The core of market strategy

In 1815, Nathan Rothschild became the first banker in London to discover that Wellington had defeated Napoleon at Waterloo, setting in motion the accumulation of a family fortune the likes of which had never been seen before. Rothschild had built an intelligence network of agents, riders, ships and carrier pigeons throughout Europe. His agent at Waterloo, a man named Rothsworth, watched as Napoleon fell to the lesser forces of Wellington, and within a few hours, Rothschild knew that England had won.

The following morning Rothschild arrived at the London Stock Exchange as he did each day, looking solemn. He proceeded to divest himself of his constituents' shares in the Bank of England and other core stocks, selling off large blocks of shares from every sector of the British economy. In the process, he led other investors to believe, quite falsely, that Napoleon had won. The fever pitch of the sell-off forced prices to rock bottom levels, where his agents bought the stock at a fraction of its real value. The Rothschild family became the most powerful financial consortium in Europe, as his brothers established banks in Vienna, Naples and Paris, and the Bank of England became a private company of shareholders. The Rothschild family is still one of the richest in the world, with hundreds of operating companies in every corner of the globe in every area of business.

That exemplifies the ability to make decisions--to take action--based on the collection and analysis of market intelligence. And it demonstrates the nature of competitive intelligence as the core of business strategy. The ultimate goal of any CI undertaking is to produce "actionable" intelligence--something at which most CI programs fail, at least at first. Good research must invariably lead to good analysis--a better understanding of how external forces can benefit the firm in the future. CI analysts must make recommendations to constituents and must explain the implications of the alternatives.

Today, these lessons from history apply to the nature of competitive advantage itself--the ability to apply the company's core competencies to achieve sustainable market advantage--whatever business it is in. The misunderstanding surrounding CI's two distinct roles--tactical support and strategic decision-making--mires far too many undertakings in the area of acquiring competitor knowledge. That dichotomy can best be explained by saying that strategic intelligence is most concerned with "doing the right thing"--deciding how to best leverage competitively unique, value-building competencies to enter and dominate markets; it involves strategy planning and is measured in terms of effectiveness. Tactical intelligence is about "doing the thing right"--executing the business strategy on an operational basis in each of the lines of business in which the firm competes; it involves day-to-day execution against competitors measured in terms of efficiency. Strategy decides what business to be in; tactics compete effectively in whatever that business might be. Those firms that master both domains--effective in strategy planning and efficient in tactical execution--become winners. Those that lack in either die quickly (if they execute their flawed strategy effectively) or slowly (if they can neither plan efficiently nor execute effectively), or merely survive (usually the firm that plans well but executes poorly).

Let's look at the case of IBM under Akers in the late 80s and early 90s. IBM was the dominant market leader in mainframe computing and executed its tactical operations in the market extremely well. However, it had inefficient strategic direction, characterized most blatantly by being in the wrong business: The mainframe marketplace was not growing at all with the acceptance of the PC in the corporate computing marketplace. IBM's sales force and operational personnel were better than any in the world, but they were in the wrong business--mainframes. That condition can be described by saying that IBM had effective tactics and inefficient strategy--a condition that would have led to a slow death, using the principles previously outlined.

Knowledge management and the ability to understand not just competitors but the market as a whole can create internal and external awareness and responsiveness to market forces--in effect, can predict where the market will go in the future. But the application of such CI programs must be broad. The most insidious competitive forces a firm will experience are those indirect competitors that wreck the marketplace for you and your direct competitors by making your business obsolete. Remember the buggy whip!

Let's take a favorite example of insidious market force--the Internet. Its effect on commercial realities was profound as small, nimble competitors launched to challenge long-established brick-and-mortar business models.

Perhaps the most visible example of the evolutionary impact the Internet imposes is that of the travel industry. Consider travel agents in particular--once proud issuers of airfare and hotel arrangements. Consumers today turn almost without exception to the Internet to book accommodations, indeed to bid one supplier against another to find the lowest price. It is a textbook example of the product life cycle run at Internet speed; a technology that once adapted to the product forces mature "cash cows" into the decline of price commoditization. How have travel agents adapt? Darwin's "The Origin of Species" is more relevant than any other explanation. It would be a mistake to see adaptation as the driving force; it's really based on "survival of the fittest" (and the death of those who failed to refocus on other markets).

Today, travel agents (the ones who've survived) don't sell just airfare or hotel stays; they sell tours, a value-added solution that takes advantage of older core competencies to build a custom product for customers who seek greater value and are willing to pay for it. It's an example, too, of how core competencies can become mere success factors, necessary for all players in a market--customer value in travel being described by the unique understanding of a particular destination and the expertise required to aggregate customers together for a "tour." As a result, customer needs are met--the desire to travel as a group, bring a knowledgeable guide or buy a bundle of services--and that sector survives.

Considering the changing needs of the market, we need to devise methods by which we can tie intelligence back to the competitive strategy process--not just helping our firms compete day to day in the businesses we already have, but make business leaders aware of where the market will be in the future and take action to enter those markets at the right time. The now familiar management directive to "put yourself out of business before competitors do" applies here, but not without considered thought about which businesses you should choose. Market-focused knowledge management must be as much concerned about the future applicability of that knowledge as it is the present.

So how do we decide which businesses to be in?

We must first and foremost consider the objectives of the corporation ... usually support of stakeholders--first among equals being shareholders--most commonly through consistent growth and profitability. Incidentally, not all businesses have that as their core set of values. Prevalent in the high-tech sector is the recent idea that the company is the product, that the owners and founders could reap their reward without ever turning a profit or shipping a product.

But assuming that growth and profitability are the goals, the firm seeks by geography and product/service mix to identify the markets in which it has competency. Products and services themselves are not the basis to enter new markets; core competencies determine that, based on competitive uniqueness (no other firm can do it the way we can) and customer perception that those competencies contribute a disproportionate share of value (the reason people buy from us rather than from someone else). All products or services undergo the same life cycle--beginning with innovation where R&D exceeds revenues; moving through the adoption phase to achieve a level of profitability; to maturity when the product becomes the proverbial "cash cow;" and eventually reaching decline, when low-cost producers have commoditized the market and product differentiation is based on little more than price.

Successful companies innovate continuously, thereby ensuring that they always have products in various phases, ideally in adoption and maturity when they are achieving their highest profit potential.

Intel Intel, for example, leverages its core competencies (brand loyalty and speed to market) in the processor and semiconductor business based on the seemingly perpetual need (read as "market growth") for faster and faster processors. However, in the past several quarters, based on Intel's recognition that its continued profitability is dependent on that continued demand, its competitive strategy is reflected in its startup and planning of entries into a number of non-core businesses to help ensure continued growth in faster and faster processors. The company has perceived that demand has begun to wane with the relative stabilization of clock-cycle-eating software applications; the challenge has become to scrape processor cycle latency down to zero, thereby increasing demand for more processing power. Specifically, Intel has forays in multimedia (the most processor-demanding applications being video conferencing and gaming, but also rich-media Internet content) and home networking (realizing the potential for users to buy products that leverage the latent computer power available through a simpler way to network PCs).

Competitive intelligence is as much about market knowledge and awareness as it is about competitors specifically. The key to that awareness is to create responsiveness to external threats and opportunities by leveraging internal strengths and balancing internal weaknesses. The knowledge that companies acquire remains largely useless to them unless applied to decisions about the two fundamental domains of business activity--strategic (what businesses should the corporation be in) and tactical (how can the corporation best execute those selected businesses).

The next time you're wondering about what knowledge of the market and competitors means to your company, keep in mind that mere survival is not the goal. Building effective strategy and executing efficient tactics will help your company become a winner.