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Don’t Be Blind-Sided By Industry Upheavals:
How an Early-Warning System Helps You Anticipate the Future
By Leonard Fuld Fuld & Company Cambridge, Massachusetts USA
Copyright © 2004
. They just seem to feel powerless to confront them. Kodak has been caught unprepared by the movement to digital photography. heard-on-the-street information. Wherever you have high impact and a certain set of events. on behalf of Fuld & Co. • Provide case examples of companies that have effectively used Early Warning. In this paper I: • Define what Early Warning is and is not (how it is NOT watching or monitoring). Executives know they will be experiencing upheavals in their industries. however. According to a recent survey. Taking the time to sketch three or four Copyright © 2004 Page 2 . Merck has been thrown off balance by the movement in the pharmaceuticals arena to partnerships with biotechnology companies. Monitoring is the task of keeping watch on existing competition and competitive threats or opportunities. If you believe. that a certain event has both high impact on your business and a great deal of uncertainty surrounding it — mostly because it is a bit too far into the future — you have a perfect candidate for implementing an early warning process. major corporations are being caught off-guard by industry upheavals — huge industry upheavals. What makes such an early warning process essential is its ability to enable a company avoid driving itself toward one specific outcome. What is Early Warning? First. and other means of monitoring. Sun Microsystems is trying desperately to adjust to the trend toward open source software. yet only 3% of them have any kind of “Early Warning System”. That’s risk. • Identify emerging upheavals for several important industries. You must track it now. The solution: An “Early Warning System” keyed to both industry change and competitive actions. which increases its chances of being wrong and failing. The results can be calamitous.White Paper Don’t Be Blind-Sided By Industry Upheavals: How an Early-Warning System Helps You Anticipate the Future By Leonard Fuld One after another. Early warning is about seeing a few moves ahead of the current market. with all of your resources: databases. • Describe the essential tools of an Early Warning System. more than 93% of strategists believe that their companies will experience competitive shocks in the near future. the problem or the opportunity is already at your doorstep. The problem of these and other large companies? A failure to anticipate the industry upheavals early enough to develop appropriate long-term strategies. The combination of dangers confronting executives and the difficulty most have confronting these dangers prompted me. to provide insights into how to begin developing an effective Early Warning System. what do I mean by “early warning”? It is not watching or monitoring — they are not the same.
have benefited a great deal from early warning processes. Of course. and the associated strategies. Case Examples of Effective Early Warning Companies. An Early Warning Toolkit The tools of an early warning system are: • Scenario analysis Copyright © 2004 Page 3 . Visa International was concerned during 2000 with the potential invasion of the P2P (Peer-to-Peer) Internet alternative payment systems. at the same time. Visa International. They spent weeks interviewing panels of internal and external experts to elicit these drivers. which has enabled the firm to make changes in its business. it threatened to marginalize the traditional credit card players – Visa and Mastercard. The early warning process is structured around understanding the continuous evolution of the driver set. and AstraZeneca. The drivers were used to create a series of scenarios. as diverse as Shell. AstraZeneca’s strategy and intelligence organizations began to build a similar early warning process. the intelligence team tracked the markers. Quarter after quarter. test them. which in turn had to be distilled to a small set of plausible. Visa’s intelligence organization not only developed the scenarios. if not always probable. the scenario that emerged was far less threatening. their ability to sign up (and sign away) merchants. Monitoring and reporting on the evolving nature of this potential threat also gave Visa management time to roll out a reasoned strategy that would both strengthen its market position and retain its customer base. among them. The firm linked the strategy creation and early warning processes and broke them down into six steps: • • • • • Identify key drivers Build scenarios (roadmaps) Determine strategic implications Adjust company strategy Maintain learnings (early warning) As with Visa. the AstraZeneca team spent a great deal of time at the beginning preparing the foundation for each potential scenario. The company will be prepared no matter how the future unfolds. and ultimately prioritize them. and even the level of capital the venture funds were investing in these startups. and it won’t fail. but also identified signals necessary to track whichever roadmap would emerge. how that impacts the scenarios. Three years ago.outcomes — and plan strategies that account for each outcome — gives a company a safety net. These visions then became a “toolkit” for the management team to use in creation of its strategies. That foundation is a set of drivers — forces shaping whatever future world could emerge. visions that delineated the possible boundaries of the future. The signals included the P2Ps’ level of advertising expenditures. which promised to make paying on the Net and elsewhere very easy. By early 2001.
while others will wind up flat on their backs. surprises and shocks inevitably arrive. leading Kodak in installation of U. Edwards. Fuji is riding out the storm quite nicely. not a quick fix. Kodak did not. as well as the Voice Over IP that will quickly drain revenue from the former long-distance cash Copyright © 2004 Page 4 . he’s had to raise his bid twice already). when PeopleSoft moved to consolidate its industry by making an offer to buy J. Pharmaceuticals. it and at least one or two other major pharmaceutical companies will probably merge and continue the consolidation forced by pricing pressures and the increasing successes of biotechnology companies on the high end. The power of Direct-to-Consumer marketing. Upheavals that have arrived An examination of several currently emerging upheavals tells us that some companies will actually thrive on the changes. that a pharmaceutical firm has in bringing a decade-long experimental drug to market. Kodak has attempted to explain away its loss of market share and revenues with less and less conviction. struggling to climb out of the chemical film quagmire. Quarter after quarter. Kodak is now caught in the vortex. but he’s still in the game. 2) Long-distance carriers will find their revenue dropping precipitously from the revenues shifting to wireless which themselves are undergoing withering price pressures. Scenario analysis is an art.D. Digital photography. events haven’t unfolded exactly the way he envisioned (i.S. He was ready and put a plan in motion. Fujifilm’s CEO Minoru Ohnishi saw the possibilities for an emerging digital revolution as early as the mid-1980’s and began to develop digital imaging capability. and generic incursions on the low end. Early warning is a process. Hence. Larry Ellison of Oracle saw the industry shock of consolidation rapidly approaching in early 2003. fighting for survival. Here are three examples: • Software industry. its cash cow for more than a century.• • Monitor trigger points that signal the likelihood of one scenario evolving over another An effective means to expedite decisions (when you can clearly see the shock approaching) While the payoff can be enormous. Pfizer pushed its lower-dosage drug through well financed advertising. With the failure of Merck to sustain its pipeline. management needs to have discipline and patience.e. involving — 1) High-speed wireless threatens to undermine cable operators and will accelerate the demise of neighborhood video rental stores. Zocor. retail digital minilabs by 50-to-1. the same type of patience. and most companies fail to connect the future roadmaps they created through scenarios with a process to track those potential futures. was an upheaval that caught Merck’s statin drug. Sure. e. • • Industry upheavals almost on our doorstep • 2005-2007: A multi-pronged telecom upheaval. promotional and sales channels. by surprise.g. particularly in the form of Pfizer’s Lipitor.
and then to monitor them on an ongoing basis so that adjustments can be made as potential upheavals either gain or lose steam.cows. Other sources to review: “Be Prepared. a Cambridge. in which video will be sent wirelessly. The trend to using the same chips in TV displays as in computer displays is further evidence of the emergence of IP-based entertainment devices.com . Fuld. leading to the emergence of routable video and a lowering of barriers to entry in home video.” Leonard M. OctoberNovember 2003 Leonard Fuld is president of Fuld & Company. Although industry upheavals are cataclysmic changes. offering high speed Internet access and VoIP calling. Included among the proposals are tax cuts on dividend income and capital gains for individuals. and a major revenue source for most large insurance carriers. Fuld. We will start to see Wi-Fi hotspots link up to build informal metropolitan area networks. November 2003 “War games in an Era of Collaboration. they signal their approach long before arriving on the competitive scene. The challenges for executives lie in how they actually determine which upheaval will be “foundation shakers. either in a densely populated downtown setting. Massachusetts-based competitive intelligence consulting firm and author of recently published Harvard Business Review article on early warning. Congress is currently working on tax legislation that includes tax cuts to help grow the economy and support job opportunities. For more information. tnagle@fuld. Fuld. contact: North America: Leonard M. Copyright © 2004 Page 5 . • 2004-2007: Erosion of tax benefits on issuers of annuities threaten existence of a major market for insurers (5-year timeframe): The federal tax code will wipe away the tax shelters currently offered through this investment channel.” Michael Sandman/Leonard M. or a new suburban development. There will be a trial of 802. CriticalEYE. lfuld@fuld. or +44 (207) 659-6999 Acknowledgements: The author would like to thank Ben Gilad for his pioneering work in early warning and to Michael Sandman of Fuld & Company for this contributions in scenario analysis and war gaming. this is further bad news on top of the widespread emergence of VoIP for the wireline carriers.” and how they prepare their companies to turn the disruption into opportunities. The upheaval is the threat to the cable monopoly on video. The key for executives to make effective decisions lies in a newly evolving form of scenario modeling to anticipate potential futures. particularly for young urban dwellers. The Harvard Business Review.11g.com or +1 (617) 492-5900 Europe: Anthony Nagle. as video over wireless becomes an additional competitor. but it does not include similar tax relief to variable annuities. thus circumventing cable. a high speed wireless standard. While not enough to severely impact wireline and traditional wireless carriers.