CORPORATE ESPIONAGE

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A CASE STUDY

{ An attempt to understand & assimilate the aspect of ‘Corporate Behavior’ & study this real-life example of corporate misdoing & unethical practice}

What is Corporate Espionage“Corporate” ‘pertaining to a corporation or a group is coming together for a common goal’. Moving onto ‘Espionage’, it means ‘the systematic use of spies to get military, political or industrial secrets’ (1793, from Fr.espi onnage2). ‘Corporate Espionage’ basically suggests impregnating a corporate system or structure with spies or systems so as to facilitate leakage of information which could in all probability mar the growth, financial stability & the prospects of the victim organization to have sustained development in future. 2

Corporate Espionage (CE)Acquisition of trade secrets from business competitors, a reaction to the efforts of many businesses to keep secret their designs, formulas, manufacturing processes, research, and future plans. Practices that fall under CE are; Dumpster Diving Social Engineering Interviews Bugging offices and Hacking systems

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Difference :Corporate Espionage & Corporate IntelligenceNow at this juncture, it’s essential to make a clear demarcation between the terms ‘Corporate or Industrial Espionage’ & ‘Corporate Intelligence Gathering’. ‘IE or CE’ is distinct from legal & ethical activities such as examining corporate publications, websites, patent filings and the like to determine the operations of a corporation. All these come under the gamut of ‘Corporate Competitive Intelligence. ’CE’ would cover illicit activities like theft of trade secrets, bribery, blackmail & technological surveillance, attempts to sabotage a corporation may be considered corporate espionage.Although from the looks of the definition the distinction is crystal clear, in practice it is quite difficult to sometimes tell the difference between legal & illegal methods.

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Evolution of Corporate EspionageHistory dates back to sixth century. China had monopoly in silk production. Justinian hired monks to gain understanding about silk production. Monks succeeded in smuggling silkworm eggs and mulberry seeds out of China & Byzantine empire replaced China as the largest silk producer.5

18th century France sent spies to steal Great Britain’s Industrial secrets. Power loom plans were stolen by Americans from England in 1811.

The Desperation for Corporate Espionage• Technological advancements in 1990’s made companies invest heavily in R&D activities.• The late 20th century corporate world had to have the right information at right time to make decisions• 21st century, CE had found wide acceptance and usage in many nations.• Almost every Fortune 500 company was engaged in some form of CI activity.

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Economic Espionage Act, 1996• To prevent the theft of American Intellectual Property by Foreign companies and Governments.• The act made CE (buy or possess trade secrets obtained without owners authorization) a criminal offense.• 10 years imprisonment or a fine of $250,000 on any person or $ 5 million on any company violating the Act.

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REAL LIFE INSTANCES OF ‘CORPORATE ESPIONAGE’

Here are just a few of the more prominent instances of real-life Corporate Espionage: 8

In 1999, one of the most famous cases of corporate treachery, a Taiwanese company head was arrested as he was convicted to have paid an Avery Dennison (U.S. Label manufacturer) employee $160,000 for the secret formulas for the company’s pressure-sensitive adhesive. In 1996, General Motors sued Volkswagen, charging that GM’s former head of production had stolen trade secrets & turned them over to Volkswagen.

In 2000, Oracle Corporation head Larry Ellison had hired an investigation firm to dig out embarrassing secrets about Bill Gates headed Microsoft. In 2003, Italian auto manufacturer Ferrari charged Toyota with stealing the design for its Formula One Racing Car.

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Established in 1837 by William Procter & James Gamble. One of the Largest FMCG Companies in the world. Number One maker & Marketer of Household products in U.S.A Five Business Segments includes Fabric & Home Care, Baby, Feminine and family care, Beauty care, Health care, Food and Beverages

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P&G• Ranked 31st among the Fortune 500 Companies in 2003.• Operations in more than 80 countries world wide• Employee strength of more than 110,000 worldwide.

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• Formed in 1930 by the merger of Margarine Unie (Dutch Company) & Lever Brothers (British Soap Company)• Main Focus on it’s Foods, Personal Care & Home Care Business.• Second largest Consumer Goods Company (After P&G)• Third largest Food Firm after Nestle & Kraft Foods in the world.

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• The Group operates through seven segments: a) Soaps and Detergents b) Personal Products c) Exports d) Beverages e) Foods f) Ice Creams and Other • Significant Business in US, Europe, Asia & Latin America.

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and Unilever entered the U.S market in late 19th cent. & Competed with the market leader P&G. P&G dominated the U.S household & personal care market while Unilever dominated the European market. Equal Dominance of P&G & Unilever in Asia. Both Competed in every aspect of their operations.

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Leading Brands

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All’s Fair in Love, War - & Hair• P&G and Unilever are fierce competitors in the shampoo industry.• P&G, the world’s largest producer of hair care products & trying to increase its position in the industry by introducing new brands, like Physique, and buying others, like Clairol.

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• P&G was accused to have their competitive intelligence operatives misrepresent themselves as market analysts, journos & students to Unilever employees so as to gather some important information. However, these accusations were outright denied by Mr. Pepper & P&G top notches.• Top managers in P&G’s competitive analysis department engaged in corporate spying practices at its rival corporation, Unilever Ltd. The internal spying operation gathered about 80 documents detailing Unilever’s plans for the U.S. hair care business over the next three years, including critical information such as launch-plans, prices & margins. 17

– Begun in late 2000 to spy on hair care business of Unilever– Planned by the Competitive Analysis team by hiring outsiders– “Dumpster Diving” also called as Rubbish archeology– Misrepresentations as market analysts & journalists– $3 million was spent on the operation.

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P&G’s Secret Operation

Shampoo Giants Tell Spies to Wash and Go

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Market Strategies

Margins

Launch Plans

prices

Spying Operation

Advertising Budgets

Product Development

plans

A Shocking Revelation“Procter & Gamble found engaged in illegal Corporate Espionage against archrival, Unilever” – Fortune magazine August 2001John Pepper, then chairman of Procter and Gamble, discovered this operation which did not violate U.S. law but, violated strict guidelines regarding P&G business policies.

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“Everyone does competitive intelligence work, but we are shocked at the levels to which they (P&G) went” -Unilever Spokesperson, September 2001

“None of the information that was gathered during this (spying) operation was ever used by P&G or will ever be used. It was an unfortunate situation. We certainly re- gret that it occurred. We have acted responsibly & promptly to protect Unilever’s interests” -P&G Spokesperson, September 2001

“Yes, P&G took the right position in approaching Unilever about this (espionage) activity. But to say the P&G-Unilever event should never happened is overly simplistic”

-Leonard Fuld, President, Fuld & Co. (Investigation firm), September 2001

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Top Management Shocked !!– P& G’s Top Management found about CE in early 2001.– Unilever & P&G were competing to acquire “Clairol”.– Decision on offer price was to be made after considering CI on Unilever’s hair care business which was far too detailed & sensitive.– P&G sacked the 3 executives involved in the covert operation.

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P&G Makes Admission on Violation – P&G wrote letter to Unilever.– Company’s chairman John Pepper called Unilever’s co-chairman Niall Fitzgerald to settle the issue.– Invitation to Unilever to interview P&G staff as well as the agents to identify the extent of transgression.

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Dissatisfied – Unilever was not satisfied by the level of co-operation.– P&G did not sack any of their employees.– P&G won the auction for Clairol for $4.95 billion in May 2001

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Settlement Terms & Conditions– Reassignment of key personnel to other business divisions of the company– Restriction on launch of certain new products until the end of 2003– Appointment of a 3rd party investigator to review P&G’s Business & Marketing strategies– Cash payment of more than $10 million in settlement.

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Lessons to be Learnt– 90% of the information on any company is available in the public domain if the investigators know what and where to look for.– Unilever should have at least taken routine precautionary measures to destroy its documents– Laws related to espionage practices should be more stringent by clearly defining every activity that falls under CE.– Companies should formulate an internal code of Ethics & ensure that employees abide by that code and the concept of CI should not be maligned by CE.

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A dumpster diver would say ‘I want it all’ & A savvy CI analyst would say ‘I have to act quickly, so what is the minimum information I need to draw a conclusion?’

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Competitive Intelligence• CI is Information acquired by a market competitor about the companies with which it competes.• CI may be acquired from, the competitor's customers (current and former), suppliers, former employees, stockholder meetings, industry associations and trade shows, trade journals, newspaper articles, research studies, or advertising copy

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Competitive Intelligence PracticesCompanies need to be aware of their competitor’s strategies and make efforts to effectively counter those strategies in order to sustain themselves in the marketMajor companies using CI are; Microsoft Motorola P&G HP IBM Coca-Cola Xerox & many more…

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THANK YOU FOR YOUR ATTENTION 30

Sameer Sharma | M +91 95940samirE justmailsameer@gmail.com