Delivering Intelligence Through the Management of Weak Signals IQPC Conference April 1st, 2008, Sao Paulo Rainer Michaeli Board Member dcif (Deutsches Competitive Intelligence Forum) Board Member SCIP (Society of Competitive Intelligence Professionals; 2003-2005) Director Institute for Competitive Intelligence (ICI)
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Delivering Intelligence Through the Management of Weak Signals
Board Member dcif (Deutsches Competitive Intelligence Forum)Board Member SCIP (Society of Competitive Intelligence Professionals; 2003-2005)Director Institute for Competitive Intelligence (ICI)
Dipl.-Ing. Aeronautical Engineering TU Braunschweig/Universityof York, GBMBA (INSEAD) France
Professional ExperienceProject- and Product Management DIEHL GmbH & Co KGKey Account ManagerCOMPUNET AG
Founder and owner of DIE DENKFABRIK, Advisory Services in Business and Technology, since 1993Board Member SCIP (Society of Competitive Intelligence Professionals) 2003-2005Board Member dcif (DeutschesCompetitive Intelligence Forum) Director Institute for Competitive Intelligence (ICI) since 2004
Intelligence ExperienceMilitary OR studies500+ „Competitive Intelligence“projects for leading German and international companiesCI-Trainer for IIR, Euroforum, Management Circle, DGI, EAP (Ecole Européenne des Affaires, Paris), SCIPAssociate professor at the University of Applied Sciences Darmstadt on „Competitive Intelligence“ and „Dynamic Business Strategies“Various publications (including a 630 page textbook; Top 3 Financial Times Germany bestseller)
What is Competitive Intelligence?The Academic Answer
” ... an analytical process which transforms disaggregated company, industry and market data into actionable strategic knowledge about the position, performance, capabilities and intentions of target companies”.
What are Weak Signals?In academic research "weak signals" may be understood as advanced, noisy and socially situated indicators of change in trends and systems that constitute raw informational material for enabling anticipatory action.There is confusion about the definition of weak signal by various researchers and consultants.
Sometimes it is referred as future oriented information, sometimes more like emerging issues. Within Strategic Early Warning the concept of “weak signals” (Ansoff, 1975) aims at early detection of signals which could lead to strategic surprises and to an event which has the potential to jeopardise an organization’s strategy. Detecting “weak signals” is achieved by scanning the organizational environment. The concept of environmental scanning (Aguilar,1967) describes a process whereby the environment in which an organization operates is systematically scanned for relevant information.
From Information to IntelligenceAny signal analysis combines indicators from various sources and aggregates them into meaningful signals. Signals are then analyzed an interpreted for impact on a company
How are Weak Signals Managed?Phase 1 is characterised by the information gathering of “weak signals”, or trends and issues. Detecting “weak signals” is achieved by scanning the organizational environment. The concept of environmental scanning (Aguilar,1967) describes a process whereby the environment in which an organization operates is systematically scanned for relevant information. The purpose is to identify early signals of possible environmental change and to detect environmental change already underway.
The scanning itself relies primarily on examining various media sources, the technique of content analysis (Nasbitt, 1982). The scanning activity is complemented by monitoring trends and issues that have already drawn attention.
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Kit for the CI-AnalystFor meaningful signal analysis, we need to identify signals with powerful characteristics! Ideally they have been tried out alreadyMethodologies to find meaningful signals
Propagation of News/Issues in an IndustryThink about the propagation of news/issues in your industry. Information flows from primary sources via media to secondary sources.
Track typical flows in your industry over timeHow many people do know the news/issues at a given moment of time?Try to set up networks at each of the typical propagation points
How to select „Sensors“ forWeak Signals Community?Internal Experts (technicians, scientists, marketers, sales reps, investor relation, HR, etc) have several years of experience in their given disciplineNominate experts in a formal selection process. Make sure they understand role, assignment and incentives (if any)External Experts (retirees, academics, consultants, representatives of associations) have a standing relationship with the EWS team. Select candidates for their technical expertise, market knowledge, industry experience)
1) In-depth analysis of the trend or issue, examining the core and thevarious contexts of this phenomenon. The aim is to gain an impression of the possible potential development of an issue or trend. 2) The second step has several objectives.
The attempt should be made to think creatively about how the particular trend or issue could evolve. The nature of the contexts needs to be examined in order to cluster several trends or issues, thus providing an understanding of the mutual influences on and of trends and issues. It is important, due to the limited resources in any organization, to identify and select those trends and issues that are particularly relevant.
Retrieved from "http://en.wikipedia.org/wiki/Strategic_early_warning_system"
One way to think about Bayes‘ theorem is that it provides a mechanism to update prior probabilities when new information becomes available –
.... sounds like an blue-print for signal analysis, right?Let‘s work through an example and learn how to apply the Bayes‘ Theorem
Properly understood, Bayes’ theorem is the fundamental law governing the process of logical interference, of deciding what conclusions we can make and the degree of confidence which we can make them, based on the totality of relevant evidence available. The theorem of Bayes is the mathematical equivalent of “logical” and “rational” thinking. It therefore possesses all the power of logic itself.
The ChallengeBoss: „Find out, whether our competitor ALPHA will launch a new product! No
rocket-engineering analysis, no fancy intelligence riddles, no mind games, just your defendable assumption about the likelihood of their product launch. Isn‘t that what I pay you for?”
What should you do?
...guessing?
... ask 5 experts?Might end your CI career earlier than you desire ...
Rather than trying to guesstimate the absolute probability P(market entry), one can more accurately estimate the conditional probability of a market entry, given that an indicator was observed, denoted as P(A|I)
P(A) is the probability of event A (here: market entry of ALPHA)= P(not A) = 1-P(A), i.e. only two possible outcomes. The sum of all
possible outcomes must add up to 100%
?%
Signal I:ALPHA hires a new marketing agencyOur HUMINT team learned that ALPHA is dissatisfied with their existing agency; ALPHA’s marketing manager indicated in a speech that ALPHA will never use their old agency again for a major product launch; however, they might continue to work through the existing marketing agency under new terms & conditions ...
Bayesian Analysis (2) - PrevalenceWhat do we need to know for the Bayesian Formula?1) P(A) = ? Probability that event “ALPHA market entry” will occur based only on the prior
information (i.e. NO ADDITIONAL INFORMATION / OBSERVATION AVAILABLE – a dull world without CI), called the a priori probability
Note:This might very often be a rough estimation or simply a 50/50 assumptionIt could sometimes be based on track records of past behaviour: How many times in the past did “Alpha” enter a new market once the opportunity was given? Say in 3 out of 9 cases, i.e. we associate an empirically derived probability of 33%.Good idea to maintain a fact sheet of past events (time-line analysis) ...P(A) is often called the “prevalence” of the event A
We take P(A) = 33% based on our track record of similar events
Probability that indicator I “hire a new marketing agency” will occur if event “ALPHA market entry” will occur Often called the “sensitivity” of an indicator (“how good is the indicator to indicate an upcoming event”)
no -?marketentry
Hire newagency
Hire newagency
No- ?
yes
no
yes -
yes -?
?A)|(I =P
A)|(I1)|( PAIP −=
?)A|(I =P
)A|(I1)|( PAIP −=
CI-analyst’s judgement: P(I|A) = 90% (i.e. a strong signal/high sensitivity)How to generate such probabilities?
Human judgement (interview experts revealing relevant data; mind games)Simulations (statistical/dynamic)Experience of the CI Analyst
Probability that indicator “new agency” will NOT be observed if the event “market entry” will not occur
Often called the “specificity” of an indicator (“how good is the indicator to not raise false alarms?”)
(ALPHA might hire a new agency simply for legal reasons or they might have intended to launch the new product, hence hired the new agency, but later had second thoughts about the launch)
Notes: We give credit to the fact that we learned about ALPHA’s general dissatisfaction with their recent agency); i.e = 70%
Rather than having to use the a priori probability of 33% likelihood of market entry the observation of the indicator “new marketing agency” increases the likelihood of occurrence to 60% (a posteriori probability). There’s only a 7% probability that ALPHA will enter the market, despite the fact that the indicator was not observed (makes you sleep well!)
The difference between the a posteriori and the a priori probability is called the “predictive gain”, here 60%-33% = 27% (that’s what you are paid for!!!)
Hire newagency
marketentry
marketentry
Yes: 60%P(AI I)
Yes: 7%
No: 93%
No: 40%marketentry
Hire newagency
Hire newagency
Yes: 90%
Yes: 30%
No: 70%
No: 10%
known(CI analyst/expert knowledge)What we need to know
Bayesian Analysis forSignal Analysis (1)To design early warning systems or secure our findings, we can combine several (conditional independent) indicators.Calculation is usually done with a decision analysis software
20%50%M&A
80%30%Press Release
70%90%New Marketing Agency
SpecificitySensitivityIndicator
Calculation in software with indicator “New Marketing Agency“ only
How are Weak Signals Managed?Phase 3 describes the formulation of an appropriate strategy to react to the trends and issues which have been identified and labeled as relevant.
Use the Awareness – Motivation – Capabilities Analysis for Formulating Dynamic Responses in direct rivalry situations
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Competitive DynamicsCompetitive strategies are executed on the interfirm rivalry: Action – Response with direct impact on customersCI-Professionals should be aware and proficient in managing these activitiesKey to understanding competitive dynamics are signal analysisTypical operational competitive activities are
Change in pricesAcquisitionsEntry into new markets (regions or product segments)Launch of new productsInternal organizational restructuringsR&D initiatives Global purchasing measuresetc.
Economic Returnsfrom Competitive ActionsAdvantages based on competitive activities will be negated over time by competitive responsesIf a competitor‘s response follows quickly to an initiative then exploitation phase has a limited duration. An aggressor should strive to optimize the entire trapezoidal area constituted by TS, TN, TA .
CI Professionals should be able to predict types and impacts of actions and responses – Signal analyses is key to achieving this goal
Characteristics of Competitive Actionsand Responses
Use these attributes to describe competitive actions Likelihood
The probability that a firm will initiate an attack or that a defender will retaliateSpeed
The timing of the action or response, in terms of announcement speed and execution speed
TypeStrategic or tactical action or responses a) Pricing b) Marketing c) New product offerings d) Capacity-related and scale-related types of action e) Service and operation change f) Signaling
MagnitudeDesignates for instance, % of price cuts, the increase in advertising expenditures, or the number of products involved in an action or response
ScopeDesignates for instance, the number of product lines or geographical markets involved in an action or response
LocationThe market(s) where the action or response is taken, with special emphasis on whether a response is offered in the same or different market(s) where the action is initiated
Action and Response SpeedCompetitors can be characterized by their action and response execution speedOften competitors use initial announcements to manipulate customers, competitors and industry observers (i.e. Microsoft – 18 months leadtime to announce vaporeware)
Prediction of Competitive ResponsesUltimate goal of the Analysis of Competitive Dynamics is the prediction of the response time b1 and b2 and the actual type of reaction!Essential for this is to understand how a competitive action affects the internal behavior of the defending organization. The A-M-C (Awareness, Motivation, Capability) perspective provides an integrated understanding of the three key components of internal behavior that eventually define a competitor‘s response. For some industries it has been advisable to maintain a log-book where actions and reactions are traced.Especially deviations from typical patterns might signal a change in competitive behavior.
Knowledge about competitor actions and the relationship to the attackerIf a company simply does not know that it is under attack, than no response can be expectedIf a company is well informed about competitors intentions than a response is likely and fast
Actions that generate high awareness includeWidely advertised price cutsAggressive, name-calling advertising campaignsThe global launch of a new product or service offeringPublicly announced ambitious growth targets and strategiesAcquisitions and mergers with other competitorsAcquisitions of key suppliers or retailers
Actions that result in low awareness includeIncremental improvements in service and product qualityImprovements in operational efficiencyInternal reorganizationsInvestments in primary research projectsAgreements with suppliers or retailers
A-M-C Model:MotivationWhat is the motivation for a defender to react? Usually the motivation for a response is high if the expected financial rewards are high (or losses are significant without a response i.e.
Attack on Cash Cows products triggers responsesAttacks on Dog products are ignored
If a company is highly motivated than a response is likely and potentially fast
Attacks that generate a high motivation to respond Direct attacks on a competitor’s core or central markets (e.g., largest, most profitable, or strategically most important markets)Direct attacks on a market that is noncore, but holds great potential for growth and future expansion
Attacks that generate a low motivation to respond Attacks on noncore marketsAttacks that establish a strong presence that would be difficult to dislodgeSituations in which a response would result in a damaging battle (e.g., price war) that destroys returns for all players
A-M-C Model:Capability„Capability“ refers to the capability of a defender to accumulate resources for a response and the ability to organize a response within the organizationA response can be expected, if it is easy, economical and without any organizational restructuring, i.e.
Price adoptions are easily achievedProduct developments might require complex processes and ties resources
Attacks that are more difficult to respond to includeOnes that leverage proprietary technology, skills, or resources to which competitors may not have accessOnes that involve complex coordination between various functions within a companyOnes that involve alliances with external partners
Attacks that are easier to respond to include:Price-cutsAdvertising campaignsPromotions
Asymmetrical Competitive InformationBear in mind that every competitor might have a different A-M-C perspectives on its environment. Reasons might stem from asymmetrical information or from skewed perceptions of available information
Boeing and Airbus, direct competitors for passenger aircrafts had completely different perceptions for the future of long range, long haul aircrafts. Consequently developments (A-380), announcements and signaling to customers were quite different.
Asked about his key competitors, Scott McNeil CEO and founder of Sun Microsystem answered, “IBM, DEC and HP“
When asked why he didn‘t mentioned NCR, twice the size of Sun and a global top 5 PC manufacturer, McNeil answered:
Lessons Learned fromAttack and DefenseHow should attacking and defending companies behave?
Empirical studies seem to indicated specific rules per industry when competitive interaction and its outcomes are investigatedFinal results: Profits, Growth, Mkt. Share, stock pricesUse these insights to implement attack/defense patterns in your competitive arena – based on the signals you analyze
Impact of Action-Response (2)The potential market share gain increases, if complexity of measures increases and if several responsive activities are required. If the response speed is slow, market share gains increases
Impact of Action-Response (4)Potentially market share gains increases if attacks are simple or complex and if …… attacks are easily predictable or unpredictable
simple complexExtent of Attack Complexity
Mar
ket S
hare
Gai
n
predictable unpredictableExtent of Attack Unpredictability
Impact of Action-Response (5)If attacks are intense and continuously exercised than stock price development are positively influenced i.e. number and density of TV spotsIf attacks bear an element of surprise, then stock prices of rivals tend to decline
Stoc
kPr
ice
Sporadic,Infrequent
Intense,Sustained
Number of Actions within SustainedAttack per Unit Time
Predicable,Inertia
Extent of Change in Focal Firm’s Sequence of Actions
Impact of Action-Response (7)Overly aggressive competitors might end up with a declining profitability –despite gains in market shares. CI Professionals should be knowledgeable to provide guidance for sustainable profitability! Insight knowledge into Awareness – Motivation – Capabilities of Competitors are key to success
Audit with A-M-C (1)Awareness refers to a defender’s cognizance or knowledge of a specific
competitive action (or attack) and its understanding of the implications of the action for its own company and the industry as a wholeShould the action formally announced? If so, by whom and under what circumstances? How extensive should the industry and press coverage be about the action? How much information about the action should be made available?To what extent should the action he kept secret before being introduced? (Gillette’s Mach3, under development for eight years, was not even known to Gillette largest shareholder, Warren Buffet, until nine months before its release.)Is the defender taking any major strategic or organizational initiative that might distract it from paying due attention to the action?Does the defender share similar assumptions about the industry outlook and competitive situation?To what extent is the defender cognizant of the short- or long-term implications of the action for itself and other competitors?
Audit with A-M-C (2)Motivation refers to the incentives that drive a firm’s decision to respond to a
competitive action. It centres primarily on gains and losses.1. How specific is the attack? Does the action target a specific competitor, or is it a
general move without any target?2. From a financial and investment perspective, how important is the market(s) or
business(es) under attack? How dependent is the defender on the market(s) und attack? A defender may consider a market (or business) critical for a variety of reasons: e.g., revenue or profit streams, market share, growth potential.
3. From a strategic and organizational point of view, how critical is the market(s) or business(es) being attacked? How vital is the market(s) given the defender’s current strategy?
4. Symbolically, how vital is the market(s) or business(es)? (e.g., a company’s original business may be deemed vital.) Have any of the firm’s senior executive ever been in charge of (or made his/her career in) this market or business?
5. Is success (or failure) in the market central to the defender’s reputation?
Audit with A-M-C (3)Capability refers to a defender’s organizational or financial readiness to mount a
response1. Does the defender’s organizational structure permit an effective response, if it
decides to react?2. Does the firm have the required war chest to retaliate? Would it be able to
continue the war of attrition should its self-defense generate a counter response?
3. Does the firm have access to the resources and skills necessary to respond?4. Are the opportunity costs of responding so high that the defender will forfeit-i.e.,
not undertake a response?5. Does the defender have the drive to fight back? Does it have the management
… and ReactionBIC does not react at all – Sensor blades are not perceived as a threat to the disposable BIC productsSchick launched a new razor product „Trazor“
SpeedOnly 8 months after the Sensor - launch
TypeIndirect, operational reaction – targeted towards the conventional low-end Segment. One might conclude insufficient resources prevented a direct response to the high-tech blade segment
MagnitudeOnly fractions of the Sensor launch budget
ScopeUSA, then other countries – Looks like damage control, defensive operation
Venue„Low-tech“ Segment
By analyzing reactions one can assesscompetitive positions and guesstimate about resources
… and ConsequensesLaunch of Sensor blades were a huge success for Gilette, obviously competitors were taken by surpriseWhen the Mach3 blades were introduced in 1998 Gilette followed the Sensor launch patternRivalry was extremely high …
[…] in 1997, the FBI arrested Steven L. Davis on five counts of wire fraud and theft of trade secrets. Davis had been working for Wright Industries, a principal subcontractor for Gillette. Despite having signed a confidentiality/nondisclosure agreement, Davis attempted to sell trade secrets behind the Gillette MACH 3 razor design to BIC Corporation (Gallagher, 1998)
Weak Signals and Early WarningThe aim of an Strategic Early Warning System (SEWS) is to assist organizations in dealing with discontinuities or strategic “surprises”. By detecting “weak signals” (Igor Ansoff, 1975), which can be perceived as important discontinuities in an organizational environment, SEWS allows organizations to react strategically ahead of time.The underlying assumption of SEWS is that discontinuities do not emerge without warning. These warning signs can be described as “weak signals”. The concept of “weak signals” (Ansoff, 1975) aims at early detection of those signals which could lead to strategic surprises and to an event which has the potential to jeopardise an organization’s strategy. Furthermore, the concept of a SEWS is intended to constitute an important part of a strategic management system, operating real-time in an organization, and assisting in identifying the new, which emerges as “weak signals”.
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Case Study:DaimlerChrysler Aerospace AG (DASA)DASA (Munich, Germany-based aerospace company with $10 billion in 1999 revenues), a division of DaimlerChrysler AG, recognizes the need to anticipate and rapidly respond to competitive events in the marketplace.DASA integrates future-focused scenario planning activities with continuous, strategically focused monitoring activities that rigorously track environmental and market events and report critical shifts to senior decision makersDASA‘s strategic early warning system succeeds in forecasting the 1997 merger of two significant U.S.-based competitors (Boeing/McDonnell Douglas) by continually gauging the event‘s probability, allowing senior executives time to proactively formulate an effective strategic response.
DASA‘s Early Warning System ProcessThe Strategic EWS integrates monitoring activity with scenario development exercises to create specific „signposts“ that enable early identification of events with strategic implications.
Designated expert scanners report „trigger“events to a cross-functional group of VPs who, in turn regularly present distilled strategic intelligence reports to top executives.
Group DiscussionWhy does your company need an Early Warning System?Do you operate an Early Warning System already?
If yes:Which indicators do you use? Who has selected them? Based on which rational?How do you operate this system? Sketch information and reporting flow in your organization.How do you measure the performance of your EWS?
If not: Why not?Are you often surprised by competitors? Can you guesstimate the value of earlier insight?