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Statements on Management Accounting

B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
C R E D I T S
T I T L E
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 manu-
script. 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 con-
tinuing 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.
Developing Comprehensive
Competitive Intelligence
Published by
Institute of Management Accountants
10 Paragon Drive
Montvale, NJ 07645-1760
www.imanet.org
Copyright © 1996
Institute of Management Accountants
All rights reserved
Statements on Management Accounting
B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
T A B L E O F C O N T E N T S
Developing Comprehensive
Competitive Intelligence
I. Rationale . . . . . . . . . . . . . . . . . . . . . . . 1
II. Scope . . . . . . . . . . . . . . . . . . . . . . . . . 1
III. Defining Competitive Intelligence
Programs . . . . . . . . . . . . . . . . . . . . . . . .2
IV. Objectives of Competitive
Intelligence Programs . . . . . . . . . . . . . . .3
V. The Role of the Management
Accountant . . . . . . . . . . . . . . . . . . . . . . .3
VI. The Competitive Intelligence Process . . . .4
VII. Tools and Techniques for Developing
Competitive Intelligence . . . . . . . . . . . . . .9
Strategic Analysis Techniques . . . . . . .10
Industry Classification Analysis . . . . . . .11
Core Competencies and
Capabilities Analysis . . . . . . . . . . . . . . .13
Resource Analysis . . . . . . . . . . . . . . . . .14
Future Analysis . . . . . . . . . . . . . . . . . . .15
Product-Oriented Analysis Techniques . .15
Reverse Engineering/Teardown Analysis . .15
Customer-Oriented Analysis Techniques .16
Customer Value Analysis . . . . . . . . . . .17
Value Chain Analysis . . . . . . . . . . . . . .19
Competitive Benchmarking . . . . . . . . . .21
Financial Analysis Tools . . . . . . . . . . . .22
Traditional Ratio Analysis . . . . . . . . . . .22
Sustainable Growth Rate Analysis . . . . .22
Disaggregated Financial Ratio Analysis . .24
Competitive Cost Analysis . . . . . . . . . .24
Behavioral Analysis Techniques . . . . . .25
Shadowing . . . . . . . . . . . . . . . . . . . . . .25
VIII. Implementing a Competitive
Intelligence Program . . . . . . . . . . . . . . .26
IX. Organizational and Management
Accounting Challenges . . . . . . . . . . . . . .30
X. Conclusion . . . . . . . . . . . . . . . . . . . . .31
Bibliography
Exhibits
Exhibit 1: Levels of Intelligence-Gathering . . .2
Exhibit 2: The Competitive Intelligence
Process . . . . . . . . . . . . . . . . . . . .5
Exhibit 3: Industry Life Cycles . . . . . . . . . .10
Exhibit 4: Marks & Spencer's Competitive
Advantage . . . . . . . . . . . . . . . . .13
Exhibit 5: Customer Value Triad . . . . . . . . .16
Exhibit 6: Customer Value Map:
Luxury Cars . . . . . . . . . . . . . . . .18
Exhibit 7: The Value Chain Concept . . . . . .20
Exhibit 8: Calculating Sustainable
Growth Rate . . . . . . . . . . . . . . .23
I . RATI ONALE
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 oppor-
tunities, 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 competi-
tors’ 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 consid-
erable 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 uncer-
tain, 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.
I I . SCOPE
This guideline is primarily focused on competitor
analysis and synthesizing that analysis into com-
petitive 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, com-
petitive 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 intel-
ligence-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.
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The concepts, tools, techniques and implemen-
tation steps in this guideline apply to all
organizations that produce and sell a product or
service in a highly competitive environment,
as well as:
G large and small organizations;
G public and private entities;
G enterprises in all business sectors;
G all management levels; and
G all levels of the firm.
This guideline will help management account-
ants and others:
G understand how competitive intelligence
relates to the organization’s goals, strategies
and objectives;
G explain the benefits of implementing a compet-
itive intelligence process;
G understand the steps required to implement
an effective competitive intelligence program;
G understand the tools and techniques for con-
ducting a systematic, formal and disciplined
competitive intelligence process;
G appreciate the organizational and managerial
accounting challenges in implementing new
and improved competitive intelligence
approaches; and
G broaden management awareness and obtain
support for a competitive intelligence effort.
I I I .DEFI NI NG COMPETI TI VE
I NTELLI GENCE 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
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
Business
Intelligence
Broadest scope, including environmental
scanning, market research and analysis,
and competitive intelligence
Broad scope, assimilating all of the
competitor intelligence
Narrow focus on an individual competitor profile
Competitive
Intelligence
Competitor
Analysis
EXHI BI T 1: LEVELS OF I NTELLI GENCE- GATHERI NG
EXHIBIT 1. LEVELS OF INTELLIGENCE-GATHERING
1 Much of this material is based on The Society of Competitive
Intelligence Professionals. 1993. Global Perspectives on
Competitive Intelligence.
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:
G 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;
G gathered data (many unorganized, disconnected
and unevaluated bits of input) become compet-
itive intelligence (data that are organized and
evaluated so that a firm gains new, different
insights about its competition);
G while individuals and/or units are formally
charged with intelligence responsibilities,
every organizational member is an intelligence
antenna;
G competitive intelligence programs evolve to
address changing critical issues and to permit
organizational renewal; and
G competitive intelligence programs are not
industrial espionage. Rather, they are the process
of gathering, analyzing and using publicly avail-
able data. Obtaining confidential competitive
information by nefarious means, and acting in
clearly unethical or even illegal ways, is not
competitive intelligence.
I V. OBJ ECTI VES OF COMPETI TI VE
I NTELLI GENCE 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 intelli-
gence 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:
G to provide an early warning of opportunities
and threats, such as new acquisitions or
alliances and future competitive products and
services;
G to ensure greater management awareness of
changes among competitors, making the
organization better able to adapt and respond
appropriately;
G to ensure that the strategic planning decisions
are based on relevant and timely competitive
intelligence; and
G to provide a systematic audit of the organiza-
tion’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.
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
Competitive intelligence may also be viewed as a
competitiveness audit, a concept that manage-
ment 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:
G identifying the need for a new or improved
competitive intelligence process;
G educating top management and other senior
managers about that need;
G developing a plan along with cross-functional
team members for designing, developing and
implementing the new, improved competitive
intelligence practice, including its underlying
architectures;
G identifying the appropriate tools and techniques
for conducting competitor analysis;
G providing financial input, analysis and expertise
to the competitive intelligence effort;
G contributing to and using competitive intelligence
in target costing;
G ensuring that the competitive intelligence
efforts are tied to the firm’s goals, strategies,
objectives and internal processes, as appropri-
ate; and,
G continually assessing the new, improved com-
petitive intelligence process and its implications
for the organization, and continually improving
the process.
VI . THE COMPETI TI VE
I NTELLI GENCE PROCESS
An effective competitive intelligence process allows
the appropriate members of a firm to actively and
systematically collect, process, analyze, dissemi-
nate and assimilate competitor information so
that they can respond appropriately.
There are many approaches to creating competi-
tive intelligence. Corporate experience suggests
that several elements are critical to an effective
intelligence process. These include:
G define the business issue(s);
G determine the sources of competitive data;
G gather and organize the data;
G produce actionable intelligence;
G communicate results and findings;
G provide input into the strategic planning
process; and
G 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:
G How can our product or service be differentiat-
ed? How can we add customer value by doing
something better than or different from our
competitors? How can perceived quality be
enhanced?
G Can we employ synergy, focus or a preemptive
move to gain advantage?
G What alternative growth directions should be
considered? How should they be pursued?
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
G What investment level is most appropriate for
each market?
G 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 intelli-
gence 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 informa-
tion, 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:
G internal staff;
G published information;
G third-party interviews; and
G 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
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
PLAN DO CHECK ACT
Data Information Intelligence
Define
the Business
Issue(s)
Gather/
Organize
the Data
Produce
Actionable
Intelligence
Communicate
Results &
Findings
Provide
Feedback
Re-evaluate
Tactical
Intelligence
Strategic
Intelligence
Strategic
Planning
Process
Determine
Sources of
Competitive
Data
EXHI BI T 2: THE COMPETI TI VE I NTELLI GENCE PROCESS
EXHIBIT 2. THE COMPETITIVE INTELLIGENCE PROCESS

responding to them. The distribution function
comes into contact with intermediaries in distri-
bution channels. Production managers might see
competitors at capital equipment trade shows;
design and development personnel may
encounter competitors’ technical staff at profes-
sional 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 liter-
ature. 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 competi-
tor’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, com-
petitors’ 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 informa-
tion 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 medium-
sized company is doing some of its own
competitive research. Senior executives pre-
occupied 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
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
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 perfor-
mance and prospects, including economic
conditions, social change, technological develop-
ments, 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 intelli-
gence 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 perfor-
mance 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 estab-
lished a network of e-mail 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.
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Criteria for evaluating whether the organization
can act upon its competitive intelligence are:
G Have the conclusions been challenged and
tested?
G Have the underlying assumptions, uncertainties
and limitations been identified?
G Have implications been developed?
G Are the data presented in an effective format
for planning?
G Do they meet users’ needs?
G Have alternative findings/views been identified?
G 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 dis-
seminating 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 compet-
itive 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 debrief-
ings 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 presenta-
tions to stimulate discussion and response.
The key to successful communication of intelli-
gence 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 reverse-
engineer 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 intelli-
gence 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 like-
ly effects of the data on business strategy.
By providing management with implications and
strategic alternatives, competitive intelligence
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can be effectively integrated into the strategic
management process.
Provide Feedback and Re-evaluate
A key feature of an effective competitive intelli-
gence process is its feedback mechanism.
Users need to evaluate the relevance, timeliness
and comprehensiveness of the material.
Feedback often helps clarify users’ needs, iden-
tify missing information and suggest new areas
of investigation.
VI I . TOOLS AND TECHNI QUES
FOR DEVELOPI NG COMPETI TI VE
I NTELLI GENCE
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 establish-
ing 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 diversi-
fication, vertical integration, entry and exit, and
the allocation of resources within a diversified
corporation. It emphasizes an in-depth under-
standing 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 busi-
ness 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 30-40 years, in many respects as com-
petition 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 organ-
ization. Some of these techniques are:
G industry classification analysis;
G core competencies and capabilities analysis;
G resource analysis; and
G 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 indus-
tries and for highlighting crucial differences. As
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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:
G introduction;
G growth;
G maturity; and
G 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 satura-
tion, 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.
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EXHI BI T 3: I NDUSTRY LI FE CYCLES
Introduction Growth
Time
I
n
d
u
s
t
r
y

S
a
l
e
s
Maturity Decline
EXHIBIT 3. INDUSTRY LIFE CYCLES

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 1976.
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 indus-
tries); 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 differ-
ences 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 exist-
ing 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, organiza-
tions 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), com-
panies possess no more than five or six funda-
mental competencies. These competencies con-
tribute 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
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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 capabili-
ties 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 capabil-
ities, 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 replace-
ment merchandise through Wal-Mart’s distribu-
tion systems in order to avoid losing out on
sales. This highly effective and efficient supplier-
to-–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 techno-
logical 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 sec-
ondary 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 suc-
cess 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 compet-
itive 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
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2 Much of this material is based on Collis and Montgomery
1995.
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:
G 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.
G How quickly does this resource depreciate?
The longer lasting a resource is, the more
valuable it will be.
G Who captures the value that the resource
creates? Not all profits from a resource auto-
matically flow to the organization that “owns”
the resource. Typically, the value is subject to
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+
+
+
+
+
+
+
+
+
+
EXHI BI T 4: MARKS & SPENCER’ S COMPETI TI VE ADVANTAGE
Tangible
Resource Competitive Advantage
in Great Britain
Intangible
Capabilities
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 Managerial judgement
Supplier chain
Employee loyalty
Brand reputation
Freehold locations
Source: Collis and Montgomery, 1995.
EXHIBIT 4. MARKS & SPENCER’S COMPETITIVE ADVANTAGE
Source: Collis and Montgomery, 1995.

bargaining among customers, distributors,
suppliers and employees.
G 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 tradi-
tional scenario-planning process would be hard
pressed to represent the range of potential out-
comes. 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:
G Which customers will be served in the future?
G Through what channels will customers be
reached in the future?
G Who will be competitors in the future?
G What will be the basis for the firm’s competitive
advantage in the future?
G 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 implementa-
tion priorities.
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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 reduc-
tions 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, higher-
quality Japanese copiers made by such manufac-
turers 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’ automo-
biles, 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 manufac-
turers 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-
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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.
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 poor-
quality 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
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EXHI BI T 5: CUSTOMER VALUE TRI AD
Competition
Customer
Value
Service
Quality
Product
Quality
Price
Source: The Society of management Accountants of Canada. 1995. Monitoring Customer Value.
Hamilton, ON: The Society of Management Accountants of Canada.
EXHIBIT 5. CUSTOMER VALUE TRIAD
Source: The Society of Management Accountants of Canada. 1995.
Monitoring Customer Value. Hamilton, ON: The Society of Management Accountants of Canada.
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 justifica-
tion 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 maxi-
mized 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 competi-
tors. Some of these techniques are:
G customer value analysis;
G value chain analysis; and
G 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 depart-
ment; 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 satis-
faction and quality service from the customer’s
perspective. The interview centers on five signif-
icant 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. Company-
wide regional and local performance are
compared and contrasted.
Customer value analysis is a more formal
process utilizing a set of tools to better under-
stand 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.
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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.
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EXHI BI T 6: CUSTOMER VALUE MAP: LUXURY CARS
BMW
5-Series
Fair-value
line
Superior
customer value
Inferior
customer value
Lincoln
Continental
Acura
Legend
60
0.75
Lower
1.00
1.25
Higher
80
Information for relative performance based on Consumer Reports ratings, April 1993.
Relative performance: Overall score
R
e
l
a
t
i
v
e

p
r
i
c
e
100
Lexus
LS 400
Source: Gale, 1994.
EXHIBIT 6. CUSTOMER VALUE MAP: LUXURY CARS
Source: Gale, 1994.

Customer value management is the idea that
as much data as can be gathered about
one’s customers need to be brought together,
brought alive, and made an integral part of
the management process and used to drive
organizational behavior.
For example, a company that has always under-
stood that firms succeed by providing superior
customer value is Milliken & Co. A key reason
Milliken achieves quality leadership and premium
prices in an amazingly wide array of niches is
because, since 1985, it has regularly deployed a
systematic measurement of customer satisfac-
tion and customer-perceived quality relative to
competitors for all of its fifty-plus business units.
It tracks such things as lead time, on-time delivery,
order-fill rate, etc. Milliken executives use the
information in two ways—to create pressure to
improve and to provide insights on how to do so.
Business-unit managers use their data to align
Milliken’s products, services and processes ever
more closely to the marketplace.
Value Chain Analysis
The idea of a value chain was first suggested by
Michael Porter (1985) as a way of presenting the
building of value (as related to the end cus-
tomer) along the chain of the activities that go to
make up the final offering to the customer.
Porter describes the value chain as the internal
processes or activities a company performs “to
design, produce, market, deliver and support its
product.” He further states that “a firm’s value
chain and the way it performs individual activities
are a reflection of its history, its strategy, its
approach to implementing its strategy, and the
underlying economics of the activities themselves.”
John Shank and Vijay Govindarajan (1993)
describe the value chain in broader terms than
does Porter. They state that “the value chain for
any firm is the value-creating activities all the
way from basic raw material sources from com-
ponent suppliers through to the ultimate end-use
product delivered into the final consumers’
hands.” This description views the firm as part of
an overall chain of value-creating processes for
the end customer.
The value-creating processes within a firm
(e.g., R&D, design production, etc.) and the larger
value chain for its industry are illustrated
in Exhibit 7.
Value chain analysis is used by organizations to
develop an understanding of the sources of
competitive advantage in a particular industry,
as well as to assess their own unique
competitive position in providing customer
value. For example, the value chain can be a
useful competitive intelligence framework for
disaggregating a firm into distinct activities
in order to identify:
G factors that determine the costs of performing
different activities and their relative importance;
G why a firm’s costs differ from those of its
competitors, and vice-versa;
G which activities a firm and its competitors
perform efficiently or inefficiently;
G how costs in one activity influence costs in
another activity; and
G which activities a firm or its competitors
should undertake itself and which activities
it should contract out.
By analyzing how a firm or a competitor creates
value for customers and by systematically
appraising how each activity helps differentiate
the company, the value chain permits an organi-
zation to match demand- and supply-side
sources of differentiation advantage.
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Breaking down the industry value chain can
reveal which activities are the most (and least)
critical to competitive advantage (or disadvan-
tage). The experience of the Swiss watchmakers
is a good illustration. The Swiss firms were
relatively small, labor-intensive assemblers who
made good profits for many years before the
advent of low-cost, mass-produced watches in
the 1970s. Their first reaction to the increased
competition was to restructure their industry to
gain economies of scale similar to their global
competitors.
However, they failed to realize that manufacturing
was not their critical problem, since this set of
activities added only a small proportion of the
value of the final product. Far more significant
were downstream activities in the output logistics,
marketing, sales and service areas. An inexpen-
sive watch was not enough: the Swiss had to
lower their costs of distribution and service.
Their eventual and hugely successful answer
was the Swatch, which was inexpensive, virtually
indestructible, and could be distributed through
a wide variety of low-cost channels from depart-
ment stores to discount houses.
In order to decide which elements of the value
chain to focus upon, companies must determine
who the customers are and what they want from
the product. How does the customer choose
from among competitors, i.e., what is the
cost/benefit of the product to the customer?
Competitive Benchmarking
Competitive benchmarking is a widely used
competitive intelligence technique. It consists of
organizations carefully studying other organiza-
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EXHI BI T 7: THE VALUE CHAI N CONCEPT
Industry Value Chain
Value Chain of Firm Z
The end-use consumer pays for profit margins throughout the value chain
Supplier
Value Chain
Firm Z
Value Chain
Firm Y
R&D Design Production Marketing Distribution Service
Firm X
Distribution
Value Chain
Buyer
Value Chain
Disposal/
Recycle
Value Chain
Source: Porter, 1985.
EXHIBIT 7. THE VALUE CHAIN CONCEPT
Source: Porter 1985.

tions’ performance in an aspect of their business,
with a view to improving their own performance.
Benchmarking is a customer-driven commitment
to continuous improvement, linking customer
value requirements to business strategies.
Benchmarks can be divided into two categories:
G what is to be measured; and
G who is to be measured.
In deciding what is to be measured, an organiza-
tion should consider three types of benchmarks:
G strategic benchmarks—measure and compare
the relative position of a particular company
within an industry and the result of a company’s
performance at the functional and operational
levels;
G functional benchmarks—identify products,
services and work processes. They usually
involve specific business activities within a
given functional area such as manufacturing,
marketing or engineering; and
G operational benchmarks—yield the reasons for
a functional performance gap. Organizations
need to understand these benchmarks at the
operational level in order to identify the corrective
actions required to close the performance gap.
In deciding who is to be measured, an organiza-
tion should consider three types of benchmarks:
G competitive benchmarks—identify the products,
services and work processes of an organization’s
direct and strongest competitors in the industry;
G internal benchmarks—compare an organization’s
own similar processes, products or services; and
G analogous benchmarks—compare performance
to a world-class organization that may occupy a
different industry but performs a similar process.
Effective benchmarking focuses on the effective-
ness of a company’s units in delivering a
high-value product. Ineffective benchmarking
focuses solely on the efficiency of the processes
of the functional units, without careful analysis
of what those processes are supposed to
deliver to the customer.
AT&T, for example, has a system that links
benchmarking activities to the processes that
drive performance. At leading AT&T businesses,
the approach is:
G understand the needs and perceptions of the
customers that it serves;
G pinpoint which processes drive its performance
and benchmark them against competitors on
the quality attributes and subattributes that
drive customer value and market share; and
G benchmark the processes that have a major
impact on its competitive position against the
“best of breed.”
It should not be overlooked that the true value
of benchmarking does not lie in determining
current performance levels. If an organization
sets goals against today’s levels, its performance
objectives might target plans that were developed
years ago and are just reaching fruition today.
The true value of benchmarking is that it enables
skilled analysts to determine a competitor’s likely
performance levels in the future.
3
Financial Analysis Tools
Financial strength obviously affects a company’s
strategic weaponry and the role that each
product line or division plays in its portfolio.
Thus, few competitor assessments would be
complete without an in-depth financial analysis.
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3 For more information on benchmarking, the reader should
refer to The Institute of Management Accountants Statement
on Management Accounting, Effective Benchmarking.

Several financial analysis techniques can be
utilized within competitive intelligence. Although
these techniques have their limitations, thoughtful
digging and analysis in the absence of hard data
can help a firm understand the economic and
financial characteristics, capabilities and potential
direction of competitors. These techniques
include:
G traditional ratio analysis;
G sustainable growth rate analysis;
G disaggregated financial ratio analysis; and
G competitive cost analysis.
Traditional Ratio Analysis
The usual starting point for understanding a
competitor’s financial condition and performance
is traditional financial and ratio analysis. Publicly
available data from annual reports, 10Ks, other
SEC filings, Dun & Bradstreet credit ratings, bro-
kerage reports and on-line services are often
readily available.
These analyses usually concentrate upon under-
standing the composition of a firm’s financing,
the investment of those funds in assets and
their use in several areas: to grow the business;
to generate profits; to provide a satisfactory
return on assets, total capital and shareholders’
equity; and to generate cash. Organizations can
use the analysis to determine historical patterns
and trends, and to make comparisons with other
participants and competitors in an industry.
Traditional financial and common-size ratio analy-
sis measures a firm’s historical financial perfor-
mance and its financial condition at a specific
time. But this technique can also measure a
firm’s future ability to compete. Its financial
structure can indicate the firm’s ability to raise
new capital. Its historical asset management
performance can suggest how the firm might
manage assets in the future. Its historical
growth, profitability, returns and cash flow
characteristics may indicate the firm’s market
share, its ability to utilize pricing as a competitive
tactic, its cost management practices and
capabilities, and, the firm’s ability to reinvest.
Financial and ratio analysis has its limitations. The
technique is historical: there is no assurance that
the future will resemble the past. More importantly,
it may occur at a level of aggregation that makes it
difficult to understand the performance of specific
businesses, product lines or products. These ratios
are also vulnerable to manipulation through oppor-
tunistic accounting practices.
Sustainable Growth Rate Analysis
With increasing global competition, different
national reporting requirements make it difficult,
if not impossible, to develop comparative and
useful competitor financial analysis. And worse,
most financial analysis tools are rooted in the
past: few by themselves are predictive. Yet good
competitive intelligence must alert organizations
to a competitor’s likely future strategies and
actions.
Sustainable growth rate (SGR) analysis is a
dynamic, future-oriented technique that permits
the intelligence analyst to assess how a firm’s
financial practices will affect its ability to grow.
SGR analysis provides an analytical framework
that relates a firm’s sales growth, profitability,
asset requirements and its financial policy. It
determines whether a firm can grow without
affecting its degree of financial leverage, or how
its financial leverage is affected based on a
projected growth rate and other relationships.
SGR analysis is applicable to a wide variety
of reporting formats. It enables comparison of
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performance over time to quickly identify
elements of a competitor’s strategy so that their
strengths and weaknesses can be identified.
To calculate an SGR, organizations need the
following information:
G earnings (or profit) before interest and taxes;
G total assets;
G interest;
G shareholders equity;
G taxes; and
G dividends.
Exhibit 8 presents the calculations made to
ascertain the SGR of a firm, predicated on its
profitability, asset requirements and financial
policies. Once an initial calculation has been
made, a firm can use the SGR model to deter-
mine the impact of such changes as improved
profitability, improvements in asset manage-
ment, modifications to the firm’s capital struc-
ture policies and changes in dividend policy.
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
EXHI BI T 8: CALCULATI NG SUSTAI NABLE GROWTH
4
Return on Assets
(ROA)
Return on Equity Before Tax
(ROEBT)
Return on Equity After Tax
(ROEAT)
Sustainable Growth Rate
(SGR)
A) Margin x Asset Turnover
= ROA
Source: Harkleroad 1993.
A) EBIT
Sales
= Margin
B) Sales
Total Assets
= Asset Turnover
B) ROA x Leverage
= ROEBT
A) EBIT – Interest
x
Total Assets
EBIT Equity
= Leverage
B) ROEBT x Tax Effect
= ROEAT
B) ROEAT x Dividend Effect
= SGR
A)
1 –
Taxes
EBT
= Tax Effect
A)
1 –
Dividends
EAT
= Dividend Effect
EXHIBIT 8. CALCULATING SUSTAINABLE GROWTH RATE
4
Source: Harkleroad 1993.
4 Definitions for calculating SGR are: EBT = earnings before
taxes. EAT = earnings after taxes, EBIT = earnings before
interest and taxes.
Disaggregated Financial Ratio Analysis
Often, publicly available financial information
appears only on a corporation-wide basis. It is
necessary to disaggregate some numbers in order
to understand the economic characteristics and
financial details of a competitor’s business units
or product lines.
For example, a company might learn about another
firm’s overall variable and fixed cost structure and,
hence, its average contribution margin, by compar-
ing changes in costs relative to changes in sales
across different time periods. If sales increased by
6 percent and costs increased by only 3 percent,
the average contribution margin of the business is
about 50 percent (assuming that fixed costs
remain fixed from one period to the next).
A company can utilize line-of-business reporting
to disaggregate a competitor’s total sales, possibly
operating income, and assigned assets in order
to understand the relative profitability and return-
on-asset characteristics of the competitor’s various
business lines. The company might start with a
competitor’s financial numbers for its business
lines, then fill in some gaps by utilizing other
companies with similar business lines.
A company might be able to disaggregate a set
of summary financial statements to a great
extent in order to better understand the financial
characteristics of subordinate business units,
product lines and, possibly, even major products.
Competitive Cost Analysis
In order to survive and prosper under price
competition, firms must usually establish a low-
cost position. A competitive cost advantage
typically requires possession of a scale-efficient
plant, superior process technology, ownership of
low-cost sources of raw materials or proximity to
low-wage labor or markets.
Some companies are able to make a highly
detailed estimate of the costs of competitors’
products. Starting with reverse engineering/
teardown analysis, they can determine the bill of
materials for a competitor’s product, whether that
material component has been purchased or man-
ufactured, and what the manufacturing process
looks like. They then attempt to obtain vendor
quotations, labor rates and estimated times. They
may even view the competitor’s facilities in order
to estimate its size, age and other characteristics.
Given time and effort, a firm may closely estimate
a competitor’s costs for a product.
Recently, Caterpillar encountered strong compe-
tition from its Japanese competitor, Komatsu.
After undertaking a competitor cost initiative,
Caterpillar concluded that Komatsu’s costs were
as much as 30 percent below its own costs. One
primary reason for this discrepancy lay in
Komatsu’s efficient manufacturing processes
compared with Caterpillar’s more traditional,
functional manufacturing. Following this initiative,
Caterpillar undertook a major capital investment
program called PWAF (Plant With A Future) in order
to upgrade all of its manufacturing facilities.
In its plants, Caterpillar made operations more
flow-oriented, removed wasteful material handling
operations, reduced inventory levels and
shortened response times. As a result of its
competitive cost study, the company has
become much more competitive.
As a source of competitive advantage, competitive
cost analysis assumes that the company can
translate its low-cost production into prices that
undercut those of competitors, and that value-
conscious customers will purchase from the
lowest-priced supplier.
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This equivalency breaks down when products are
differentiated and when the product is consumed
jointly with other goods and services. In these
cases, it may be difficult to determine which firm
in an industry is the cost leader. The identity of
the cost leader may depend upon market circum-
stances and customer characteristics.
Behavioral Analysis Techniques
In evaluating competitors, the conventional tools
and techniques of competitive analysis tell only
part of the story. Quantitative data on product
characteristics, sales, costs and market share
are important. But they tell little about a competitor’s
culture and management style, and how it
retains employee loyalty.
“As goes the management, so goes the firm”:
this truism implies that key managers signifi-
cantly affect a firm’s current performance and
future direction. Learning as much about those
managers as possible may provide clues about
the firm’s future actions (witness Jack Welch at
General Electric or Bill Gates at Microsoft).
One behavioral analysis technique that organiza-
tions utilize in developing competitive intelli-
gence is shadowing.
Shadowing
Shadowing means learning as much as possible
about a competing firm’s managers: their
education, background and experience, previous
actions, track record, and whom they hire (and
their backgrounds, experiences and records).
Understanding a competitor’s management helps
a company predict what that competitor might do.
For example, examining the career path of a rival
chief executive might reveal something about his
or her strengths and weaknesses. If that execu-
tive has never worked for another firm, he or she
may know little about how other companies are
run. A specialization in a single function might
mean that the executive will ignore other areas.
A company can also learn about a competitor by
examining which executives it attracts and loses.
If both the senior manufacturing manager and
the senior research manager leave the competing
company in the same year, then perhaps they
failed to persuade the company to consider tech-
nical priorities. The balance of power might now
lie with the sales and marketing executives.
Shadowing implies that a company must stay on
top of competitors’ day-to-day actions rather than
wait for the periodic release of financial results.
The company must receive constant feedback
from customers and others in the marketplace;
track product introductions, price changes and
other initiatives; monitor capital investment
initiatives; and talk to suppliers and others who
may have contact with competitors. In effect,
a company must keep its ear to the ground in
order to obtain, assimilate and act upon as much
information about competitors as possible.
VI I I . I MPLEMENTI NG A
COMPETI TI VE I NTELLI GENCE
PROGRAM
Implementing a competitive intelligence program
can take considerable effort and time, perhaps
as much as three to five years.
Organizations take several key steps to implement
a successful program. These are:
G establish context;
G ensure senior management support;
G select a team, team leader and process champion;
G conduct a needs assessment;
G create a competitive intelligence framework;
G establish structure, location and administration;
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
G involve key users;
G educate, involve and motivate employees;
G establish a storage and retrieval system;
G implement counterintelligence procedures; and
G evaluate the competitive intelligence process.
Establish Context
A context should answer the key question: “What
should be the mission of the competitive intelli-
gence program?” Missions can be informational,
offensive and defensive; most firms have a
mixture of all three. Informational missions
provide a general understanding of an industry
and its competitors. Defensive missions attempt
to identify a competitor’s potential actions that
could endanger the firm’s market position.
Offensive missions attempt to identify competitors’
vulnerabilities and/or to assess the impact of
strategic actions on competitors. Following the
lead of General Electric, for example, several
companies espouse a philosophy of being No. I
or No. 2 in all of their business categories. In
order to accomplish this goal, a company defines
what business categories it occupies or wants to
occupy and identifies who its competitors are.
Then it measures its performance against that of
its competitors in an effort to achieve market
gains at their expense.
Ensure Senior Management Support
In order to work throughout the organization,
competitive intelligence programs require the full
support of senior management. Senior man-
agers must fully endorse the process, remain
actively involved and demonstrate commitment
by their actions.
One way to gain credibility and management
support is to begin with a specific product line or
business area in which the benefits will be
demonstrated relatively early.
Select a Team, Team Leader and
Process Champion
Competitive intelligence programs need a focal
point, either an individual or a specific group. For
example, some organizations establish a team
responsible for designing, developing, implement-
ing and sustaining their intelligence programs.
The team members usually represent a variety
of disciplines: marketing and sales, production
and distribution, product development, finance
and accounting. In order to understand competi-
tors and set strategy based on their behavior
and direction, organizations must understand all
vital aspects of their business. Cross-functional
membership on the competitive intelligence
team provides the experience and skills needed
to bring this breadth of understanding to
the process.
For organizations electing to establish an intelli-
gence team, it is important to select a strong
and committed team leader. For example,
CitiCorp has an executive whose functional title
is manager of competitive intelligence. This
individual is ultimately responsible for imple-
menting a competitive intelligence program
throughout the firm.
The competitive intelligence effort obviously
requires explicit leadership. A senior executive
should become the process champion to
continually promote the program and to connect
the interests of senior management with
those of the competitive intelligence team leader
and members.
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Conduct a Needs Assessment
Implementing an intelligence program can some-
times be an overwhelming task. A company often
faces a morass of information to be organized. A
much-needed focus can come from taking an
“intelligence snapshot.” A three-part needs
assessment examines an organization’s true
competitive intelligence needs, the resources it
typically uses to meet those needs and the
communication channels used to send and
receive information.
Conducting a needs assessment helps focus the
effort and energies of the team charged with
building the competitive intelligence program.
The assessment also helps identify the key
people who must support the intelligence effort,
both as suppliers and users. More important,
the assessment narrows the planning and
design of the competitive intelligence program by
pinpointing which informational areas already
exist and which need development.
Create a Competitive
Intelligence Framework
A tremendous amount of data could be gathered
by many people from a variety of sources and
ultimately become competitive intelligence.
Alternatively, this exercise could simply cause
“data confusion” with little redeeming benefit.
Organizations must develop a basic framework
for gathering data that might become informa-
tion and, ultimately, intelligence. This framework
should be based on the needs of the firm’s key
decision-makers, customer expectations and the
potential capabilities of competitors.
To ensure that an organization gathers the
appropriate data about competitors, it must
understand what drives customer behavior. If
customers want or need certain features, the
organization gathers data about competitors’
abilities to provide those features. For other
attributes like response time, customer service
and price, more and more is being learned about
assessing and monitoring customer value.
Understanding what drives customer behavior
provides a foundation for building competitor
and competitive intelligence.
Organizations should consider what characteristics
of its key competitors make them successful,
and incorporate these characteristics in develop-
ing their framework for gathering data.
Establish Structure, Location
and Administration
A key component of a competitive intelligence pro-
gram is the design of its administrative process and
structure. A typical competitive intelligence program
answers several questions: To whom will it report?
Who will receive the information? Will administra-
tion be centralized or divisionalized?
The answers to these questions vary, depending
on what works best for that company. For example,
at Southwestern Bell, the intelligence gathering
process was formalized by the establishment of
two competitor analysis groups. One serves the
company’s marketing staff, the other serves the
sales staff.
In a small to medium-sized company, the compet-
itive intelligence program is best directed by the
president or the vice-president of marketing.
Centering administration around the president
offers several advantages. The president can fit
data into a bigger picture and quickly incorporate
information in policy decisions. However, one
advantage that the top marketing executive enjoys
is closer, more regular contact with a competitive
intelligence team.
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Involve Key Users
It is essential that organizations bring key users
of competitive intelligence information into the
development process early in order to reflect
their wants and needs. Without the early involve-
ment of the people responsible for introducing
a product line or developing new products, the
program is less likely to meet their needs and
gain their support.
Organizations can ensure that they are heading
in the right direction by asking key decision-mak-
ers about the nature of the decisions they make
and the kinds of information they need about the
market and competition. Involving these people
should also help ensure they become a receptive
audience for the data.
Educate, Involve and Motivate Employees
Competitive intelligence is more a process than
a product. As a way of thinking, communicating
and acting, it must be embedded to make it truly
pay off. Embedding competitive intelligence
necessitates considerable training throughout
the organization. Employees need to know the
rationale for the program. They need to perceive
the usefulness of the competitive information
they encounter. Finally, every employee must be
motivated to become active in the program.
Employees need education about possible
sources of information that exist and about how
to communicate in order to make the process
work. A good intelligence program works only if
everybody participates.
It is also important to give employees the
foundation and techniques they need in order
to legally and ethically collect competitive intelli-
gence data. Unethical behavior can quickly
translate into lost dollars.
Another crucial component of intelligence sys-
tems is motivation. All of the organization’s
members, from the president to the custodial
staff, are valuable intelligence agents. Typically,
70 to 80 percent of the intelligence needed by a
firm resides with employees, who collect it in
dealings with suppliers, customers and other
industry people. These employees must be moti-
vated to contribute to the intelligence effort and
pass along needed information.
Employees who possess knowledge often
cannot find the people who need that knowledge
or do not know what information is important
in the first place. In order to make intelligence
visible, an organization requires incentives and
awareness, the keys to the intelligence system:
G incentives—without incentives to provide a
personal benefit, employees lack motivation to
join the intelligence effort. Many companies
motivate their employees to contribute by
simply feeding back information through
newsletters, e-mail or competitor information
bulletin boards. Other firms give awards to
employees who have contributed vital market
and competitor information to managers.
G awareness—even in high-morale organizations
whose employees are happy to contribute vital
information to management, individuals need
to know what information is important and who
needs it. Firms raise employee awareness in
many ways. For example, Xerox’s copier group
constantly “broadcasts” competitor information
throughout the organization via bulletin boards
and displays. In one long corridor, for example,
the Competitive Assessment Team posts
competitors’ newspaper advertisements to raise
awareness of competing products, features
and prices. The group has also rolled rival
copiers into the employee lunchroom, permit-
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B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
ting about 7,000 employees, including market-
ing executives, engineers and purchasing
agents, to literally touch and feel the competing
product.
Establish a Storage and Retrieval System
Central to implementing a competitive intelligence
program is an effective system for data storage
and retrieval. If data are gathered at several
points throughout an organization but are not
integrated in a structured way, then the company
gains fewer benefits for integrative thinking and
decision-making. The program also falls short
of its potential if data are brought together in a
central location but represent nothing more than
a plethora of disconnected data points.
Technology, including data management software
and networking, can consolidate and maintain
data entered in several locations and distribute the
data throughout the organization as appropriate.
Organizations using database technologies
should strive to keep the storage system simple.
A system with too many bells and whistles
makes it difficult to organize or retrieve the infor-
mation. Managers of the intelligence program
should continually ask themselves how a data-
base adds value. If the database fails to speed
up analysis or help management make decisions,
it should not be created.
Implement Counterintelligence Procedures
For some organizations, counterintelligence is a
more pressing challenge than developing compet-
itive intelligence. According to Benjamin Gilad,
5
an effective competitive intelligence strategy
extracts as much information as possible from
and about other firms even as it divulges little
information about the company and safeguards
its own information. Firms must protect their
confidential information, ensure that employees
understand the importance of confidentiality for
remaining competitive, and guard against the
risk that competitors are obtaining intelligence
of their own.
Illegal activity such as theft of information and
bugging occurs rarely, but the potential is there.
For example, French agents in 1993 admitted to
bugging first-class seats in Air France to discover
secrets from American executives. According to
Siemens’ Defence Electronics Group, industrial and
financial espionage in Germany are responsible for
losses of between DM60 and 140 billion a year.
Typical counterintelligence programs include two
key components: technical measures and the
human factor:
G technical measures—A counterintelligence
program contains several physical safeguards
to protect data including:
G disposal devices for confidential information
such as shredders/disintegrators and incin-
erators;
G periodic checks by security experts for wire-
tapping and bugging;
G protection of computer secrecy by classifying
data into categories of sensitivity, limiting
access to computer terminals and using
encryption devices to transmit sensitive data;
G background checks on prospective employees.
G the human factor—While technical and physical
measures are designed specifically to fight
illegal espionage, the key to preventing leaks
of legally and ethically collected intelligence is
to pay attention to the human factor by:
G educating employees, including warnings not
to discuss business in public;
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5 Benjamin Gilad is an intelligence expert who was formerly
the head of the Intelligence Unit of the Israeli police. He is
the author of several books and numerous articles on
competitive intelligence.
G creating an image and reputation for tough-
ness through confidentiality clauses in employ-
ment contracts and aggressive prosecution of
espionage, insider leaks and ex-employees
who use trade secrets in their careers.
Evaluate the Competitive
Intelligence Process
Once organizations begin their competitive intel-
ligence efforts, they should evaluate the process
on several levels. Initially, the objective is to
inform the organization of the importance of
competitive intelligence and gain commitment to
the concept. Organizations might gain a general
sense of whether or not this objective is being
realized. Alternatively, they can survey employees
to find out whether they have become more aware
of the importance of competitive intelligence.
A second objective is to involve the organization
in gathering data and in subsequent activities.
Here as well, organizations can assess increases
in the level of activity and the number of employees
contributing data.
Third, the organization should see evidence of
more analysis and information about competitors:
quick reports, detailed reports, presentations and
other communication forms. It should also see
signs that the competitive intelligence is being
used in critical management decisions incorporat-
ing a competitive element. The ultimate test is
whether or not an organization actually becomes
more competitive, i.e., increased market penetra-
tion and profitability.
I X. ORGANI ZATI ONAL AND
MANAGEMENT ACCOUNTI NG
CHALLENGES
For many firms, designing and implementing a
competitive intelligence process represents a
major shift in focus. The organization must move
from emphasizing historical, financial, internally
oriented information toward a prospective, some-
times qualitative and judgmental, externally
oriented view that emphasizes the market,
market forces and competitors—where they are,
what they can do, what they are likely to do and
what might be an appropriate response or even
preemptive actions. Even organizations that
already consider themselves to be market-
focused probably need to adopt a different view
of competitors in order to truly understand them
and what they can and might do.
Creating and implementing such a cultural shift
must start with top management and must
be reinforced continually by those managers.
When they demonstrate in-depth knowledge of
competitors, ask questions about them and
emphasize the importance of outperforming
them, managers make employees throughout
the organization appreciate the importance of
a proactive competitor intelligence process.
Gaining and sustaining the support and involve-
ment of top management is an extremely
important, and often difficult, first step.
The challenge for management accountants is to
apply their capabilities to important new areas
such as competitive intelligence. Management
accountants are trained and skilled in data gath-
ering, analysis and presentation. Traditionally,
they have applied most of these skills to internal,
historical financial accounting and to managerial
decision-making, based largely on cost analysis.
Increasingly, management accountants must
become involved in new areas of analysis,
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frequently in external issues involving the market
and competitors.
X. CONCLUSI ON
Facing continual change in customers’ needs,
competitors’ offerings and a firm’s own products
and services, a business must stay on top of
relationships and respond accordingly if it hopes
to succeed. Failure to monitor competitors’
offerings is like operating in the dark.
In a changing, highly competitive market, the firm
with a successful, proactive competitive intelli-
gence process will respond most quickly and
wisely to changes in markets and competitors,
and should thereby succeed over the long term.
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