare to your competitors. It provides a window as to why a customer is buying or not buying your products and/or services. The analysis provides information about the performance of both your firm and your competitors. This information can then be actively used to fo- cus sales staff more effectively in the

marketplace and also to inform research and development of products.

Background

Many companies believe they are already do- ing WLA, as they do keep track of their wins and losses and do conduct post mortems. However, these results are generally not shared across the firm; only salespeople are involved, and a history of "lessons learned" is lost. WLA is a management tool that allows man- agers to understand the effectiveness of their sales team and the effectiveness of competit- ors. It is an analytical tool that sits well in the competitive intelligence framework, provid- ing knowledge about a firm's sales perform- ance. If you know yourself and your compet- itors from a customer perspective, then your

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ability to improve your sales success is increased. WLA requires the gathering of direct feed- back from a client or potential client about why you won or lost a specific sale or con- tract. It must include both wins and losses. The wins commonly highlight your firm's strengths and your competition's weak- nesses, while the losses typically highlight your firm's weaknesses and your

competition's strengths.1

The feedback obtained from a number of these interviews is analyzed. The results il- lustrate your firm's position in the market and that of your competitors. WLA provides information you can actively use to improve both the performance of your sales force and your existing products, and to guide your firm in the research and development of new products. To be most effective, a win/loss program should be established as an ongoing process

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conducted on a regular basis by a third-party supplier for maximum objectivity. Key ele-

ments suggested by Schulz2 include the following:

• Ongoing (not a temporary event around a particular client, product, or sales representative)

• Uses customer feedback (rather than or in addition to sales representative feedback)

• Timing (within a reasonably short time following the buying decision)

• Employs a consistent methodology • Consists of clearly defined users

The feedback incorporating the preceding elements and obtained using the WLA pro- cess provides more detailed and useful in- formation than the traditional sales post mortem. A sales post mortem involves your sales team discussing its experience of the sale after it is won or lost. WLA directly

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involves the decision maker with the client firm responsible for the sale or non-sale. It provides access to information your client may use in deciding whether or not to do business with you that your sales team may not aware of; for example, internal budget constraints or the nature of deals offered by your competitors. It gives insight into the client's relationship with both your own sales team and your competitor's sales team and into the market perception of your products and after sales service.

Strategic Rationale and Implications

WLA is a unique tool that brings together all the elements of strategy—information about customers, competitors, and your own firm—within the context of a most critical element for a business, the buying decision.

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As a market listening tool, it is designed to provide a firm with information that can act- ively be used to increase its sales. By seeking feedback directly from the target market and subjecting this to analysis, a firm can gain a more objective understanding of its place in the market and use this to improve its position. From win/loss interviews, a firm can identify how a competitor is developing their products and/or services or whether they have or have not delivered on promises. It can provide an avenue to re-open doors with former clients. As a tool, it makes existing and potential clients realize the commitment your firm has to maintaining good customer relationships. However, the strategic implications of WLA are highly dependent on the quality of the raw data. The raw data gathered from clients should be free from any political or strategic bias and subjective perspective—particularly

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where employees within a firm may distort information. Sales staff, for example, are not the best group to conduct WLA, as they often may be too biased or emotionally involved with their accounts to be objective when con- ducting a WLA. Many firms employ third- party interviewers to gather the feedback for WLA specifically to avoid subjective influ- ences from tainting the data and conduct parallel interviews with relevant sales staff, as well as clients, to allow comparison of these differing perspectives of the same sale/ non-sale. The results of WLA performed on feedback interviews will give information about sales performance, sales opportunities, market perception of your and your competitors' products, and your competitors' strategies. It can provide a measurement of how your firm is positioned with decision makers and key influencers within a client's firm. When ac- ted on, this information can enable your firm

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to improve sales, increase market share, un- derstand the market to maximize business opportunities, and focus marketing and sales resources to increase revenue. Naylor identifies tactical and strategic bene- fits flowing from WLA. Tactical benefits tend to focus on sales performance, while stra- tegic ones flow beyond the sales team to as- sist with product management, mergers and alliances, and product research and develop- ment. These are summarized in Table 15.1. Table 15.1 Tactical and Strategic Benefits of WLA

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Source: Adapted from Naylor, E. (2002). "Increasing sales through win/loss analysis," Competitive Intelligence Magazine, 5(5), pp. 5–8. WLA must not be confused with typical sales post mortems. First, analysts have the op- portunity to learn about customers' percep- tions. Customers' perceptions are the basis for their decision-making processes and ulti- mately impact a firm's sales performance. As Ritchie points out, "widely held perceptions,

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or misconceptions, must not be discounted. Instead they must be managed or changed in future sales encounters." Second, WLA should be an independent evaluation and conducted regularly to allow medium- and long-term trends in the market to be identified. Most firms adopt a monthly or quarterly cycle. Third, when conducted systematically and regularly, WLA enables a firm to keep a close eye on its market, to monitor its own per- formance, and to gain timely feedback on its strategies and practices.

Strengths and Advantages

WLA is a systematic analysis of nominated sales results—both wins and losses. It en- compasses feedback from strategically im- portant existing clients, former clients, and potential clients.

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Conducting win/loss interviews is a direct demonstration to your clients and potential clients that your firm values its relationship with them. Interviews are conducted as close as possible to the actual sale or non-sale being investig- ated to ensure accurate recall of the circum- stances. Because interviews are conducted by an independent third-party interviewer, in- formation bias is limited, and particular is- sues relevant to its business are covered in a more transparent way. Obtaining informa- tion that addresses specific issues ensures meaningful comparison can be made when analyzing the responses obtained at indi- vidual interviews. Regular and systematic WLA processes provides not only immediate feedback, but can also be used to compare and uncover trends over time. The WLA process allows for direct feedback on what the decision-making criteria

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employed by your clients, in awarding your firm their business or taking it to a competit- or, are. An expert interviewer can go beyond the standard questionnaire to probe a client and give him or her a chance to directly ex- press their needs and preferences. This in turn gives your firm the opportunity to make meaningful changes acting on customer ad- vice to improve practices and win new sales. The benefits of conducting WLA extend bey- ond providing tactics to improve sales. WLA also has an impact on marketing, product improvement, and research and develop- ment. Information coming out of WLA can be distributed throughout the firm to aid in overall performance improvements. The res- ults obtained from WLA may be used to in- form other strategic programs within a firm. For example, it may assist in the develop- ment of training programs for sales staff or assist in product improvement projects.

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The WLA process will give an indication in real time of the market's response to new business strategies and products. It will en- able the firm to identify and respond to trends over time in the market and assist in sales forecasting. If undertaken in a system- atic way, it will assist in growing revenues both in the short and long term. In summary, WLA establishes a market listening and positioning tool with consistent analysis allowing for improved and informed decision making in an organization by

• Helping decision makers understand the customer's perspective.

• Providing objective input into sales and marketing strategies.

• Identifying opportunities, including target markets, key sales proposi- tions, and winning attitudes.

• Improving business performance at the expense of competitors.

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Weaknesses and Limitations

WLA is based on data obtained from inter- views arising out of sales results. It is to that extent reactive and event-driven. Care must be taken to ensure that a good mix of sales results is followed up. Results will be skewed, for example, if in one round of WLA, only successful sales to existing clients are analyzed. A key weakness of this process is that inter- views are only as good as the interviewer conducting them. When an interviewer is in- experienced or has not been thoroughly briefed on the sensitivities of the market in question, the quality of the data obtained will be compromised. An inexperienced inter- viewer may lack the confidence to ask ques- tions beyond those contained in the standard

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questionnaire developed for the WLA pro- cess. Even the most experienced interviewer will be unable to gain all the useful informa- tion potentially available if they are not suffi- ciently aware of the issues in the market to know when to probe for further detail in an interview and when it is not relevant. There is no value in information gathered if it is not systematically disseminated to those who can act on it. As is a danger with any information-gathering process in a firm, it is possible for the results of WLA to end up be- ing fiercely guarded rather than distributed. On the other hand, it is possible to under- mine the process by giving all of the results to everyone and no one having time to read them, let alone act on them. The value of WLA will only be as good as the system set up to inform interested parties of the results. Information taken out of con- text—for example, in an attempt to extrapol- ate widely from one individual analysis—will

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not be reliable. The true value of WLA is in the ongoing process. WLA must be conducted systematically and in a timely fashion. Interviews must be or- ganized and followed up as soon as possible after the sale is won or lost. Delay in inter- viewing may result in inaccurate recall, so the analysis performed does not reflect the real reasons behind the decision to do busi- ness with your firm or with your competi- tion. WLA itself should be conducted regu- larly to give truly comparable results. The analysis must not, for example, be shelved while more important issues are dealt with, as sporadic WLA will not give reliable information. The fact that WLA focuses on sales results may lead to a politicizing of the process with- in a firm. The sales team may be reluctant to cooperate fully with the process if they feel they are being singled out unfairly. Other parts of the firm may try to ambush the

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process to push their own agendas. The team responsible for running WLA must be very carefully chosen and trained to ensure the members fully understand the WLA process and are prepared to implement it properly.

Process for Applying the Technique

Numerous writers in the field suggest that there are up to seven steps to consider in cre- ating and implementing a WLA process. These steps are shown in Figure 15.1. Each of the steps in the WLA process are described next. Figure 15.1 The win/loss process

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Step 1: Determine the Target Segments and Identify Prospects

Target the right accounts to analyze and the right interval to conduct analysis. A good starting point is to look at the accounts that generate most of your firm's revenue (the 80/20 rule—80% of a firm's revenue comes from 20% of its customers). However, other

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considerations in choosing whom to inter- view may include whether your firm wishes to pick up business from particular potential clients or ex-clients or whether there are plans to introduce new products to the mar- ket. Specific companies that meet the firm's chosen criteria need to be identified and singled out and reviewed to ensure that the targets are worth the investment. Powell and Allgaier suggest that one needs to start by segmenting the specific market group or target, particularly if the purpose of WLA is to identify sales sources. Once target segments and their criteria are identified, key information needs to be collected to qualify potential prospects. The interval over which you run your WLA will depend on your firm's requirements. Monthly analysis requires a greater commit- ment of time and money but will provide very quick market feedback. Some firms prefer to run a large win/loss study annually.

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The interval chosen will also be affected by how quickly you wish to be able to act on the information you obtain as well as the fre- quency of sales opportunities experienced.

Step 2: Understand Internal Cultural Issues

Understanding your firm's culture will provide a guide as to how information will be used. For example, in a learning and con- sultative culture, sales representatives and their managers might become highly in- volved in both the collection and evaluation of information. It is also important to ensure that involve- ment in the process extends beyond the sales team. Other key stakeholders need to be clearly identified, and creating cross-func- tional teams may be a way of addressing the differing needs of critical groups.

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The results of WLA have implications that go beyond increasing sales. To get the most out of the process, the team running the pro- gram should include members from other departments and have the support of senior management. Schulz points out the wisdom of involving senior management (even up to the CEO) to help to keep internal politics out of WLA. The objectives of the program must also be well defined. The roles of designing and implementing the program should be clearly understood, as these may be assigned to different people. Those who are likely to be affected by the in- formation obtained from the WLA program should be educated about the process to en- sure they support it. This should reduce in- ternal resistance to WLA. Some staff, partic- ularly in sales, may feel that their perform- ance is being unfairly singled out for atten- tion by the program. Staff should be reas- sured that the WLA program has wider

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implications for the firm than simply monit- oring the performance of individuals in the sales team. The decision must be made whether to use an independent third party to conduct the interviews or whether to use your sales team. Use of a third-party interviewer has cost im- plications. It will also require a commitment of time from internal staff to brief the inter- viewer. The use the firm intends to make of the information will also direct the decision of who conducts interviews. When the res- ults of the interviews will be used in part to evaluate the performance of members of the sales team, Schulz suggests keeping sales staff involvement in the interview process to a minimum. However, parallel interviews of client and sales representative can reveal valuable information about the different per- ceptions they have of the same sales negotiations.

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Step 3: Develop the Questionnaire

A WLA questionnaire needs to cover a num- ber of broad areas. Naylor suggests four, as follows:

• Sales attributes—This will cover the professionalism of your sales team, the quality of the relationship your firm has with the client, and the esteem in which the client holds your firm compared to your competitors.

• Company reputation—This in- cludes questions about the percep- tion of your firm's and your compet- itors' image in the marketplace, the stability of your firm, and its reliabil- ity as a supplier and the quality and performance of your products.

• Product attributes—This is a wide area basically covering whether your products actually perform as

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promoted and covers issues of price and technology.

• Service issues—These questions will cover the delivery and imple- mentation, maintenance/after sales service, and training provided to clients.

Depending on the purpose of the WLA, other areas that might be included in the question- naire could address matters relating to how the purchase decision will be made. Will it be made by a group or individual? What are the decision criteria? When will the decision be made? Are there other stakeholders involved? Another consideration will be the sophistica- tion of the analysis you plan to carry out on the results. When analysis will stop at the quick identification of market trends, nu- merous detailed questions may not be neces- sary. When statistical analysis is the aim, the information must be sufficiently detailed to

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address the required level of analysis and still be of practical value. Standard issues need to be identified in the questionnaire to ensure that the data from multiple interviews can be effectively ana- lyzed together. At the same time, some flex- ibility in the interview process will enable valuable exploration of individual situations.

Step 4: Preparation for the Interviews

The interviewer now needs to be briefed about the significance of winning or losing each sale. To get the most out of the inter- view, the interviewer must be aware of all relevant details and sensitivities of the sale/ non-sale being investigated. When an interviewer does not fully under- stand the background of a particular sale ne- gotiation, he or she is unlikely to be able to

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stray from the standard form questionnaire to probe for detailed situation-specific feed- back. Specific and detailed information can greatly enhance the overall value of the WLA process.

Step 5: Conducting Interviews

Carefully consider how you wish to go about conducting interviews. This decision will de- pend to an extent on whether you plan to use a third-party interviewer or your own sales team. Experts in this field highly recommend the use of an independent third party to avoid interview results being skewed by any pre-existing relationship between a salesper- son and his or her client. For example, the interviewer may direct the responses they re- ceive with unintentional body language cues. One option is to conduct interviews by tele- phone. This is a common practice in the U.S.

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and is quite time and cost effective. However, in some situations—for example, for big-ticket purchase items—it may be preferable to conduct face-to-face interviews in order to obtain optimal results in a partic- ular situation. Here you will need to rely on your sales team to advise when face-to-face interviews would be better. It should be noted that face-to-face interviews provide a much greater opportunity to garner in-depth information and to build on customer rela- tionships than do telephone interviews. Interviews should be conducted as close in time to the actual sale/non-sale so to avoid memories of the negotiations fading. Some firms may also interview the salesperson in- volved in the particular sale/non-sale to in- vestigate differences between the firm's own internal perception of the negotiations and those of the client.

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Step 6: Analysis and Interpretation

Once the interviews are completed, the res- ults need to be tallied and analyzed. The in- terviewer will generally summarize each completed interview and provide an analysis of key trends or issues identified as a result of the interviews in a report. If the interviews are carried out by internal staff, then train- ing and support must be provided to carry out these tasks effectively and to aid with the report development. WLA must be given clear priority over other duties when analysis is due to be done. The value of WLA can be compromised by sporadic rather than regu- lar analysis. As the WLA program continues over time, trends will emerge from the analytical res- ults. These need to be interpreted in light of the firm's strategic and competitive intentions.

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Further, over time, WLA becomes more valu- able in identifying trends that impact product development and sales forecasting. Companies have been known to adjust their product plans in light of client feedback from WLA.

Step 7: Dissemination

The report and results can now be dissemin- ated. There will be information arising out of WLA that is relevant to different depart- ments in the firm such as research and de- velopment, marketing, and sales. The pro- gram team should ensure that each depart- ment receives the information relevant to it. This should hopefully increase the likelihood that the information is read and supports de- cision making in the appropriate depart- ment. The results may be presented in differ- ent forms depending on preferences.

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Different staff will have different preferences for how the WLA results should be commu- nicated to them—from verbal presentations at the completion of interviews to half-yearly reports. Schulz highlights a WLA program where senior management received a monthly report summarizing quantified res- ults, while the sales team had results incor- porated into their regular e-mail alerts. Properly conducted WLA is one of the most valuable tools for sales account strategies. WLA helps firms understand the value of customers and the cost of retaining them versus acquiring new ones. Simultaneously, it allows firms to capture best practices in sales and identify trends to enhance future revenue streams.

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Case Study: Microsoft Business Solutions

Microsoft Business Solutions (now known as Microsoft Dynamics) provides a line of fin- ancial, customer relationship, and supply chain management solutions to help busi- nesses improve their performances. De- livered through a network of specialized partners, these integrated business manage- ment solutions work with Microsoft software to streamline processes across an entire business and include applications and ser- vices for retailers, manufacturers, wholesale distributors, and service companies, doing business domestically or in multiple countries. At the time of this case study, Microsoft Business Solutions was well positioned to be the dominant player in the mid-level finan- cial software market with its Great Plains solution. This solution provides a financial,

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analytics, and business management system that unifies data and processes across a busi- ness, integrating easily with other solutions, and connecting employees, customers, and suppliers regardless of time or location. With a strong product and a large sales force, Microsoft had the potential of winning the majority of competitive opportunities. The challenge facing Microsoft Business Solutions was to understand the competitive environment in order to leverage its strengths and capitalize on the weaknesses of its competitors with the goal of winning the lion's share of opportunities.

Understanding the Environment

Primary Intelligence conducted a win/loss assessment of Microsoft Great Plain's previ- ous 100 opportunities, comprised of 50 wins and 50 losses. Information was gathered on

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purchase selection criteria, primary compet- itors' strengths and weaknesses, the efficacy of various marketing activities, and customer satisfaction. Analysis of the gathered information yielded a clear picture of the competitive environ- ment, focusing on areas of differenti- ation—both in product and in sales method- ology. It became apparent that Microsoft Business Solutions had clear advantages in certain areas that had not been previously identified and that although the competition was strong in most areas, they exhibited spe- cific weaknesses that contributed to Mi- crosoft wins.

Learning from Their Losses

Two important, related things Microsoft Business Solutions learned from their losses were that: a) prospects didn't perceive that

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they or their partners understood their needs; and b) one of the ways prospects ex- pressed this was in lower marks for industry experience and knowledge. Because of the knowledge gained in the win/ loss report, Microsoft Business Solutions subsequently announced industry-focused strategies in four major industry sectors that they believe will help them and their part- ners be more successful in the mid-market.

Leveraging the Data

As part of the Primary Intelligence solution, senior analysts helped Microsoft Business Solutions leverage the data in the report to improve their competitive position in the marketplace, provide even further insight in- to the competitive sales cycle that Microsoft Business Solutions' channel partners cur- rently face in today's market conditions, and

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gain important insight into potential new strategies and programs that could be imple- mented to ultimately help the partner win more business in competitive situations.

Keeping Current

Another valuable tool for Microsoft Business Solutions was the comparison Primary Intel- ligence provided with the previous year's win/loss study. Analysis of the differences showed that certain shortcomings had been addressed, while new potential problems had surfaced. It also showed the progress, or lack of progress, of the competition, making it possible to assess new threats and exploit new opportunities. This ongoing assessment made it possible for Microsoft Business Solutions to track the dy- namics of the industry, respond quickly to

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change, and stay one step ahead of the com-

petition.3

FAROUT Summary

Figure 15.2 Win/loss analysis FAROUT summary

Future orientation—Medium to long term. Each time WLA is conducted, information will be obtained about how to improve sales by optimizing the focus of sales resources. Over the long term, market trends are re- vealed and can be used to fine tune strategic planning, research, and development.

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Accuracy—Medium. Accuracy will depend on the integrity of the interviews conducted. Use of an independent third party will im- prove accuracy. Resource efficiency—Medium to high. A third party specialist will be able to run a firm's WLA program very efficiently, albeit in a more costly manner. When internal staff take a greater role, there will be a decrease in the resource efficiency due to the utilization of staff time. Objectivity—Medium to high. When inter- views are conducted by a third party, ob- jectivity should be high. However, use of staff to conduct interviews will probably res- ult in a lowering of objectivity as internal bi- ases creep in. Usefulness—High. WLA provides useful practical and insightful information on cus- tomer perceptions and competitors' activities.

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Timeliness—Low to medium. The timeliness of the information obtained will depend on the interval chosen for the WLA process and how often it is repeated.

Related Tools and Techniques

• Benchmarking • Blindspot analysis • Comparative cost analysis • Competitive positioning analysis • Competitor analysis • Customer segmentation and needs

analysis • Customer value analysis • Functional capability and resource

analysis • Scenario analysis • SWOT analysis • Value chain analysis

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References

Gale, B. (1994). Managing Customer Value: Creating Quality and Service that Cus- tomers Can See. New York, NY: Free Press. Levy, S. (2003). "A call to integrate: CI, cus- tomer relationship management, and sales force automation," Competitive Intelligence Magazine, March–April. Naylor, E. (2002). "Increasing sales through win/loss analysis," Competitive Intelligence Magazine, 5(5), pp. 5–8. Powell, T., and C. Allgaier (1998). "Enhan- cing sales and marketing effectiveness through competitive intelligence," Competit- ive Intelligence Review, 9(4), pp. 29–41. Powell, T., and C. Allgaier (2003). "How high is your sales IQ?," Competitive Intelligence Magazine, 6(6), pp. 30–35.

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Prescott, J., and C. Miree (2000). "TAP-IN to strategic and tactical intelligence in the sales and marketing functions," Competitive Intelligence Review, 11(1), pp. 4–16. Ritchie, J. (1992). "Competitor assessment tools: win/loss analysis," Competitive Intelli- gence Review, Winter, pp. 18–19. Schulz, S. (2002). "Seven steps to building a successful win/loss program," Competitive Intelligence Magazine, 5(5), pp. 9–12. Web sites (all accessed March 12, 2006): www.graffgroup.com/winlossarticle.html www.lassiterassociates.com/winloss_case- study.html www.marketing-intelligence.co.uk/ resources/competitor-analysis.htm www.primary-intel.com.solutions/win- loss.aspx www.webpronews.com/ebusiness/sales/ wpn-9-20041209HowWinLossAnalys- isCanImproveYourSalesPerformance.html

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Endnotes

1 Ritchie, 1992. 2 Schulz, 2002. 3 Source: Web site: http://www.primary-in- tel.com/solutions/winloss.aspx, Primary In- telligence (accessed March 12, 2006).

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16

Strategic Relationship Analysis

Short Description

Strategic relationship analysis (SRA) in- volves the study of strategic inter-firm rela- tionships to determine their present and po- tential future competitive impacts. Strategic relationships (SRs) are found in the form of alliances, consortia, joint ventures, networks, and partnerships. They are all cooperative arrangements in which the competitive suc- cess of the partners is bound together to some degree.

Background

Strategic relationships were studied by inter- national business scholars in the early 1970s. Most of the mainstream economics and in- dustrial organization research struggled to fit SRs within the predominant "theory of the firm" that had guided knowledge develop- ment to that time. By the 1990s, inter-firm relationships began to be addressed as part of the quickly developing organizational eco-

nomics field.1

Since the early 1990s, there has been an ex- plosion of research into all forms of SRs, us- ing approaches such as historical industrial marketing, negotiation analysis, organization economics, organizational sociology, popula- tion ecology, resource-based view of the firm, social network theory, and strategy and general management. Researchers have mostly assessed how SRs are formed and managed, with some more recently trying to

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understand how they relate to various per- formance outcomes. Scholars have attempted to classify SRs across a range of variables, including but not limited to duration of commitment, extent of joint decision-making, nature of contract, degree of interdependence, degree of re- source sharing, and degree of overlap among

their value chains.2 One way of illustrating the range of relationships is to examine many of the popular forms of relationships, as shown in Figure 16.1. Figure 16.1 Common forms of SRs

In this instance, we are particularly inter- ested in inter-firm relationships between business organizations. This is not to

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discount the value of management network analysis, which examines the relationships between individuals within and around an organization. Indeed, many of the concepts developed at the micro-level of network ana- lysis are adaptable for use at the more macro-level of inter-organizational or inter- firm analysis, and vice versa. Common forms of strategic inter-firm relationships include, but are not limited to, those described next. Consortia—An association of firms who co- operate for some definite purpose. Coopera- tion is normally formed through contracts. Each party retains its separate legal status, and the consortium's control over each parti- cipant is generally limited to activities in- volving the joint endeavor, particularly the allocation of profits. A well-known consorti- um is Airbus Industrie, one of the world's premier airplane manufacturers that oper- ates mainly in Europe. Airbus is owned by EADS and British Aerospace. EADS itself is a

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merger of France's Aeropspatiale-Matra, Germany's Daimler-Chrysler Aerospace, and Spain's Construcciones Aeronauticas, all of whom were originally separate partners in the consortium. Airbus' status as a consorti- um means that profits accrue to the partner firms relative to their ownership interests. Constellations/alliance groups/strategic networks—A constellation is a set of firms linked together through alliances that com- pete in a particular competitive domain, business, market, or technology. These are portfolios of alliances that come together either formally or informally within a larger network. Popular examples of these constel- lations are the global airline relationships that compete under the Star Alliance global partnership, OneWorld, or SkyTeam Global Alliance umbrellas. Joint ventures (JVs)—Contractual agree- ments bringing together two or more organ- izations for the purpose of executing a

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particular business undertaking. The con- tracting parties form a new legal entity and agree to share in the profits and losses of the JV. These can be either operating or non-op- erating forms. Operating JVs create a new firm with its own facilities to perform desig- nated functions. Non-operating JVs are purely administrative or legal entities that contract with their parent firms for certain activities. Licensing agreements—The granting of per- mission by a firm to use intellectual property rights, such as patents technology, or trade- marks under certain defined conditions. The sponsor is typically a larger and more estab- lished partner that provides the smaller party with needed capital to develop a prom- ising product. These can include simple product development funding agreements with or without options to acquire the result- ing output or non-specific development funding that was targeted to help the

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sponsor obtain access to more preliminary developmental work or research that may not be immediately applicable to its business. Mergers and acquisitions (M&As)—Some- times viewed as an alternative strategy to an alliance because the relationship involves a complete transfer of ownership of one organ- ization to the other (that is, the relationship essentially ends after the acquisition is com- pleted). These need to be considered and compared as strategic options for one anoth-

er.3 M&As are especially well suited for situ- ations where the popular forms of SRs do not go far enough in providing a firm with access to the resources it needs to compete more ef- fectively. Many M&As are driven by strategies to achieve one of the following ob-

jectives:4

• Allow the acquiring firm to immedi- ately gain more market share.

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• Eliminate surplus capacity in an in- dustry by removing the "fat" from bloated operations.

• Facilitate a firm's entry to new geo- graphic territories or international markets.

• Extend the firm's business into new product or service categories.

• Provide speedier access to developing technologies as opposed to performing time-consuming R&D.

• Lead the convergence of existing in- dustries whose boundaries are being blurred by disruption and new mar- ket opportunities.

Minority investments—A relationship in which one firm makes an investment in the shares of another, but whose ownership of the firm is less than 50 percent of its out- standing shares. These are often made by large, established businesses that make

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purchases in high-potential businesses at an early stage of those businesses' development. Networks—An intricately connected system of firms. Derived from social network analys- is, this is the study of the structural form of the ties that link organizations or individu-

als. 5 It is a particularly useful tool for mer- gers and acquisitions, JV analysis, and inter- firm relationships. Outsourcing—Work is performed for a firm by people other than the firm's full-time em- ployees. The two big drivers behind out- sourcing are that outsource providers can provide services better, cheaper, or more quickly than the firm can or that it allows the firm to focus its capabilities on what it does best in the marketplace. Strategic alliances (SAs)—Agreements between organizations in which each mutu- ally commits resources to achieve shared ob- jectives. Firms may form strategic alliances with a wide variety of players: customers,

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suppliers, competitors, universities, or divi- sions of government. Through strategic alli- ances, firms can improve competitive posi- tioning, gain entry to new markets, supple- ment critical skills, and share the risk or cost of major development projects. When these cut across national boundaries, and depend- ing on how many boundaries are involved, they are sometimes referred to as cross-na- tional, multinational, or global strategic alli- ances. Others define these more restrictively; for example, Professor Benjamin Gomes- Casseres of Brandeis University views them as open-ended, incomplete agreements with shared control that create value by combin- ing the capabilities of separate firms. An "in- complete" agreement means that the full terms or conditions of the alliance are not fully established at its conception because if they were, the need for a strategic alliance would not exist. Professor Gomes-Casseres summarizes why these are used when he

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states, "With an alliance, you can pinpoint where the greatest value creation potential lies and form the partnership around those specific areas only."

Strategic Rationale

Over the last few decades, firms across nearly every industry and in all parts of the world have elected to form SRs to help them accomplish their strategic initiatives and en- hance their competitiveness in domestic and international markets. There is evidence that firms are increasingly looking to SRs as a way of achieving greater scale, incorporating new expertise, or quickly moving into a new geographic region, particularly if they view the complexity and resources required to merge with, or acquire another, firm to be too daunting. Gomes-Casseres notes that we now understand better about how firms and

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alliances are organized, but are still lagging in understanding how these relationships impact marketplace dynamics; nevertheless, there are a number of reasons why organiza- tions pursue these relationships as a means of enhancing their competitiveness.

Purposes Served by SRs

SRs can mean different things to different organizations. Relationships, like alliances and JVs, serve many strategic purposes; in other words, helping the organization posi- tion itself for the longer term, making un- common marketplace moves, enhancing its competitiveness, and allocating significant resources. The competitive attraction of rela- tionships is in allowing firms to bundle com- petences and resources in a joint effort that is more valuable than when they are kept separate.

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SRs have become a more prominent tool in supporting a firm's pursuit of competitive- ness. There are a number of reasons for this increased popularity of SRs; the prominent ones are identified in Table 16.1. Table 16.1 Reasons for Engaging in Strategic Inter-Firm Relationships

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Firms have a range of options for achieving enhanced growth and competitiveness. In fact, there is empirical evidence that points to the substantial financial and strategic value of SRs, including but not limited to the following:

• A 1999 survey on global alliances by Accenture Consulting showed that strategic alliances accounted for an average of 26 percent of Fortune 500 firms' revenue, which was up from 11 percent only five years earlier, and that alliances accounted for 6 to 15 percent of the market value of the av-

erage firm.6

• Firms, such as Cisco, which use ac- quisitions and alliances appropri-

ately, grow faster than rivals do.7

• Studies demonstrated that the 15 most successful strategic alliances in- creased shareholder value by $72

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billion, while the 15 least successful ones generated a loss of market cap-

italization of around $43 billion.8

• American firms announced 74,000 acquisitions and 57,000 SAs between 1996 and 2001. During that period, the acquisitions' combined value was

driven upward by $12 trillion.9

Developing and maintaining successful rela- tionships in a variety of forms with other firms is critical to achieving competitive ad-

vantage for many firms.10 Firms like Cisco, HP, IBM, Oracle, and Procter & Gamble, among others, are increasingly looking to al- liances to enhance their competitive capabil- ities and win new marketplaces. Relation- ships have also become more critical to the successful execution of business strategies, particularly in the global marketplace. They are a flexible alternative to acquisition or growing organically and can provide better

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access to resources and capabilities. With the growing number and complexity of relation- ships, however, most firms are not as process focused and disciplined as those whose rela- tionship successes are commonly heard about in the general and business media. There is always an element of co-operation present in the realm of competition; even long-time rivals form relationships to achieve common aims. Notable examples are the Airbus consortium of European aircraft manufacturers described earlier, different banks working together to launch Visa and Mastercard, the Sematech consortium of U.S. semiconductor manufacturers, and milk and dairy farmers using the Dairy Farmers of America organization to achieve cooperative marketing, distribution, supplies purchasing, and market access in that agricultural sector. The development of trust and commitment in these collaborative and competitive

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relationships will usually lead to more bene-

ficial outcomes.11

SRs take on a greater role for multinational corporations in a rapidly globalizing market- place. A firm that seeks global market leader- ship requires relationships to assist it in ac- complishing what it cannot easily do alone. For example, SRs can help a firm get into critical country markets more quickly than it can alone, acquire inside knowledge about unfamiliar markets and cultures through its relationships with local partners, or access valuable skills and competencies that are concentrated in particular geographic loca-

tions.12

Two Key Strategic Relationship Processes

All SRs will compose at least the following two critical processes that will be of prime

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interest to the business and competitive analyst:

1. 1. The process of forming the stra- tegic relationship

2. 2. The process of managing the relationship

Each of these processes should be studied by the analyst as they can offer clues that can impact a rival's, or your own firm's, competitiveness. Although successful SRs can be prime vehicles for future growth and increase the shareholder value of the participating parties, many firms are finding it increas- ingly difficult to capture the full value of their relationships. It is commonly accepted that a majority of strategic alliances under- perform or end prematurely, and a number of the failed relationships have resulted in dramatic decreases in market capitaliza-

tion.13 Two primary reasons for relationship

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failure are insufficient attention to the work- ing relationship between partners and lack of a corporate alliance management capability. Firms that have demonstrated the best per- formance in alliance management are those for whom relationship competencies are a corporate capability and the relationship management process is viewed as a central feature to their firm's success. Gomes-Casseres identified 10 factors to be critical to success in both alliance formation and management processes:

1. 1. Alliances must serve a clear stra- tegic purpose that is related to the larger business strategy of the firm.

2. 2. Partners must have complement- ary objectives and capabilities.

3. 3. Partners must be able to work on those tasks in the relationship for which they are uniquely qualified.

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4. 4. Incentives must be structured to encourage co-operation among the partners.

5. 5. Areas of potential conflict between the partners must be identified in ad- vance and minimized.

6. 6. Communication must be active, two-way, and candid to encourage the development of shared trust.

7. 7. Personnel must move in both dir- ections between partners.

8. 8. Partners need to retain a focus on their long-term shared objectives and sometimes be willing to suffer incon- venience or pain in the short term.

9. 9. Partners should try and develop a number of projects on which they can collaborate together so that all their eggs are not in one risky basket.

10. 10. Partners should retain and build in as much flexibility into their ar- rangements as feasible in order to

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evolve with changes in the environment.

Despite the many benefits that have been achieved by partners in SRs, there is growing evidence that overall performance in rela- tionships may not be as positive as was ini-

tially thought.14 Many SRs become unstable, break apart, and are discontinued. The longevity of an alliance depends on how well the partners work together, their success in responding to and adapting to changing in- ternal and external conditions, and their willingness to renegotiate the bargain if cir- cumstance so warrant. There are also dangers for firms that rely too heavily on SRs. A key vulnerability is one party becoming dependent on other firms in their relationships for essential expertise and capabilities over the long term. Because of these varied performance outcomes, it is crit- ical that you be able to understand and

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decipher the signs of changing competitive- ness within relationships affecting the firms, their industries, and their rivals.

Strengths and Advantages

SRs have grown in prominence in recent years and are expected to continue this trend. Because of the competitive import- ance and sheer value of these inter-firm combinations, business and competitive ana- lysts need techniques that allow them to draw insights into the decisions and actions their own firms need to take to improve their competitive context. Effectively combined with other tools, SRA can be a powerful weapon in the analytical arsenal of the analyst. SRA assists the analyst in focusing on com- petition in the way that it is increasingly be- ing structured. It helps you to understand

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the nature of competition as it is conducted by different combinations of firms. It can also be used to provide insights into compet- ition at a more micro-level (for example, re- lationships at a particular stage of an industry's value chain) than some other techniques. SRA can be supported by software applica- tions expressly developed for the purpose of helping you visualize competition as it occurs in networks or constellations. These applica- tions have grown in both availability and functionality in recent years. Combined with the growth of data available on the World Wide Web, these techniques can uncover re- lationships that would have previously gone unnoticed. SRA is one of the newest and fastest-devel- oping fields of analysis. Analysts can apply and use this technique in ways that were not even considered a few years ago. As such, an analyst's ability to develop new insights and

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to better support decisions and actions could be a strategic advantage for the firms who are successfully employing this method.

Weaknesses and Limitations

The application of SRA does not provide ready-made insights or provide immediate decision-making support, but it does provide a wealth of newly organized data and inform- ation, often in complex and intricate graphic forms. In order to accomplish the task of de- veloping strategic insight, SRA must be com- bined with other techniques to get actionable insights. It must also be combined with the growing body of knowledge in this area since there are still no ready-made guidelines that can be universally applied to help you under- stand competition within strategic inter-firm relationships.

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Many SRA efforts, especially those supported through task-specific software applications, quickly become exercises in developing com- plex network diagrams that provide little practical insight. Most decision makers will not easily or quickly appreciate these visual- izations, as they are not the type of data (that is, ordinarily condensed, synthesized, and succinctly summarized) that usually cross their desks. The analyst must make sense of these diagrams in ways that the decision maker will appreciate. This is an area of competitive analysis that is only now receiv- ing attention, and there remains a lot to learn. SRA requires specific forms of data to be ef- fective. Much of this data will not be easily or inexpensively available or will not be avail- able in a format that will promote the applic- ation of SRA techniques. This will require analysts to work with their firm's informa- tion specialists and be included when

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information communication and technology purchasing decisions are being made. Even these decisions will be difficult for analysts and their firm's IT specialists, since many of the applications that would support the gath- ering and organization of data for studying relationship-based competition are in the de- velopment phase, and there are few lengthy track records of experience about the vendors of these systems.

Process for Applying the Technique

There are two major processes that an ana- lyst needs to understand in analyzing SRs. The first requires you to assess the firm's strategic relationship readiness and capabil- ity. The second requires you to assess your rival's relationships, relationship resources,

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and capabilities. Each of these is discussed in turn in the following section.

1. Studying Your Own Firm's Relationship Formation Readiness

In forming a strategic relationship, firms should begin by assessing their readiness to be involved in a relationship. Among other things, this includes having in place negoti- ation skills, change management expertise, relationship management competence, inter- operable systems and processes, support from senior executives, and governance in the form of a relationship management structure. Relationship-seeking firms should also define their business vision and strategy in order to understand how an alliance fits their objectives. Establishing goals and objectives

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for the relationship is usually the best place to start, followed by figuring out how closely matched they are to the firm's larger busi- ness and strategy goals. This stage of the formation process should also include an un- derstanding of the benefits and costs that will potentially be generated within the rela- tionship. Intangible benefits in the form of risk reduction, increased visibility or publi- city, knowledge transfers, rival inhibition, and customer goodwill need to be considered. Alternatives to a strategic relationship, in- cluding building the capabilities or seeking the benefits through the firm's own (that is, organic) activity, or mergers and acquisi- tions, should also be considered to determ- ine if a relationship is a superior means of helping the firm meet its goals. The firm can usually proceed to the next step if it determ- ines at this step that the goals of the poten- tial relationship fit neatly with its larger

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strategy, the net gains of engaging in the re- lationship outweigh the estimated losses, harms and/or risks, there are no unaccept- able risks, and a relationship is a superior option to the others available to achieve its goals. The next step is for you to evaluate and select potential partners based on the level of mu- tual benefit that can be generated and the perceived ability of the firms to work well to- gether. Analysts should consider: the com- plementariness of the partner's operational/ production and technical capabilities; wheth- er it has been involved successfully in any prior relationships and if it has the capabilit- ies to manage the relationship; and whether it has the resources to make a good "go" of the relationship. It usually also helps to un- derstand the partner's reputation in the mar- ketplace, as the new relationship will be based at least partly upon that facet. Finally, it is useful to work through several of the so-

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called soft "S" elements of the McKinsey 7S framework (see Chapter 12, "McKinsey 7S Analysis"), such as shared values, leadership style of decision makers, and skills in order to determine whether the potential "fit" of these elements will be supportive to the pro- posed relationship. Assuming the responses to all of these areas are positive, you can re- commend pursuing negotiations. What occurs next in the relationship forma- tion process is a meeting with the top pro- spective relationship partner to discuss the future of the potential relationship. This or- dinarily begins by specialists in the firm de- veloping a working relationship and mutual recognition of opportunities with the pro- spective partner. The firm should have con- fidence in its ability to negotiate reasonable, if not mutually favorable, terms with the partner. It should also have confidence in its ability to resolve any potential differences in establishing the relationship objectives,

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gaining agreement on the allocation of re- sources, melding different communication and information infrastructures, creating shared human resource policies and plans, gaining exclusivity on forming relationships with other firms, and establishing perform- ance management and measurement sys- tems, as well as developing controls to assure both parties that the relationship is operat- ing according to both parties' wishes. Once the relationship is agreed and estab- lished, the next task is to provide the appro- priate level and quality of management to the relationship. Like most other organiza- tional forms, relationships can evolve over time in a life cycle pattern. A relationship life cycle would include stages of pre-relation- ship (identification of potential partners), negotiation, introduction (the launch of the relationship), relationship management, and the latest stage of dissolution or restructur- ing. The life cycle concept can help you

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understand the phases of the relationship and may provide some keys as to what the partners in the relationship might do in terms of future investments, resource alloca- tions, and other tactical options. Relationship management is a unique facet of the SR process and requires the partners to demonstrate they have the capabilities to effectively manage their relationship with one another. Some firms designate particular individuals or groups to take on this respons- ibility. Here are some of the tasks at which an analyst needs to become adept when as- sessing SRs:

• Assessing the degree of fit between the relationship portfolio and the firm's business or corporate strategy, goals, and objectives

• Assessing the overall performance and value in the firm's portfolio of relationships

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• Assessing the performance of indi- vidual relationships

• Reviewing all relationships to identi- fy current and potential synergies

• Removing underperforming relation- ships from the portfolio

• Identifying the fastest-growing rela- tionships for additional resource al- location and funding for greatest return

• Evaluating prospective partners and offering negotiation consultation and assistance

• Defining the parties' roles and re- sponsibilities in the originating and originated relationship

• Facilitating the launch of new rela- tionships by establishing appropriate governance structures and operating protocols

• Re-launching poorly performing alliances

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• Assessing the health of the working relationship between your firm and your partners

• Comparing alliance management capability against demonstrated and proven practices (see Chapter 11, "Benchmarking," for more on this task)

• Facilitating the creation of knowledge and performance management sys- tems to facilitate the sharing of les- sons and learning across the relation- ship portfolio

Having done the preceding tasks, the analyst should be in a better position to provide in- sights to decision makers who need to make determinations about relationships as a means for accomplishing their strategies. The next task will be to study the relation- ships maintained and potentially sought by market rivals. This is done in order to identi- fy opportunities and threats facing your firm

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so you can make decisions and take actions to improve your competitive position.

2. Studying a Rival's Relationships

There are a variety of techniques for studying a rival's relationships. The method we re- commend is a fairly typical three-step pro- cess, which includes the following:

1. 1. Identify relationships. 2. 2. Map relationships. 3. 3. Assess and analyze the

relationships.

These are discussed in order next.

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1. Identify Relationships

Many relationships are subtle and unan- nounced; others are bold and "in your face." For publicly traded rivals with highly visible products targeted at consumers, it is gener- ally easier to identify their relationships. A big part of this process involves taking the results of the rival's business model analysis (see Chapter 8, "Business Model Analysis")

and SWOT.15 A business model analysis has, for example, shown that two firms in the op- erating systems marketplace took very differ- ent approaches to leveraging their primary products. Microsoft had a closed platform and deliberately made it difficult for others to partner with them unless it was squarely on Microsoft's terms. Red Hat took the op- posite approach with its Linux systems and essentially tried to leverage its open platform through relationships with whatever parties could benefit from a relationship with it.

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It is also important at this stage to identify the nature of the relationships. Does the rival tend to prefer using strategic alliances? Has it been dependent on JVs? Does it have rela- tionships with certain consortia that it relies upon for its competitiveness? The analyst should try and uncover the rival's choice of relationships in the recent past, as this may indicate its predilection toward the future. A historiographical approach (see Chapter 25, "Historiographical Analysis") can be used to facilitate this examination of past relationships.

2. Map Relationships

Where the nature of a rival's relationships are predominantly in network forms (for ex- ample, constellations, strategic alliances, and consortia), it is usually best at this point for you to employ mapping techniques so that

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these relationships can be studied visually. These maps can be developed in two primary ways: by using whiteboards and markers/ pen and paper, or by using digital mapping, modeling, and/or visualization software. Be- cause of the overwhelming volume of data associated with a rival's relationships, ana- lysts need "maps" of the pathways between firms, especially in complex industries or marketplaces. These maps can provide a sense of context that is absent from most hierarchical presentations of data in linear text form. The map can also help you to quickly get an adequate overview of the rela- tionships in an unfamiliar area to guide the efficient use of conventional analysis methods. One of the newer ways of understanding re- lationships is to do an analysis of relation- ships using information available on the In- ternet. Search engines such as HotBot, Google, and Alta Vista provide the "reverse

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link look-up" for links that lead into a firm's main Web site. The links indicate either offi- cial or unofficial relationships. Using this form of hypertext link analysis, you can often uncover relationships between firms that may not have been as clearly uncovered through traditional methods of human source or media analysis collection. Reid ex- tensively describes how this form of Web link analysis can uncover otherwise hidden relationships within the World Wide Web, particularly as the relationships may provide you with competitive analysis insights. In this book, we are mainly looking at the re- lationships between firms. Although we fo- cus our comments to this level, this does not preclude you from looking at the nature, type, and directions of individual or personal relationships. Each of these levels of analysis can help you gain a richer understanding of the firm's rivals, its relationships, opportun-

ities, and vulnerabilities.16 Corporate

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relationships are the formal and informal re- lationships that a rival has with other organ- izations. Most relationships are created be- cause there are some important exchanges of resources (funds, expertise individuals, and assets) occurring between the related organ- izations. These exchanges ordinarily leave a trail of visible evidence that is among the easiest for good intelligence practitioners to locate and gather.

3. Assess and Analyze the Relationships

Once the analyst has mapped the relation- ships that rivals maintain, he needs to exam- ine the structure, developmental and mana- gerial process, and context of these relation- ships for a variety of factors. Among the

factors are the following: 17

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Age or timing of the relationship. SRs have been known to follow a traditional life cycle

pattern,18 and the age of the relationship can provide clues as to what might transpire with the SR in the near future. SRs tend to go one of two ways after a number of years: They either disband due to the failure of the rela- tionship to accomplish the partners' goals, or they are restructured to create a new, inde- pendent entity or a different organizational form to maximize the ability of the relating partners to succeed in the marketplace. On the emergent side of the life cycle, Eisen- hardt and Schoonhoven argue that firms ex- hibit a higher propensity to enter into alli- ances in markets with many competitors, as well as in markets that are in an emergent life cycle stage. Some industries—for ex- ample, biotechnology—also exhibit patterns whereby high levels of relationships are formed at an early stage of technology evolu-

tion.19

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Location of the relationships. You need to assess whether the rival tends to use its rela- tionships in certain geographic markets (that is, it has JVs in Asia, but not in Western Europe), or whether the relationships are located at a particular point in the rival's value chain (for example, some firms in chemicals, biotechnology, and pharmaceutic- al industries are known to rely heavily on SRs to help them perform their research and development activities; auto manufacturers rely heavily on relationships in the purchas- ing and sourcing areas, as well as the devel- opment of advanced technologies). Management's relationship capacity and expertise. Many firms active in pursuing and participating in relationships will have indi- viduals (for example, relationship portfolio managers) and structures (for example, an alliance management function) designed to manage their portfolio of relationships; this is usually a sign that it views this activity as

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important to its success. Relationship man- agement capabilities have become increas- ingly important in firms that simultaneously manage a large number of relationships. These firms are essentially forced to institu- tionalize relationship management practices. Due to the strategic importance of relation- ships in many of these firms, relationship management capabilities have the potential to be a source of competitive advantage. On the other hand, firms that have no history of being in relationships before may experience greater difficulties in developing these relationships. Market context of relationships. In order to determine whether a relationship will actu- ally impact the profitability or market share of your firm, you should attempt to answer the following questions:

• What is the size and relative attract- iveness in terms of profit potential of

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the market targeted by the relationship?

• What share of the market do the po- tential partners currently hold?

• How quickly is this particular area of the prospective partners' business growing?

• Have prospective partners been im- proving their capability in the tar- geted relationships' market area?

Combining these questions with already con- ducted techniques, such as critical success factor analysis (see Chapter 18, "Critical Suc- cess Factors Analysis"), industry analyses (see Chapter 6, "Industry Analysis (The Nine

Forces)"), competitor analyses,20 and/or SWOT can be highly beneficial in answering these questions. Mix of relationships. This requires you to look at the types of relationships the rival has. Does the rival primarily use strategic

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alliances, or do they rely heavily on licensing agreements or co-activity (that is, co- marketing, co-production, and co-purchas- ing) arrangements? Assuming the rival offers products or services across a range of mar- kets, does it use certain forms of relation- ships in some markets, while using different forms in others? The mix of relationships it uses may provide you with insight into what it is trying to achieve and the next steps it may choose to make. Number of relationships. Some firms are known for making heavy use of relationships in the way they approach their marketplaces; others are known for avoiding them. The number of relationships a rival has, particu- larly as it compares to other rivals in similar marketplaces, can give helpful insights into the approach, resources, and capabilities of the rival. Position in the relationship. The positions of members in the relationship, particularly in

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networks or consortia, can indicate much about the behavior of firms or the entire re- lationship. Firms positioned at the center of a relationship often display a greater ability to influence the outcome. Networks or con- sortia with a powerful, centrally positioned firm will often take on these attitudes and behavior, as opposed to the characteristics of the more peripheral parties. Potential for knowledge spillovers. SRs are often formed to capitalize on knowledge, two types of which are of particular interest to the analysts since they signal different things: migratory knowledge, often technical in nature, which can be transferred easily between people or organizations in a formula or product; and embedded knowledge, which defines how a particular firm organizes itself

to do business.21 SRs take place between myriad organizations in many industries, and large multinational corporations can be involved in hundreds of relationships

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simultaneously.22 Therefore, it is often im- portant not only to identify your rival's part- ners but also its partner's relationships as well. A rival's partner may also be your com- petitor or collaborator in another relation- ship, so care must be taken that information or knowledge shared in one relationship doesn't leak over to your rival through an- other relationship. Size of the firms in the relationship. The re- search remains unclear about the relation- ship between the size of firms and the likeli- hood to either form or behave in certain ways in relationships. Gomes-Casseres sug- gests that absolute size may be less import- ant for the partnering behavior of small firms compared to their relative size with direct rivals. He notes that firms that lead their market segments and are large com- pared to their direct competitors are likely to have less incentive to seek alliances.

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Strength and positions of the parties in the relationships. Some relationships are more important to a rival firm than others; for ex- ample, one in which the rival is benefiting unevenly or is in a sector that it considers to be critical for its future or growth will be more closely guarded and given more mana- gerial attention than relationships that are at the periphery of their strategy. Eisenhardt and Schoonhoven suggest that firms are more likely to form alliances if they are in a vulnerable strategic position. They define strategic position through the number of competitors, the stage of market develop- ment and the strategy of the firm. Another key facet to the strength of the relationships is to look at the resources strength and cap- abilities of the partners involved. Well-man- aged relationships between strong partners can often result in more powerful rivals in the marketplace.

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Clusters of relationships. As opposed to only assessing micro-level dyadic relations between firms, you also need to look at multi-level relationships in the form of alli- ance blocks, clusters or constellations. Com- petition between alliance blocks is a form of rivalry in which groups or clusters of firms that link together for a common purpose by means of SRs, is superimposed on competi-

tion between individual firms.23 Driving forces and competitive pressures often favor some clusters while hurting others. The profit potential of different clusters varies due to strengths and weaknesses in each cluster's market position. A good example of clusters of relationships is the constellation of relationships present among air transport- ation firms. Table 16.2 shows the constella- tion of relationships that constitutes these relationships as of 2006. Table 16.2

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Major Constellations in the Air Transporta- tion Industry Circa 2006

Source: Market shares are of all air passen- gers as of end 2004 and were drawn from data in the IATA 2005 annual report. After having studied the relationships and worked through these questions, you should be in a good position to make sense of the competitive impact of the rival's relation- ships. At this point, it will be important to re- commend insights to decision makers that can leverage them. For example, a recom- mendation might be to fund opportunities to weaken a rival's position by weakening its re- lationships or to strengthen one of your own

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firm's relationships as a means of precluding a rival from gaining an advantage. The kinds of recommendation that can emanate from SRA are often high level and of high value and therefore should be most appealing to the senior decision makers and executives in your firm.

FAROUT Summary

Figure 16.2 Strategic relationship analysis FAROUT summary

Future orientation—Low to medium term. Projecting the nature of SRs into the future is

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not an easy task, and most forms of SRA have yet to build in the ability to extrapolate relational behavior into anything beyond the short term. Accuracy—Medium to high. Most SRA re- quires sophisticated mapping, mathematical modeling, and statistical skills, assuming the presence of the appropriate data underlying these applications. Resource efficiency—Low to medium. Gath- ering the data needed to perform a sophistic- ated SRA can require substantial digital as well as human resources. The establishment of databases for this purpose can require a significant amount of cumulative effort over time. Objectivity—Medium to high. To the extent that this analysis is not supported through sophisticated models and databases, there can be a high degree of subjectivity involved in interpreting the results of the relationship analysis.

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Usefulness—Medium. SRA is most useful when combined with other tools. It can an- swer some tactical questions easily and quickly, but to help promote strategy devel- opment, it needs to be usefully combined with other techniques. Timeliness—Medium. This depends on the presence of the appropriate data, the nature of SRA applications employed, and the nature of the decision-making task to which it is being applied.

Related Tools and Techniques

• Industry analysis • Issue analysis • Management network analysis • Stakeholder analysis • STEEP/PEST analysis • Strategic group analysis

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• SWOT analysis

References

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research: A review and typology," Journal of Management, 29(6), pp. 991–1013. Cainarca, G.C., Colombo, M.G., and S. Mari- otti (1992). "Agreements between firms and the technological life cycle model: Evidence from information technologies," Research Policy, 21, pp. 45–62. Churchwell, C.D. (2004). "Rethink the value of joint ventures," Harvard Business School Working Knowledge newsletter, May 10 edition. Cross, R., Parker, A., and S.P. Borgatti (2002). "Making invisible work visible: Using social network analysis to support strategic collaboration," California Manage- ment Review, 44(2), pp. 25–46. Cross, R., Parker, A., Prusak, L., and S.P. Borgatti (2001). "Knowing what we know: Supporting knowledge creation and sharing in social networks," Organizational Dynam- ics, 30(2), pp. 100–120.

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Cross, R.L., Parker, A., and S.P. Borgatti (2000). "A birds-eye view: Using social net- work analysis to improve knowledge creation and sharing," Knowledge Directions, 2(1), pp. 48–61. De Man, A.P. (2002). "How to analyze alli- ance networks," Competitive Intelligence Magazine, 5(4), pp. 14–16. Doz, Y.L., and G. Hamel (1998). Alliance Ad- vantage. Cambridge, MA: Harvard Business School Press. Dyer, J.H., Kale, P., and H. Singh (2004). "When to ally and when to acquire," Har- vard Business Review, July, pp. 108–115. Eisenhardt, K., and C.B. Schoonhaven (1996). "Resource-based view of strategic al- liance formation: Strategic and social effects in entrepreneurial firms," Organization Science, 7, pp. 136–150. Fleisher, C.S., and B.L. Bensoussan (2003). Strategic and Competitive Analysis: Meth- ods and Techniques for Analyzing Business

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Competition. Upper Saddle River, NJ: Prentice Hall. Gary, L. (2004). "A growing reliance on alli- ance," Harvard Management Update, April, article reprint U0404B. Gomes-Casseres, B. (2005). "How alliances reshape competition," Ch. 3 in Shenker, O., and J.J. Reuer (eds.), Handbook of Strategic Alliances. Newbury Park, CA: Sage Publications. Gomes-Casseres, B. (1998). "Strategy before structure," Alliance Analyst, August, online text available at ht- tp://www.alliancestrategy.com/MainPages/ Publications/Managerial.shtml. Gomes-Casseres, B. (1997). "Alliance strategies of small firms," Small Business Economics, 9, pp. 33–44. Gomes-Casseres, B. (1996). The Alliance Re- volution. Cambridge, MA: Harvard University Press.

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Gompers, P.A. (2001). "A note on strategic alliances," note 9-298-047, Boston, MA: Harvard Business School. Gonzalez, M. (2001). "Strategic alliances:

The right way to compete in the 21st cen- tury," Ivey Business Journal, 66(1), Sept/ Oct, pp. 47–51. Jagersma, P.K. (2005). "Cross-border alli- ances: Advice from the executive suite," Journal of Business Strategy, 26(1), pp. 44–50. Kassler, H. (2000). "Competitive intelligence and the Internet: Going for the gold," In- formation Outlook, 4(2), pp. 37–42. Khanna, T. (2001). "Inter-firm alliances: Analysis and design," Administrative Science Quarterly, 46(3), pp. 582–585. Krackhardt, D., and J. Hansen (1993). "In- formal networks: The firm behind the chart," Harvard Business Review, July/August, pp. 104–111.

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Kuglin, F.A., with J. Hook (2002). Building, Leading, and Managing Strategic Alliances. New York, NY: AMACOM. Lorange, P., and J. Roos (1993). Strategic Alliances: Formation, Implementation, and Evolution. Malden, MA: Blackwell. Lyles, M.A. (1988). "Learning among joint venture-sophisticated firms," pp. 301–316 in Contractor, F., and P. Lorange (eds.), Coop- erative Strategies in International Business. Lexington, MA: Lexington Books. Mockus, D. (2003). "Do you REALLY know what the competition is doing?" Journal of Business Strategy, 24(1), Jan/Feb, pp. 8–10. Park, S.O., and G.R. Ungson (2001). "Inter- firm rivalry and managerial complexity: A conceptual framework of alliance failure," Organization Science, 12(1), pp. 37–53. Reid, E. (2004). "Using web link analysis to detect and analyze hidden web communit- ies," in Vriens, D.J. (ed.), Information and Communications Technology for

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Competitive Intelligence. Hershey, PA: Idea Group Publishing. Segil, L. (2004). Measuring the Value of Partnering: How to Use Metrics to Plan, Develop, and Implement Successful Al- liances. New York, NY: AMACOM. Segil, L. (2003). "Relationship management as a corporate capability," The CEO Refresh- er (an e-magazine), retrieved from the Web on March 10, 2006 at ht- tp://www.refresher.com/!lscapability.html. Thompson, A.A., Gamble, J.E., and A.J. Strickland (2006). Strategy: Winning in the

Marketplace, 2nd edition. New York, NY: McGraw-Hill. Vanhaverbeke, W., and N.G. Norderhaven (2001). "Competition between alliance blocks: The case of the RISC microprocessor technology," Organization Studies, 22(1), January, pp. 1–30. Walker, G., Kogut, B., and W. Shan (1997). "Social capital, structural holes and the

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formation of an industry network," Organiz- ation Science, 8(2), pp. 109–125. Wallace, R.L. (2004). Strategic Partner- ships: An Entrepreneur's Guide to Joint Ventures and Alliances. Chicago, IL: Dear- born Trade Publishing. Yoshino, M.Y., and U.S. Rangan (1995). Strategic Alliances: An Entrepreneurial Ap- proach to Globalization. Boston, MA: Har- vard Business School Press.

Endnotes

1 Gomes-Casseres, 2005. 2 Bamford, Gomes-Casseres, and Robinson, 2003; Gomes-Casseres, 1996. 3 Dyer, Kale, and Singh, 2004. 4 Thompson, Gamble, and Strickland, 2006. 5 Krackhardt and Hansen, 1993. 6 Gonzalez, 2001.

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7 Dyer, Kale, and Singh, 2004. 8 Gonzalez, 2001. 9 Dyer, Kale, and Singh, 2004. 10 One bit of evidence that relationships have become more prominent among business professionals has been the formation of asso- ciations dedicated to meeting the needs of those individuals who perform in strategic relationship roles—for example, the Associ- ation of Strategic Alliance Professionals (ASAP), Inc., headquartered in Massachu- setts (see http://www.strategic-alli- ances.org). This association assists both those involved in developing alliances, as well as those executives who must manage them. 11 Lorange and Roos, 1993. 12 Badaracco Jr., 1991; Jagersma, 2005. 13 Dyer, Kale, and Singh, 2004; Gonzalez, 2001.

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14 Churchwell, 2004; Park and Ungson, 2001. 15 See Fleisher and Bensoussan, 2003, Chapter 8. 16 For literature and guidance on conducting this form of network analysis at the level of individual to individual relationships, see Borgatti and Foster, 2003; Cross, Parker, and Borgatti, 2002, 2000; Cross et al., 2001; and Krackhardt and Hansen, 1993. 17 de Man, 2002; Gomes-Casseres, 2005; Mockus, 2003. 18 See Fleisher and Bensoussan, 2003, Chapter 24. 19 Walker, Kogut, and Shan, 1997. 20 See Fleisher and Bensoussan, 2003, Chapter 11. 21 Badaracco Jr., 1991. 22 Doz and Hamel, 1998. 23 Vanhaverbeke and Norderhaven, 2001.

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17

Corporate Reputation Analysis

Short Description

Corporate reputation analysis (CRA) identi- fies a firm's or industry's perceptual image among key stakeholders based on a given set of factors. The CRA process sets out to give strategic managers a solid understanding of the firm's current image with their stake- holders to enable it to improve its relations with them in the future, ultimately increas- ing the firm's performance. The results of CRA provide a solid foundation to plan ef- fective reputation management.

Background

In 1983, Fortune Magazine published their first edition, featuring its list of America's Most Admired Companies. In many regards, this was the first real introduction of CRA to the general public. Since then, many variations and modifica- tions have been made to the general idea of what is "admired" in firms, and CRA has emerged as a process to be used for analysis over various different specific criteria. Cor- porate reputation became recognized as a valuable asset. Popular media organizations used CRA to create "most admired" or "top ten" lists of firms that reflected the interests of their tar- get audiences, whether these are gender-spe- cific or based on broader concerns such as diversity, the environment, etc. These lists were, and still are, usually constructed using

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opinion sought from CEOs and industry analysts. Over time, CRA moved beyond media organ- izations and was adopted by many consult- ing firms, communications agencies, as well as internal marketing departments who con- ducted the analysis and used the results for reputation management. It was not until 1999 that a systematic at- tempt was made to standardize CRA and make the process less subjective. Charles Fombrun, who founded The Reputation In- stitute, developed, with Naomi Gardberg and Joy Sever, a standardized formula for CRA, which they called the Reputation Quotient. The article they published about it in 2000 notes that their aim was to broaden CRA, taking it beyond the narrow range of opinion traditionally sought by the media and open the process to encompass the perceptions of multiple stakeholder groups. Their plan was to develop CRA into a robust analytical

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instrument that was both statistically valid and reliable. While this standardized process was a great advancement for the analytical technique, many firms continue to construct their own CRA processes to meet their own specific purposes. Reputation management can be shown diagrammatically as follows in Figure 17.1. Figure 17.1 Reputation management

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In recent times, a number of firms throughout the world sadly have damaged their corporate reputations through the be- havior of their senior executives. Increas- ingly reputation risk management is becom- ing an agenda item for directors and in boardrooms. So whatever method they employ, individual firms that actively monitor their reputation among stakeholders can use the information they obtain to strategically manage their reputation on a continuous basis. Charles Fombrun and Christopher Foss quote Alan Greenspan's commencement speech as Chairman of the U.S. Federal Reserve—"In today's world, where ideas are increasingly displacing the physical in the production of economic value, competition for reputation becomes a significant driving force, propelling our economy forward. Man- ufactured goods often can be evaluated be- fore the completion of a transaction. Service

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providers, on the other hand, usually can of- fer only their reputations."

Strategic Rationale and Implications

According to Grahame Dowling: "When strategy involves either growth or innova- tion, a company puts its corporate reputation into play. Growth involves stretching the company's operations, sometimes to the breaking point. Innovation involves doing

something new."1

CRA seeks to identify and possibly enhance a firm's, or group of firms', image(s) among their stakeholders. The process may be un- dertaken by an individual firm to obtain in- formation about its current reputation and help it design strategies to improve its repu- tation. The process may also be applied across an industry to accurately gauge how a

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firm's reputation compares to those of its competitors. Comparative information can then be used to differentiate the firm from its competitors. While the particular reputation factors ex- amined in a given analysis may vary, they all relate to the reputation of the firm in the eyes of stakeholders and should give an in- dication of the success or otherwise of the firm's reputation management strategies. Dowling suggests that the major sources of corporate reputation risk fall into six broad areas:

1. 1. The industry in which a firm operates.

2. 2. Identifying strategies. 3. 3. The culture and daily operations of

the firm. 4. 4. The comments and behavior of

senior executives. 5. 5. Managing stakeholder

relationships.

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6. 6. Response to a crisis.

Firms that can effectively monitor their reputation among selected stakeholders across the six board areas mentioned previ- ously will have a useful view of what type of strategic initiatives might be required to en- hance their image. It will give the firm direct feedback of its reputation as perceived by stakeholders after the affects of public rela- tions and advertising (both by the firm and by its competitors), media exposure, and any other external influences (for example, mar- ket speculation) are taken into account. Successfully managing a company's reputa- tion on a continuous basis is referred to as reputation management and is becoming in- creasingly important to senior management. Reputation management is usually a func- tion of the public relations department and requires every aspect of a firm's operation to be consciously communicated with an over- all strategy of improving or maintaining

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reputation. It may entail differently con- structed messages tailored for specific groups of stakeholders—for example, more technical information being made available to industry analysts than is provided in press releases to general media outlets. The image a firm communicates can heavily influence the actions of key stakeholders of the firm, including customers, employees, investors, and so on. The result of this is that the firm's reputation also has an impact on the overall value of the business, in dollar terms and also in terms of its value as a po- tential business partner in strategic alliances. The management of corporate reputation, then, can be seen to be an important part of the successful management of a firm overall.

Strengths and Advantages

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Universal

The main advantage of CRA is that the pro- cess can be applied to any firm, no matter what type of industry it operates in or what size it is. The need to be aware of the image portrayed to key stakeholders is universal to all business. Small businesses may earn a good reputation in the eyes of the general public in a variety of ways—for example, by sponsoring local events, through the build up of customer loyalty and resulting word-of- mouth recommendations, or a network of friendships linking many people within the community directly to those participating in the business. Similarly, large firms earn their reputation in many ways (for example, spon- soring events or supporting charity), but quite often the image of the top executive has a very strong affect on the firm's overall reputation. For example, firms such as

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Apple, Ford, and GE have very prominent CEOs. Although small and large firms can both use the CRA very effectively, the analysis process would generally be quite different for each of them. The inherent flexibility of CRA makes it easy to customize it to any specific situ- ation based on the firm in question or in- dustry in which it operates. Unlike many other analytical techniques, there is no given set of attributes or factors that must be in- cluded. In practice, there are many factors that reappear continuously in CRA throughout the world, and its ability to transform a firm is a major strength. The technique may be scaled up or down in com- plexity to allow it to be easily administered and managed by any type of strategic man- ager. Many small business planners might balk at the notion of using (and funding) complex analysis techniques or paying for market research that could investigate

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