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.

Holding On to Old Business Models

IT’S NO SECRET that innovative competitors, new technologies, and regulatory conditions force industry leaders to adapt to new market realities. Why, then, when the writing is on the wall that paradigmatic shifts are occurring in an industry, do most market share leaders try to perpetuate obsolescing business models?

Consider Microsoft. The company announced last year that it would offer a free, Web-based service that works with Word, Excel, and PowerPoint to allow people to store and access files online, according to an article in the Seattle Post Intelligencer. (http://seattlepi.nwsource.com/business/333748_software01.html)

Clearly, Microsoft is embracing the shift from desktop-based software applications to web-based ones, right? It is responding to the launch in 2006 of Google Docs, a free application that allows users to create and edit word-processing and spreadsheet files online, inside a web browser. It no doubt knows that future growth prospects for its Office software lies in workplace use of Web 2.0 – the use of wikis, Internet delivery of applications, and Web-enabled collaboration – where hosted services, instead of desktop-based applications, are the wave of the future.

Not so fast. Microsoft’s online service, named Office Live Workspace, will require that editing and creating documents still take place on the PC desktop, requiring a regular version of Microsoft Office that users will have to purchase and install on their computers. Why? According to David Smith, an analyst with Gartner, a technology research firm, “They (Microsoft) certainly are not looking to push the envelope and be the leader in providing Web-based Office tools. They need to do it in a way that preserves their business.” Office is Microsoft’s second-biggest product behind Windows.

To be sure, abandoning a market or business model that has served a company well for years is challenging. No company wants to embrace a new business too soon and risk forgoing revenue from a legacy product that still has some life left. Still, holding on to an old business model for too long can cause a market leader to lose its dominant position, perhaps forever. The trick is to maintain market vigilance of indicators of significant change in a way that allows for maximum strategic flexibility.

Take photographic film processing. When was the last time you took a role of film to a local drug store or supermarket to have pictures developed? “Now you can bring your media card in and go to a kiosk and have it printed in a second. Or you can have it printed at a one-hour photo lab. Or you can upload the image to a wholesale facility on the Internet and have it delivered to a retail store,” says Bing Liem, senior vice president of sales for the imaging division of Fujifilm USA, as quoted in The New York Times. (http://www.nytimes.com/2007/10/09/business/09film.html?_r=1&oref=slogin)

So, how have photography companies responded? As its film business has tanked, Kodak has spent the last few years making a transition to digital technology. This transition balances embracing a new business model with a reasonable extension of an old one.

In the heyday of film, some 25 billion photographic images were not just captured but printed as well, according to the Times article. By 2009, as the use of digital cameras continues to grow, some 135 billion images will be captured, but far fewer printed. The challenge is getting people to print those images out.

According to the Photo Marketing Association, when digital camera owners in the United States do print out their digital images, they usually do so in stores rather than on home printers. So, Kodak is helping retail stores replace their old silver halide photo processing equipment with kiosks that consumers can use to print digital pictures.

Meanwhile, Kodak’s strategy for its film business now calls for targeting third world economies where home computers are less common. It is selling low-cost film cameras throughout Asia, according to a Kodak spokesperson. In August 2007, Kodak posted record sales in India.

By monitoring key indicators – in this case, the propensity of consumers to print digital images in stores rather than at home – Kodak has been able to reposition a key product, photo finishing equipment, to correspond to the obsolescence of film and the rapid growth in digital imaging. Meanwhile, instead of perpetuating its film business in mature markets that have moved beyond film, Kodak now is replicating a business model in markets not yet impacted by digital photography technical advances.

The best of both worlds, to be sure.

Could an early warning system have helped predict our current financial woes?

Much has been said about the causes of the financial crisis to which we are all held captive. Politicians blame each other for the mess, citing varying degrees of under (or over) regulation depending on wind directionality, Wall-Streeters blame avaricious mortgage lenders and profligate home-buyers, consumers blame greedy executives and the politicians beholden to them, and media pundits blame everyone. The interesting question, however, isn’t so much who was to blame, but more, what were the signposts along the way that, had they been identified beforehand, could have helped authorities avert the disaster. In other words, could a unified financial early warning system have helped predict and forestall our current financial woes?

To be fair, foreknowledge of the current crises would likely not have been enough to avert it (excessive systemic risk is purged from markets in one way or another) but surely paying attention to the warning signs (of which there were many) would have allowed governments to shore up soon-to-be faltering banking systems or at least ensure that adequate policy measures were in place that would help to guide the flailing, seemingly haphazard decisions that policy makers have made in the last few weeks.

So what, exactly, would the harbingers of a doomed economy look like, and where would one look to find them? Well for starters at least, historically speaking the major economic downturns have been preceded by a marked uptick in panicky investor behavior. In other words: volatility. Well, you may ask, by the time investors and policy-makers have noticed that volatility is on the upswing, isn’t it likely far too late to take decisive action? That depends upon your definition of too late. To be sure, the tell-tale signs of volatility began appearing as early as July and August of 2007. In fact, the Chicago Board of Trade’s Volatility Index or VIX (often referred to as the Fear Index), began a series of what should have been alarming spikes on mounting concerns about, what was at the time, a growing credit crisis. Granted, increased volatility does not necessarily mean a marked downturn, but had policy-makers created an integrated system of early warning indicators that included volatility monitoring, a VIX spike could have put them on alert.

Remember those Wall-Streeters and bankers who were looking for someone to blame? Well it turns out that they had advanced warning of what was going on in the credit markets and broader economy as well. How, you ask? As we’ve all come to know, inter-bank lending is in many ways the life-blood of our economy. When the credit markets freeze up, banks stop lending to one another (well technically they don’t stop lending, they simply charge prohibitive inter-bank rates which in and of itself is a measure of risk and uncertainty in the overall economy). Often referred to as the TED Spread, the difference between Treasury yields and the London Interbank Offered Rate measures the degree to which banks feel that their peers will default on inter-bank loans, or counter-party risk. In fact, that summer the TED Spread saw a spike to levels it hadn’t seen since the Black Monday crash of 1987. So how far back did banks begin panicking? You guessed it, the same exact time the VIX was spiking towards the end of summer 2007.

These are but two of several examples of potential indicators you are likely to hear about in the coming weeks and months. Again, while any one of these signals doesn’t necessarily mean that an economy is doomed, had the right people, armed with a list of triggers or indicators, been paying attention, policy-makers could have taken steps much sooner. When you think about the hysteria of the last few weeks, the speed with which Secretary Paulson tried to cram the Emergency Economic Stabilization Act of 2008 through congress, the ensuing equity market melt-down, and about the shape of things to come, think about how different things might have been if those who hold the public trust had done their jobs.

On second thought, the really interesting question isn’t what the early warning indicators might have looked like, it’s why our leaders weren’t looking for them to begin with. Truth be told, governments should have begun taking action to quash the mounting crisis more than a year ago.

The Paranoid Still Survive

Ten years after former Intel CEO Andy Grove wrote his best-selling book Only the Paranoid Survive, a report in USA Today (January 31, 2007) suggests a healthy dose of insecurity is still at the heart of CEO success. "I am driven by fear of failure," says Dennis Manning, CEO of Guardian Life Insurance of America, which has annual revenue of more than $7 billion. "It's a strong motivator for me. If I fail, maybe 50,000 people fail with me."

What do CEO's worry about? According to the PricewaterhouseCoopers 10th Annual Global CEO Survey, 37 percent of those CEOs interviewed worry about pandemics, 40 percent about global warming, and 50 percent about terrorism. The overall optimism expressed in the survey is also tempered by other considerations tied to obstacles to growth. CEOs cite the uncertain availability of skilled resources, overregulation, and low-cost competition as impediments to future growth. And, sources of future growth most often cited in the survey include penetrating new markets, M&As, and technical innovation, all areas with higher levels of risk than less venturesome options such as better penetration of existing markets.

What does all this mean for strategy and competitive intelligence? Lots. CEO intelligence needs are more complex than ever. Corporate CI practitioners have to maintain vigilance against a wide array of risks, from bird flu to offshore competitors. More importantly, against a wide array of risks, from bird flu to offshore competitors. More importantly, they have to continuously feed their CEO's paranoia. "Healthy doses of corporate insecurity help keep a company fresh and competitive and ensure that the leadership and drive . . . remain active," says Ciena CEO Gary Smith, as reported in USA Today. Intelligence reports and approaches to strategy that harness this paranoia -- by generating plausible future scenarios and corresponding strategy options -- can be highly successful. According to Martin Frid-Nielsen, CEO of telecommunications company SoonR, "Paranoid people often see problems long before their more complacent counterparts. A little bit of insecurity goes a long way to push a company toward perfection, especially when that insecurity resides in the CEO."

A dose of paranoia may be what this troubled economy needs.

Competitive Intelligence Lessons from Frost & Sullivan's 2008 Growth & Innovation Congress

The most interesting learnings from attending this weeks Frost & Sullivan's Global Congress on Corporate Growth are results shared from an annual CEO Survey. The most striking highlights from a competitive intelligence (CI) practitioner standpoint include:

* CEO's number one priority is growth and overwhelmingly agreed that competitive strategy is the most effective growth strategy

* According to the same executives, the number one external challenge to growth is the competitive environment.

That is good news for us because it validates the role CI can play in shaping and executing resilient strategies in light of an increasingly competitive environment. But here is the discouraging news - only 37% of these companies involve CI in developing their firms growth strategy. A major disconnect but unfortunately a reality many of us have grappled with as practitioners and consultants.

Why is CI left out of these discussions? The same stigma that CI is more about data than insight and analysis seem to continue to plague the profession. The burden is on us to change this misperception. Our challenge is not that we can't do the analytical part of the job but instead that in today's economy with constrained budgets and resources, we are pulled in many directions including spending an inordinate amount of time collecting and managing data leaving little room for developing insights and true intelligence.

In light of the economic turmoil we find ourselves in, it will be interesting to watch if the remaining 63% of CEO's are compelled to draw on our expertise out of necessity.

Signaling Complexity

Monitoring corporate signaling practices can and should play an important role in competitive intelligence practitioners’ repertoires.
Changes to dividend policy are often regarded as one of the most salient signaling mechanisms. More often than not, however, organizations will use a suite of signaling techniques tailored to meet the unique environment in which they operate. In other words, industry structure, competitive market forces, and the competition’s intent all play a role in management’s signaling strategies.

And this makes sense. There is real benefit to be had -- such as lowering cost of capital -- from disclosing relevant information about the directionality of an organization’s revenue streams. Fortunately, there exists a delicate balancing act that management must conduct when choosing between the benefits of releasing proprietary information and the associated costs. It is in this balancing act that insight can be had.

For example, consider firms that operate in industries with relatively low entry barriers. These firms are less inclined to rely solely on accounting disclosures as the cost associated with releasing proprietary information likely exceeds costs associated with stock repurchases and/or dividend policy alterations. So what might this mean for an intelligence professional?

For starters, an analyst whose knowledge of an industry is more robust might spend less time poring over SEC filings and annual reports, choosing instead to monitor changes in capital structure and alterations in an organization’s payout policy. Moreover, that same analyst might be more apt to recognize that a voluntary accounting disclosure represents a major signal about the future prospects of the organization, its strengths and weaknesses, or trigger a more detailed investigation.

Similarly, the nature of the competitive environment can play an important role in an organization’s signaling strategies. Firms operating in industries with high concentration ratios (a measure of the relative size of firms relative to their industry as a whole) often have higher political costs and will shy away from signaling via accounting disclosures to avoid government attention. In such cases, analysts would be wise to focus on a firm’s dividend and repurchase policies.

But that’s not all. Consider the insight that might be had from changes in payouts from a firm in a nearly monopolized industry. What might a substantial payout convey about the prospects of the organization, pending regulation, or the industry as a whole? While this question can’t be answered with signaling analysis alone, this new piece of intelligence can add depth and texture to competitor and industry assessments.

Just as an intelligence analyst should pay attention to industry structure and the competitive environment, she should also be wary of her competition’s short and long-term objectives. To be sure, organizations keen on delivering growth tend to re-invest excess capital. What if the proportion of excess capital retained begins to decline? Does that mean the organization anticipates slower growth? Again, the answer isn’t going to be apparent but if our analyst knows that the competition has stated that its goal is to grow for its share-holders, faltering re-investment rates may signal an important and/or deliberate organizational change.

Unfortunately, these are not hard and fast rules. Careful judgement must be exhibited when conducting signal analysis and individual data-points are not likely to yield epiphanous insight. Nevertheless, these examples illustrate two things. The first is that monitoring the suite of corporate signaling efforts can play an important role in garnering insight on the competition. Importantly, however, these examples also illustrate that signal analysis can be much more valuable if it is paired with complementary analytical techniques, industry and competitive awareness.

William J. Dragon
Will is a Senior Consultant at Outward Insights, a Boston-area strategy and competitive intelligence consulting firm. He can be reached at wdragon@outwardinsights.com.
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