This action might not be possible to undo. Are you sure you want to continue?
By Avner Barnea
The discipline of Competitive Intelligence is favorable in monitoring external business threats and identifying new opportunities. It is evident that a successful understating of signals, ignoring noises and being able to deliver insights to the senior management has a great value and sometimes can save the firm from severe setbacks and even from a complete failure. One of the greatest restraints in the long way to make CI relevant and a recognizable discipline is the difficulties to prove its added value and to point out how it is incorporated with other business disciplines. There are different ways to measure the value of CI and to evaluate its contribution, but I have doubts regarding the validity of these tests. Intelligence, is in the "business" of quality research and strengthen the understanding and not in the "business" of quantity of results (also known as statistical inference) which is certainly more measureable but less precise in this mater. It is almost impossible to isolate the unique contribution of the CI from other elements that are participating in the process of the decision making2. Recently, one of my clients was looking at the added value of its CI unit and has sent a detailed questionnaire to different executives and also interviewed some of them and then analyzed the replies to gain insight. I do not recognize this analysis as having a lot of value. Unfortunately, there are not yet proofs of a concept that performs better. Drawing lessons from critical failures of many companies in a wide spectrum of sectors reveals that it is possible to prevent many of these hazards by better understanding of signals
Was published in Competitive Intelligence Magazine, Vol. 13, No.1 January-March 2010.
See also in Cohen, D., (2006), "What's Your Return on Your Knowledge". Harvard Business School, Reprint Number F0612G.
that appear in various forms. One of the firms' capabilities that can be of assistance is the CI. The contribution of CI is based on focusing on external threats (and opportunities) rather than multi tasking practices qualified by other business functions. If this assumption may be proving right, CI would find itself in a different position, better supporting other business disciplines.
When growth stalls
A new article by Matthew S. Olson, Derek van Bever, and Seth Verry3 that won the 2008 McKinsey Award for the best articles published in the Harvard Business Review magazine, analyses the reasons that successful companies lost momentum, while the management did not recognize that the stall came. The writers claim that a "few on the senior team see the stall coming and the core performance metrics often fail to register trouble on the horizon". Olson, van Bever, and Verry have completed a comprehensive analysis of the growth experiences of some 500 leading corporations in the past half century, focusing particularly on “stall points”—the term for the start of reversals in company growth, as opposed to quarterly stumbles or temporary corrections. The companies in the study included more than 400 that have appeared on the Fortune 100 since that index was created, some 50 years ago, along with about 90 non-U.S. companies of a similar size. The study revealed various patterns in the incidence, costs, and root causes of growth stalls. The article offers advice on how to avoid these hazards, drawing from practices currently in use at large, high-growth companies to foresee possible stalls and head them off. It explored why management is so often blindsided by these events. Professor Daniel Kahneman, Nobel laureate, notable for his work on behavioral finance and hedonic psychology, have said recently in an interview to an Israeli business magazine that "people tend to attach to a certain anchor, usually caught by false "reality" and do not try to act rationally, to gather information and to integrate it in the decision making process".4 "Stall points" is not referred to situations of gradual loss of market share and profit margins as happened to IBM. During the 1980's IBM was the most admired company in the Fortune 500 survey but during the 1990's, there were rapid changes in the industry and technology which were ignored by IBM. In 1994 the company had losses of $USB15 and its market Olson, M. van Bever, D. Verry, S. (2008), "When Growth Stalls", Harvard Business Review, March.
The Marker, (Israel), 2nd. April 2009. See also in Kahneman, D., (2005), Rationality, Fairness, Happiness. Ketter Publishing, Israel. Chapter 6. 2
capitalization had gone from $USB105 to $USB32. However, it survived after major changes on its business strategy. At this moment, a large number of global companies may be perilously close to their own stall points. Knowing how to avoid growth stalls begins with understanding their causes and recognizes alerting signals.
The case of Levi Strauss
Senior management at Levi Strauss & Company could be forgiven for not seeing it coming. The year was 1996. The company had just achieved a personal best, with sales cresting $7 billion for the first time in its history. This performance extended a run of growth in which overall revenue had more than doubled within a decade. Since taking the company private in 1985, management had relaunched the flagship 501 brand, introduced the Dockers line of khaki pants, and increased international sales from 23% to 38% of revenue and more than 50% of profits. Growth in 1995 was the strongest it had been in recent years. From that highresult of 1996, company sales went into free fall. Year-end revenue results for 2000 were $4.6 billion—a 35% decline from four years prior. Market value declined even more precipitously: Analysts estimate that it went from $14 billion to $8 billion in those four years. The company’s share of its core U.S. jeans market dropped by half over the 1990s, falling from 31% in 1990 to 14% by decade’s end. Today, with a new management team in place, Levi Strauss has undergone a companywide transformation. It may be regaining its position, but it has yet to return to growth.
Stalls are recognizable
87% of the companies in this research group have suffered one or more stall points. On average, companies lose 74% of their market capitalization, as measured against the S&P 500 index, in the decade surrounding a growth stall. More often than not, the CEO and senior team are replaced in its aftermath. And unless management is able to diagnose the causes of a stall and get the company back on track quickly—turning it around in a matter of several years—the odds are against its ever returning to healthy top-line growth. That paper turned attention to why companies stall. Out of the 500 companies, those have selected for in-depth case research 50 that were representative of the whole in terms of industry mix and age. The researchers assembled comprehensive folders on all of them, drawing on the public record of financial reports and published materials, on case studies, and on personal interviews. This enabled them to identify the top three factors contributing to 3
each company’s growth stall. After all these analyses they were able to identify the root causes of stalls and the major categories they fell into.
A careful analysis of 50 representative companies that experienced growth stalls revealed nearly as many root causes for them: external, strategic, and organizational factors are responsible for the failures. They were identified as the factors contributing to each company’s stall while 87% of them have been identifies as in the management control.
Most organizations actually accelerate into a stall, experiencing unprecedented progress along key measures just before growth rates tumble. When the momentum is lost, it’s as if the pillars have been knocked out from under their corporate strategy. It is intriguing to see that few on the senior team see the stall coming and do not recognize the trouble on the horizon. Deeper analysis sheds light on the most common causes of growth stalls, which turn out to be preventable for the most part. In fact most stalls occur for reasons that are both knowable and addressable at the time. It is evident that the root causes of stalls are not so varied or complex that it is impossible to see patterns. The research demonstrates that the vast majority of stall factors result from a choice about strategy or organizational design. They are, in other words, controllable by the management.
These intriguing findings are raising questions as to the abilities to avoid stall points and thus keeping the companies on track and prevent painful revenue stalls.
Stalls and the role of the senior management
It is evident that in most of the cases the senior management was not aware to the coming stall. There is a question whose responsibility is to look at the external factors and identify signals5 that may indicate that the business environment is changing, to recognize in time to what direction and to alert the management. It is obvious that the change is a process that could take a long time. Most of the time there is no specific sign for a change. There are many conflicting alerts and various pieces of information that need a careful, comprehensive and ongoing analysis. Who will be tasked to do it? The senior management is usually preoccupied with running the business and making sure that the enterprise will move on smoothly. In addition, we have learnt from the current economic downturn that executives were inclining to get caught by a certain "anchors" that prevented them from looking at the situation rationally. Unfortunately, these intuitive motives are powerful and
For comprehensive discussion on signals, look at Day, G., Shoemaker, P., (2006). Peripheral Vision: Detecting the Weak Signals That Will Make or Break Your Company. Harvard Business School Press.
tend to be a fertile ground for further mistakes while assume wrongly that what happened in the past will probably happen repeatedly. Forever!
Possible solutions to avoid stalls
My hypothesis is that recognizing the threats is a process that can last for a long time alongside with signals that can be detected and analyzed and thus creating a quality early warning. It depends very much on the existence of a functional responsibility inside the firm that has been tasked to look at this mater continuously and is examined by its performance. The solution that I prefer is to build up a first class capability that will monitor continuously three environments and will identify threats as early as possible. Otherwise, there is a risk to the growth of the company and in some cases even to its survival. The CI unit will be granted the responsibility to address the insight obtained from the following three environments: Figure No. 1: Integration of the three environments
1. The macro environment- Assessment of the external factors including the economy,
political situation, social circumstances, new technologies and regulations updates in the competitive marketplace where the company is performing. A possible result: An alert of a significant change in this environment.
2. The firm's environment – Assessment of the internal information already exists in the
firm's systems regarding the firm's performance and its possible meanings. A possible result: Foreseeing difficulties arise that need a quick response.
3. The competitive environment – Assessment of the changes in the external
environment including moves taken by competitors, by strategic suppliers and strategic customers and also the potential threats by new entrants and its immediate and future impact on the firm. A possible result: Detecting early move by a new competitor that can impact on the firm's plans. The systematic process of gathering information from these three environments must be followed by an assessment that will be presented to the executives in the process of the decision making. Following specific signals that may exhibit or point towards significant changes is not enough. There is often a need to receive support from an interdisciplinary team that will take responsibility to absorb the assessments and discuss their relevance. This team will also be responsible to direct the intelligence efforts towards essential information and to obtain better observation of the threats. One of the key success factors backing the decision making process is the high standard of insights based on the information that have been gathered.
Factors playing an influential role in the assessment phase
The assessments prepared by the CI capability have to be distinguished by the following criteria:
1. Timely- Reports have to relate to the time line of the threat. And also they have to be
delivered to the relevant people in time. The basis is periodical reports and special reports in time of immediate threats.
2. Actionable –Reports have to be comprehensible as much as possible to enable the
decision makers to understand their meaning and implications.
3. Future focused –Reports have to indicate towards implications of the threats and the
potential consequences in case the required steps will be postponed.
4. Insight- Reports have to include also projections and to evaluate the results of steps
that will be taken by the firm or the price of overlooking significant changes in the marketplace. 6
To make sure that stall points will be dictated in time, it is crucial to avoid a situation that the top team of the firm is siloed. CI function has to expand its vision and share the signals of relevancy. One of the guiding principles is sharing information and moving the top management towards horizontal direction as a process of efficiency. This has to be guided top down hoping to relate with the threats in real time. The final report based on these criteria has to be brief and includes key insights. This will be an agenda for further discussions as to the implications and the moves that may have to be considered by the management.
The matrix of impact and likelihood
I have acquired wide experience by using the following model which is extremely recommended to CI professionals. The following matrix is remarkably useful to evaluate complex situations, especially when it is hard to recognize the signals or to isolate noises6. The matrix is based on two variables. Likelihood- is the probability that the signal (or set of signals) will become a significant threat. Impact- is the potential harmful effect of the signals gathered on the development of the firm and its performance. Each threat is positioning on the matrix according to the combined score of likelihood and impact as was evaluated carefully by the CI and other executives involved in this effort.
Figure No. 2: Assessment of threats
Low Likeliho od
1. Threat C- The potential impact is estimated as low while the likelihood that it will
happen is considered medium. Conclusion- the overall threat is evaluated as low. No further steps are needed at this stage as the cost of a mistake on the company is negligible.
2. Threat B - The potential impact is evaluated as high while the likelihood that it will
happen is evaluated as low. Conclusion – although the overall threat is evaluated as low executives have to be on alert in case the evaluation was wrong and the impact of a mistake on the business could be costly.
3. Threat A – Both the impact and the likelihood are evaluated as high. Conclusion – the
threat is considered high and it deserves an immediate management attention. The precise score given to each threat is a result of cautious assessment based on the information gathered and the assessment criteria mentioned above. It is practically evident that threat A will receive a management priority in the strategic deployment of the firm if the executives will accept this assessment. It is brought to the attention of the decision makers by the CI enables them to relate to the advancing threats.
Stall points cannot be explained by the "Black Swan" theory refers by Nassim Taleb7 as "a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations". Unlike the philosophical "black swan problem", the "Black Swan" theory refers only to events of large consequence and their dominant role. A Black Swan is a metaphor for something that could not exist and predicated.
Taleb, N. (2007), The Black Swan: The Impact of the Highly Improbable. New York: Random House. 8
In our case, it is evident that deeper analysis sheds light on the most common causes of growth stalls, which turn out to be preventable for the most part. We have to remember that in fact most stalls occur for reasons that are both knowable and addressable at the time. Actually, ignoring signals that cause stall points cannot be described better than Taleb who have said recently8: "People are ignoring the major impact that rare events can make on their decisions. They prefer to cross the street while their eyes are covered." The question is raised with regards to the reasons for blind eye by executives. It may be right to look at another theory which will help to understand this phenomenon. "The Tragedy of
the Commons" is an influential article written by Garrett Hardin and first published in the in 19689. The article describes a dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared resource even when it is clear that it is not in anyone's long term interest for this to happen. The
phenomenon of the "tragedy of the commons" has particular relevance in analyzing
behavior in the fields of economics, evolutionary psychology, game theory, and politics.
One could take as an example a football stadium crowded with exciting supporters. The strategy of the individual is to stand in order to maximize his view while the collective strategy is that all will stay in their seats to enable to watch the game. In our case, it seems that the right step is that the CI will take the initiative and become the "individual" that will point to the alerting signals and will not stay in calm assuming that this is the best way, believing wrongly that the common strategy cannot miss.
About the Author Avner Barnea is a former senior member of the Israeli Intelligence Community holds a MA from the Hebrew University of Jerusalem and graduated from the Top Executive Program in Marketing Management from the Tel Aviv University Graduate School of Business Administration. He is a strategic consultant in the field of competitive intelligence and business strategy in Israel and abroad. He is lecturer on competitive intelligence in the MBA program of the Ono Academic College and a guest lecturer on competitive intelligence at the Hebrew University of Jerusalem Business School, and in various business executives training
The Marker, (Israel), 2nd. April 2009. Hardin, G. (1968). "The Tragedy of the Commons". Science, 162(1968):1243-1248. 9
programs. Avner has an intensive experience in the integration of competitive intelligence systems into Israeli corporations. Avner can be reached at: firstname.lastname@example.org