Your Competitors: Who Mill Theq Be? Dav id B . F r a n c i s

Mercator Consultants LLC

Even the best companies can fall victim to new competition, as recent history makes all too clear. In many of these cases, real surprise was not a factor, but denial and delay were. Often advancing rivals were not taken seriously, and no effective action was taken until too late. Sometimes “obsessive concentration” on traditional competitors was to blame or an emergent competitor was discounted because it was initially in a peripheral segment of the market. The author puts forth a four-step program to keep companies off the list of hture victims: First, stay alert to change, both rapid and evolutionary, with a team of intelligence professions who can “institutionalize watchfulness” through systematic monitoring. The team should regularly meet with a formal competitive working group chosen from across the company’s staff functions and line units, and with top management. Second, understand an advancing competitor’s strategy by constructing an in-depth assessment of the company and infm‘ng its future direction. Third, make a compelling case for action to rally management and the entire company to meet the challenge. Fourth, enable action by supporting the strategy staff and management to form and evaluate effective responses to the new competitive threat. 0 1997 John Wdey & Sons. Inc.

The once proud corporation, accustomed to a command- ing position in its market, is brought to its knees by some upstart competitor-or even more insidious, a sea-change in its marketplace. How can this happen? How do the once invincible get brought so low? What causes these changes in fortune and how can we as competitive intelli- gence professionals prevent them?

We all know the stories; some of us had the misfortune to have participated in them personally. Here are a few fa- miliar ones:

Some Cautionarq Tales 0 DETROIT’S BIG THREE AUTO COMPANIES LOST 16

SHARE POINTS between 1970 and 1987, as the

Competitive Intelligence Review, Vol. 8(1) 16-23 (1997) 0 1997 John Wiley & Sons, Inc. CCC 1058-0247/97/01016-08

Japanese shrewdly entered a weakly defended segment o f the U S . market, then proceeded to change the basis of competition forever.

0 ATCT GAVE UP 24 SHARE POINTS TO MCI A N D

SPRINT in the decade between 1985 and 1994, revolutionizing U S. long-distance service, and triggering tectonic changes in telecommunications that continue today.

0 ACCORDING TO DAVID KEARNS’S OWN BOOK (Kearns and Nadler, 1992), Xerox went from a commanding 95% o f U S . copier installations in 1970 to a mere 12% in 1984. The rapid appearance ofmultiple Japanese competitors in Xerox’s marketplace left the copier giant confused and defenseless.

C Hho Hill Your Competitors Be?

0 I B M WENT FROM ITS MOST PROFITABLE PERIOD in the mid-’8Os to an $8 billion dollar loss in 1993 as customers rejected mainframes in favor of personal- computer-based client-server systems, causingjohn Akers and several hundred thousand employees to lose their jobs.

There is every reason to believe that history will repeat itself. Leading candidates for tomorrow’s victims might include:

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APPLE COMPIJTER, which may never be able to recover from allowing Microsoj to pre-empt its exclusive franchise on user-friendly personal computing.

ATGT which, despite the lessons o f the ‘80s and early ‘90s) is now threatened by new competitors rangingfrom cable TI/ to the Internet. There is little solace in thought that both M C I and Sprint are in the same predicament this time.

AMERICAN EXPRESS, whose late recognition o f consumer preferencesfor no-fee revolving credit cards has cost it 10 share points in the last decade. Actually, all o f the plastic- based payment systems face a far more serious threat unless they can adapt to the Internet and electronic payment systems cf the future.

How Could It Happen? Even business historians may never know all the causes of these competitive disasters, but there are some unifjring themes:

The victims were aware of the problem. We can argue about how much advance information they had, but it seems unlikely that real surprise was a factor. Certainly the Big Three knew the Japanese were invading their market and surely AT&T was well aware of MCI and Sprint’s efforts. Kearns’s book makes it clear that Xerox knew what was happening to it; Canon and others made several false starts over a several year period before suc- cessful entry was achieved.

CERTAINLY THE BIG THREE KNEW THE

JAPANESE WERE INVADING THEIR MARKET, AND

SPRINT’S EFFORTS. XEROX ALSO KNEW WHAT

WAS HAPPENING TO THEM, SINCE CANON MADE

SURELY AT&T WAS WELL AWARE O F MCI AND

SEVERAL FALSE STARTS BEFORE SUCCESSFUL

MARKET ENTRY WAS ACHIEVED.

The new competition was not taken seriously. Denial is a major factor in all of these cases, and complacency and overconfidence contribute, too. It has been said that “whom the gods would punish, they first make success- ful.” Too often, market success and market myopia go to- gether. Sometimes the new information is known, but doesn’t get the attention it deserves; it may be distorted by the victim’s tendency to see things in its own tradi- tional terms. IBM, for example, analyzed its market in ways that emphasized the importance of the mainframe, a story it very much wanted to believe. Sometimes, obses- sive concentration on traditional competitors in the fore- ground keeps the victim fiom seeing new threats as they appear on the horizon.

In several of the cases, the new competition was dis- counted because it was initially in a narrow, peripheral segment of the market, not the profitable heart of the victim’s business. This was certainly true for the auto companies and for Xerox and IBM. Indeed, IBM turned its back on a number of new competitors such as Apple, Compaq, Sun, and Silicon Graphics who were creating key growth segments of the computer market because the new businesses did not seem as attractive as mainframes. Sometimes there is a sense of moral outrage when tradi- tional rules are broken, leading the victim to say things like: “They can’t do that!” or “That’s unfair!”

No eflective action was taken until far too late. Even when the problem was acknowledged, action was delayed or inappropriate. A former member of the IBM corpo- rate strategy staff once said to the author: “We knew what was happening, we just couldn’t get top manage- ment to act” (Private Communication, 1993).

cording to Kearns, the only short-term responses Xerox could make were unacceptable because they had too much negative impact on earnings. At IBM, too, there was no ready substitute for the high-margin mainframe revenue when sales sharply declined.

But when it goes out of control, the disaster becomes a sort of wake-up call for the victim. As a senior IBM exec- utive put it recently: “Lose eight blllion dollars! That’s one way to get the company moving!” (Gilad, 1996, quoting IBM senior vice president David Thomas) Perhaps only large-scale disaster can get the attention of an entrenched, complacent corporate culture, but it seems unnecessary.

Finding an acceptable response is often a problem. Ac-

What Can ~e 00 About It? n Four-Step Ajprodch But what does all of this mean for us as competitive in- telligence professionals? How can we prevent disasters

like this in our own companies? While senior execu- tives have the ultimate responsibility for action, we must have the insight to see the new competition, the professional skill to assess its true importance, the cre- ativity and persistence to make a compelling case, and the ability to help management respond effectively. We can view these responsibilities as a four-step program that we can follow to keep our companies off the list of future victims:

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3.

4.

STAY ALERT: we must insure that the company is not taken by surprise through constant watchfulness and systematic monitoring ofthe outside world. UNDERSTAND NEW COMPETITOR’S STRATEGIES: we must provide an informed estimate ofthe new competitor’s future direction that will help make the case for action, and will also suggest possible responses. MAKE THE CASE: we must articulate a compelling case for action, to rally the management team and the entire organization to meet the challenge. ENABLE ACTION: we must support the strategy stafand top management in formulating and evaluating eflective responses to new competition.

Let us explore each of the four steps in detail.

Stay Alert Even though it seems that most victims are aware of the new competition, a company cannot afford to be sur- prised. Moreover, the sooner the problem is identified (and acknowledged.? the more effectively the company will be able to respond. As we have seen, the passing of time may clarifjr the threat, but it also limits the available op- tions for action.

THE PASSING OF TIME MAY CLARIFY THE

THREAT, BUT IT ALSO LIMITS THE AVAILABLE

OPTIONS FOR ACTION.

New competition is always created by change. We can identift emergent competitors through constant watch- fulness, disciplined monitoring of the outside world. Change may be rapid and event-oriented but hard to evaluate, such as an acquisition or a new CEO. It may be slow and evolutionary: harder to recognize and easy to discount, such as a change in customer preferences or the acceptance of a new technology or new distribution scheme.

As Peter Drucker puts it:

Major changes . . . start outside an organization. . , . At least havthe new technologies that have transformed an industry in the past 50 years camefrom outside the industry itseF . . , Though thegreat majority o f businesses will continue to operate locally or regionally, they allface, at least potentially, global competitionfrom places they have never heard ofbef0re. (Drucker, 1995)

Here are some ways to institutionalize watchfulness:

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ONGOING INTERVIEWS OF TOP MANAGEMENT to ensure that the intelligence team understands the internal environment: management’s strategies, priorities, and perceptions o f industry trends. Interviews should be as non-directive as possible, to encourage open-ended speculation and conjecture. Though it sounds like a clichk, the old ((l/tnrlat keeps you awake at night?” can be a great executive interview kickox and asking (‘What critical decisions will you have to make in the next 6-12 months?” often elicits afarsighted response.

CONSTANT MONITORING OF THE EXTERNAL

ENVIRONMENT by the intelligence team, using both published information and the company’s own human intelligence networks, looking for unexpected changes in:

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MARKET TRENDS.

TECHNOLOGICAL DEVELOPMENTS.

ALLIANCES, MERGERS, ACQUISITIONS.

NE w CUSTOMER PREFERENCES.

COMPETITORS’ BASIC CAPABILITIES, management team, or financial condition.

LEGISLATIVE OR REGULATORY CLIMATE, tax law, environmental law, etc.

ANYTHING ELSE SIGNIFICANT to our business.

PERIODIC-PERHAPS QUARTERLY-MEETINGS OF A

FORMAL COMPETITIVE WORKING GROUP, convened by the intelligence director, and composed of unconventional, even iconoclastic thinkers, chosenfrom across the company’s staflfurutions and line units. This group will review the monitoring results, speculate about emerging competitors and begin articulating the threat they could represent. The desired result is a list ofnew competitors, prioritized according to the threat they pose, with enough supporting information to explain the initial evidence and logic.

< Who Will Your ConpeHtors Be? -2

THE DESIRED RESULT IS A LIST OF NEW

COMPETITORS, PRIORITIZED ACCORDING TO

THE THREAT THEY POSE, WITH ENOUGH

SUPPORTING INFORMATION TO EXPLAIN THE

INITIAL EVIDENCE AND LOGIC.

0 REVIEWING THE WORKING GROUP’S FINDINGS WITH

SOME TOP MANAGEMENT GROUP as a reality check and to begin building a consens~~s. Because the conclusions may be viewed as controversial and may meet with resistance, it5 important to pre-test and pre-sell the message.

The competitive working group should use the moni- toring data as a starting point, selectively considering any new developments that could indicate an emerging com- petitor. This requires brainstorming: allowing participants to propose any and all ideas without penalty or fear of ridicule. I t also requires some discipline, compelling the group to have some plausible logic that explains how an embryonic Competitor identified today might develop into a serious, mature future threat. Often, the use of a skilled, outside facilitator can keep these competitive workshops on track and focused. The facilitator’s outside perspective and non-partisan stance can multiply his or her effectiveness at managing both the content as well as the interpersonal dynamics of the meeting.

Understand New Competitors’ Strategies Identifying the new competitor is not enough. We must have some idea of its future direction and strategy. Of course, we can never really know a competitor’s strategy. But we can observe its behavior and make an estimate; we can i n z r the strategy. If it isn’t already available, we

should begin by constructing an in-depth assessment of the new competitor. This is a comprehensive picture of its activities with emphasis on the competitor’s likely fu- ture capabilities and direction.

With the background information assembled, we can begin to infer the strategy. Public statements by senior executives as revealed to stockholders or security analysts often give clues (although occasionally, such statements are designed to exaggerate or even mislead). We should always check to see that these statements are supported by real actions, such as new product introductions, new mar- ket entries, new geographic activity, and so on. There may be supporting evidence of recent new capabilities, both those developed internally, or acquired via alliances or acquisitions. Profiles of the competitor’s top manage- ment and their past leadership styles and decision making behavior can also be useful in understanding their likely future directions.

Figure 1 shows a sketch of an inferred strategy for competitor “A.” Note that both the evidence and the conclusions are presented. Also note that the intelligence professional clearly separates inferences (“We believe that “A” will . . .”) from the facts.

Make the Case Even if we were 100% accurate in identieing new com- petitors, we would stdl have the problem of convincing top management and the entire organization of the seriousness of the situation. Usually, they are aware of the competition, but they deny the gravity or urgency of the problem.

Most large organizations, especially those with strong cul- tures, have well-developed immune systems that reject dls- comforting ideas as though they were foreign bodies. Sales- dominated cultures, like IBM’s, accustomed to strong,

Strategy = Competitor “A”

We believe that “A” will attempt to increase its share of the global market by:

Exclusive arrangements with major US distributors. Intensive US trade sales campaigns, with special promotions. Alliances in China, Southeast Asia, Indonesia. Investments in world-wide distribution logistics.

New CEO, Marketing VP Strong cash position Excess manufacturing capacity

Evidence

Figure 1.

New Product Competitor lug**

cost Time Develop product 10M - Tool up mfg. 20M - Hire sales team 1 OM - Test marketing 1 OM - Prepare launch 20M -

I Rollout 1 OM

TOTAL 80M March 1998

one-sided advocacy are especially intolerant of negative mes- sages and inhospitable to bad news. Generally, CEOs, boards of &rectors, and senior executives are not responsive to vague theories about emerging competitors or to “Chicken Little” style forecasts of impending doom. It is crucial to have a compelhng story, with a credlble storyline that has predicted time-kames and quantifiable consequences. It is important to spend enough time and resources developing the story and articulating it in ways that make it difficult to “shoot the messenger” or ignore the message.

MOST LARGE ORGANIZATIONS, ESPECIALLY THOSE

WITH STRONG CULTURES, HAVE WELL-DEVELOPED

IMMUNE SYSTEMS THAT REJECT DISCOMFORTING

IDEAS AS THOUGH THEY WERE FOREIGN BODIES.

SALES-DOMINATED CULTURES, LIKE IBM’s, ARE ESPECIALLY INHOSPITABLE TO BAD NEWS.

Figure 2 shows a simple Gantt chart that describes a projected new product launch by competitor “B.” The more specific we can be in these predictions, the more likely we are to get management’s attention. Of course, we need to support our predictions with facts and logic, and we need to make the uncertainties clear, too.

In more complex cases, where competitors can imple- ment their strategies in alternative ways, we can construct event trees as shown in Figure 3. These graphs force us to make the logic of our thinking explicit and formal, docu- menting the steps that the competitor would have to complete to make the threat real. They can also be used to analyze the competitor’s likelihood of success, and they can help in formulating strategy.

Each branch in the tree represents an event in a se- quence; each node represents an “AND” connective (signifying that all the connected branches must occur

Market Entry

Competitor “C” Market Entry

AND I I

Cash I

Distribution I

Sales 8 I

Technology Requirements Marketing Capability Required

OR +ll OR , . I ,

Develop Acquire In-house Distributor Develop License Alliance

In-house

AND

Hire Equip Recruit AND dl

Build Buy Cap Staff Lab GUN Whouses Fleet Inventory

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Choke Points

Competitor “C” Market Entry

AND

I I I 1 Technology Sales a Distribution Cash

Requirements Marketing Capability Required

Develop Develop Acquire In-house

License Alliance In-house Distributor

OR +ll

. . Staff Lab Guru \\ \ Whouses Fleet Inventory

Choke Points

Figure 4.

for the competitor’s success) or an “OR” (signifying that any one of the branches can occur for success.) Each branch in the tree should be associated with a rough time frame, so that we can determine the immediacy of the threat.

Figure 3 describes competitor “C’s” potential entry into our market. Note that “C” must have all four ele- ments of technology, sales & marketing, distribution, AND cash to succeed, but there are alternative ways- internal development, licensing, OR an alliance-to ac- quire the requisite technology.

While Gantt charts or event trees may be useful con- structs, the objective is still to compose an attention-get-

ting, compelling story, one that evokes a thoughtful, or- ganized timely response to the new competitor.

Enable Action Competitive strategy is a much discussed, much studied field that is outside the scope of this brief article. Deter- mining an appropriate response may also be outside the charter of our competitive intelligence team. But the partnership between strategy and intelligence must be intimate. Formulating a counter-strategy will require all relevant information about a competitor and will also suggest new efforts that the intelligence team must un- dertake in support of action.

Alternative Actions - Competitor ‘ID”

Launch new product first .Cost: $60M . Benefit: prevent loss of $20M revenue, first

. Risks: cannibalize our own product . D’s likely response: accelerate development

two years

and launch

Figure 5.

<->

Alternative Actions - Competitor “D”

Pre-empt distributors with exclusive contracts Cost: $2OM/year Benefit: ensure access to customers Risks: potential anti-trust implications D’s likely response: other distributor pacts

Figure 6.

THE PARTNERSHIP BETWEEN STRATEGY AND

FORMULATING A COUNTER-STRATEGY WILL

INTELLIGENCE MUST BE INTIMATE.

REQUIRE ALL RELEVANT INFORMATION ABOUT

A COMPETITOR AND WILL ALSO SUGGEST NEW

EFFORTS THAT THE INTELLIGENCE TEAM MUST

UNDERTAKE IN SUPPORT OF ACTION.

Sometimes the inspiration for our response will come from the work already completed, to identify the new competitor, build an in-depth assessment, or understand the competitor’s strategy. The event trees we discussed in the previous section can also be analyzed to identify places where we can disrupt the smooth unfolding of the competitor’s plan.

Figure 4 shows three such “choke points” of competi- tor “Cs” plan to enter our market. If we can control all three choke poin tss ign exclusive contracts with the best guru’s, exclusively license the leading-edge technol- ogy, and lock-up the leading alliance partners-we may be able to slow “C” down or stop him altogether. (We should, however, make sure our general counsel has re-

viewed our activities for possible anti-trust conse- quences.)

As we saw in the four cases presented at the start, paralysis is often the problem. When our core business is threatened, all responses may seem unacceptable com- pared to the status quo, especially when we are accus- tomed to prosperity. So, it is important to formulate and evaluate as many alternatives as possible. Figures 5 to 7 show some simple responses to a hypothetical competitor “D.” As shown, we should consider both the risks and benefits of each alternative. We must be sure to include likely competitive responses and any legal risks. Some- times game theory can help us in our evaluation. For ex- ample, competitors’ potential moves and our potential countermoves can be analyzed using game trees, analo- gous to the event trees in figures 3 and 4. (Dixit and Nalebuf, 1991)

As we examine responses, we may need to reflect on our own business and its weaknesses, so that we can strengthen it. We may find it necessary to take risks and challenge the established order and traditions of our busi- ness. This makes some responses especially difficult to de- vise and defend in internal discussions. The services of an

Alternative Actions = Competitor “D”

Offer volume deals to major accounts . Cost: $20M/year . Benefit: hold onto share . Risks: start a “gas war” . D’s likely response: price cuts, T & C improvements

Figure 1.

C- Hho Hill Your tornpentors Be? > experienced outside facilitator can help keep the discus- sion focused and productive. The facilitator, who does not have the organization’s cultural biases and blind spots, can often help the in-house participants to be more cre- ative as well as objective.

Summary Learning from past and present cautionary tales, we have seen that even (or perhaps especially) the best companies fall victim to new competition. Actual surprise seems rare, however, while denial or discounting the threat seems to be the main ingredient of disaster. Delaying or procrastinating action completes the trap. But if we intel- ligence professionals practice the four-step program sug- gested here, we have a fighting chance of keeping our companies alive, competitive, and out of the management strategy casebooks.

While following the four steps, it is critical to success that we have the facts; that we use analysis to get beyond today’s facts; that we be forthright, forceful, and articulate in making the case; and that we engage both manage- ment and the entire organization to get effective, timely action. We should always remember that, according to Intel CEO Andy Grove: “Only the paranoid survive!”

W E SHOULD ALWAYS REMEMBER THAT,

ACCORDING TO INTEL CEO ANDY GROVE, “ONLY THE PARANOID SURVIVE!’’

This brief survey has only scratched the surface. The situations, new competitors, and competitive challenges that companies face are all different, all complex, all in- triguing. But a disciplined, systematic approach can help prevent companies from being embarrassed by new com-

petitors or becoming the next victim of a tragedy like the ones described in this article. Readers are encouraged to use the techniques described here and freely adapt them to their own special situations. The author would appre- ciate any feedback or comments, especially those regard- ing real-world successes or failures.

References Dixit, A.K. and Nalebuf, B.J. (1991) Thinking Strategically. New York: W.W. Norton & Co.

Drucker, PE (1995) “The Information Executives Truly Need,” Haward Business Review, January-February.

Gilad, B. “Understanding the Competition: The CEO’s Per- spective,’’ SCIP Annual International Conference, March, 1996.

Kearns, D.T. and Nadler, D.A. (1992) Prophets in the Dark. New York: Harper Business.

Private Communication, 1993.

About the Author Dr. David Francis is the managing principal of Mercator Consultants LLC, a f irm specializing in business intelligence and competitive strategy, with a special focus on science and technology-based industries and on issues related to their future. Previously, he developed the computer industry practice at The Futures Group after more than 20 years at IBM, where he held senior management positions. Dr. Francis earned his Pk. D in electrical engineering and biotechnology from Carnegie- Mellon University. He has been a S C I P member sincejune 1995. Mercator Consultants is located at 666 West Hill Road, Stamford, CT 06902; El: 203-322-3954; Fax: 203-322-5592.