Developing Comprehensive Competitive Intelligence

Statements on Management Accounting

B U S I N E S S P E R F O R M A N C E M A N A G E M E N T

C R E D I T S

T I T L E

This statement was approved for issuance as aStatement on Management Accounting by theManagement Accounting Committee (MAC). The Instituteof Management Accountants (IMA) extends appreciationto The Society of Management Accountants of Canada(SMAC) for its collaboration in creating this SMA, and toRobert A. Howell, DBA, clinical professor of managementaccounting at Thunderbird—The American GraduateSchool of International Management and president ofHowell Management Corporation, who drafted the manu-script. Representatives of the Consortium for AdvancedManufacturing—International (CAM-I) contributed as wellto the project.

IMA offers special thanks to Randolf Hoist, SMACManager, Management Accounting Guidelines, for his con-tinuing oversight and to the members of the focus groupthat helped shape the final document, including MAC chairman Alfred M. King and MAC member Dennis C. Daly.

Developing ComprehensiveCompetitive Intelligence

Published byInstitute of Management Accountants10 Paragon DriveMontvale, NJ 07645-1760www.imanet.org

Copyright © 1996Institute of Management Accountants

All rights reserved

Statements on Management Accounting


T A B L E O F C O N T E N T S

Developing ComprehensiveCompetitive Intelligence

I. Rationale . . . . . . . . . . . . . . . . . . . . . . . 1

II. Scope . . . . . . . . . . . . . . . . . . . . . . . . . 1

III. Defining Competitive Intelligence Programs . . . . . . . . . . . . . . . . . . . . . . . .2

IV. Objectives of Competitive Intelligence Programs . . . . . . . . . . . . . . .3

V. The Role of the Management Accountant . . . . . . . . . . . . . . . . . . . . . . .3

VI. The Competitive Intelligence Process . . . .4

VII. Tools and Techniques for Developing Competitive Intelligence . . . . . . . . . . . . . .9

Strategic Analysis Techniques . . . . . . .10

Industry Classification Analysis . . . . . . .11

Core Competencies and Capabilities Analysis . . . . . . . . . . . . . . .13

Resource Analysis . . . . . . . . . . . . . . . . .14

Future Analysis . . . . . . . . . . . . . . . . . . .15

Product-Oriented Analysis Techniques . .15

Reverse Engineering/Teardown Analysis . .15

Customer-Oriented Analysis Techniques .16

Customer Value Analysis . . . . . . . . . . .17

Value Chain Analysis . . . . . . . . . . . . . .19

Competitive Benchmarking . . . . . . . . . .21

Financial Analysis Tools . . . . . . . . . . . .22

Traditional Ratio Analysis . . . . . . . . . . .22

Sustainable Growth Rate Analysis . . . . .22

Disaggregated Financial Ratio Analysis . .24

Competitive Cost Analysis . . . . . . . . . .24

Behavioral Analysis Techniques . . . . . .25

Shadowing . . . . . . . . . . . . . . . . . . . . . .25

VIII. Implementing a Competitive Intelligence Program . . . . . . . . . . . . . . .26

IX. Organizational and Management Accounting Challenges . . . . . . . . . . . . . .30

X. Conclusion . . . . . . . . . . . . . . . . . . . . .31

Bibliography

ExhibitsExhibit 1: Levels of Intelligence-Gathering . . .2

Exhibit 2: The Competitive Intelligence Process . . . . . . . . . . . . . . . . . . . .5

Exhibit 3: Industry Life Cycles . . . . . . . . . .10

Exhibit 4: Marks & Spencer's CompetitiveAdvantage . . . . . . . . . . . . . . . . .13

Exhibit 5: Customer Value Triad . . . . . . . . .16

Exhibit 6: Customer Value Map: Luxury Cars . . . . . . . . . . . . . . . .18

Exhibit 7: The Value Chain Concept . . . . . .20

Exhibit 8: Calculating Sustainable Growth Rate . . . . . . . . . . . . . . .23

I . RAT IONALEFor a number of years, many firms have focusedon the marketing principle of “knowing and satisfying customers at a profit.” This focus hasled these firms to consider new customer oppor-tunities, modify channels of distribution, developnew products, and reorganize and restructure toachieve these objectives.

In strong markets, such customer-focused actionscan and did lead to growth and profitability. Today,these same firms realize that they cannotincrease growth and profitability without a strongunderstanding of every aspect of their competi-tors’ business and activities.

Most companies have informally monitored theircompetitors for some time. They know somethingof their competitors’ management, markets andcustomers, products and services, facilities,technologies and finances. However, fewer firmshave applied their knowledge of their competitorsin a proactive, disciplined, systematic fashion toachieve a competitive advantage.

Instead, what competitor intelligence they haveis often informal, scattered, anecdotal, and fallsfar short of its potential value. Although consid-erable data may exist on market shifts, customerneeds, and competitors’ capabilities andactions, few firms try hard enough to coordinatesuch information into competitive intelligencethat they can act upon.

As the business world gets more competitive,such informal information-gathering is no longeradequate for proactive companies. With businessmore complex and the economic climate so uncer-tain, these corporations are becoming far moresophisticated at scrutinizing the competition.They seek out more information, and spend moretime and effort analyzing it. As these companies

have discovered, an effective competitive intelligence program is absolutely necessary forsuccess in today’s—and tomorrow’s—competitiveenvironment.

I I . SCOPEThis guideline is primarily focused on competitoranalysis and synthesizing that analysis into com-petitive intelligence. Although broader intelligencealso must be done by an entity and is mentionedin several places, this guideline is not aboutbroad business intelligence. Exhibit I suggests a relationship between these three types of intelligence-gathering—competitive analysis, com-petitive intelligence and business intelligence.

In Exhibit I, competitor analysis occupies the bottom of the inverted pyramid because of itsnarrow focus on an individual competitor profile.A competitor profile is a package of informationabout a specific competitor at a specific time.The profile typically includes an overview of a competitor, its key executives, important markets and product lines, underlying operationsand technology, and financial performance. Itwould include an analysis to enable a companyto interpret how the competitor’s strengths andweaknesses, resource availability and strategicdirection would affect it.

In the middle of the pyramid, competitive intelligence has a broader scope because itassimilates all of the competitor analysis. At thetop of the pyramid is the broadest degree of intel-ligence-gathering, business intelligence, whichincludes environmental scanning (including suchissues as economic conditions, social change,technological developments, and political andregulatory events); market research and analysis;and competitive intelligence.

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The concepts, tools, techniques and implemen-tation steps in this guideline apply to all organizations that produce and sell a product orservice in a highly competitive environment,as well as:

l large and small organizations;l public and private entities;l enterprises in all business sectors;l all management levels; andl all levels of the firm.

This guideline will help management account-ants and others:

l understand how competitive intelligencerelates to the organization’s goals, strategiesand objectives;

l explain the benefits of implementing a compet-itive intelligence process;

l understand the steps required to implementan effective competitive intelligence program;

l understand the tools and techniques for con-ducting a systematic, formal and disciplinedcompetitive intelligence process;

l appreciate the organizational and managerialaccounting challenges in implementing newand improved competitive intelligenceapproaches; and

l broaden management awareness and obtainsupport for a competitive intelligence effort.

I I I .DEF IN ING COMPETIT IVEINTELL IGENCE PROGRAMS1

Competitive intelligence programs are the foundation on which organizational objectives,strategies and tactics are built, assessed andmodified. They permit organizations to assessboth their industry life cycle and the capabilities

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Business

Intelligence

Broadest scope, including environmentalscanning, market research and analysis, and competitive intelligence

Broad scope, assimilating all of thecompetitor intelligence

Narrow focus on an individual competitor profile

Competitive

Intelligence

Competitor

Analysis

EXHIBIT 1: LEVELS OF INTELLIGENCE-GATHERINGEXHIBIT 1. LEVELS OF INTELLIGENCE-GATHERING

1 Much of this material is based on The Society of CompetitiveIntelligence Professionals. 1993. Global Perspectives onCompetitive Intelligence.

of current and potential competitors in order tomaintain or develop a competitive advantage.Competitive intelligence programs provide inputfor such decisions as which products, marketsand business lines to invest in and develop, whichto acquire or develop joint ventures around, andwhich to divest themselves of or exit.

While there are many different ways of designingand implementing competitive intelligence programs, all have common elements:

l competitive intelligence programs focus onindustries and on creating competitor profiles,particularly identifying organizational and performance implications of industry changesand of competitors’ actions and reactions;

l gathered data (many unorganized, disconnectedand unevaluated bits of input) become compet-itive intelligence (data that are organized andevaluated so that a firm gains new, differentinsights about its competition);

l while individuals and/or units are formallycharged with intelligence responsibilities,every organizational member is an intelligenceantenna;

l competitive intelligence programs evolve toaddress changing critical issues and to permitorganizational renewal; and

l competitive intelligence programs are notindustrial espionage. Rather, they are the processof gathering, analyzing and using publicly avail-able data. Obtaining confidential competitiveinformation by nefarious means, and acting inclearly unethical or even illegal ways, is notcompetitive intelligence.

IV. OBJECT IVES OF COMPETIT IVEINTELL IGENCE PROGRAMSOrganizations continually seek new ways toachieve sustainable competitive advantage andto counter aggressive competition. Proactive

organizations recognize the advantage to begained from an organized competitive intelli-gence program. In the Japanese semiconductorindustry, for example, large organizations suchas Mitsubishi, Mitsui, Sumitomo and Marubenimaintain intelligence departments that rival theU.S. Central Intelligence Agency in ability andaccuracy. In the U.S., competitive intelligenceprograms are a popular tool among companiessuch as IBM Corp., Texas Instruments, Inc.,CitiCorp, AT&T Inc., U.S. Sprint, McDonnellDouglas Corp., and 3M.

Organizations develop competitive intelligenceprograms with the following objectives in mind:

l to provide an early warning of opportunitiesand threats, such as new acquisitions oralliances and future competitive products andservices;

l to ensure greater management awareness ofchanges among competitors, making theorganization better able to adapt and respondappropriately;

l to ensure that the strategic planning decisionsare based on relevant and timely competitiveintelligence; and

l to provide a systematic audit of the organiza-tion’s competitiveness that gives the CEO anunfiltered and unbiased assessment of thefirms relative position.

V. THE ROLE OF THE MANAGE-MENT ACCOUNTANTCompetitive intelligence is a process of gatheringdata, creating information and making decisions.Management accountants are trained to gatherdata, assimilate data into information and makedecisions based upon information, frequentlywith their management counterparts.

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Competitive intelligence may also be viewed as acompetitiveness audit, a concept that manage-ment accountants are familiar with. Managementaccountants’ training and experience make themwell-suited to the requirements of the competitiveintelligence process.

Management accountants may be activelyinvolved in introducing a competitive intelligenceprocess in several ways:

l identifying the need for a new or improvedcompetitive intelligence process;

l educating top management and other seniormanagers about that need;

l developing a plan along with cross-functionalteam members for designing, developing andimplementing the new, improved competitiveintelligence practice, including its underlyingarchitectures;

l identifying the appropriate tools and techniquesfor conducting competitor analysis;

l providing financial input, analysis and expertiseto the competitive intelligence effort;

l contributing to and using competitive intelligencein target costing;

l ensuring that the competitive intelligenceefforts are tied to the firm’s goals, strategies,objectives and internal processes, as appropri-ate; and,

l continually assessing the new, improved com-petitive intelligence process and its implicationsfor the organization, and continually improvingthe process.

V I . THE COMPETIT IVE INTELL IGENCE PROCESSAn effective competitive intelligence process allowsthe appropriate members of a firm to actively andsystematically collect, process, analyze, dissemi-nate and assimilate competitor information sothat they can respond appropriately.

There are many approaches to creating competi-tive intelligence. Corporate experience suggeststhat several elements are critical to an effectiveintelligence process. These include:

l define the business issue(s);l determine the sources of competitive data;l gather and organize the data;l produce actionable intelligence; l communicate results and findings;l provide input into the strategic planning

process; andl provide feedback and re-evaluate.

A model of the steps of the typical competitiveintelligence process is illustrated in Exhibit 2.The following paragraphs describe each of the steps.

Define The Business Issue(s)The first step of a competitive intelligenceprocess is to define the business issue(s). Whatkind of intelligence is expected and for whom?How will they use the competitive intelligence?When do they need it?

Surveying senior management to determine thesubject and purpose of the needed informationmakes it more likely that the information will becollected systematically, with priorities set by theusers of the data and not its producers.

Examples of typical business issues are:l How can our product or service be differentiat-

ed? How can we add customer value by doingsomething better than or different from ourcompetitors? How can perceived quality beenhanced?

l Can we employ synergy, focus or a preemptivemove to gain advantage?

l What alternative growth directions should beconsidered? How should they be pursued?

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l What investment level is most appropriate foreach market?

l What strategies best suit our strengths, objectivesand organization?

Tactical intelligence focuses on business issues,such as the competitor, customer and supplieractions, that can have an impact on the businesstoday, next month and next quarter. Such intelli-gence is usually developed at the business unitor business sector level.

In contrast, strategic intelligence helps steer the overall direction of the business. Strategicintelligence, though often fed by tactical informa-tion, should come from the senior levels of thecompany.

Determine the Sources of Competitive DataAfter the business issues have been identifiedand the project delineated, the key sources ofcompetitive data can be identified and utilized,which typically include:

l internal staff;l published information;l third-party interviews; andl commissioned research.

Internal Staff—Data that most organizationsalready possess about their competitors is oftenimportant. According to some estimates, a firmalready possesses as much as 80 percent ofwhat it would ever need to know. For example,marketing, sales and service staff are alwaysaware of market behavior and trends, and of howcompetitors are creating them or usually

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PLAN DO CHECK ACT

Data Information Intelligence

Define the Business

Issue(s)

Gather/Organizethe Data

ProduceActionableIntelligence

CommunicateResults &Findings

ProvideFeedback

Re-evaluate

TacticalIntelligence

StrategicIntelligence

StrategicPlanningProcess

DetermineSources of Competitive

Data

EXHIBIT 2: THE COMPETITIVE INTELLIGENCE PROCESS

EXHIBIT 2. THE COMPETITIVE INTELLIGENCE PROCESS

responding to them. The distribution functioncomes into contact with intermediaries in distri-bution channels. Production managers might seecompetitors at capital equipment trade shows;design and development personnel mayencounter competitors’ technical staff at profes-sional meetings; and finance and accountingstaff might see their counterparts at conferenceor seminar presentations that provide potentialinsights. But because these data are usually dispersed throughout the organization or are notintegrated or are not timely enough, most firmsunderutilize or even miss them.

Published Information—Plenty of published information about competitors might already begathered throughout a firm but not yet integrated.For example, mandatory financial filings such asannual reports and Securities ExchangeCommission filings are readily available. If acompetitor has an active public informationoffice, the company might produce a lot of materialthat provides useful insight. Clipping servicescan be utilized to glean articles appearing in thetrade press. Patents and technical articles writtenby competitors’ staff members can signal theirtechnical direction. For example, Intel monitorscompetitors’ progress in developing eight-inchsilicon wafers by keeping track of scientific liter-ature. Intel staffers in Tokyo and California siftthe thousands of technical papers published inJapan each year and translate the most interestinginto English. As well, security analysts’ reportsmay provide third-party perspectives on a competi-tor’s performance, position and likely direction.Dispersed throughout an organization, thesekinds of information may tell little; compiled,integrated and analyzed, they might present amuch clearer picture.

Third-Party Interviews—Organizations regularlycontact external groups and individuals that also

encounter its competitors. Customers are the mostobvious, direct and useful example. If customershave been approached by competitors, they willlikely share new insights about the competitors’efforts with their original supplier. Similarly, com-petitors’ customers might share information aboutthe perceived advantages provided by competingcompanies’ products and services. Other usefulthird parties include distributors who carry or are atleast aware of competitors’ products and services;common suppliers or suppliers who might havebeen approached by the competition; formeremployees of competitors; trade associations;trade press; and financial analysts.

Commissioned Research—Instead of collectingtheir own data, some organizations buy informa-tion from market research companies. Smallmarket research firms can provide a wealth ofcontinuous information about publicly held companies for a modest fee ($3,000 - $5,000annually). Most of this information is either inthe public domain or regularly reported in thefinancial press and includes: patents filed,lawsuits, new plants or plant expansions andclosings, biographical information on companyexecutives, overall or individual product salesdata, new product announcements, etc. A casecan be made for using outside research as insurance alone, even if the small or medium-sized company is doing some of its own competitive research. Senior executives pre-occupied with operating matters stand a goodchance of missing important items. In addition,they cannot assume that they will always find outwhat is going on in the marketplace from theirown people.

Gather and Organize the DataIt is important to organize competitive data sothat they can be logically stored and retrieved.One useful framework includes a major category

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for broad industry data, another for data collectedon each competitor being tracked, and a third forcompetitive data that relate to specific areasthat management is particularly concernedabout in its own firm.

For the industry database, organizations typicallytrack the forces that influence industry perfor-mance and prospects, including economic conditions, social change, technological develop-ments, legislation and regulations, customerbuying patterns and supplier trends. Industrysales, industry concentration and relative marketshare in all product markets, operating profits,after-tax profits, return on assets and otherfinancial performance measures should also bemonitored. The resulting system should permit a company to monitor changes in industry structure and attractiveness, ensuring that it cancontinually capture and track relevant data.

The next level of data in the competitive intelli-gence system usually relates to the specific competitors that are being tracked. The intent is to develop a comprehensive profile of the particular competitor. This kind of informationincludes a general description of the competitor;a timeline of the critical events in its history; key executive profiles; issues of organization,management style and culture; the company’sapproach to markets and key customers; anexplanation of the company’s businesses, productlines and products; R&D and technology perfor-mance and direction; manufacturing operations;thorough financial analysis; and other criticalinformation or issues that provide additionalinsight or understanding of the competitor.

More and more companies are taking aggressiveapproaches to data collection. For example,Kodak maintains a database of news articlesand summaries of competitive studies available

to any employee in its network. AbbottLaboratories distributes competitive reportforms to generate intelligence gathered from corporate reports. Hewlett-Packard has estab-lished a network of e-mail contacts to collect critical information.

There probably are some critical success factorsthat relate to a specific industry—quickresponse to customer needs, new productdevelopment performance, low-cost operations,financial acumen—which drive an industry’s andindividual firm’s success. These critical areasshould receive particular attention as the dataare being gathered and disseminated. At thesame time, organizations must be careful not to focus so exclusively on the perceived criticalsuccess areas that they overlook other emergingimportant areas.

For example, it is critical that organizations donot spend all of their time gathering data aboutcurrent competitors. They also need to allocatesome time to looking at who their competitorsmight be in five years. By doing so, organizationsmay be able to prevent their potential competitorsfrom gaining a foothold.

Produce Actionable IntelligenceAfter all of the data have been gathered, animportant step is to check and verify these datawith both line and staff managers. Obtainingtheir acceptance before proceeding to the nextstep avoids having the data support conclusionsthat line or staff managers oppose. If they haveaccepted the data, these people will usually beless able to resist their logical implications. Forexample, at Southwestern Bell, managementrequires all non-published information to be considered mere rumors—unless it can be independently verified. Once verified, the datacan be analyzed.

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Criteria for evaluating whether the organizationcan act upon its competitive intelligence are:

l Have the conclusions been challenged andtested?

l Have the underlying assumptions, uncertaintiesand limitations been identified?

l Have implications been developed?l Are the data presented in an effective format

for planning?l Do they meet users’ needs?l Have alternative findings/views been identified?l Can management act while there is still time

to make a difference?

Communicate Results and FindingsDisseminating competitive intelligence closesthe loop between those who collect and analyzecompetitive information and those who use it tomake decisions.

There are several ways of presenting and dis-seminating competitive intelligence throughout afirm. One way is to gather all such informationinto a competitor profile report for distributionthroughout the organization, in part or in whole,on a need-to-know basis.

A more dynamic approach is to create a compet-itive intelligence center for maintaining andupdating information about competitors andabout the firm’s own competitive intelligenceefforts. Appropriate executives can then convenemeetings and hold discussions based on thecompetitive information presented.

Some companies hold periodic competitive debrief-ings for senior management in order to discuss thefirm’s principal competitors, their performance, theirpossible actions and the implications for the firm.These gatherings utilize both reports and presenta-tions to stimulate discussion and response.

The key to successful communication of intelli-gence is to focus on the competitive issues thatmatter most, and on how to gather and apply theinformation to quickly and expediently addressthese issues.

For example, Coming and Xerox will reverse-engineer a competitor’s product and then communicate the findings to a broad audience,knowing that an engineer will use the resultingintelligence differently than will a marketer.Corning’s management realizes that the entirecorporation will benefit from the information inthe end. When Kraft realized that much of itscompetitive data was squirreled away throughoutthe corporation, it decided to audit and indexthese “hidden” resources so all managers couldbenefit from them. Canon knows that much of its market knowledge lies outside Japan and has decided to translate critical technical andcompetitor information into Japanese, thus makingit accessible to all company management.

Provide Input into the Strategic Planning ProcessStrategic planning is an integrative activity. Itpulls together information from throughout theorganization, and, at its best, helps create acohesive direction for the organization. Unlesscompetitive intelligence becomes one of the key components of strategic planning, the intelli-gence process will have failed to achieve its purpose or to justify the necessary investment.

What organizations need is a concise version ofwhat the data say and mean. Beyond simplyregurgitating public data, the analysis mustextend into original research and assess the like-ly effects of the data on business strategy.

By providing management with implications andstrategic alternatives, competitive intelligence

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can be effectively integrated into the strategicmanagement process.

Provide Feedback and Re-evaluateA key feature of an effective competitive intelli-gence process is its feedback mechanism.Users need to evaluate the relevance, timelinessand comprehensiveness of the material.Feedback often helps clarify users’ needs, iden-tify missing information and suggest new areasof investigation.

V I I . TOOLS AND TECHNIQUESFOR DEVELOPING COMPETIT IVEINTELL IGENCEJust as competition has increased for most firmsduring the past 50 years, so there has been anevolution of thought, practice, and tools andtechniques that support competitive intelligenceefforts. These tools and techniques can be categorized as strategic, product-oriented,customer-oriented, financial and behavioral.

Strategic Analysis TechniquesCompanies typically make superior profits eitherby entering a profitable industry or by establish-ing a competitive advantage over their rivals.Their strategy is usually defined by the answersto two basic questions: “Which business shouldwe be in?” and “How should we compete?”

The answer to the first question defines corporatestrategy, which addresses issues such as diversi-fication, vertical integration, entry and exit, andthe allocation of resources within a diversified corporation. It emphasizes an in-depth under-standing of the market, particularly of competitorsand customers. The goal is not only to gaininsight into current conditions but to anticipatechanges that have strategic implications.

The answer to the second question defines busi-ness strategy, or how the firm will compete withina specific industry or market. If the firm is to win,or even survive, it must adapt a strategy thatestablishes a sustainable competitive advantage.

Strategic analysis has evolved significantly duringthe past 30-40 years, in many respects as com-petition has strengthened and become moreglobal. Although the strategic analysis tools andtechniques may have originally been developedto be used within a firm, many are equally applicable for competitive analysis. Tools andtechniques that formerly were primarily internallyfocused have been turned around to focus moreexplicitly on the external environment and to analyze competitors in the same way that a firmwould analyze and evaluate itself.

Organizations use several strategic analysistechniques in developing competitive intelligencefor their corporate and business strategies.Besides helping select the correct strategy,these techniques provide a framework for rationaldiscussion of alternative ideas and the means tocommunicate the strategy throughout the organ-ization. Some of these techniques are:

l industry classification analysis;l core competencies and capabilities analysis;l resource analysis; andl future analysis.

Industry Classification AnalysisThe ability to identify an industry with a group ofsimilar industries helps organizations to betterunderstand the nature of their competition and thesources of competitive advantage in an industry.

Industry classification analysis is a valuabletechnique for revealing similarities among indus-tries and for highlighting crucial differences. As

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such, industry classification is a valuable tool fordeveloping competitive intelligence.

One key basis for classifying industries is maturity.Industries typically follow a life cycle that comprisesa number of evolutionary characteristics commonto different industries. The industry life cycle is theindustry equivalent of the product life cycle.

To the extent that an industry produces a rangeand sequence of products, an industry life cyclewill likely last longer than that of a single product.Four stages are typically defined as:

l introduction;l growth;l maturity; andl decline.

The life cycle and the stages within it are definedby changes in an industry’s growth rate overtime. The characteristic profile is that of an S-shaped growth curve as shown in Exhibit 3.

In the introduction stage, the industry’s productsare little known, there are a few pioneering firmsand a few pioneering customers, and marketpenetration is initially slow. During the growthstage, diffusion of information about the productscauses accelerating market penetration. In thematurity stage, the market approaches satura-tion, demand shifts from new customers toreplacement demand, and the rate of growth ofindustry sales slows. Finally, as the industrybecomes challenged by new industries that produce technologically superior substitute products, the industry enters its decline stage.

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EXHIBIT 3: INDUSTRY LIFE CYCLES

Introduction Growth

Time

Industr

y S

ale

s

Maturity Decline

EXHIBIT 3. INDUSTRY LIFE CYCLES

The duration of the various phases of the lifecycle varies considerably from industry to industry.For example, the life cycle of the railroad industryextended for about 100 years from 1840 beforeentering its declining phase. The first Apple personal computers were assembled in 1976.By 1978, the industry was in its growth phasewith a flood of new and established firms enteringthe industry. Toward the end of 1984, the firstsigns of maturity appeared: growth stalled,excess capacity emerged, and the industrybegan to consolidate around a few companies.

Some industries may never enter a decliningphase. For example, industries supplying basicnecessities such as residential construction,food processing and clothing are likely to remainmature but are unlikely to enter prolongeddecline. Some industries may experience a rejuvenation of their life cycle.

Although the life cycle is a common technique ofindustry classification used in strategic analysis,numerous other approaches to classification arepossible. Industries can be classified by type of customer (producer-good and consumer-good indus-tries); by the primary resources used to compete(technology-based, marketing-based, or professionalskill-based industries); or by the geographic scopeof the industry (local, national or global).

The critical issue in evaluating the usefulness ofany means of industry classification is whether itcan offer insights into similarities and differ-ences among industries for the purposes of formulating competitive intelligence corporateand business strategies.

Core Competencies and Capabilities AnalysisIndustry classification analysis is well suited todescribing the what of competitiveness, or whatmakes one firm or one industry more profitable

than another. Also, understanding the particularsof competitors’ costs, quality, customer serviceand time to market advantages may still leave thequestion of why largely unanswered. For example,why do some companies seem able to continuallycreate new forms of competitive advantage whileothers seem able only to observe and follow? Whyare some firms competitive advantage creatorsand others advantage imitators?

There is a need not only to keep score of exist-ing advantage—what they are and who has them—but to discover the engine that propels theprocess of advantage creation. The tools ofindustry and competitor analysis are much bettersuited to the first task than to the second.

Thus, while it is entirely appropriate to have astrong end-product focus, this approach shouldbe supplemented by a core competence focus.For competitive intelligence purposes, organiza-tions should be viewed not only as a portfolio ofproducts or services, but also as a portfolio ofcore competencies.

Core competence represents the consolidationof company-wide technologies and skills into acoherent trust. The key to strategic managementcan be management of core competencies ratherthan business units, because the sustainablecompetitive advantage of business units derivesfrom core competencies.

According to Prahalad and Hamel (1994), com-panies possess no more than five or six funda-mental competencies. These competencies con-tribute disproportionately to customer-perceivedvalue, are competitively unique and can beapplied to various product areas.

For example, consider the core competencies of Sony in miniaturization, 3M in sticky-tape

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technology, Black & Decker in small motors, andHonda in vehicle motors and power trains. Each ofthese competencies underlies several businessunits. NEC has developed fundamental capabili-ties in several technical areas (semi-conductors,computing and telecommunications) that it cancombine and recombine in order to achieve anadvantage over competitors that lack similar fundamental competencies.

A core capability is oriented not to products butto processes. Thus, a company gains a significantcompetitive advantage in its mainstream businessprocess or processes. In appraising core capabil-ities, what is important is not just current competencies in existing activities but a firm’spotential to expand, develop and redeploy itscore capabilities.

One frequently cited example is Wal-Mart. Thisretailer knows exactly which merchandise itemsand how many of each have been sold in each ofits stores daily. This information is fed backthrough the company’s information system to itssuppliers. The suppliers can rapidly ship replace-ment merchandise through Wal-Mart’s distribu-tion systems in order to avoid losing out onsales. This highly effective and efficient supplier-to-–customer chain makes it difficult for Wal-Mart’s competitors to compete effectively.

Competencies and capabilities represent two different but complementary dimensions of anemerging paradigm for corporate strategy. Bothconcepts emphasize “behavioral” aspects ofstrategy, unlike traditional structural models.But, while core competence emphasizes techno-logical and product expertise at specific pointsalong the value chain, capabilities are morebroadly based and encompass the entire valuechain. Capabilities are visible to the customer,unlike core competencies. The combination of

core competencies and capabilities can give afirm an important competitive advantage.

Developing competitive intelligence based solelyon an analysis of competitor core competenciesand capabilities, however, may not suffice. Bythemselves, core competencies and capabilitiesfail to explain the management of core and sec-ondary processes, structure and culture. Forexample, 3M might have developed non-woventechnology as a core competency, but not enoughto make it a product leader in tapes and soappads. Likewise, suggesting that Wal-Mart’s suc-cess stems solely from its logistics competenceis simplistic; success is usually multifaceted.

Resource Analysis2

Developing competitive intelligence based onanalyzing core competencies and capabilitiesmay overlook some important ways in whichorganizations develop diversification strategiesthat make sense. For example, core competenciesand capabilities assume that the roots of compet-itive advantage are inside the organization andthat the adoption of new strategies is constrainedby the current levels of a firm’s resources.

A resource-based framework combines the internalanalysis of phenomena within organizations withthe external analysis of their industry and theircompetitive environment. The resource-basedframework analyzes organizations as distinct collections of physical assets (such as plants orequipment) and intangible resources (such asbrand names or technological know-how).

Thus, competitive advantage is attributed to theownership of a valuable resource that enablesthe organization to perform activities better or ata lower cost than its competitors. Marks and

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2 Much of this material is based on Collis and Montgomery1995.

Spencer, for example, possesses a range ofresources that yield it a competitive advantage inBritish retailing. This is illustrated in Exhibit 4.

It is important for organizations to avoid analyzingresources in isolation since their value is determined in the interplay with market forces. Aresource that has a value in a particular industryor at a particular time might not have the samevalue in a different industry or time.

For a resource to qualify as the basis for aneffective strategy, a number of questions shouldbe asked about its value in the external market.

These are:

l Is the resource difficult to copy? Inimitability isat the heart of value creation because it limitscompetition. If a resource is inimitable, thenany profit stream it generates is more likely tobe sustainable.

l How quickly does this resource depreciate?The longer lasting a resource is, the more valuable it will be.

l Who captures the value that the resource creates? Not all profits from a resource auto-matically flow to the organization that “owns”the resource. Typically, the value is subject to

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++++++++++++++++++++

EXHIBIT 4: MARKS & SPENCER’S COMPETITIVE ADVANTAGE

Tangible

Resource Competitive Advantage

in Great Britain

Intangible

Capabilities

1% occupancy costs versus a 3% to 9% industry average

Customer recognition withminimal advertisingNo promotional sales

Lower labor turnover8.7% labor costs versus 10%to 20% industry average

Lower costs and higherquality of goods sold

Fewer layers of hierarchyManagerial judgement

Supplier chain

Employee loyalty

Brand reputation

Freehold locations

Source: Collis and Montgomery, 1995.

EXHIBIT 4. MARKS & SPENCER’S COMPETITIVE ADVANTAGE

Source: Collis and Montgomery, 1995.

bargaining among customers, distributors,suppliers and employees.

l Can a unique resource be replaced by a differentresource?

The best of a firm’s resources are often intangible,not physical. Hence the current emphasis on thesofter aspects of corporate assets—the culture, thetechnology and the transformational capabilities.

Future AnalysisDeveloping competitive intelligence about currentmarkets and industries is certainly useful. Justas important are thoughtful inquiries aboutevents and forces that will determine the future.The question that goes unasked at many organizations is: What emerging trends andunanticipated developments could reshape ourbusiness? Forecasts might offer early warnings,but some firms allow the process to becomenothing more than an exercise in extrapolatingrecent history. While the notion that the futurewill be more or less like the past can be comforting,simple projections of the present are often welloff the mark.

Hamel and Prahalad (1994) suggest that effectivefuture analysis involves more than good scenarioplanning or technology forecasting, though scenarios and forecasts are often useful buildingblocks. Nor is it about developing contingencyplans around a few most likely scenarios. Forexample, in unstructured industries the numberof future permutations is so great that any tradi-tional scenario-planning process would be hardpressed to represent the range of potential out-comes. Whereas scenario planning may be useful for considering the consequences of oilprice changes, it may not be much help findingthe first winning applications for interactive television or entirely new applications for geneticengineering.

Future analysis asks critical questions about thefuture, such as:

l Which customers will be served in the future?l Through what channels will customers be

reached in the future?l Who will be competitors in the future?l What will be the basis for the firm’s competitive

advantage in the future?l What skills or capabilities will make the firm

unique in the future?

Future analysis enables decision-makers andplanners to grasp the long-term requirements tosustain competitive advantage.

Apple Computer is an example of a company thatdemonstrated substantial ability in the area offuture analysis. In the 1970s, it looked forward to a world with “a computer for everyman, woman, and child.” This was at a time whencomputers were most often found in speciallybuilt rooms deep in the bowels of corporateoffice buildings, and the idea of a kid having acomputer was laughable. The result was theApple II, the first truly successful mass-marketcomputer, which was introduced in 1977, fouryears ahead of the IBM PC.

The significant Japanese quality advantage inthe North American automobile market is attributable to effective future analysis.Japanese car makers did not start out with aquality advantage. Japanese auto companiesrealized decades ago through their competitiveintelligence that new and formidable competitiveweapons would be needed to beat U.S. car companies in their home market. The newweapons they set about developing were quality,cycle time and flexibility. Twenty years later,Toyota’s foresight had become GM’s implementa-tion priorities.

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Product-Oriented Analysis TechniquesThe pursuit of a sustainable advantage is typicallythe focus of corporate strategy. But advantageslast only until competitors have duplicated oroutmaneuvered them. Protecting advantageshas become increasingly difficult. Once theadvantage is copied or overcome, it is no longeran advantage. It is now a cost of doing business.Ultimately, innovators are only able to exploittheir advantage for a limited time before competitors launch a counterattack. Then theoriginal advantage begins to erode and a new initiative is needed.

Over time, organizations are forced to shift theircost (and price) and quality positions. Industriesreadjust their minimum acceptable level of qualityand maximum acceptable price required to be aplayer in the marketplace.

Revolutions in quality raise standards, and thennew revolutions shatter those standards.Innovations in product or process technologydrive dramatic improvements in quality or reduc-tions in cost. Since these cycles of change aregrowing progressively shorter, it is important forfirms to regularly and systematically monitorcompetitors’ products.

One product-oriented intelligence technique thatsome companies have used for years and thatmore companies are emulating is reverse engineering/teardown analysis.

Reverse Engineering/Teardown AnalysisUsing reverse engineering/teardown analysis,a firm acquires competitors’ products, then dismantles them in an attempt to understandtheir components, how they were made, whatmanufacturing processes and equipment wereinvolved, and their quality characteristics andcost estimates. Done well, this technique helps

organizations understand competitors’ productsand processes.

Both Xerox and Chrysler have successfullydeployed reverse engineering/teardown analysis.During the late 1970s and early 1980s, Xeroxfaced fierce competition from lower-priced, higher-quality Japanese copiers made by such manufac-turers as Canon and Ricoh. Xerox tore down andanalyzed those competitors’ products, andlearned how they were designed, developed andproduced. Xerox was able to demonstrate itsown shortcomings and establish a plan to regainleadership of the copier market.

Similarly, Chrysler acquires competitors’ automo-biles, then slowly and deliberately tears themdown. By studying the product, the companygains new insights from Toyota, Honda, Ford andother leading competitors. For example, Chryslerplaced greater emphasis on noise abatement,an area in which several Japanese car manufac-turers have outperformed the company.

One criticism of reverse engineenng/teardownanalysis is that the technique fails to account fordifferences in the competitor’s manufacturingprocess. These differences significantly alterhow the product is manufactured and, as aresult, its costs. Suppose a firm uses a traditional,functional manufacturing process while its competitor utilizes a flow-oriented, just-in-timeprocess. Any assumptions that the firm makesabout manufacturing processes and costs maybe invalid.

Many companies have traditionally limited theiruse of reverse engineering/teardown analysis tomanufacturing in order to understand bills ofmaterial, manufacturing processes and theirrelated product costs. Some companies nowtake a broader cross-functional approach to com-

15


petitor product analysis. They hope to betterunderstand a competitor’s total value chain,including design and development, materialsourcing versus in-house manufacturing, thenature of the manufacturing process, distribution,sales, product quality and field service implications.

Customer-Oriented Analysis TechniquesAn important success factor for firms is the ability to deliver better customer value than thecompetition. Customer value can usually beachieved only when product quality, service quality, and value-based prices are in harmonyand exceed customer expectations. This is illustrated in Exhibit 5.

Failing to meet customer expectations in any of the three areas leaves organizations in a situation of not having delivered good customervalue. For example, if an organization offers poor-quality products or poor-quality service, then theprice should fall. If an organization sets a pricetoo high for a given level of product and servicequality, sales should suffer. Providing great product quality and poor service quality will notmaximize customer value.

There are many examples of firms that paid dearlyfor neglecting this point. For example, in theearly ‘80s, Xerox had problems with two of thethree areas of the customer value triad. Thequality of Xerox copiers did not deteriorate; in

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EXHIBIT 5: CUSTOMER VALUE TRIAD

Competition

CustomerValue

ServiceQuality

ProductQuality

Price

Source: The Society of management Accountants of Canada. 1995. Monitoring Customer Value.

Hamilton, ON: The Society of Management Accountants of Canada.

EXHIBIT 5. CUSTOMER VALUE TRIAD

Source: The Society of Management Accountants of Canada. 1995.

Monitoring Customer Value. Hamilton, ON: The Society of Management Accountants of Canada.

fact, there were product improvements and newproduct introductions while market position was declining.

However, the relative quality of Xerox copierscompared to competitive products was declining.Competitors not only closed the technologicalgap but also passed Xerox in some product linesand created a technological gap of their own.Since the relative quality of Xerox copiers haddeteriorated, there was no longer any justifica-tion for premium prices. Customers exercisedtheir economic power and bought the productsthat represented the best value.

The result for Xerox was a 50 percent loss ofmarket share and a $500 million decline in profits.Once Xerox corrected the problems and maxi-mized customer value, it regained a leadershipposition in the industry.

Organizations use several competitive intelligencetechniques to help them determine how they aredelivering customer value relative to their competi-tors. Some of these techniques are:

l customer value analysis;l value chain analysis; andl competitive benchmarking.

Customer Value AnalysisIn many markets, customers take low price andhigh quality for granted. The current battlefield insophisticated markets, and the next one indeveloping markets, is superior customer value.Understanding where one’s competitors stand interms of providing superiorcustomer value is acritical aspect of competitor analysis andcompetitive intelligence.

Since customers determine anticipated benefitsand costs, it is the customer’s perception of each

that is relevant. Knowing how well a competitor isachieving customer value requires assessing thatcompetitor’s customers.

There are a number of customer value monitoringtools and techniques including customer contact,customer value surveys, customer value analysisand customer value management.

Customer contact can be reactive, when the customer initiates contact with the supplierorganization, by contacting a salesperson or byphoning or writing to a customer service depart-ment; or proactive, when the organization initiatesthe contact to obtain advice and information thatmight not show up through customer inputs.

Customer value surveys are more formal processes used to understand customer value.For example, Roadway Express conducts quarterlytelephone surveys of 1,000 randomly selectedusers of long-haul and less-than-truckload serviceswith the goal of understanding customer satis-faction and quality service from the customer’sperspective. The interview centers on five signif-icant dimensions: capabilities to perform theservice, competitive pricing, interactionsbetween the customer and the transportationsupplier, transit times and a general comfortlevel with the transportation company. Company-wide regional and local performance are compared and contrasted.

Customer value analysis is a more formalprocess utilizing a set of tools to better under-stand markets and customers. Applied to a competitor’s customers it can provide significantinsight into how well a competitor is achievingcustomer value.

For example, one important customer valueanalysis technique is a customer value map.

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Organizations use customer value maps toillustrate how a customer decides amongcontending suppliers. It shows which companiesmight be expected to gain market share and why. Suppliers usually gain market share whentheir relative quality performance is superior and their relative price point is lower.

An organization can use its customer value mapto compare itself to competitors and to comparethe value positions of each of its internal businesses. Exhibit 6 shows a customer valuemap for one set of competitors. This exhibit combines relative quality and price informationon a two-dimensional, four-box grid. Using theBMW 5-Series as the baseline, luxury cars arecompared to the two dimensions of performanceand price. The relative performance informationcomes from a Consumer Reports rating scheme;

the relative price information was derived usinga market-perceived price profile methodology.

Running from the lower left on the customervalue map to the upper right is the fair-value line,which indicates where quality is balancedagainst price. Competitors below and to the rightof the line are in a strong share-gaining position.Competitors above and to the left of the line arein a share-losing position.

The Lexus LS 400 is considered to have higherperformance but also higher price; the AcuraLegend, lower performance and lower price. TheLexus LS 400’s higher performance relative to its higher price actually makes it a better customer value than the BMW 5-Series. TheAcura’s combined lower performance and lowerprice make it a poorer customer value.

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EXHIBIT 6: CUSTOMER VALUE MAP: LUXURY CARS

BMW5-Series

Fair-valueline

Superiorcustomer value

Inferiorcustomer value

LincolnContinental

AcuraLegend

60

0.75

Lower

1.00

1.25

Higher

80

Information for relative performance based on Consumer Reports ratings, April 1993.

Relative performance: Overall score

Rela

tive p

rice

100

LexusLS 400

Source: Gale, 1994.

EXHIBIT 6. CUSTOMER VALUE MAP: LUXURY CARS

Source: Gale, 1994.

Customer value management is the idea that as much data as can be gathered about one’s customers need to be brought together,brought alive, and made an integral part of the management process and used to drive organizational behavior.

For example, a company that has always under-stood that firms succeed by providing superiorcustomer value is Milliken & Co. A key reasonMilliken achieves quality leadership and premiumprices in an amazingly wide array of niches isbecause, since 1985, it has regularly deployed asystematic measurement of customer satisfac-tion and customer-perceived quality relative tocompetitors for all of its fifty-plus business units.It tracks such things as lead time, on-time delivery,order-fill rate, etc. Milliken executives use theinformation in two ways—to create pressure toimprove and to provide insights on how to do so.Business-unit managers use their data to alignMilliken’s products, services and processes evermore closely to the marketplace.

Value Chain AnalysisThe idea of a value chain was first suggested byMichael Porter (1985) as a way of presenting thebuilding of value (as related to the end cus-tomer) along the chain of the activities that go tomake up the final offering to the customer.

Porter describes the value chain as the internalprocesses or activities a company performs “todesign, produce, market, deliver and support itsproduct.” He further states that “a firm’s valuechain and the way it performs individual activitiesare a reflection of its history, its strategy, itsapproach to implementing its strategy, and theunderlying economics of the activities themselves.”

John Shank and Vijay Govindarajan (1993)describe the value chain in broader terms than

does Porter. They state that “the value chain forany firm is the value-creating activities all theway from basic raw material sources from com-ponent suppliers through to the ultimate end-useproduct delivered into the final consumers’hands.” This description views the firm as part ofan overall chain of value-creating processes forthe end customer.

The value-creating processes within a firm (e.g., R&D, design production, etc.) and the largervalue chain for its industry are illustrated in Exhibit 7.

Value chain analysis is used by organizations todevelop an understanding of the sources of competitive advantage in a particular industry,as well as to assess their own unique competitive position in providing customer value. For example, the value chain can be a useful competitive intelligence framework for disaggregating a firm into distinct activities in order to identify:

l factors that determine the costs of performingdifferent activities and their relative importance;

l why a firm’s costs differ from those of its competitors, and vice-versa;

l which activities a firm and its competitors perform efficiently or inefficiently;

l how costs in one activity influence costs inanother activity; and

l which activities a firm or its competitorsshould undertake itself and which activities it should contract out.

By analyzing how a firm or a competitor createsvalue for customers and by systematicallyappraising how each activity helps differentiatethe company, the value chain permits an organi-zation to match demand- and supply-sidesources of differentiation advantage.

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Breaking down the industry value chain canreveal which activities are the most (and least)critical to competitive advantage (or disadvan-tage). The experience of the Swiss watchmakersis a good illustration. The Swiss firms were relatively small, labor-intensive assemblers whomade good profits for many years before theadvent of low-cost, mass-produced watches inthe 1970s. Their first reaction to the increasedcompetition was to restructure their industry togain economies of scale similar to their globalcompetitors.

However, they failed to realize that manufacturingwas not their critical problem, since this set ofactivities added only a small proportion of thevalue of the final product. Far more significantwere downstream activities in the output logistics,marketing, sales and service areas. An inexpen-

sive watch was not enough: the Swiss had tolower their costs of distribution and service.Their eventual and hugely successful answerwas the Swatch, which was inexpensive, virtuallyindestructible, and could be distributed througha wide variety of low-cost channels from depart-ment stores to discount houses.

In order to decide which elements of the valuechain to focus upon, companies must determinewho the customers are and what they want fromthe product. How does the customer choosefrom among competitors, i.e., what is thecost/benefit of the product to the customer?

Competitive BenchmarkingCompetitive benchmarking is a widely used competitive intelligence technique. It consists oforganizations carefully studying other organiza-

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EXHIBIT 7: THE VALUE CHAIN CONCEPT

Industry Value Chain

Value Chain of Firm Z

The end-use consumer pays for profit margins throughout the value chain

SupplierValue Chain

Firm ZValue Chain

Firm Y

R&D Design Production Marketing Distribution Service

Firm X

DistributionValue Chain

BuyerValue Chain

Disposal/Recycle

Value Chain

Source: Porter, 1985.

EXHIBIT 7. THE VALUE CHAIN CONCEPT

Source: Porter 1985.

tions’ performance in an aspect of their business,with a view to improving their own performance.Benchmarking is a customer-driven commitmentto continuous improvement, linking customervalue requirements to business strategies.

Benchmarks can be divided into two categories:

l what is to be measured; andl who is to be measured.

In deciding what is to be measured, an organiza-tion should consider three types of benchmarks:

l strategic benchmarks—measure and comparethe relative position of a particular companywithin an industry and the result of a company’sperformance at the functional and operationallevels;

l functional benchmarks—identify products,services and work processes. They usuallyinvolve specific business activities within agiven functional area such as manufacturing,marketing or engineering; and

l operational benchmarks—yield the reasons fora functional performance gap. Organizationsneed to understand these benchmarks at theoperational level in order to identify the correctiveactions required to close the performance gap.

In deciding who is to be measured, an organiza-tion should consider three types of benchmarks:

l competitive benchmarks—identify the products,services and work processes of an organization’sdirect and strongest competitors in the industry;

l internal benchmarks—compare an organization’sown similar processes, products or services; and

l analogous benchmarks—compare performanceto a world-class organization that may occupy adifferent industry but performs a similar process.

Effective benchmarking focuses on the effective-ness of a company’s units in delivering a high-value product. Ineffective benchmarkingfocuses solely on the efficiency of the processesof the functional units, without careful analysisof what those processes are supposed to deliver to the customer.

AT&T, for example, has a system that linksbenchmarking activities to the processes thatdrive performance. At leading AT&T businesses,the approach is:

l understand the needs and perceptions of thecustomers that it serves;

l pinpoint which processes drive its performanceand benchmark them against competitors onthe quality attributes and subattributes thatdrive customer value and market share; and

l benchmark the processes that have a majorimpact on its competitive position against the“best of breed.”

It should not be overlooked that the true value of benchmarking does not lie in determining current performance levels. If an organizationsets goals against today’s levels, its performanceobjectives might target plans that were developedyears ago and are just reaching fruition today.The true value of benchmarking is that it enablesskilled analysts to determine a competitor’s likelyperformance levels in the future.3

Financial Analysis ToolsFinancial strength obviously affects a company’sstrategic weaponry and the role that each product line or division plays in its portfolio.Thus, few competitor assessments would becomplete without an in-depth financial analysis.

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3 For more information on benchmarking, the reader shouldrefer to The Institute of Management Accountants Statementon Management Accounting, Effective Benchmarking.

Several financial analysis techniques can be utilized within competitive intelligence. Althoughthese techniques have their limitations, thoughtfuldigging and analysis in the absence of hard datacan help a firm understand the economic andfinancial characteristics, capabilities and potentialdirection of competitors. These techniquesinclude:

l traditional ratio analysis;l sustainable growth rate analysis;l disaggregated financial ratio analysis; andl competitive cost analysis.

Traditional Ratio AnalysisThe usual starting point for understanding acompetitor’s financial condition and performanceis traditional financial and ratio analysis. Publiclyavailable data from annual reports, 10Ks, otherSEC filings, Dun & Bradstreet credit ratings, bro-kerage reports and on-line services are oftenreadily available.

These analyses usually concentrate upon under-standing the composition of a firm’s financing,the investment of those funds in assets andtheir use in several areas: to grow the business;to generate profits; to provide a satisfactoryreturn on assets, total capital and shareholders’equity; and to generate cash. Organizations canuse the analysis to determine historical patternsand trends, and to make comparisons with otherparticipants and competitors in an industry.

Traditional financial and common-size ratio analy-sis measures a firm’s historical financial perfor-mance and its financial condition at a specifictime. But this technique can also measure afirm’s future ability to compete. Its financialstructure can indicate the firm’s ability to raisenew capital. Its historical asset managementperformance can suggest how the firm might

manage assets in the future. Its historicalgrowth, profitability, returns and cash flow characteristics may indicate the firm’s marketshare, its ability to utilize pricing as a competitivetactic, its cost management practices and capabilities, and, the firm’s ability to reinvest.

Financial and ratio analysis has its limitations. Thetechnique is historical: there is no assurance thatthe future will resemble the past. More importantly,it may occur at a level of aggregation that makes itdifficult to understand the performance of specificbusinesses, product lines or products. These ratiosare also vulnerable to manipulation through oppor-tunistic accounting practices.

Sustainable Growth Rate AnalysisWith increasing global competition, differentnational reporting requirements make it difficult,if not impossible, to develop comparative anduseful competitor financial analysis. And worse,most financial analysis tools are rooted in thepast: few by themselves are predictive. Yet goodcompetitive intelligence must alert organizationsto a competitor’s likely future strategies andactions.

Sustainable growth rate (SGR) analysis is adynamic, future-oriented technique that permitsthe intelligence analyst to assess how a firm’sfinancial practices will affect its ability to grow.

SGR analysis provides an analytical frameworkthat relates a firm’s sales growth, profitability,asset requirements and its financial policy. Itdetermines whether a firm can grow withoutaffecting its degree of financial leverage, or howits financial leverage is affected based on a projected growth rate and other relationships.

SGR analysis is applicable to a wide variety of reporting formats. It enables comparison of

22


performance over time to quickly identify elements of a competitor’s strategy so that theirstrengths and weaknesses can be identified.

To calculate an SGR, organizations need the following information:

l earnings (or profit) before interest and taxes;l total assets;l interest;l shareholders equity;l taxes; andl dividends.

Exhibit 8 presents the calculations made toascertain the SGR of a firm, predicated on itsprofitability, asset requirements and financialpolicies. Once an initial calculation has beenmade, a firm can use the SGR model to deter-mine the impact of such changes as improvedprofitability, improvements in asset manage-ment, modifications to the firm’s capital struc-ture policies and changes in dividend policy.

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EXHIBIT 8: CALCULATING SUSTAINABLE GROWTH4

Return on Assets(ROA)

Return on Equity Before Tax(ROEBT)

Return on Equity After Tax(ROEAT)

Sustainable Growth Rate(SGR)

A) Margin x Asset Turnover

= ROA

Source: Harkleroad 1993.

A) EBIT Sales = Margin

B) Sales Total Assets = Asset Turnover

B) ROA x Leverage

= ROEBT

A) EBIT – Interest x Total Assets EBIT Equity

= Leverage

B) ROEBT x Tax Effect

= ROEAT

B) ROEAT x Dividend Effect

= SGR

A) 1 – Taxes EBT = Tax Effect A) 1 – Dividends

EAT = Dividend Effect

EXHIBIT 8. CALCULATING SUSTAINABLE GROWTH RATE4

Source: Harkleroad 1993.

4 Definitions for calculating SGR are: EBT = earnings beforetaxes. EAT = earnings after taxes, EBIT = earnings before interest and taxes.

Disaggregated Financial Ratio AnalysisOften, publicly available financial informationappears only on a corporation-wide basis. It isnecessary to disaggregate some numbers in orderto understand the economic characteristics andfinancial details of a competitor’s business unitsor product lines.

For example, a company might learn about anotherfirm’s overall variable and fixed cost structure and,hence, its average contribution margin, by compar-ing changes in costs relative to changes in salesacross different time periods. If sales increased by6 percent and costs increased by only 3 percent,the average contribution margin of the business isabout 50 percent (assuming that fixed costsremain fixed from one period to the next).

A company can utilize line-of-business reportingto disaggregate a competitor’s total sales, possiblyoperating income, and assigned assets in orderto understand the relative profitability and return-on-asset characteristics of the competitor’s variousbusiness lines. The company might start with acompetitor’s financial numbers for its businesslines, then fill in some gaps by utilizing othercompanies with similar business lines.

A company might be able to disaggregate a setof summary financial statements to a greatextent in order to better understand the financialcharacteristics of subordinate business units,product lines and, possibly, even major products.

Competitive Cost AnalysisIn order to survive and prosper under price competition, firms must usually establish a low-cost position. A competitive cost advantage typically requires possession of a scale-efficientplant, superior process technology, ownership oflow-cost sources of raw materials or proximity tolow-wage labor or markets.

Some companies are able to make a highlydetailed estimate of the costs of competitors’products. Starting with reverse engineering/teardown analysis, they can determine the bill ofmaterials for a competitor’s product, whether thatmaterial component has been purchased or man-ufactured, and what the manufacturing processlooks like. They then attempt to obtain vendorquotations, labor rates and estimated times. Theymay even view the competitor’s facilities in orderto estimate its size, age and other characteristics.Given time and effort, a firm may closely estimatea competitor’s costs for a product.

Recently, Caterpillar encountered strong compe-tition from its Japanese competitor, Komatsu.After undertaking a competitor cost initiative,Caterpillar concluded that Komatsu’s costs wereas much as 30 percent below its own costs. Oneprimary reason for this discrepancy lay inKomatsu’s efficient manufacturing processescompared with Caterpillar’s more traditional,functional manufacturing. Following this initiative,Caterpillar undertook a major capital investmentprogram called PWAF (Plant With A Future) in orderto upgrade all of its manufacturing facilities.

In its plants, Caterpillar made operations moreflow-oriented, removed wasteful material handlingoperations, reduced inventory levels and shortened response times. As a result of itscompetitive cost study, the company hasbecome much more competitive.

As a source of competitive advantage, competitivecost analysis assumes that the company cantranslate its low-cost production into prices thatundercut those of competitors, and that value-conscious customers will purchase from the lowest-priced supplier.

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This equivalency breaks down when products aredifferentiated and when the product is consumedjointly with other goods and services. In thesecases, it may be difficult to determine which firmin an industry is the cost leader. The identity ofthe cost leader may depend upon market circum-stances and customer characteristics.

Behavioral Analysis TechniquesIn evaluating competitors, the conventional toolsand techniques of competitive analysis tell onlypart of the story. Quantitative data on productcharacteristics, sales, costs and market shareare important. But they tell little about a competitor’sculture and management style, and how itretains employee loyalty.

“As goes the management, so goes the firm”:this truism implies that key managers signifi-cantly affect a firm’s current performance andfuture direction. Learning as much about thosemanagers as possible may provide clues aboutthe firm’s future actions (witness Jack Welch atGeneral Electric or Bill Gates at Microsoft).

One behavioral analysis technique that organiza-tions utilize in developing competitive intelli-gence is shadowing.

ShadowingShadowing means learning as much as possibleabout a competing firm’s managers: their education, background and experience, previousactions, track record, and whom they hire (andtheir backgrounds, experiences and records).Understanding a competitor’s management helpsa company predict what that competitor might do.

For example, examining the career path of a rivalchief executive might reveal something about hisor her strengths and weaknesses. If that execu-tive has never worked for another firm, he or she

may know little about how other companies arerun. A specialization in a single function mightmean that the executive will ignore other areas.

A company can also learn about a competitor byexamining which executives it attracts and loses.If both the senior manufacturing manager andthe senior research manager leave the competingcompany in the same year, then perhaps theyfailed to persuade the company to consider tech-nical priorities. The balance of power might nowlie with the sales and marketing executives.

Shadowing implies that a company must stay ontop of competitors’ day-to-day actions rather thanwait for the periodic release of financial results.The company must receive constant feedbackfrom customers and others in the marketplace;track product introductions, price changes andother initiatives; monitor capital investment initiatives; and talk to suppliers and others whomay have contact with competitors. In effect,a company must keep its ear to the ground inorder to obtain, assimilate and act upon as muchinformation about competitors as possible.

V I I I . IMPLEMENTING A COMPETIT IVE INTELL IGENCEPROGRAMImplementing a competitive intelligence programcan take considerable effort and time, perhapsas much as three to five years.

Organizations take several key steps to implementa successful program. These are:

l establish context;l ensure senior management support;l select a team, team leader and process champion;l conduct a needs assessment;l create a competitive intelligence framework;l establish structure, location and administration;

25


l involve key users;l educate, involve and motivate employees;l establish a storage and retrieval system;l implement counterintelligence procedures; andl evaluate the competitive intelligence process.

Establish ContextA context should answer the key question: “Whatshould be the mission of the competitive intelli-gence program?” Missions can be informational,offensive and defensive; most firms have a mixture of all three. Informational missions provide a general understanding of an industryand its competitors. Defensive missions attemptto identify a competitor’s potential actions thatcould endanger the firm’s market position.

Offensive missions attempt to identify competitors’vulnerabilities and/or to assess the impact ofstrategic actions on competitors. Following thelead of General Electric, for example, severalcompanies espouse a philosophy of being No. Ior No. 2 in all of their business categories. Inorder to accomplish this goal, a company defineswhat business categories it occupies or wants tooccupy and identifies who its competitors are.Then it measures its performance against that ofits competitors in an effort to achieve marketgains at their expense.

Ensure Senior Management SupportIn order to work throughout the organization,competitive intelligence programs require the fullsupport of senior management. Senior man-agers must fully endorse the process, remainactively involved and demonstrate commitmentby their actions.

One way to gain credibility and management support is to begin with a specific product line orbusiness area in which the benefits will bedemonstrated relatively early.

Select a Team, Team Leader and Process ChampionCompetitive intelligence programs need a focalpoint, either an individual or a specific group. Forexample, some organizations establish a teamresponsible for designing, developing, implement-ing and sustaining their intelligence programs.

The team members usually represent a variety of disciplines: marketing and sales, productionand distribution, product development, financeand accounting. In order to understand competi-tors and set strategy based on their behaviorand direction, organizations must understand all vital aspects of their business. Cross-functionalmembership on the competitive intelligenceteam provides the experience and skills neededto bring this breadth of understanding to the process.

For organizations electing to establish an intelli-gence team, it is important to select a strongand committed team leader. For example,CitiCorp has an executive whose functional titleis manager of competitive intelligence. This individual is ultimately responsible for imple-menting a competitive intelligence programthroughout the firm.

The competitive intelligence effort obviouslyrequires explicit leadership. A senior executiveshould become the process champion to continually promote the program and to connectthe interests of senior management with those of the competitive intelligence team leaderand members.

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Conduct a Needs AssessmentImplementing an intelligence program can some-times be an overwhelming task. A company oftenfaces a morass of information to be organized. Amuch-needed focus can come from taking an“intelligence snapshot.” A three-part needsassessment examines an organization’s truecompetitive intelligence needs, the resources ittypically uses to meet those needs and the communication channels used to send andreceive information.

Conducting a needs assessment helps focus theeffort and energies of the team charged withbuilding the competitive intelligence program.The assessment also helps identify the key people who must support the intelligence effort,both as suppliers and users. More important,the assessment narrows the planning anddesign of the competitive intelligence program bypinpointing which informational areas alreadyexist and which need development.

Create a Competitive Intelligence FrameworkA tremendous amount of data could be gatheredby many people from a variety of sources andultimately become competitive intelligence.Alternatively, this exercise could simply cause“data confusion” with little redeeming benefit.Organizations must develop a basic frameworkfor gathering data that might become informa-tion and, ultimately, intelligence. This frameworkshould be based on the needs of the firm’s keydecision-makers, customer expectations and thepotential capabilities of competitors.

To ensure that an organization gathers the appropriate data about competitors, it mustunderstand what drives customer behavior. Ifcustomers want or need certain features, theorganization gathers data about competitors’

abilities to provide those features. For otherattributes like response time, customer serviceand price, more and more is being learned aboutassessing and monitoring customer value.Understanding what drives customer behaviorprovides a foundation for building competitor and competitive intelligence.

Organizations should consider what characteristicsof its key competitors make them successful,and incorporate these characteristics in develop-ing their framework for gathering data.

Establish Structure, Location and AdministrationA key component of a competitive intelligence pro-gram is the design of its administrative process andstructure. A typical competitive intelligence programanswers several questions: To whom will it report?Who will receive the information? Will administra-tion be centralized or divisionalized?

The answers to these questions vary, dependingon what works best for that company. For example,at Southwestern Bell, the intelligence gatheringprocess was formalized by the establishment oftwo competitor analysis groups. One serves thecompany’s marketing staff, the other serves thesales staff.

In a small to medium-sized company, the compet-itive intelligence program is best directed by thepresident or the vice-president of marketing.Centering administration around the presidentoffers several advantages. The president can fitdata into a bigger picture and quickly incorporateinformation in policy decisions. However, oneadvantage that the top marketing executive enjoysis closer, more regular contact with a competitiveintelligence team.

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Involve Key UsersIt is essential that organizations bring key usersof competitive intelligence information into thedevelopment process early in order to reflecttheir wants and needs. Without the early involve-ment of the people responsible for introducing a product line or developing new products, theprogram is less likely to meet their needs andgain their support.

Organizations can ensure that they are headingin the right direction by asking key decision-mak-ers about the nature of the decisions they makeand the kinds of information they need about themarket and competition. Involving these peopleshould also help ensure they become a receptiveaudience for the data.

Educate, Involve and Motivate EmployeesCompetitive intelligence is more a process thana product. As a way of thinking, communicatingand acting, it must be embedded to make it trulypay off. Embedding competitive intelligencenecessitates considerable training throughoutthe organization. Employees need to know therationale for the program. They need to perceivethe usefulness of the competitive informationthey encounter. Finally, every employee must bemotivated to become active in the program.

Employees need education about possiblesources of information that exist and about howto communicate in order to make the processwork. A good intelligence program works only ifeverybody participates.

It is also important to give employees the foundation and techniques they need in order to legally and ethically collect competitive intelli-gence data. Unethical behavior can quickly translate into lost dollars.

Another crucial component of intelligence sys-tems is motivation. All of the organization’smembers, from the president to the custodialstaff, are valuable intelligence agents. Typically,70 to 80 percent of the intelligence needed by afirm resides with employees, who collect it indealings with suppliers, customers and otherindustry people. These employees must be moti-vated to contribute to the intelligence effort andpass along needed information.

Employees who possess knowledge often cannot find the people who need that knowledgeor do not know what information is important in the first place. In order to make intelligencevisible, an organization requires incentives andawareness, the keys to the intelligence system:

l incentives—without incentives to provide a personal benefit, employees lack motivation tojoin the intelligence effort. Many companiesmotivate their employees to contribute by simply feeding back information throughnewsletters, e-mail or competitor informationbulletin boards. Other firms give awards toemployees who have contributed vital marketand competitor information to managers.

l awareness—even in high-morale organizationswhose employees are happy to contribute vitalinformation to management, individuals needto know what information is important and whoneeds it. Firms raise employee awareness inmany ways. For example, Xerox’s copier groupconstantly “broadcasts” competitor informationthroughout the organization via bulletin boardsand displays. In one long corridor, for example,the Competitive Assessment Team posts competitors’ newspaper advertisements to raiseawareness of competing products, featuresand prices. The group has also rolled rivalcopiers into the employee lunchroom, permit-

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ting about 7,000 employees, including market-ing executives, engineers and purchasingagents, to literally touch and feel the competingproduct.

Establish a Storage and Retrieval SystemCentral to implementing a competitive intelligenceprogram is an effective system for data storageand retrieval. If data are gathered at severalpoints throughout an organization but are notintegrated in a structured way, then the companygains fewer benefits for integrative thinking anddecision-making. The program also falls short of its potential if data are brought together in acentral location but represent nothing more thana plethora of disconnected data points.

Technology, including data management softwareand networking, can consolidate and maintaindata entered in several locations and distribute thedata throughout the organization as appropriate.

Organizations using database technologiesshould strive to keep the storage system simple.A system with too many bells and whistlesmakes it difficult to organize or retrieve the infor-mation. Managers of the intelligence programshould continually ask themselves how a data-base adds value. If the database fails to speedup analysis or help management make decisions,it should not be created.

Implement Counterintelligence ProceduresFor some organizations, counterintelligence is amore pressing challenge than developing compet-itive intelligence. According to Benjamin Gilad,5

an effective competitive intelligence strategyextracts as much information as possible fromand about other firms even as it divulges little

information about the company and safeguardsits own information. Firms must protect theirconfidential information, ensure that employeesunderstand the importance of confidentiality forremaining competitive, and guard against therisk that competitors are obtaining intelligenceof their own.

Illegal activity such as theft of information andbugging occurs rarely, but the potential is there.For example, French agents in 1993 admitted tobugging first-class seats in Air France to discoversecrets from American executives. According toSiemens’ Defence Electronics Group, industrial andfinancial espionage in Germany are responsible forlosses of between DM60 and 140 billion a year.

Typical counterintelligence programs include twokey components: technical measures and thehuman factor:

l technical measures—A counterintelligence program contains several physical safeguardsto protect data including:l disposal devices for confidential information

such as shredders/disintegrators and incin-erators;

l periodic checks by security experts for wire-tapping and bugging;

l protection of computer secrecy by classifyingdata into categories of sensitivity, limitingaccess to computer terminals and usingencryption devices to transmit sensitive data;

l background checks on prospective employees.

l the human factor—While technical and physicalmeasures are designed specifically to fight illegal espionage, the key to preventing leaksof legally and ethically collected intelligence isto pay attention to the human factor by:l educating employees, including warnings not

to discuss business in public;

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5 Benjamin Gilad is an intelligence expert who was formerlythe head of the Intelligence Unit of the Israeli police. He isthe author of several books and numerous articles on competitive intelligence.

l creating an image and reputation for tough-ness through confidentiality clauses in employ-ment contracts and aggressive prosecution ofespionage, insider leaks and ex-employeeswho use trade secrets in their careers.

Evaluate the Competitive Intelligence ProcessOnce organizations begin their competitive intel-ligence efforts, they should evaluate the processon several levels. Initially, the objective is toinform the organization of the importance ofcompetitive intelligence and gain commitment tothe concept. Organizations might gain a generalsense of whether or not this objective is beingrealized. Alternatively, they can survey employeesto find out whether they have become more awareof the importance of competitive intelligence.

A second objective is to involve the organizationin gathering data and in subsequent activities.Here as well, organizations can assess increasesin the level of activity and the number of employeescontributing data.

Third, the organization should see evidence ofmore analysis and information about competitors:quick reports, detailed reports, presentations andother communication forms. It should also seesigns that the competitive intelligence is beingused in critical management decisions incorporat-ing a competitive element. The ultimate test iswhether or not an organization actually becomesmore competitive, i.e., increased market penetra-tion and profitability.

IX . ORGANIZAT IONAL AND MANAGEMENT ACCOUNTINGCHALLENGESFor many firms, designing and implementing acompetitive intelligence process represents amajor shift in focus. The organization must movefrom emphasizing historical, financial, internallyoriented information toward a prospective, some-times qualitative and judgmental, externally oriented view that emphasizes the market,market forces and competitors—where they are,what they can do, what they are likely to do andwhat might be an appropriate response or evenpreemptive actions. Even organizations thatalready consider themselves to be market-focused probably need to adopt a different viewof competitors in order to truly understand themand what they can and might do.

Creating and implementing such a cultural shiftmust start with top management and must be reinforced continually by those managers.When they demonstrate in-depth knowledge ofcompetitors, ask questions about them andemphasize the importance of outperformingthem, managers make employees throughoutthe organization appreciate the importance of a proactive competitor intelligence process.Gaining and sustaining the support and involve-ment of top management is an extremely important, and often difficult, first step.

The challenge for management accountants is toapply their capabilities to important new areassuch as competitive intelligence. Managementaccountants are trained and skilled in data gath-ering, analysis and presentation. Traditionally,they have applied most of these skills to internal,historical financial accounting and to managerialdecision-making, based largely on cost analysis.Increasingly, management accountants mustbecome involved in new areas of analysis,

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frequently in external issues involving the marketand competitors.

X . CONCLUSIONFacing continual change in customers’ needs,competitors’ offerings and a firm’s own productsand services, a business must stay on top ofrelationships and respond accordingly if it hopesto succeed. Failure to monitor competitors’ offerings is like operating in the dark.

In a changing, highly competitive market, the firmwith a successful, proactive competitive intelli-gence process will respond most quickly andwisely to changes in markets and competitors,and should thereby succeed over the long term.

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Developing Comprehensive Competitive Intelligence

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