Competitive Intelligence
by Mike Brooks

Humankind is a competitive species. We will often suppress this instinct in our personal lives, since many of our aims may be better achieved by co-operation. But in business the competitive urge is not an awkward, antisocial trait to be avoided; it is a key ingredient of success and even survival. Conventional capitalist theory argues that free competition provides a social benefit as well as an economic one: the less efficient firms are weeded out and products are provided in larger amounts and at lower prices. Consequently, a key focus of any commercial enterprise is to identify the nature and extent of the competition and to determine how best to handle the threat.

In the past this activity has largely centred on competitor analysis – i.e., the process of assessing the strengths and weaknesses of rival firms and adjusting your strategies accordingly. More recently this concept has been expanded to cover a wider field, known as competitive intelligence (CI). According to a study by Insead business school, firms that devote excessive resources to benchmarking are often outperformed by those that focus on customers and how to satisfy their needs. This broader view of the overall competitive environment distinguishes CI from its more limited antecedent. It covers all the relevant factors that could endanger a company’s profits – for example, technological developments, changing consumer tastes and general economic trends.

The economic theory that price is the main determinant of competitive advantage is now recognised as an oversimplification. Where there are complicated pricing structures involving, for example, quantity discounts and unpublished net pricing, it is often hard to know what prices your rivals are charging. Equally, where competing products are not identical, it is hard to assess the extent to which extra features on different products attract incremental revenues.

In some markets, different products fulfil the same customer needs. An obvious example of this is passenger transport: rail operators are competing not only with other railways but also with airlines, bus companies and car manufacturers. More radically, they are also in competition with teleworking. CI considers the whole range of competing suppliers, the prices they achieve and the nature of the customer satisfaction they provide. This provides a major opportunity for the finance function in general and management accountants in particular to contribute to a process that was once the preserve of the sales and marketing department.

Another distinguishing feature of CI is that it involves a systematic search for usable information. Conventional market research exercises have too often been anecdotal, unstructured and reflective of the short-term concerns of sales and marketing.

An aspect of CI that provides a useful starting point is the concept of key intelligence topics. These include:

• Strategic issues: the actions and omissions that will have the most significant impact on the company’s revenues and profits.
• Early-warning topics: issues not included in the management’s assessment of the company’s competitive position, but which could be of future significance.
• The full population of competitors, both actual and potential.
• Counterintelligence: how to prevent the competition from doing to you what you are trying to do to them.

The military intelligence approach might be useful here, because it aims to find answers to the following questions:

• What is the problem that finding this information would help us to solve?
• What would we lose if we fail to find the information?
• By how much would we benefit if we find the information?
• Where can we find the information?
• How much will it cost us to find it?

The information required is not often openly available and you may have to infer it from the behaviour of competitors and the preferences of consumers. For the latter, direct questioning through market surveys is feasible. For the former, identifying the required information and assessing its significance is much harder – a rival may itself not fully understand why it behaves the way it does or how consumers perceive its products.

The problem of deciding which information is needed is easily to underestimate. Often the nature and extent of the available intelligence become clear only after the search has started, so researchers must be prepared for the occasional false trail. Much of the information is available from public sources in the form of financial data. Even where the material is contained in published information regulated by accounting standards, the degree of comparability may be less than you might expect. Financial managers will be best placed to assess the reliability of this data and highlight possible interpretation problems. Beware: creative accounting is still alive and well.

A careful examination of the brochures, manuals and other marketing documents produced by your rivals can often be extremely revealing. In addition, the information they publish on their websites and provide at trade exhibitions should be scoured for evidence of new projects. Occasionally, in their enthusiasm to impress customers your competitors may be indiscreet in what they disclose. CI analysts do need to be careful about how they obtain such information. It is clearly not ethical to pretend to be a potential customer to lure overzealous sales executives into revealing more than they should, but as long as they do not try to conceal their identity, researchers can legitimately acquire a lot of useful information directly from the enemy.

One problem that analysts can encounter is the false belief that, because a particular piece of information is desirable, it actually exists. You need considerable self-discipline to resist attaching to a discovered piece of information the attributes you need from it. The ability to assess the quality of the data is crucial, as the evidence will vary from the completely reliable to the positively misleading. Researchers need a quality assessment model to determine the integrity of the intelligence before they can draw conclusions from it. A simple data-quality hierarchy that you could use categorises information into the following groups:

• Verified facts. For companies, these include annual reports Companies House returns, offer documents and other regulated filings. At industry level, these include official statistics, competition authority reports and census figures.
• Reasonably reliable facts. These usually come from secondary sources and include market research reports, stockbrokers’ reports and the unaudited components of company reports. Although these are less reliable than verified facts, they are unlikely to be systematically misleading and can be cross-checked for overall consistency.
• Rumours. These may be highly relevant to the questions you are asking and they may provide supporting evidence, but they are unlikely to be reliable enough to form the main basis for strategic decisions.

A firm’s ability to balance the relative contributions of these different categories of information to the overall assessment is crucial.

Mike Brooks FCMA is a business writer and consultant. This article is contributed by CIMA, The Chartered Institute of Management Accountants.