Statements on Management Accounting

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1 Statements on Management Accounting BUSINESS PERFORMANCE MANAGEMENT TITLE Developing Comprehensive Competitive Intelligence CREDITS This statement was approved for issuance as a Statement on Management Accounting by the Management Accounting Committee (MAC). The Institute of Management Accountants (IMA) extends appreciation to The Society of Management Accountants of Canada (SMAC) for its collaboration in creating this SMA, and to Robert A. Howell, DBA, clinical professor of management accounting at Thunderbird The American Graduate School of International Management and president of Howell Management Corporation, who drafted the manuscript. Representatives of the Consortium for Advanced Manufacturing International (CAM-I) contributed as well to the project. IMA offers special thanks to Randolf Hoist, SMAC Manager, Management Accounting Guidelines, for his continuing oversight and to the members of the focus group that helped shape the final document, including MAC chairman Alfred M. King and MAC member Dennis C. Daly. Published by Institute of Management Accountants 10 Paragon Drive Montvale, NJ Copyright 1996 Institute of Management Accountants All rights reserved

2 Statements on Management Accounting BUSINESS PERFORMANCE MANAGEMENT Developing Comprehensive Competitive Intelligence TABLE OF CONTENTS I. Rationale II. Scope III. Defining Competitive Intelligence Programs IV. Objectives of Competitive Intelligence Programs V. The Role of the Management Accountant VI. The Competitive Intelligence Process....4 VII. Tools and Techniques for Developing Competitive Intelligence Strategic Analysis Techniques Industry Classification Analysis Core Competencies and Capabilities Analysis Resource Analysis Future Analysis Product-Oriented Analysis Techniques..15 Reverse Engineering/Teardown Analysis..15 Customer-Oriented Analysis Techniques.16 Customer Value Analysis Value Chain Analysis Competitive Benchmarking Financial Analysis Tools Traditional Ratio Analysis Sustainable Growth Rate Analysis Disaggregated Financial Ratio Analysis..24 Competitive Cost Analysis Behavioral Analysis Techniques Shadowing VIII. Implementing a Competitive Intelligence Program IX. Organizational and Management Accounting Challenges X. Conclusion Bibliography Exhibits Exhibit 1: Levels of Intelligence-Gathering...2 Exhibit 2: The Competitive Intelligence Process Exhibit 3: Industry Life Cycles Exhibit 4: Marks & Spencer's Competitive Advantage Exhibit 5: Customer Value Triad Exhibit 6: Customer Value Map: Luxury Cars Exhibit 7: The Value Chain Concept Exhibit 8: Calculating Sustainable Growth Rate

3 I. RATIONALE For a number of years, many firms have focused on the marketing principle of knowing and satisfying customers at a profit. This focus has led these firms to consider new customer opportunities, modify channels of distribution, develop new products, and reorganize and restructure to achieve these objectives. In strong markets, such customer-focused actions can and did lead to growth and profitability. Today, these same firms realize that they cannot increase growth and profitability without a strong understanding of every aspect of their competitors business and activities. Most companies have informally monitored their competitors for some time. They know something of their competitors management, markets and customers, products and services, facilities, technologies and finances. However, fewer firms have applied their knowledge of their competitors in a proactive, disciplined, systematic fashion to achieve a competitive advantage. Instead, what competitor intelligence they have is often informal, scattered, anecdotal, and falls far short of its potential value. Although considerable data may exist on market shifts, customer needs, and competitors capabilities and actions, few firms try hard enough to coordinate such information into competitive intelligence that they can act upon. As the business world gets more competitive, such informal information-gathering is no longer adequate for proactive companies. With business more complex and the economic climate so uncertain, these corporations are becoming far more sophisticated at scrutinizing the competition. They seek out more information, and spend more time and effort analyzing it. As these companies have discovered, an effective competitive intelligence program is absolutely necessary for success in today s and tomorrow s competitive environment. II. SCOPE This guideline is primarily focused on competitor analysis and synthesizing that analysis into competitive intelligence. Although broader intelligence also must be done by an entity and is mentioned in several places, this guideline is not about broad business intelligence. Exhibit I suggests a relationship between these three types of intelligence-gathering competitive analysis, competitive intelligence and business intelligence. In Exhibit I, competitor analysis occupies the bottom of the inverted pyramid because of its narrow focus on an individual competitor profile. A competitor profile is a package of information about a specific competitor at a specific time. The profile typically includes an overview of a competitor, its key executives, important markets and product lines, underlying operations and technology, and financial performance. It would include an analysis to enable a company to interpret how the competitor s strengths and weaknesses, resource availability and strategic direction would affect it. In the middle of the pyramid, competitive intelligence has a broader scope because it assimilates all of the competitor analysis. At the top of the pyramid is the broadest degree of intelligence-gathering, business intelligence, which includes environmental scanning (including such issues as economic conditions, social change, technological developments, and political and regulatory events); market research and analysis; and competitive intelligence. 1

4 EXHIBIT 1: LEVELS OF INTELLIGENCE-GATHERING EXHIBIT 1. LEVELS OF INTELLIGENCE-GATHERING Broadest scope, including environmental scanning, market research and analysis, and competitive intelligence Broad scope, assimilating all of the competitor intelligence Business Intelligence Competitive Intelligence Narrow focus on an individual competitor profile Competitor Analysis The concepts, tools, techniques and implementation steps in this guideline apply to all organizations that produce and sell a product or service in a highly competitive environment, as well as: large and small organizations; public and private entities; enterprises in all business sectors; all management levels; and all levels of the firm. This guideline will help management accountants and others: understand how competitive intelligence relates to the organization s goals, strategies and objectives; explain the benefits of implementing a competitive intelligence process; understand the steps required to implement an effective competitive intelligence program; understand the tools and techniques for conducting a systematic, formal and disciplined competitive intelligence process; appreciate the organizational and managerial accounting challenges in implementing new and improved competitive intelligence approaches; and broaden management awareness and obtain support for a competitive intelligence effort. III.DEFINING COMPETITIVE INTELLIGENCE PROGRAMS 1 Competitive intelligence programs are the foundation on which organizational objectives, strategies and tactics are built, assessed and modified. They permit organizations to assess both their industry life cycle and the capabilities 1 Much of this material is based on The Society of Competitive Intelligence Professionals Global Perspectives on Competitive Intelligence. 2

5 of current and potential competitors in order to maintain or develop a competitive advantage. Competitive intelligence programs provide input for such decisions as which products, markets and business lines to invest in and develop, which to acquire or develop joint ventures around, and which to divest themselves of or exit. While there are many different ways of designing and implementing competitive intelligence programs, all have common elements: competitive intelligence programs focus on industries and on creating competitor profiles, particularly identifying organizational and performance implications of industry changes and of competitors actions and reactions; gathered data (many unorganized, disconnected and unevaluated bits of input) become competitive intelligence (data that are organized and evaluated so that a firm gains new, different insights about its competition); while individuals and/or units are formally charged with intelligence responsibilities, every organizational member is an intelligence antenna; competitive intelligence programs evolve to address changing critical issues and to permit organizational renewal; and competitive intelligence programs are not industrial espionage. Rather, they are the process of gathering, analyzing and using publicly available data. Obtaining confidential competitive information by nefarious means, and acting in clearly unethical or even illegal ways, is not competitive intelligence. IV. OBJECTIVES OF COMPETITIVE INTELLIGENCE PROGRAMS Organizations continually seek new ways to achieve sustainable competitive advantage and to counter aggressive competition. Proactive organizations recognize the advantage to be gained from an organized competitive intelligence program. In the Japanese semiconductor industry, for example, large organizations such as Mitsubishi, Mitsui, Sumitomo and Marubeni maintain intelligence departments that rival the U.S. Central Intelligence Agency in ability and accuracy. In the U.S., competitive intelligence programs are a popular tool among companies such as IBM Corp., Texas Instruments, Inc., CitiCorp, AT&T Inc., U.S. Sprint, McDonnell Douglas Corp., and 3M. Organizations develop competitive intelligence programs with the following objectives in mind: to provide an early warning of opportunities and threats, such as new acquisitions or alliances and future competitive products and services; to ensure greater management awareness of changes among competitors, making the organization better able to adapt and respond appropriately; to ensure that the strategic planning decisions are based on relevant and timely competitive intelligence; and to provide a systematic audit of the organization s competitiveness that gives the CEO an unfiltered and unbiased assessment of the firms relative position. V. THE ROLE OF THE MANAGE- MENT ACCOUNTANT Competitive intelligence is a process of gathering data, creating information and making decisions. Management accountants are trained to gather data, assimilate data into information and make decisions based upon information, frequently with their management counterparts. 3

6 Competitive intelligence may also be viewed as a competitiveness audit, a concept that management accountants are familiar with. Management accountants training and experience make them well-suited to the requirements of the competitive intelligence process. Management accountants may be actively involved in introducing a competitive intelligence process in several ways: identifying the need for a new or improved competitive intelligence process; educating top management and other senior managers about that need; developing a plan along with cross-functional team members for designing, developing and implementing the new, improved competitive intelligence practice, including its underlying architectures; identifying the appropriate tools and techniques for conducting competitor analysis; providing financial input, analysis and expertise to the competitive intelligence effort; contributing to and using competitive intelligence in target costing; ensuring that the competitive intelligence efforts are tied to the firm s goals, strategies, objectives and internal processes, as appropriate; and, continually assessing the new, improved competitive intelligence process and its implications for the organization, and continually improving the process. VI.THE COMPETITIVE INTELLIGENCE PROCESS An effective competitive intelligence process allows the appropriate members of a firm to actively and systematically collect, process, analyze, disseminate and assimilate competitor information so that they can respond appropriately. There are many approaches to creating competitive intelligence. Corporate experience suggests that several elements are critical to an effective intelligence process. These include: define the business issue(s); determine the sources of competitive data; gather and organize the data; produce actionable intelligence; communicate results and findings; provide input into the strategic planning process; and provide feedback and re-evaluate. A model of the steps of the typical competitive intelligence process is illustrated in Exhibit 2. The following paragraphs describe each of the steps. Define The Business Issue(s) The first step of a competitive intelligence process is to define the business issue(s). What kind of intelligence is expected and for whom? How will they use the competitive intelligence? When do they need it? Surveying senior management to determine the subject and purpose of the needed information makes it more likely that the information will be collected systematically, with priorities set by the users of the data and not its producers. Examples of typical business issues are: How can our product or service be differentiated? How can we add customer value by doing something better than or different from our competitors? How can perceived quality be enhanced? Can we employ synergy, focus or a preemptive move to gain advantage? What alternative growth directions should be considered? How should they be pursued? 4

7 EXHIBIT 2: THE COMPETITIVE INTELLIGENCE PROCESS EXHIBIT 2. THE COMPETITIVE INTELLIGENCE PROCESS Define the Business Issue(s) PLAN DO CHECK ACT Determine Sources of Competitive Data Gather/ Organize the Data Produce Actionable Intelligence Communicate Results & Findings Strategic Intelligence Tactical Intelligence Provide Feedback Re-evaluate Strategic Planning Process Data Information Intelligence What investment level is most appropriate for each market? What strategies best suit our strengths, objectives and organization? Tactical intelligence focuses on business issues, such as the competitor, customer and supplier actions, that can have an impact on the business today, next month and next quarter. Such intelligence is usually developed at the business unit or business sector level. In contrast, strategic intelligence helps steer the overall direction of the business. Strategic intelligence, though often fed by tactical information, should come from the senior levels of the company. Determine the Sources of Competitive Data After the business issues have been identified and the project delineated, the key sources of competitive data can be identified and utilized, which typically include: internal staff; published information; third-party interviews; and commissioned research. Internal Staff Data that most organizations already possess about their competitors is often important. According to some estimates, a firm already possesses as much as 80 percent of what it would ever need to know. For example, marketing, sales and service staff are always aware of market behavior and trends, and of how competitors are creating them or usually 5

8 responding to them. The distribution function comes into contact with intermediaries in distribution channels. Production managers might see competitors at capital equipment trade shows; design and development personnel may encounter competitors technical staff at professional meetings; and finance and accounting staff might see their counterparts at conference or seminar presentations that provide potential insights. But because these data are usually dispersed throughout the organization or are not integrated or are not timely enough, most firms underutilize or even miss them. Published Information Plenty of published information about competitors might already be gathered throughout a firm but not yet integrated. For example, mandatory financial filings such as annual reports and Securities Exchange Commission filings are readily available. If a competitor has an active public information office, the company might produce a lot of material that provides useful insight. Clipping services can be utilized to glean articles appearing in the trade press. Patents and technical articles written by competitors staff members can signal their technical direction. For example, Intel monitors competitors progress in developing eight-inch silicon wafers by keeping track of scientific literature. Intel staffers in Tokyo and California sift the thousands of technical papers published in Japan each year and translate the most interesting into English. As well, security analysts reports may provide third-party perspectives on a competitor s performance, position and likely direction. Dispersed throughout an organization, these kinds of information may tell little; compiled, integrated and analyzed, they might present a much clearer picture. Third-Party Interviews Organizations regularly contact external groups and individuals that also encounter its competitors. Customers are the most obvious, direct and useful example. If customers have been approached by competitors, they will likely share new insights about the competitors efforts with their original supplier. Similarly, competitors customers might share information about the perceived advantages provided by competing companies products and services. Other useful third parties include distributors who carry or are at least aware of competitors products and services; common suppliers or suppliers who might have been approached by the competition; former employees of competitors; trade associations; trade press; and financial analysts. Commissioned Research Instead of collecting their own data, some organizations buy information from market research companies. Small market research firms can provide a wealth of continuous information about publicly held companies for a modest fee ($3,000 - $5,000 annually). Most of this information is either in the public domain or regularly reported in the financial press and includes: patents filed, lawsuits, new plants or plant expansions and closings, biographical information on company executives, overall or individual product sales data, new product announcements, etc. A case can be made for using outside research as insurance alone, even if the small or mediumsized company is doing some of its own competitive research. Senior executives preoccupied with operating matters stand a good chance of missing important items. In addition, they cannot assume that they will always find out what is going on in the marketplace from their own people. Gather and Organize the Data It is important to organize competitive data so that they can be logically stored and retrieved. One useful framework includes a major category 6

9 for broad industry data, another for data collected on each competitor being tracked, and a third for competitive data that relate to specific areas that management is particularly concerned about in its own firm. For the industry database, organizations typically track the forces that influence industry performance and prospects, including economic conditions, social change, technological developments, legislation and regulations, customer buying patterns and supplier trends. Industry sales, industry concentration and relative market share in all product markets, operating profits, after-tax profits, return on assets and other financial performance measures should also be monitored. The resulting system should permit a company to monitor changes in industry structure and attractiveness, ensuring that it can continually capture and track relevant data. The next level of data in the competitive intelligence system usually relates to the specific competitors that are being tracked. The intent is to develop a comprehensive profile of the particular competitor. This kind of information includes a general description of the competitor; a timeline of the critical events in its history; key executive profiles; issues of organization, management style and culture; the company s approach to markets and key customers; an explanation of the company s businesses, product lines and products; R&D and technology performance and direction; manufacturing operations; thorough financial analysis; and other critical information or issues that provide additional insight or understanding of the competitor. More and more companies are taking aggressive approaches to data collection. For example, Kodak maintains a database of news articles and summaries of competitive studies available to any employee in its network. Abbott Laboratories distributes competitive report forms to generate intelligence gathered from corporate reports. Hewlett-Packard has established a network of contacts to collect critical information. There probably are some critical success factors that relate to a specific industry quick response to customer needs, new product development performance, low-cost operations, financial acumen which drive an industry s and individual firm s success. These critical areas should receive particular attention as the data are being gathered and disseminated. At the same time, organizations must be careful not to focus so exclusively on the perceived critical success areas that they overlook other emerging important areas. For example, it is critical that organizations do not spend all of their time gathering data about current competitors. They also need to allocate some time to looking at who their competitors might be in five years. By doing so, organizations may be able to prevent their potential competitors from gaining a foothold. Produce Actionable Intelligence After all of the data have been gathered, an important step is to check and verify these data with both line and staff managers. Obtaining their acceptance before proceeding to the next step avoids having the data support conclusions that line or staff managers oppose. If they have accepted the data, these people will usually be less able to resist their logical implications. For example, at Southwestern Bell, management requires all non-published information to be considered mere rumors unless it can be independently verified. Once verified, the data can be analyzed. 7

10 Criteria for evaluating whether the organization can act upon its competitive intelligence are: Have the conclusions been challenged and tested? Have the underlying assumptions, uncertainties and limitations been identified? Have implications been developed? Are the data presented in an effective format for planning? Do they meet users needs? Have alternative findings/views been identified? Can management act while there is still time to make a difference? Communicate Results and Findings Disseminating competitive intelligence closes the loop between those who collect and analyze competitive information and those who use it to make decisions. There are several ways of presenting and disseminating competitive intelligence throughout a firm. One way is to gather all such information into a competitor profile report for distribution throughout the organization, in part or in whole, on a need-to-know basis. A more dynamic approach is to create a competitive intelligence center for maintaining and updating information about competitors and about the firm s own competitive intelligence efforts. Appropriate executives can then convene meetings and hold discussions based on the competitive information presented. Some companies hold periodic competitive debriefings for senior management in order to discuss the firm s principal competitors, their performance, their possible actions and the implications for the firm. These gatherings utilize both reports and presentations to stimulate discussion and response. The key to successful communication of intelligence is to focus on the competitive issues that matter most, and on how to gather and apply the information to quickly and expediently address these issues. For example, Coming and Xerox will reverseengineer a competitor s product and then communicate the findings to a broad audience, knowing that an engineer will use the resulting intelligence differently than will a marketer. Corning s management realizes that the entire corporation will benefit from the information in the end. When Kraft realized that much of its competitive data was squirreled away throughout the corporation, it decided to audit and index these hidden resources so all managers could benefit from them. Canon knows that much of its market knowledge lies outside Japan and has decided to translate critical technical and competitor information into Japanese, thus making it accessible to all company management. Provide Input into the Strategic Planning Process Strategic planning is an integrative activity. It pulls together information from throughout the organization, and, at its best, helps create a cohesive direction for the organization. Unless competitive intelligence becomes one of the key components of strategic planning, the intelligence process will have failed to achieve its purpose or to justify the necessary investment. What organizations need is a concise version of what the data say and mean. Beyond simply regurgitating public data, the analysis must extend into original research and assess the likely effects of the data on business strategy. By providing management with implications and strategic alternatives, competitive intelligence 8

11 can be effectively integrated into the strategic management process. Provide Feedback and Re-evaluate A key feature of an effective competitive intelligence process is its feedback mechanism. Users need to evaluate the relevance, timeliness and comprehensiveness of the material. Feedback often helps clarify users needs, identify missing information and suggest new areas of investigation. VII. TOOLS AND TECHNIQUES FOR DEVELOPING COMPETITIVE INTELLIGENCE Just as competition has increased for most firms during the past 50 years, so there has been an evolution of thought, practice, and tools and techniques that support competitive intelligence efforts. These tools and techniques can be categorized as strategic, product-oriented, customer-oriented, financial and behavioral. Strategic Analysis Techniques Companies typically make superior profits either by entering a profitable industry or by establishing a competitive advantage over their rivals. Their strategy is usually defined by the answers to two basic questions: Which business should we be in? and How should we compete? The answer to the first question defines corporate strategy, which addresses issues such as diversification, vertical integration, entry and exit, and the allocation of resources within a diversified corporation. It emphasizes an in-depth understanding of the market, particularly of competitors and customers. The goal is not only to gain insight into current conditions but to anticipate changes that have strategic implications. The answer to the second question defines business strategy, or how the firm will compete within a specific industry or market. If the firm is to win, or even survive, it must adapt a strategy that establishes a sustainable competitive advantage. Strategic analysis has evolved significantly during the past years, in many respects as competition has strengthened and become more global. Although the strategic analysis tools and techniques may have originally been developed to be used within a firm, many are equally applicable for competitive analysis. Tools and techniques that formerly were primarily internally focused have been turned around to focus more explicitly on the external environment and to analyze competitors in the same way that a firm would analyze and evaluate itself. Organizations use several strategic analysis techniques in developing competitive intelligence for their corporate and business strategies. Besides helping select the correct strategy, these techniques provide a framework for rational discussion of alternative ideas and the means to communicate the strategy throughout the organization. Some of these techniques are: industry classification analysis; core competencies and capabilities analysis; resource analysis; and future analysis. Industry Classification Analysis The ability to identify an industry with a group of similar industries helps organizations to better understand the nature of their competition and the sources of competitive advantage in an industry. Industry classification analysis is a valuable technique for revealing similarities among industries and for highlighting crucial differences. As 9

12 EXHIBIT 3: INDUSTRY LIFE CYCLES EXHIBIT 3. INDUSTRY LIFE CYCLES Introduction Growth Maturity Decline Industry Sales Time such, industry classification is a valuable tool for developing competitive intelligence. One key basis for classifying industries is maturity. Industries typically follow a life cycle that comprises a number of evolutionary characteristics common to different industries. The industry life cycle is the industry equivalent of the product life cycle. To the extent that an industry produces a range and sequence of products, an industry life cycle will likely last longer than that of a single product. Four stages are typically defined as: introduction; growth; maturity; and decline. The life cycle and the stages within it are defined by changes in an industry s growth rate over time. The characteristic profile is that of an S-shaped growth curve as shown in Exhibit 3. In the introduction stage, the industry s products are little known, there are a few pioneering firms and a few pioneering customers, and market penetration is initially slow. During the growth stage, diffusion of information about the products causes accelerating market penetration. In the maturity stage, the market approaches saturation, demand shifts from new customers to replacement demand, and the rate of growth of industry sales slows. Finally, as the industry becomes challenged by new industries that produce technologically superior substitute products, the industry enters its decline stage. 10

13 The duration of the various phases of the life cycle varies considerably from industry to industry. For example, the life cycle of the railroad industry extended for about 100 years from 1840 before entering its declining phase. The first Apple personal computers were assembled in By 1978, the industry was in its growth phase with a flood of new and established firms entering the industry. Toward the end of 1984, the first signs of maturity appeared: growth stalled, excess capacity emerged, and the industry began to consolidate around a few companies. Some industries may never enter a declining phase. For example, industries supplying basic necessities such as residential construction, food processing and clothing are likely to remain mature but are unlikely to enter prolonged decline. Some industries may experience a rejuvenation of their life cycle. Although the life cycle is a common technique of industry classification used in strategic analysis, numerous other approaches to classification are possible. Industries can be classified by type of customer (producer-good and consumer-good industries); by the primary resources used to compete (technology-based, marketing-based, or professional skill-based industries); or by the geographic scope of the industry (local, national or global). The critical issue in evaluating the usefulness of any means of industry classification is whether it can offer insights into similarities and differences among industries for the purposes of formulating competitive intelligence corporate and business strategies. Core Competencies and Capabilities Analysis Industry classification analysis is well suited to describing the what of competitiveness, or what makes one firm or one industry more profitable than another. Also, understanding the particulars of competitors costs, quality, customer service and time to market advantages may still leave the question of why largely unanswered. For example, why do some companies seem able to continually create new forms of competitive advantage while others seem able only to observe and follow? Why are some firms competitive advantage creators and others advantage imitators? There is a need not only to keep score of existing advantage what they are and who has them but to discover the engine that propels the process of advantage creation. The tools of industry and competitor analysis are much better suited to the first task than to the second. Thus, while it is entirely appropriate to have a strong end-product focus, this approach should be supplemented by a core competence focus. For competitive intelligence purposes, organizations should be viewed not only as a portfolio of products or services, but also as a portfolio of core competencies. Core competence represents the consolidation of company-wide technologies and skills into a coherent trust. The key to strategic management can be management of core competencies rather than business units, because the sustainable competitive advantage of business units derives from core competencies. According to Prahalad and Hamel (1994), companies possess no more than five or six fundamental competencies. These competencies contribute disproportionately to customer-perceived value, are competitively unique and can be applied to various product areas. For example, consider the core competencies of Sony in miniaturization, 3M in sticky-tape 11

14 technology, Black & Decker in small motors, and Honda in vehicle motors and power trains. Each of these competencies underlies several business units. NEC has developed fundamental capabilities in several technical areas (semi-conductors, computing and telecommunications) that it can combine and recombine in order to achieve an advantage over competitors that lack similar fundamental competencies. A core capability is oriented not to products but to processes. Thus, a company gains a significant competitive advantage in its mainstream business process or processes. In appraising core capabilities, what is important is not just current competencies in existing activities but a firm s potential to expand, develop and redeploy its core capabilities. One frequently cited example is Wal-Mart. This retailer knows exactly which merchandise items and how many of each have been sold in each of its stores daily. This information is fed back through the company s information system to its suppliers. The suppliers can rapidly ship replacement merchandise through Wal-Mart s distribution systems in order to avoid losing out on sales. This highly effective and efficient supplierto- customer chain makes it difficult for Wal- Mart s competitors to compete effectively. Competencies and capabilities represent two different but complementary dimensions of an emerging paradigm for corporate strategy. Both concepts emphasize behavioral aspects of strategy, unlike traditional structural models. But, while core competence emphasizes technological and product expertise at specific points along the value chain, capabilities are more broadly based and encompass the entire value chain. Capabilities are visible to the customer, unlike core competencies. The combination of core competencies and capabilities can give a firm an important competitive advantage. Developing competitive intelligence based solely on an analysis of competitor core competencies and capabilities, however, may not suffice. By themselves, core competencies and capabilities fail to explain the management of core and secondary processes, structure and culture. For example, 3M might have developed non-woven technology as a core competency, but not enough to make it a product leader in tapes and soap pads. Likewise, suggesting that Wal-Mart s success stems solely from its logistics competence is simplistic; success is usually multifaceted. Resource Analysis 2 Developing competitive intelligence based on analyzing core competencies and capabilities may overlook some important ways in which organizations develop diversification strategies that make sense. For example, core competencies and capabilities assume that the roots of competitive advantage are inside the organization and that the adoption of new strategies is constrained by the current levels of a firm s resources. A resource-based framework combines the internal analysis of phenomena within organizations with the external analysis of their industry and their competitive environment. The resource-based framework analyzes organizations as distinct collections of physical assets (such as plants or equipment) and intangible resources (such as brand names or technological know-how). Thus, competitive advantage is attributed to the ownership of a valuable resource that enables the organization to perform activities better or at a lower cost than its competitors. Marks and 2 Much of this material is based on Collis and Montgomery

15 Spencer, for example, possesses a range of resources that yield it a competitive advantage in British retailing. This is illustrated in Exhibit 4. It is important for organizations to avoid analyzing resources in isolation since their value is determined in the interplay with market forces. A resource that has a value in a particular industry or at a particular time might not have the same value in a different industry or time. For a resource to qualify as the basis for an effective strategy, a number of questions should be asked about its value in the external market. These are: Is the resource difficult to copy? Inimitability is at the heart of value creation because it limits competition. If a resource is inimitable, then any profit stream it generates is more likely to be sustainable. How quickly does this resource depreciate? The longer lasting a resource is, the more valuable it will be. Who captures the value that the resource creates? Not all profits from a resource automatically flow to the organization that owns the resource. Typically, the value is subject to EXHIBIT 4: MARKS & SPENCER S COMPETITIVE ADVANTAGE EXHIBIT 4. MARKS & SPENCER S COMPETITIVE ADVANTAGE Resource Competitive Advantage in Great Britain Tangible Intangible Capabilities Freehold locations Brand reputation Employee loyalty Supplier chain Managerial judgement 1% occupancy costs versus a 3% to 9% industry average Customer recognition with minimal advertising No promotional sales Lower labor turnover 8.7% labor costs versus 10% to 20% industry average Lower costs and higher quality of goods sold Fewer layers of hierarchy Source: Collis and Montgomery, Source: Collis and Montgomery,

16 bargaining among customers, distributors, suppliers and employees. Can a unique resource be replaced by a different resource? The best of a firm s resources are often intangible, not physical. Hence the current emphasis on the softer aspects of corporate assets the culture, the technology and the transformational capabilities. Future Analysis Developing competitive intelligence about current markets and industries is certainly useful. Just as important are thoughtful inquiries about events and forces that will determine the future. The question that goes unasked at many organizations is: What emerging trends and unanticipated developments could reshape our business? Forecasts might offer early warnings, but some firms allow the process to become nothing more than an exercise in extrapolating recent history. While the notion that the future will be more or less like the past can be comforting, simple projections of the present are often well off the mark. Hamel and Prahalad (1994) suggest that effective future analysis involves more than good scenario planning or technology forecasting, though scenarios and forecasts are often useful building blocks. Nor is it about developing contingency plans around a few most likely scenarios. For example, in unstructured industries the number of future permutations is so great that any traditional scenario-planning process would be hard pressed to represent the range of potential outcomes. Whereas scenario planning may be useful for considering the consequences of oil price changes, it may not be much help finding the first winning applications for interactive television or entirely new applications for genetic engineering. Future analysis asks critical questions about the future, such as: Which customers will be served in the future? Through what channels will customers be reached in the future? Who will be competitors in the future? What will be the basis for the firm s competitive advantage in the future? What skills or capabilities will make the firm unique in the future? Future analysis enables decision-makers and planners to grasp the long-term requirements to sustain competitive advantage. Apple Computer is an example of a company that demonstrated substantial ability in the area of future analysis. In the 1970s, it looked forward to a world with a computer for every man, woman, and child. This was at a time when computers were most often found in specially built rooms deep in the bowels of corporate office buildings, and the idea of a kid having a computer was laughable. The result was the Apple II, the first truly successful mass-market computer, which was introduced in 1977, four years ahead of the IBM PC. The significant Japanese quality advantage in the North American automobile market is attributable to effective future analysis. Japanese car makers did not start out with a quality advantage. Japanese auto companies realized decades ago through their competitive intelligence that new and formidable competitive weapons would be needed to beat U.S. car companies in their home market. The new weapons they set about developing were quality, cycle time and flexibility. Twenty years later, Toyota s foresight had become GM s implementation priorities. 14

17 Product-Oriented Analysis Techniques The pursuit of a sustainable advantage is typically the focus of corporate strategy. But advantages last only until competitors have duplicated or outmaneuvered them. Protecting advantages has become increasingly difficult. Once the advantage is copied or overcome, it is no longer an advantage. It is now a cost of doing business. Ultimately, innovators are only able to exploit their advantage for a limited time before competitors launch a counterattack. Then the original advantage begins to erode and a new initiative is needed. Over time, organizations are forced to shift their cost (and price) and quality positions. Industries readjust their minimum acceptable level of quality and maximum acceptable price required to be a player in the marketplace. Revolutions in quality raise standards, and then new revolutions shatter those standards. Innovations in product or process technology drive dramatic improvements in quality or reductions in cost. Since these cycles of change are growing progressively shorter, it is important for firms to regularly and systematically monitor competitors products. One product-oriented intelligence technique that some companies have used for years and that more companies are emulating is reverse engineering/teardown analysis. Reverse Engineering/Teardown Analysis Using reverse engineering/teardown analysis, a firm acquires competitors products, then dismantles them in an attempt to understand their components, how they were made, what manufacturing processes and equipment were involved, and their quality characteristics and cost estimates. Done well, this technique helps organizations understand competitors products and processes. Both Xerox and Chrysler have successfully deployed reverse engineering/teardown analysis. During the late 1970s and early 1980s, Xerox faced fierce competition from lower-priced, higherquality Japanese copiers made by such manufacturers as Canon and Ricoh. Xerox tore down and analyzed those competitors products, and learned how they were designed, developed and produced. Xerox was able to demonstrate its own shortcomings and establish a plan to regain leadership of the copier market. Similarly, Chrysler acquires competitors automobiles, then slowly and deliberately tears them down. By studying the product, the company gains new insights from Toyota, Honda, Ford and other leading competitors. For example, Chrysler placed greater emphasis on noise abatement, an area in which several Japanese car manufacturers have outperformed the company. One criticism of reverse engineenng/teardown analysis is that the technique fails to account for differences in the competitor s manufacturing process. These differences significantly alter how the product is manufactured and, as a result, its costs. Suppose a firm uses a traditional, functional manufacturing process while its competitor utilizes a flow-oriented, just-in-time process. Any assumptions that the firm makes about manufacturing processes and costs may be invalid. Many companies have traditionally limited their use of reverse engineering/teardown analysis to manufacturing in order to understand bills of material, manufacturing processes and their related product costs. Some companies now take a broader cross-functional approach to com- 15

18 EXHIBIT 5: CUSTOMER VALUE TRIAD EXHIBIT 5. CUSTOMER VALUE TRIAD Competition Customer Value Price Product Quality Service Quality petitor product analysis. They hope to better understand a competitor s total value chain, including design and development, material sourcing versus in-house manufacturing, the nature of the manufacturing process, distribution, sales, product quality and field service implications. Customer-Oriented Analysis Techniques An important success factor for firms is the ability to deliver better customer value than the competition. Customer value can usually be achieved only when product quality, service quality, and value-based prices are in harmony and exceed customer expectations. This is illustrated in Exhibit 5. Source: The Society of Management Accountants of Canada Monitoring Customer Value. Hamilton, ON: The Society of Management Accountants of Canada. Source: The Society of management Accountants of Canada Monitoring Customer Value. Hamilton, ON: The Society of Management Accountants of Canada. Failing to meet customer expectations in any of the three areas leaves organizations in a situation of not having delivered good customer value. For example, if an organization offers poorquality products or poor-quality service, then the price should fall. If an organization sets a price too high for a given level of product and service quality, sales should suffer. Providing great product quality and poor service quality will not maximize customer value. There are many examples of firms that paid dearly for neglecting this point. For example, in the early 80s, Xerox had problems with two of the three areas of the customer value triad. The quality of Xerox copiers did not deteriorate; in 16

19 fact, there were product improvements and new product introductions while market position was declining. However, the relative quality of Xerox copiers compared to competitive products was declining. Competitors not only closed the technological gap but also passed Xerox in some product lines and created a technological gap of their own. Since the relative quality of Xerox copiers had deteriorated, there was no longer any justification for premium prices. Customers exercised their economic power and bought the products that represented the best value. The result for Xerox was a 50 percent loss of market share and a $500 million decline in profits. Once Xerox corrected the problems and maximized customer value, it regained a leadership position in the industry. Organizations use several competitive intelligence techniques to help them determine how they are delivering customer value relative to their competitors. Some of these techniques are: customer value analysis; value chain analysis; and competitive benchmarking. Customer Value Analysis In many markets, customers take low price and high quality for granted. The current battlefield in sophisticated markets, and the next one in developing markets, is superior customer value. Understanding where one s competitors stand in terms of providing superiorcustomer value is a critical aspect of competitor analysis and competitive intelligence. Since customers determine anticipated benefits and costs, it is the customer s perception of each that is relevant. Knowing how well a competitor is achieving customer value requires assessing that competitor s customers. There are a number of customer value monitoring tools and techniques including customer contact, customer value surveys, customer value analysis and customer value management. Customer contact can be reactive, when the customer initiates contact with the supplier organization, by contacting a salesperson or by phoning or writing to a customer service department; or proactive, when the organization initiates the contact to obtain advice and information that might not show up through customer inputs. Customer value surveys are more formal processes used to understand customer value. For example, Roadway Express conducts quarterly telephone surveys of 1,000 randomly selected users of long-haul and less-than-truckload services with the goal of understanding customer satisfaction and quality service from the customer s perspective. The interview centers on five significant dimensions: capabilities to perform the service, competitive pricing, interactions between the customer and the transportation supplier, transit times and a general comfort level with the transportation company. Companywide regional and local performance are compared and contrasted. Customer value analysis is a more formal process utilizing a set of tools to better understand markets and customers. Applied to a competitor s customers it can provide significant insight into how well a competitor is achieving customer value. For example, one important customer value analysis technique is a customer value map. 17

20 Organizations use customer value maps to illustrate how a customer decides among contending suppliers. It shows which companies might be expected to gain market share and why. Suppliers usually gain market share when their relative quality performance is superior and their relative price point is lower. An organization can use its customer value map to compare itself to competitors and to compare the value positions of each of its internal businesses. Exhibit 6 shows a customer value map for one set of competitors. This exhibit combines relative quality and price information on a two-dimensional, four-box grid. Using the BMW 5-Series as the baseline, luxury cars are compared to the two dimensions of performance and price. The relative performance information comes from a Consumer Reports rating scheme; the relative price information was derived using a market-perceived price profile methodology. Running from the lower left on the customer value map to the upper right is the fair-value line, which indicates where quality is balanced against price. Competitors below and to the right of the line are in a strong share-gaining position. Competitors above and to the left of the line are in a share-losing position. The Lexus LS 400 is considered to have higher performance but also higher price; the Acura Legend, lower performance and lower price. The Lexus LS 400 s higher performance relative to its higher price actually makes it a better customer value than the BMW 5-Series. The Acura s combined lower performance and lower price make it a poorer customer value. EXHIBIT 6: CUSTOMER VALUE MAP: LUXURY CARS EXHIBIT 6. CUSTOMER VALUE MAP: LUXURY CARS Higher 1.25 Inferior customer value Fair-value line Relative price 1.00 Lincoln Continental BMW 5-Series Lexus LS Lower Acura Legend Superior customer value Relative performance: Overall score Information for relative performance based on Consumer Reports ratings, April Source: Gale, Source: Gale,

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