Why Now Is The Time To Consider Scenario Planning

Gotta love The Economist.

"With even short-term horizons as obscure as the San Francisco skyline during a summer fog, companies are finding their standard budgeting and forecasting of little use. The usual trick of plugging figures from operating units into spreadsheets appeals to number-crunchers, but can often generate misleading targets, especially when conditions change fast." ("Managing in the Fog, February 26 2009, at http://www.economist.com/business/displaystory.cfm?story_id=13184837)

Companies today are paralyzed. Most managers have never seen economic conditions like these. Short-term thinking prevails. From the same Economist Article:

"Faced with exceptionally volatile business conditions, senior executives are finding it harder than ever to gauge how their companies are likely to fare in the months ahead."

The risk, of course, is not having a clear strategy for growth once the recession ends, or worse, failing to position now for future opportunities. That's why cogent strategy development is more important now than ever before. With forecasts deemed virtually meaningless, and the future harder and harder to envision, managers need a tool for flexible and realistic strategy development.

"What can companies do? A few forward-thinking firms can provide inspiration. Hugh Courtney, a professor at the University of Maryland’s Robert H. Smith School of Business, thinks more companies should be using “scenario planning” alongside their financial models, which do not produce a large enough spread of possible outcomes to capture the flavour of today’s uncertainties. Sten Daugaard, the finance chief of Lego, a Danish toymaker, says his firm generated a number of different scenarios as part of its 2009 budget, the first time it had used such an approach. It has developed contingency plans for each scenario so that it can react swiftly whatever the coming months throw at it."

Scenario-based strategic planning is one such tool. Unlike most planning approaches, scenario planning starts with the assumption that the future is unknowable. Strategies designed for one vision of the future are almost certainly destined to fail, and managers usually cannot change course fast enough when the future they envisioned fails to materialize.

Instead of forcing managers to plan for the future they want, scenario planning forces corporate leaders to consider multiple, plausible futures that taken together represent a full range of threats and opportunities an organization may face in the future. Currently, we are using scenario planning to help a client develop a strategy centered around environmental sustainability, and to help another client set strategy for a major project category.

Too much short-term thinking now will make companies unprepared for the recovery. A little time spent thinking strategically now will pay dividends in the future -- whatever the future looks like.

Spotting Rivals' Vulnerabilities in the Downturn

Let’s face it. CI functions are in survival mode. There’s little doubt that the very nature of your CI operations and output must change if your CI function will survive in these uncertain times. Senior executives’ appetite for strategic intelligence is virtually non-existent right now. If you have been working in a strategically oriented CI department, or have been trying to reposition your CI function to a more strategic posture, you probably need to change tack, and do so quickly.

One way to do so may be to emphasize good, old-fashioned competitor intelligence. One of the most beneficial CI outcomes that can affect how your company emerges from the economic downturn may be to deliver targeted, insightful, and real-time assessments of how the recession is affecting your competitors. Virtually no company is immune from the detrimental effects of the current economic crisis, and your competitors are doubtless figuring out how to shore up revenues, maintain share, and avoid crippling losses -- just like your company.

Indeed, according to a recent article in the Harvard Business Review, “It’s critical to understand your own strengths and weaknesses relative to those of your competitors. They will have different cost structures, financial positions, sourcing strategies, product mixes, customer focuses, and so on. To emerge from the downturn in a lead position, you must calibrate the actions you plan to take in light of the actions that your competitors will most likely take.” (“Seize Advantage in a Downturn” by David Rhodes and Daniel Stelter. Harvard Business Review, February 2008, p.52.)

How? For starters, CI practitioners examining publicly traded rivals should consider conducting a thorough competitor financial analysis. Ratio analysis, in particular, is a relatively straightforward technique that can spot weaknesses in your competitors’ financial position that could present opportunities for your firm. Look especially at the debt ratio (how leveraged is the competitor?), debt-to-equity ratio (how much debt is the firm carrying relative to its investors’ paid-in capital?), and the quick ratio (which demonstrates a company’s access to cash in the short-term).

Similarly, assessing a competitor’s free cash flow and comparing it to its cash positions one, two and three quarters ago can provide insights into whether the recession has caused a significant decline in the amount of cash your competitor’s operations generate. If you notice a serious decline, it could be a harbinger of future measures to cut costs, assuming any access to financing is choked off.

More qualitative techniques can offer insights into competitors’ weaknesses and help your company act opportunistically to exploit them. Qualitative methods are also beneficial for assessing the impact of the downturn on privately held competitors. If you haven’t conducted a Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis on your competitors in a while, now may be a good time. Compare today’s SWOT to ones you conducted six or 12 months ago and see if the recession has affected your competitors’ strategic positioning and intent. They may be unable to seize an opportunity -- providing an opening for your firm -- or conversely may be planning a bold move that could put your firm at risk.

Similarly, now may be a great time to conduct a targeted wargame. Select a handful of competitors and game their responses to a variety of future economic shocks and compare their responses to your own company’s contingency plans. How, for instance, would competitors react to an unemployment rate above 10%? What if there is a failure of a major bank, delaying the resumption of a freer flow of credit? Will any competitors benefit from the economic stimulus package recently passed by Congress?

Returning to the basics of competitor analysis can be an effective way to rapidly change the focus of your CI function and align it to helping your company navigate the downturn. And, it could improve the chances of CI function survival.

Why Is My Competitor Doing THAT?

Many companies assume that because a competitor is pursuing a new market, lowering prices, or launching a new class of products, "it must know something that we don't." As a result, competitive strategy is often an exercise of imitating a competitor's actions instead of charting a unique course of action -- an approach that rarely results in a company establishing a leadership position in its industry.

Becoming a leader in any given industry requires not just knowing what a competitor is doing, but what it does well -- and what it does badly. Why? Would you rather compete head to head with someone where they are strongest, or identify, and then exploit, their weaknesses? Competitive intelligence (CI) is a systematic way of determining those strong and weak points.

In fact, the biggest mistake companies make when establishing a CI function is that they position it as a research function instead of a resource for informing strategic decisions. As a result, most of these CI functions often provide plenty of information but little genuine intelligence analysis, and hence they fail to deliver truly actionable insights about competitor behavior, strategy, and intent.

What can new CI functions do to get out of the information trap? The most important thing companies can do when establishing a competitive intelligence function is to develop a core set of analytic tools and models that help transform information into actionable insights. Such models can help companies understand the context behind competitor actions, assess rivals' strategic intent, and develop strategies that serve to out-maneuver, instead of copy, competitor actions.

Three types of intelligence analysis methods are particularly useful:

1. Competitor analysis tools that go beyond basic Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis. For instance, the Four-Corners analysis developed by Harvard Business School professor and strategy guru Michael Porter is a model well designed to help company strategists assess a competitor's intent and objectives, and the strengths it is using to achieve them. By examining a competitor's current strategy, future goals, assumptions about the market, and core capabilities, the Four-Corners model helps analysts address four core questions: Is the competitor satisfied with its current position? What moves might it make? Where is it vulnerable? And what might we do that will provoke retaliation? From there, you can identify a competitive strategy that maneuvers around the rival's objectives and strengths, and that plays to your company's capabilities. A client of ours -- a major financial services conglomerate -- uses Porter's Four-Corners analysis regularly to ensure that it both fully considers competitor market positioning and devises a unique course of action that reflects its own strengths, not the competitor's.

2. Early warning analysis that helps spot and assess industry trends and facilitates a discussion of future contingency plans. By identifying, and then monitoring, a set of key industry and competitive events and circumstances, companies can anticipate the emergence of competitive threats and opportunities, and implement strategies to counter them. Indicator analysis lets companies anticipate future developments far more quickly than reading about them in the business press after they have occurred. This way, strategists spend less time trying to figure out what to do in light of competitor developments and more time executing preconceived plans. This is especially helpful in fast moving industries such as information technology and retail, where fast competitive execution is crucial.

3. Broad industry analysis techniques like scenario analysis that help spot relationships along a company's value chain -- changes affecting their suppliers and customers -- that can aid competitive strategy. Good competitive intelligence functions help companies get out of the trap of devising competitive strategies against a single-point prediction about future industry conditions. Because we can't predict the future, there is just one thing we know about such industry projections -- they are wrong. Competitive intelligence functions that employ scenario analysis as a way to consider multiple, plausible, competitive and industry circumstances help their companies develop contingency plans for each. A provider of employee insurance and retirement plans with whom we work regularly employs scenario-based early warning to inform management of the threats and opportunities inherent in key industry trends. Another client was able to make appropriate adjustments in one of its major products when it learned early on that a supplier had to stop making a key ingredient.

Competitive intelligence methods such as these help companies know better how to leverage their strengths against competitor vulnerabilities, leading to strategies that are unique and based on core capabilities. Hewlett Packard's resurgence against Dell provides an interesting example. According to an article in The Wall Street Journal ("Hard Drive: How H-P Reclaimed Its PC Lead over Dell," June 4, 2007, page A1), in less than two years, HP bested Dell to become the world's personal computer sales leader. It did so not by copying Dell's highly successful direct sales model, but instead by leveraging its strengths in the retail channel and attacking a core Dell weakness.

HP concluded that it had been fighting Dell where Dell was strong, in direct sales over the Internet and phone. Instead, HP changed course and began to focus on its strength, retail stores, where Dell had no presence whatsoever. HP over the past two years moved quickly to fix logistical problems and build relationships with retailers, helping it surpass Dell in worldwide sales late last year for the first time since 2003.

Dell's response? To mimic HP and try to begin to compete in retail outlets, HP's current strength. That's likely a losing proposition.

"If all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful," says Harvard Business School’s Porter. So ask yourself, what is your company's strategic focus, to emulate a rival's strengths, or to exploit its weaknesses?

Competitive Urban Legends

We’ve all heard them. "Urban legends" are a sort of modern folklore consisting of stories often thought to be true but that, in reality, are usually false, exaggerated, distorted, or sensationalized. I’m sure you’ve heard the one about unsuspecting business travelers being anaesthetized and then waking up to find that a kidney had been harvested for surgical transplant.

For the most part, urban legends are harmless fun. But many can take on a life of their own and cause those reading or hearing them to think, just for a moment, that maybe if I’m at an ATM and sense danger, I can enter my PIN in reverse and summon the police.

Managers can hold similar myths, stereotypes, and distortions about competitors, industry conditions, or other business matters. It’s hard for executives, especially those who have been in the same industry or with the same company for most of their careers, not to develop deep-seated beliefs about their business environment. There’s always one competitor more aggressive and hungry than you are, or another competitor that certainly has a more favorable cost structure, or a supplier set to go out of business at any moment. These competitive urban legends are endemic to almost every company, and become reinforced over time as more executives buy into them.

Confronting your company’s urban legends with credible evidence may be the right course of action, but doing so can be fraught with risks. If your company is like most, the more deeply held and incontrovertible the urban legend, the more powerful and influential are the executives who espouse it. Challenging their perspective can be dangerous if not done in a logical and systematic manner.

Entering into a debate with a powerful executive places your credibility on the line. Losing such a battle can create personal and career casualties, and harm the overall perception and acceptance of competitive intelligence inside your organization. Still, when approached carefully and thoughtfully, confronting competitive urban legends is a better course of action than turning a blind eye to them.

Consider the following hypothetical example. A computer services firm found itself continually surprised by the actions of a set of competitors its managers thought they knew well. The competitors were underbidding the company for the provision of networking, systems integration, and other technical services performed for the company’s clients. The company was also pricing well out of sync with client expectations. In some cases, it underbid competitors when price did not turn out to be a prevailing decision factor for the customer. In others, it was increasingly losing bids on prices that were too high, sometimes submitting bids 20% higher than those from other competitors. Senior management scratched their collective heads. How in the world could this be happening? Confusion reigned.

During this competitive conundrum, the company’s competitive intelligence team began to hear statements made by management that seemed to be unfounded:

• "Our competitors are bidding on projects as loss leaders just to establish relationships with desired customers."

• "Competitors can’t be lowering their costs by locating their developers and technical staff offshore -- doing so would complicate services delivery and cause customers to lose confidence."

• "That competitor is in trouble; it’s losing money and is desperate for new revenue to avoid having to undergo a significant restructuring later."

Collected evidence did not suggest that competitors were adopting a loss leader approach. Furthermore, credible evidence indicated that a competitor was adopting a significant offshore strategy. And the competitor in alleged financial difficulty? No evidence indicated anything of the kind.

Furthermore, the competitive intelligence team worried that these perceptions not only clouded management’s ability to take action to correct the company’s sales decline, but also paralyzed management from taking any action at all. Strategy and sales meetings became exercises in frustration, with managers citing their company’s misaligned sales approach but remaining at a loss as to what to do about it.

For each competitive urban legend, the competitive intelligence team identified a set of intelligence requirements that, when fulfilled, would give them the evidence required to objectively and logically evaluate the truthfulness of each legend. Using this list of intelligence requirements, the team gathered published-source and human intelligence. They divided the collected data and information into two sets: one that refuted the legends, and one that supported them.

The challenge then became how to successfully (and safely) inform management that several of its competitive perceptions were no longer valid. Most competitive intelligence practitioners focus on the work behind collecting and evaluating information to create practicable intelligence, and sometimes give short shrift to thinking through a communications strategy. In this case, when you have to deliver intelligence that you know is at odds with your management’s prevailing beliefs about the competition, carefully consider the means by which you deliver that message to your decision makers.

In most cases, subtlety does not work.

When calling management perceptions into question, a direct approach usually works best. In this case, the competitive intelligence team first acknowledged the prevailing competitive perceptions, and then arrayed evidence both for and against the perceptions so management could see exactly how the analysts came to their conclusions regarding whether the legends were true. To get their point across, the team presented management’s distorted perceptions directly back to them, labeling them "urban myths." In doing so, the CI team established that a main purpose of the briefing was to call out, and refute, some of management’s beliefs.

In the management briefing, the competitive intelligence team clearly showed the pieces of evidence that supported the competitive urban legends and those that did not. For each legend, the briefing came down on one side or the other, designating a legend as a valid judgment or as an obsolete view of the competitive environment. For validated hypotheses, the competitive intelligence briefing addressed the implications of each for the computer services company’s sales and pricing strategy, and highlighted future circumstances that could change this rationale.

Communicating the competitive intelligence team’s assessment that discounted some of management’s incorrect urban legends was harder. The team stuck very closely to the evidence they presented and, in essence, allowed management to see for itself that their beliefs were no longer valid. Then, for each refuted hypothesis, the team offered alternative assessments that reconciled observed competitive behavior with the evidence collected and the unfavorable results of the recent lost sales.

For each alternative assessment, the team discussed the implications to the computer services company. They also reviewed a corresponding set of intelligence indicators that the team would continue to monitor with an eye toward warning management about future circumstances that could change these new conclusions.

Once you’ve completed your first urban legend analysis, what’s next? Like most competitive intelligence that management receives, a one-time report or briefing is not enough. To effectively prompt management to at least acknowledge that their competitive perceptions could be in error, competitive intelligence teams need a communications strategy that stresses a constant and ongoing review of prevailing hypotheses.

Consider delivering a quarterly update that confronts the competitive urban legends, offers new evidence that either supports or refutes them, and extends your analytic line. Informal reinforcement of your analysis is essential. Listen for comments by executives that are indicative of old, discounted perceptions. Find opportunities to reinforce your analysis that calls such perceptions into question. Urban legend analysis is not about aiming for one grand deliverable, but for finding opportunities to challenge and correct any distorted competitive assumptions on a continuous basis.

To be sure, confronting -- and ultimately changing -- management’s perspective on the competition is difficult, even when that perspective is out of date or based on assumptions and evidence that no longer hold true. Instead of ascribing to and reinforcing those perceptions, a better competitive intelligence strategy is to confront them head on, using inductive, hypothesis-based analysis. Remove debilitating perceptions from management’s mindset that cloud effective decision making. This will take time and persistence, but the benefits to your organization and your competitive intelligence program can be profound.

The Economic Crisis: Will Your CI Function Survive?

Last October, competitive intelligence stalwart Merck & Co. announced that it was cutting 7,200 jobs and closing three research laboratories. At the same time, other blue-chip names – Ford, General Motors, Yahoo, National City – also have announced severe staff reductions. Payrolls fell 500,000 in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News. Anyone still keeping tabs on their 401 (k) knows that the credit crisis, gloomy earnings forecasts, and a sharp decline in consumer confidence sent stock markets down almost 40 percent in 2008.

What is perhaps most worrisome is that few saw the severity of the downturn as it was taking shape, and many top minds are at a loss to explain it. In a less-than-confidence-inspiring revelation, former Fed chairman Alan Greenspan summed up the economic situation this way, “We are in the midst of a once-in-a-century credit tsunami. Central banks and governments are being required to take unprecedented measures. Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity are in a state of shocked disbelief.”

In times of economic slowdowns, corporations look to cut excess costs. Many a support function – in particular strategic planning and marketing, to name two – are often the first to get whacked. And competitive intelligence, which for most firms is nothing more than a big old cost center in the eyes of the CFO, can have a big target painted on it.

Of course, nothing could be more foolish than to scale back or even eliminate the competitive intelligence function in times of economic uncertainty. If former Fed Chairman Greenspan is in a state of “shocked disbelief” over the the role lending institutions played in the financial crisis, imagine how CEO’s and other top managers are (or aren’t) coping with the impact of the downturn.

That begs the question: for those of you wringing your hands with fear over your CI department’s future, are you asking your managers about their degree of uncertainty regarding future competitive conditions? Now is the time to revisit the very reason why your CI function was established in the first place. Any need expressed by top management to better understand competitive forces, external industry shifts, and specific competitor strategies are magnified today, with an economy in severe decline.

That means that common CI outputs that consist of quarterly competitive landscape reports and monthly competitor profiles just won’t cut it any more. The survival of your CI function may depend on your ability to deliver unique, relevant insights related to helping your company navigate through a tough economy. Now more than ever, your CI deliverables have to go a few steps farther to truly help your management team navigate uncertain economic waters.

To be sure, budgets are shrinking on all but the most essential activities. So make sure that your executives know that CI is an essential activity. Ask yourself: are you providing warning of looming threats and opportunities? Can you clearly link your CI output to key strategic initiatives and objectives at your company? How are your CI efforts helping your company to meet its goals?

For the CI function to survive, cutting back on CI professional development, limiting access to CI best practices, and retrenching away from engagement with external CI experts is the last thing you should be doing. Upgrading your CI function’s output and making the most of challenging economic times requires ongoing access to CI best-practices, a fair degree of risk-taking on your part, and a demonstration of how a well running CI function can help your organization weather what is likely to be a long and deep recession. If you don’t have 110% of your energy focused in this direction, your CI function will not be seen as a valuable asset that is essential to navigating this challenging economy.

Coping Mechanisms for Future Uncertainty

Frustrations abound over most organizations’ inability to effectively deal with future uncertainty, despite a general awareness of the sources of such uncertainty. How can organizations better counter unexpected external developments and surprises?

At the Frost & Sullivan Growth, Innovation and Leadership Executive Congress (San Francisco, September 15-16 2008) I asked 25 director, VP and C-level executives to identify the major sources of strategic surprise in their external environments. The key sources of surprise included:

• Rapid technology advances

• Unforeseen customer demands and needs

• Economic conditions

• Competitor activities and behavior

Perhaps as frustrating as the recurrence of such developments is the near-total lack of control companies have over them. Furthermore, there was widespread agreement that the time and resources firms spend on monitoring the external environment was grossly out of proportion with the time and money spend tracking internal information, further contributing to this “lack of control” feeling.

Similarly, the coping mechanisms companies use to deal with external surprise were fairly consistent -- but deemed, for the most part, to be ineffective. They include conducting ad hoc research studies, conducting one-off brainstorming sessions, and, sadly, doing nothing.

Conduct research. When faced with unforeseen external developments and an urgent need to take action, many companies retrench behind a facade of more information. Consultant studies, project-based research and other variations of data accumulation failed, according to the executives, to yield a greater understanding of the implications of the external events, nor a stronger sense about what to do. Instead, research and data gathering led to a state of “analysis paralysis” that further acerbated the feeling of frustration and hopelessness over companies’ ability to deal with external stimuli.

Brainstorming sessions. While the variety of strategy workshops, brainstorming sessions, and ideation groups tend to result in innovative solutions and approaches for uncertainty management, the transition from idea generation to implementation is weak. The main reason? Lack of clear ownership of response tactics targeted at addressing competitive environment surprise.

Do nothing. Not surprisingly, the least effective approach. Nevertheless, it is not uncommon for companies to ignore external surprises in the hope that they will simply go away.

What, then, can companies do? I believe there are three ingredients to maintaining an effective posture against future competitive uncertainty.

Avoid -- or at least minimize -- surprise in the first place. Companies can begin to reverse the imbalance between external versus internal information monitoring by pursuing an indicator-based intelligence early warning system. Such a process helps organize external intelligence gathering against a set of indicators, or signposts of future change, for which significance has been determined and a strategic response already decided.

Develop flexible strategies. By employing techniques such as scenario-based strategic planning, companies can pursue strategic plans that have flexibility built in, allowing for rapid responses to unforeseen developments within a consistent overall strategic framework.

Link intelligence analysis with strategy implementation. Organizations must ensure that intelligence insights can quickly be communicated to those responsible for owning strategic response implementation. Keeping intelligence gathering and analysis several layers beneath strategic implementation will ensure that relevant insights never get the chance to influence strategic response.

Competitive Intelligence Driving More Corporate Decisions

It's a classic good news / bad news report: more US corporations are using competitive intelligence to drive critical strategic and tactical decisions than ever before, but an alarming number of companies still do not have structured way to deliver intelligence to decision-makers in their organizations. Is the chasm between companies that value CI and those that don’t growing?

Outward Insights conducted its second “Ostriches and Eagles” CI best practices survey, which gauges the effectiveness and use of CI among US companies across industries. The first survey was conducted in 2005. The biggest finding this time around? More and more companies are “getting” the value of competitive intelligence. Most reassuring was the growth among respondents who said that CI was “an integral part of operational or tactical decisions” over the 2005 survey.

Another positive finding was the 72% of respondents that claimed to use CI to “anticipate and thwart competitor strategies” compared with 64% in 2005. This uptick reflects the increasing value executives place in the early warning applications of competitive intelligence.
Among other key findings:

• More respondents (28%) integrate likely competitor reactions into their plans for launching new products than in 2005 (21%)
• The use of scenario planning nearly doubled from 30% in 2005 to 59% this year
• The percentage of respondents who believe CI is “an integral part of the strategic planning process” was at 85%, the same as in 2005.

Despite these findings, obstacles still impede corporations from realizing the full value of competitive intelligence. For example, the survey found that nearly half of respondents say that their CI programs are not sufficiently funded. In addition, 37% of respondents said that CI does not have “sufficient stature” within their organizations. The gains that are evident in the strategic application of CI may be short-lived if these programs are not funded adequately and given proper stature in the organization. The survey also found that almost one in five executives believes that senior managers do not value the competitive intelligence they receive, and 24% of respondents said that their companies lack a formal CI process altogether.

There were some notable differences in the responses from the seven industry groups surveyed: consumer products, energy, financial services, insurance, high-tech, manufacturing, and pharmaceuticals. For example, consumer products companies were least likely to have an organized intelligence function (62% vs. 76% of all respondents), while energy companies were least likely to make CI an integral part of their strategic planning process (71% vs 85% of all respondents).

We conducted the survey in June and July 2008. The survey consisted of telephone interviews with 100 senior executives at US corporations. More than two-thirds of the companies participating had revenues of $1 billion or greater. To request a complete survey report, contact us at info@outwardinsights.com.