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Monday, November 23, 2009
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VOLUME 1
ISSUE 14
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CI lessons from WorldCom and HP/Compaq.
Bill Fiora, Outward Insights, www.outwardinsights.com
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Summary: Sprint, AT&T and Hewlett Packard should not have been as blindsided by their competitors' actions as they appeared to have been. There are basic facts that companies should know about their competitors and CI practitioners need to be doing the kind of 'what if' analysis needed to take a fresh, critical look at the competitive analysis they produce.
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Two press articles caught my eye in the flood of stories that followed revelations that WorldCom had cooked its books to the tune of billions of dollars. The articles were about two of WorldCom’s chief competitors—Sprint and AT&T. Executives at both companies said that for years they had been dismayed that they could not match WorldCom’s numbers, and that there was considerable turmoil within their own companies as a result. These executives were told that if WorldCom could post such good numbers, they should be able to match them. Of course we now know that Sprint and AT&T were chasing air. Shouldn’t they have known this?
My next example comes from the IT services industry. In late July, IBM announced that it will buy the consulting arm of PriceWaterhouseCoopers (PWC) for $3.5 billion dollars. First, here’s a bit of background on this deal. In the last decade, IBM’s consulting division has grown tremendously and helped transform Big Blue from a hardware company to an integrated provider of hardware and services. Seeing this, other hardware companies like Hewlett Packard and Compaq tried to follow IBM’s lead.
In fact, HP almost bought the same PWC consulting unit about two years ago, but the deal fell through. (The asking price then was over $18 billion—making the sale to IBM look like a bargain in comparison.) Similarly, one of the justifications for HP/Compaq merger was to compete more successfully with IBM. HP executives could not have been pleased, therefore, when IBM scooped them once again by buying PWC. After the deal was announced, HP executives said that they were no longer interested in PWC, but I am personally skeptical, and have heard different opinions from others inside the company.
The lesson from both of these examples is that Sprint, AT&T and HP should not have been as blindsided as they appear to have been. There are basic facts that companies should know about their competitors, and perfectly legal ways to collect and analyze these facts.
What-if analysis
This, of course, is not news to SCIP members, but are enough CI practitioners doing the kind of “what if” analysis that would have discovered that something was awry? In working with clients, I find that even experienced CI practitioners can get so caught up in their daily tasks that they forget to step back and take a fresh, critical look at the competitive analysis they are providing.
In the rush to meet deadlines, even the most knowledgeable analysts need to ask themselves “Is there something going on here that we’re missing?” Could Sprint and AT&T have known exactly what WorldCom was doing? Probably not. Should they have known that WorldCom’s numbers just didn’t add up? Definitely. And there are steps that both company executives could have taken in response.
Likewise for HP. Apparently, HP executives were so distracted by the contentious merger with Compaq that they took their eyes off of IBM—the very company that the merger hopes to combat. Instead of analyzing what IBM has done, HP should have been asking itself what IBM was likely to do next. If it had done so, HP could have anticipated IBM’s move for PWC (especially since HP knew from its own experience that the consulting firm was interested in being acquired.)
In fact, IBM has done this kind of bargain hunting before. Several years ago, when the bubble burst around Internet consulting firms, most observers were gloating about the decline of the sector. IBM, on the other hand, came in and bought one of the top firms — Mainspring — at a bargain price.
IBM understands the need for predictive analysis, and Big Blue has long had an active competitive intelligence (CI) program that keeps top managers ahead of industry trends. In my view, IBM’s recent successes can be traced to its CI capability and its executives’ outward-looking approach to strategy and planning.
In fact, companies that pay close attention to their external environment typically excel in the marketplace. According to a recent survey (conducted by PriceWaterhouseCoopers, no less) fast-growth companies with CEOs who rated competitor information as important grew 20% faster than their peers. These companies are also outperforming their counterparts on sustained revenue growth, gross margins, new hiring, and other key performance measures.
The need for an organized effort
CI should be an integral part of how companies do business, but apparently many corporations still don’t understand this. Many lack an organized effort to analyze what competitors are planning to do, and those companies that do have a CI team often relegate them to gathering already published reports on their industry. Reading and distributing press articles is not CI, and it won’t provide the early warning that companies in positions like HP, Sprint, and AT&T need.
In the face of rapid change and new competitive threats, companies need to anticipate rather than react to emerging threats and opportunities. Despite the growth of SCIP membership in the last ten years, and the increased recognition accorded to CI, I still believe that only a small percentage of CI teams are producing the type of forward-looking analysis that helps companies anticipate emerging issues, or are providing the type of early warning that would have helped Sprint, AT&T, and HP/Compaq.
Porter’s CI questions
When the WorldCom (and Enron) scandals first emerged, SCIP Board of Directors member Paul Houston called me and pointed out an excerpt from a classic text on competitive analysis, Michael Porter’s “Competitive Strategy.” In it, Porter lists questions that a CI team should use to analyze a competitor. Among the questions:
- What accounting system and conventions are in place?
- How does the competitor value inventory? These sorts of accounting policy issues can strongly influence the competitor’s perceptions of its performance, what its costs are, the way it sets prices, and so on.
- What is the composition of the board? Does it have enough outsiders to exercise effective outside review?
The list goes on, but I think you get the point—the techniques for doing this type of analysis are available to those companies that are willing to take advantage of them. If only AT&T and Sprint had paid attention. In the wake of these recent scandals, how many SCIP members are paying attention?
Background:
Bill Fiora is President of Outward Insights, a Boston-area consulting firm that helps companies use competitive intelligence, scenario planning and market assessments to capture new opportunities. He writes a Best Practices column for Competitive Intelligence Magazine and is a member of the adjunct faculty at Tufts University’s Fletcher School of Law Diplomacy, Boston University, and the CIA's Sherman Kent School of Intelligence Analysis. He lives with his wife and three children in Lexington MA, and spends his free time fly fishing for trout and striped bass in the waters of New England.
[Originally published in Staying Sharp, July/August 2002. www.outwardinsights.com/catalog.htm]
SCIP.online, volume 1 number 14, August 22, 2002.
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