The Corporate Library bases its grades on such thorny issues as CEOs’ compensation packages (which have to be approved by boards), the board’s composition (how many CEOs are on it -lower grade to higher number- how many independent directors are appointed who do not own their loyalty to the CEO), the company’s responsiveness to shareholders, the board’s record on strategic decisions (i.e., how many delusional acquisitions it approved), and so forth. A treasure of early warning signals. TCL anticipated the collapse of Global Crossing, Tyco, Kmart, AIG, years before the companies imploded. You should watch the short video clip of TLC ’s co-founder Nell Minow appearing together with Cotsco’s CEO on ABC 20/20. This is mind boggling demonstration of what good leadership is about (go to www.thecorporatelibrary.com and click on it under News and Events on the RHS on the screen).

There is something very appealing in the reasoning behind TCL’s early warning grading system. Anyone who believes strategy is important, and anyone who believes early warning about strategy going awry must be heeded by top execs, can see why incompetent boards are a sign of a potential forthcoming disaster. The boards who don’t do their job are typically maneuvered by strong CEOs who don’t do their jobs, either. In other words, lack of superior strategy coupled with a thick headed know-it-all leader who won’t listen to anyone but himself is a recipe for disaster. If the boards do not serve as the ultimate strategic think tank, then the company is just waiting to implode. TLC currently warns about Home Depot, Lucent, Wells Fargo and Viacom. Can anyone points to these companies’ superior strategies (aside from being everything to everyone which is not a strategy)?

Go see the profile of your competitors’ boards on TLC’s site. It may be a better EW tool than any tactical competitor’s profile you complie from the typical news feeds. Then see your company’s profile too. Maybe you should start packing now..

Ben

At the end of my last course on Nov. 16 (Value Chain Analysis), Marna came to me and asked, “What should I do for Industry value chain?” The course I teach is about a company’s value chain (from inputs to after sales service). Then Tim came to say Bye and asked “what is the best way to do industry value chain?”. Then someone else did the same. All three asked me the same question independently of each other within the same 5 minutes, and I thought: this deserves an answer.

Industry value chain, the way I understand it, refers to whom in your industry seems to capture the most value (is it you? Your competitors? The suppliers? The distribution channels? Substitutes?), and perhaps more importantly, what new values are being created and captured from your buyers, and should you try and join that game. The way I see it, the analysis must go through the following steps:
1. Define the industry. Who are you looking at? Depending on the client for your analysis (corporate development? Division? BU’s management?) your industry boundaries will change. I personally prefer the narrower definitions where business strategy actually applies. My test is how different are the five forces between segments? If the buyers are different, or barriers are different, or dynamics of competition are different, there is no point in lumping segments (industries together). The industry of commercial aircrafts manufacturing, for example, is not the same as military aircraft manufacturing.
2. Do a five force analysis. The basic tool for industry value chain remains Porter’s old five force model. The model will flash out value creation in your industry. Remember Cramer’s case? It was the suppliers capturing all value by going direct and lowering their cost (learning curves effects). In the Chain Saw case, distribution channels were starting to capture the value (mass merchandisers) and industry players caught in the middle (nor here nor there) declined. Different clusters (from strategic mapping) capture different values, so it may very well be your company is in the wrong cluster. This is not a quantitative analysis. You can place numbers on it if you feel it is necessary: clusters’ average operating profits/sales ratios for example, various suppliers’ margins, buyers’ margins (if not consumers), etc. My feeling is it is not necessary. Flushing out value in a value chain can be done qualitatively by looking at changing bargaining power.
3. From the basic five force model,, identify new industries (products or services differing from your current ones) where you think value is migrating. For those industries, do another five force analysis to determine their reasons for being attractive.
4. Finally, the five force model will tell you if an industry is attractive (allows for value capturing). But it won’t tell you if you can do the capturing. That’s the area of strategy, and that’s why I created the new course “The Role of CI in Strategy”. You have to first identify the most desirable strategic position available for you either through organic growth or acquisition. That requires an analysis of over-served or under-served segments in the industry under focus. According the the new Porter’s thinking (i.e., NOT his generic strategies from competitive Strategy), there are three bases for determining strategic positions in such a setting, and the course in Miami (Feb. 10th) will deal exactly with that. I am inviting anyone who wants to understand strategy and creating a sustainable strategic position to attend. The role of CI analysts in this arena is derived from the essence of what creates a defendable strategic position.

This new course also allows me to test a new teaching methodology. In addition to my usual case studies and Socratic Method of discussion, I intend to use the group for peer review of industries five forces. We will select several industries from among those participating in the course, and dissect their five forces as a group effort. Sometime (but not always!), what strangers can see, familiarity obscures. With my prodding, we will try and see areas where new value is being created and who is capturing it. If we fail, we can always end the session early and go to the beach.

Ben Gilad

A recent report released by a team of former CIA analysts, led by a former deputy CIA director Richard Kerr, reveals that in the months leading to the invasion of Iraq, the Bush administration’s policy committee was very receptive to the (wrong) technical intelligence about the non existent Iraqi WMD weapon program, but paid little notice to intelligence on post Saddam Iraq, which correctly assessed the future strife between the various Iraqi factions, as well as the impact on oil markets, the way the war will develop and the links of Iraq to al-Qaeda. The report goes on to conclude that expensive electronic intelligence gleamed from satellites was of little value. According to USA Today (October 12, 2005, front page), the report says that intelligence analysts failed “to question their assumptions” about Iraq chemical, biological and nuclear weapon development, which in turn fell on willing ears at the administration who were trying heavily to make the case for the war. “Heavily qualified intelligence judgments” were quickly converted to “accepted facts” when administration staffers took over.

The report may or may not get the full public attention it deserves. It was published in an obscure (to the public) professional intelligence publication Studies in Intelligence. The Bush administration’s response was classic Bush: never admit fault, never fail to commit a blunder. Whitehouse spokesman Fred Jones hastened to disparage the report as “vehemently disputed.” In my mind, the only thing vehemently disputed is Bush’s qualification to be a president, and I am looking forward to Fred Jones admitting that. And lest you think I am one of those sore liberals, I actually voted for this most incompetent of presidents.

Yet politics aside, this report is very valuable to us in the CI world. Think: if in a domain where intelligence receives top billing, enormous funding, a seat at the President table and a regular top briefing, decision makers still selectively adopt what they like out of intelligence analysis, what can one expect from business executives? My estimate is that 80% of CI collected by CI managers following management questions (those dreaded “CI projects”) is used as confirmatory intelligence to support already declared positions, and not as reality check or strategy forming input. The executive discard what goes against his or her beliefs and gladly adopt the “right” slides. “We need to change a little of your presentation, just make the tone different.” Sounds familiar? If not, do not consider yourself lucky, yet. It might be management does not even get exposed to your analysis.

It is also interesting where the CIA analysts were right – in all those strategic issues that required insight based on mostly open sources and sound minds. The hatred between Sunni and Shi’a is known to anyone who lived in the Middle East for more than 2 days. The impact on oil required understanding of markets and economies, not secret data. The state of Iraqi military preparedness could be gleamed from just watching the funny marches they put on prior to the war. It is when there was little data (as in the case of WMD), analysts started inventing their own, calling in the expensive technology, and getting zip in return. There is no substitute to Humint, and Moses knew it 3500 years ago. And I thought the Bush administration did one thing well – read the bible…

Intelligence professionals are often asked to assess the value of their business or competitive intelligence (BI/CI) effort. Most say it cannot be done. I disagree! You can measure its value; both quantitatively and how it is perceived, especially by those that use it. Let’s discuss these two objectives and some ways to approach the task.

I first addressed this problem in a research report, Measuring the Effectiveness of Competitive Intelligence, which I produced for SCIP in 1996. Our objective was to find some quantifiable means of evaluating competitive intelligence (CI). In that project, I interviewed some twenty senior executives, representing eight major companies in very different types of businesses, ranging from aerospace to electronics and including financial services. Surprisingly, none were interested in quantitative measures for their BI/CI programs. In fact, the CFO of the financial services firm did not mention financial measurement of any kind during the formal interview. When questioned about the absence, he replied, “We want to see our BI cause the business to take action ¬ – we can always go back and measure its financial value later!” All the executives interviewed stated they expected to see the BI/CI have some “visible” impact on the company and/or its management decisions.

In addition to simple ROI calculations, the SCIP research identified four quantitative and several qualitative measures that might be applied, including:
– Time saving: Savings for both professional and support personnel.
– Cost savings: Elimination or reduction in expenses.
– Cost avoidance: Elimination of planned expenses.
– Revenue increases: Increases in the number of sales or size of sales.
– Value added: Benefits not easily related to specific dollar values, e.g., more effective strategies or better new products and services.

Assessing Project Value
Such measures-of-effectiveness (MOEs), as they are called, can best be applied to specific projects but they should be selected before the project is actually begun since it is difficult to go back and recover project-specific data after it is complete. I suggest selecting a couple of MOEs initially to be sure the expected result is amenable to the type of measurement you have chosen.

A brief example may be helpful. The management of a high-tech firm decided they needed to diversify their product base but still leverage their technological competence. They would use their existing biotech production process but produce an entirely different type of end-product. To do this as quickly as possible they had decided to purchase the end-product technology for $2.5 million from another firm and use their own production processes and facility.

However, because the new product would have to compete in an entirely difference market they needed both marketing support and competitive intelligence for the new product’s intended marketplace. They would hire an appropriate market research firm but decided to form an ad hoc CI team made up of 4-5 current employees (working part-time).

The ad hoc CI team performed all the usually CI operations. In doing so, the team identified a technical conference where the new $2.5 M product category would be featured. This would provide an excellent opportunity to get a look at both competing product technologies and the competitor companies that the firm would be facing in the new marketplace.

The team prepared well for the conference, including both business and technical personnel. The CI that they collected on the new competitors was great – they not only learned who they were but a lot about the competitive tactics used in that marketplace. But the real surprise came from the competitive technology intelligence (CTI) acquired. The firm that was selling the new-product technology gave a public presentation intending to increase its sales, and in so doing divulged a great deal of the technology’s specific composition – probably more than they had intended.

When the CI team returned from the conference, they met with their own scientists and patent attorneys and it was concluded that the technology, which the firm had intended to purchase for $2.5 million, had been publicly revealed. The firm would not have to purchase it!

The CI team had, from its formation, intended to show the project’s cost-benefit. It kept all the cost data, but was not sure what type of performance measure it might use. A simple ROI was the most likely. As it turned out, the $2.5 M not spent, which falls into the category of “Cost Avoidance” (planned expenditures not spent) was an easily recognizable MOE. But because they had kept good records on the ad hoc CI teams expenses, i.e., about $175,000, they were also able to calculate the project’s return-on-investment: $2.5M minus costs ($175K) divided by cost ($175K) resulting in a simple ROI of over 1,300%. Either measure was more than acceptable to the company’s management team.

Assessing the CI Program’s Value
Programs as a whole are somewhat more difficult, but with some effort on the part of all involved the results can be very satisfying. For example, the NutraSweet BI program was estimated by the company’s CEO to have been worth a least $50 million a year over a 5-year period during the early1990’s. That assessment process was a joint effort, with the BI Department identifying the business decisions and major projects that they had contributed to over the five-year period, and the Finance Department assessing the dollar value for each. Not all BI contributions were accepted, however. The final sum, which was a combination of money saved and/or made, resulted in the $50 million/year average. When Bob Flynn, the CEO, reported the finding at the 1994 SCIP Annual Conference in Boston, he stated that it was in fact a very conservative estimate. For a program that cost about a million dollars a year, that was a pretty good ROI! (Though management was quite satisfied with the dollar amount alone.)

Making CI Success a Part of Corporate Culture
However, I believe the best measure of a CI Program’s value comes in the form of “success stories” – told by those that have benefited from the CI. For example:
• P&G’s competitive benchmarking of a competitor’s distribution system saved it some $40 million when they applied the lessons learned.

• Motorola’s successful acquisition of a European firm, credited to its BI Department, increased its yearly European profits by some $10 million – which is a good example of revenue enhancement.

• NutraSweet’s CEO commented that one decision – not to react to a competitor’s perceived initiative – actually saved the company $38 million. (A classic example of the cost saving MOE.)

• GM’s competitive benchmarking program was credited with saving the company hundreds of millions in comparable manufacturing costs.

• Merck’s CI Program was judged to be worth over $100 million in retained sales for one product alone.

The telling of such success stories by a company’s management is not only good for the CI program’s success, it also adds to the shared belief that CI is a good thing for the company – making it a part of the organization’s “corporate culture”.

In the final analysis you can evaluate your company’s CI effort – if you properly define what and how you intend to measure. In my experience, senior level users of BI/CI are not as interested in financial or quantitative measures of your CI products & services as they are in having intelligence that visibly affects their decisionmaking or business actions in a positive fashion. They do, however, expect to see some form of related action. Those actions that result in grater sales, profits, or other measures of business success are the most valued.

An old friend and associate, Robert Steele, probably put it best, “Information costs money … Intelligence makes money!” Essentially, any competitive information that a business manager acts on becomes intelligence. And, intelligence used by a company that makes money … is good intelligence!

The reason competitive intelligence programs often fail in companies is because the people in charge of developing intelligence make one or a number of potentially fatal mistakes. I list a few of them here. You may believe there are others, or you may disagree with me altogether. Nevertheless, here is my view of reality.

1. Anal retentive analysis: I recently visited a prospective client who wanted to know absolutely how we would uncover every piece of data. It was an unusual meeting, but reminded me about the lessons of the extreme. He wanted 100% assurance that we would develop THE answer. He wanted every piece of a competitor’s strategic puzzle assembled, locked up and fully understood. Anything less then perfect and he would not hire us.

We told him the truth; he did not hire us. Truth is reality. Intelligence is an art. That is the truth. It’s also a game of estimation – perhaps, well-thought out estimation based on corroborated pieces of data and solid analysis – but estimation nonetheless. This client wanted tomorrow’s news today. Impossible. There are no perfect pictures in business. If you want the perfect picture, wait long enough and you’ll find it, with one problem: The market has discovered that same picture and your competitive advantage has disappeared.

Look at reports Fuld & Company supplies clients and you will see analysis based on valid information that we try to corroborate whenever possible. It’s experience that defines good analysis, not necessarily more data. Asking for each data box to be filled in is asking for delay, and strategic failure.

2. I-am-the-victim mentality: Internal intelligence jobs definitely have their share of frustration. You are not always in charge of your own destiny. Someone else is more in “the know” than you are. For these and a variety of other reasons, I have found too many internal intelligence managers taking up the Victim’s banner. That is the absolute worst way to position yourself in a company, especially if you and your intelligence program want to succeed. Act the part of the victim and that is how others will treat you.

Does that mean you have to be obnoxious and dogmatically opinionated? Of course not. Yet, your manager should have hired you to state your opinion, based on fact. Intelligence staffers should stick their necks out from time to time if they strongly believe their assessment makes sense, or may even offer opinions contrary to the others who are senior.

I-am-the-victim voice appears in a number of guises: The anonymously-written newsletter appearing without a by-line or any other contact information. The memos or reports sent to a electronic file folder but not circulated. The analyses that are ghost written for another manager, ownership expunged.

3. Misrepresentation: Too many intelligence reports are simply not what they are advertised to be. Marketing, market research, corporate libraries and corporate intelligence departments have issued competitive profiles under the banner of a competitive “intelligence” profile, as if the addition of the sexy-sounding, alluring word “intelligence” really helps their cause. Intelligence means timely. It is analyzed information to the point where you can make a decision. It does not mean just the same old information repackaged.

Madison Avenue has a long-held maxim: Nothing kills a bad product faster than good advertising. Your internal market knows what good intelligence is. It’s insight, new and almost unique that will offer your company, your division, your product or service competitive advantage. Rehashed information is just that, rehashed. You know it and so does your client. My guess is that over half of the so-called intelligence reports circulating within companies are nothing more than warmed-over, rewritten anthologies of information gleaned from Factiva, LexisNexis and the rest of the business press.

This has got to stop. It hurts your cause, as well as your company’s competitive edge.

4. Playing the wrong part: How do you play your part if your role is to be the manager of your company’s intelligence program? I have seen some very wealthy companies and their managements believe that in order to have a world-class program you need to employ lots of very bright people and slot them into a well-thought out organization chart. In theory, it looks good; in practice, the world of corporate intelligence often works in a different manner.

The best programs I have found grow organically. That is, you start out with one person and see where it goes from here. How much demand will you have from your internal constituency? What kind of questions will your customers give you? Are they technical, or more strategic in nature? Answers to these questions alone, will begin to show you how you might need to build a staff or even if you need to build one at all. Very rarely can you anticipate the exact nature and makeup of such a staff.

You should also ask yourself how you play your cards and your role. If you think you become the answer-man for every customer, you are probably going in the wrong direction. You can never hope to answer everyone’s questions. The most successful intelligence programs are the ones that have developed large, far-reaching people networks of experts. Even a staff of a dozen dedicated analysts cannot know answers to all the arcane issues companies encounter in the market.

Over the past three decades I have seen corporate intelligence departments come and go, mostly for the above reasons. You can’t always blame failure on budget cut backs, after all. The ones that succeed either openly or subconsciously adhere to the straightforward and informal approaches I described here.

Have you found your experiences different than mine?

Leonard Fuld

Did you know which company increased in sales and earnings every year for the past 30 years? If you answered Wal-Mart, you were right. But then, everyone knows that. Now name the other company. Not that easy? It is Walgreens.

Walgreens also consistently outperformed the S&P 500, yielded higher returns to shareholders than the venerable GE, and made it into Jim Collins’s Good to Great bestseller. With 4,798 stores across the country, Walgreens controls 14% of the retail prescription drug market in the US.

Once you make it into a bestseller list of great companies, it must be a sign that you’d be there forever, right? Not necessarily. Sometime it might be the sign that you reached your peak. The list of excellent companies from Peters and Waterman old bestseller has shrunk dramatically since it was published in 1982 (it did not help that Peters now admits to faking the data in the book..). In fact, I won’t be surprised if only its publisher (HarperCollins) survived, because so many misguided people bought the In Search of Excellence. One certain prediction: The list of Build to Last or From Good To Great of Collins will go the same way. The reason? Those guru management writers do not understand strategy.

That’s a harsh statement, I know. But reality is even harsher. Strategy has little to do with people, organizations, empowerment, leadership, culture and all those wonderful concepts which are so easy to relate to and so fascinating to write about. It is true: The best strategy in the world will not yield superior profitability if it is not executed well. But strategy and execution are two distinct entities, and people tend to forget that. Execution has everything to do with people, organizations, empowerment, leadership, culture and all those other fluffy issues. Strategy is about understanding the structure of the industry. A corollary of strategy is watching diligently for early signs of that same structure changing.

Many people interpret the word strategy too broadly. The Webster dictionary defines it as a way to achieve a goal. That is correct but way too general, because in business, it leaves wide open the interpretation that anything that makes money is “strategy”. Michael Porter has shown convincingly that business or competitive strategy is not equivalent to any action that pursues growth or “makes money”, and history teaches that making money in the short run or growing in an undisciplined way is not a sustained “strategy”. Often, it is a recipe for a long term disaster. Unless one’s goal is to be mediocre, or to milk the business and get out with a nice package squeezed from a lame board, or to show quick results in his brand or area, strategy is not the same as making money. In a competitive environment, i.e., capitalistic markets, strategy is about finding a sustained position that delivers superior returns. In other words, a strategy that delivers the industry’s average return is not a competitive strategy since it does not outperform your competitors.

If this sounds somewhat Darwinist, it is. As long as the idiots from the anti globalization movement and the crazies protesting outside the G8 meetings do not succeed in destroying our great capitalistic market system, executives will need to worry about competing for customers so they can compete for capital by delivering superior returns to shareholders. They also should use strategy to reach superior returns to stave off hostile takeovers. I realize this is so much more difficult than just enacting a poison pill, but it still does not justify strategy as “everything goes” as long as it yields profits.

The economic foundation of any industry is captured by Porter’s five forces. In order for a strategy to yield consistent long term superior profitability is must keep up with changes in the five forces. This is what I call a strategic early warning system (SEWS). This is what I want my CI managers to get involved with. This is what many CI managers do not think is possible in their companies. There is a variety of reasons why CI managers do not believe they can bring executives to adopt a SEWS frame of mind for the CI role. One reason though is in need of quick dispelling: executives already know the major strategic threats to the company and do not need CI managers and/or SEWS to tell them about it.

For 30 years, the game of retailing has been about locations (reducing buyers’ power by locating near them and offering convenience) and costs (outperforming rivals by managing efficiently). Walgreens has been the king of mastering these “rules of the game”. The problem is all that excellence is worthless unless people walk in the door. And people have fewer reasons to do that. Mail order prescription drugs is the fastest growing category in the industry, accounting for 14.4% of total US market, up from 11.8% in 2001. PBMs can fill a drug order for $2.50; Walgreen does it extremely well for $4.95. PBMs started growing 10 years ago. Walgreen mentioned them first time in its annual report in 2004. Says Walgreen’s COO, Jeff Rein: “We were wrong in not seeing mail order. We admit it.”(Fortune, June 13, 2005, p. 82)

Reason number 1 goes out the door. Any other reasons? Bring them on.

In a few days, I am going to post my first real piece, on straetgy. May the force be. Tell me if I made you cry with delight.

Ben

So here is what we think: Instead of writing articles for the Academy’s Alumni Newsletter, we will post our thoughts on a blog. Every once in a while, one of the faculty members of the Academy will express himself in the form of a blog entry. If we feel the urge to go for more frequent entries, we will blog more often. So you can expect to see short articles from Jan Herring, Leonard Fuld, Mike Sandman (if he is not traveling), Karl Rose, Jay Paap, and yes, me.

We like you to comment on our pieces. We will try and capture the spirit of our interactive classes here and have some discussions going. Hopefully, these discussions will have some depth and value. Since the classes of the Academy have by now acquire the global reputation of being rowdy and challenging and alive, we hope some of that will rub on this blog as well. I for one, promise to overcome my shyness and polite upbringing and stir as much controversy as possible. Feel free to join me.

The first response we are looking for from you is simple: Tell us what topics you’d like us to address. We will be open to any request from CI to strategy to cooking and interior design. OK, I would not trust us on the last two, but I can guarantee that between the six of us, someone has a strong and completely biased opinion about the first two. And you may just learn something useful you can implement immeditely. So go ahead, post a comment to this introductory entry, and let the fun begins.

It is just one more service from the world leading Academy of CI.

May the force be with you all.

Ben Gilad