IntelligenceFailuresBy BarneaCIMoct-dec2010

8/8/2019 IntelligenceFailuresBy BarneaCIMoct-dec2010

1/7 Volume 13 Number 2 April/June 2010 www.scip.org 27

Intelligence failures:Competitive Intelligenceand Strategic Surprises

In 1962, Roberta Wohlstetter published a bookon the Japanese attack in Hawaii in 1941. This attackled President Franklin Roosevelt to decide that United

States would join the Second World War and open its FarEastern Front (Wohlstetter 1962). The US administrationhad a good and accurate picture of Japanese intentions,based on information collected by US intelligence.However, senior level decision makers in the military andpolitical areas, including the president himself, failed topay attention to the warnings prior to this attack, leadingto a major strategic surprise. Although many years havepassed since its publication, the Wohlstetter book is stillconsidered important in the field of intelligence failures.

Wohlstetter was the first to distinguish between

signals (information quality) and noise (informationnot relevant that can be misleading). For the first timean important discussion was held regarding the question:Why did U.S. intelligence, which held good information,fail to evaluate the Japanese intentions and why didthe decision makers not recognize the threat and makeappropriate plans? In retrospect, the information alreadyobtained indicated that the Japanese intended to attackimminently.

On October 1973, Egypt and Syria launched a majormilitary attack on Israel known as the Yom Kippur war.Despite much early warning information on the comingattack, Israel was caught unprepared due to intelligence

failure. Israel has paid dearly in human life and in militaryequipment (Bar and Schaeffer 2008).

PREVENTING SURPRISES

Sixty-nine years after Pearl Harbor and 37 years afterthe Yom Kippur war, the subject of handling informationand prevention surprises, in both the national intelligenceand business environments, are still concerning decision-makers in both areas. Avoiding intelligence failuresdemand timely warning. The nature of warning isdetermined by two parameters:

Clarity: Are the signals received evident enough toconvince decision makers?

Timing: Is the time gap sufficient to take measuresto encounter the threat?

A high quality early warning delivered to the decisionmakers must meet these two demands.

As the information revolution becomes morepronounced, the page of change in the competitiveenvironment quickens, and competition becomes more

global, we are seeing additional growth in academicintelligence research and education. While academic

By Avner Barnea, Ono Academic College, Israel


2/728 www.scip.org Competitive Intelligence

research in national intelligence began 50 years ago,competitive intelligence was a more recent introduction,becoming more mature in the 1990s.

The business realm has a growing awareness ofthe importance of understanding intelligence failures,with more attention devoted to this topic by academicresearchers (Gilad 2004). Numerous examples existof companies, including some of the large globalcorporations, misreading signals and being severelydamaged or even ceasing to exist.

While strategic surprises are well researched innational intelligence, in business they are is much lessstudied. Lets look into both fields to learn about theircauses and characteristics.

THE CHARACTERISTICS OF NATIONAL AND

COMPETITIVE INTELLIGENCE

The role of national intelligence is to collectinformation on threats, assess their significance andprepare final products (assessments) for the attentionof decision makers. Competitive intelligence operatesaccording to this discipline, but in comparison to nationalintelligence it has limited resources, resulting in fewerabilities to monitor mass information and analyze topics

of interest. Traditionally major business failures areattributed to various management causes and very rarelyto intelligence failures in understanding the externalenvironment, which narrows the ability to respond in timeand to take the right measures.

Changes in the national intelligence establishmentare often implemented immediately, while this kind ofchanges happen in the business sector over the course ofa generation of management (Emmons 2007). (See thedifference between the immediate establishment of theNational Counterterrism Center as a result of the 9/11

Commission Report and the urgent action required to saveIBM in the early 1990s when it took IBM few years tomove from hardware to software and services and find itsnew identity.)

Competitive intelligence is seeking its appropriateplace and the attention of decision makers. For manyyears, competitive intelligence focused mainly on tacticalinformation, monitoring competitors actions andevaluating what could happen in the short term. In recentyears a growing recognition that the firms competitiveadvantage is sustained by the intelligence support ofbusiness strategy has assisted firms to recognize and

evaluate the external business periphery and participateactively in planning for the strategic challenges.

One of the distinct differences between national

intelligence and competitive intelligence is the degree ofimportance attributed to intelligence products by decision-makers. For many years, an intelligence capability hasbeen known as an integral part of the basic capabilitiesof the state. Decision-makers recognize the importanceof receiving ongoing intelligence and assessments, andare aware that intelligence is an important element ofdecision-making.

There was generally no wide-spread acceptance ofthe need for competitive intelligence in business before1990. Managers took positions in organizations where

competitive intelligence was not institutionalized. Asthe advanced in their firms, they learned to rely on theiraccumulative experience, on incomplete information, andfrequently on their intuition rather than on establishedintelligence.

In recent years the recognition that competitiveintelligence is one of the core capabilities of a firm hasbeen growing. It is now becoming perceived as one ofthe essential capabilities in this competitive environment,along with marketing, sales, research and development,logistics management, human resources management, etc.

Research of business failures often does not relateto intelligence problems, but to other causes such asunsuitable products, wrong pricing, slow response tocompetitors initiatives, personal failures of managers,etc. In most cases, even in major business failures, it waspossible to repair losses within a reasonable time andreturn to profitability. Only in exceptional cases was theprice of failure irreversible, such as the closing of a firm orinability to return to level of significant profitable activity.

Conventional solutions of replacing seniormanagement and implementing internal organizationalchanges usually ignored main problems like lackingintelligence or overlooking available information, andfocused on common issues as the firms organizationalfailures and its inferior performance.

Significant national intelligence failures were usuallyfollowed by comprehensive investigations of the reasonsfor the event and their implications to avoid them in thefuture. Generally, the investigative report was accompaniedby a disclosure to the public of the failures causes andits consequences. Changes in national intelligenceestablishment were usually executed immediately.

intelligence failures: competitive intelligence and strategic surprises


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In business a comprehensive review of internalprocess and learning lessons are less frequent. Changesin the business sector would happen over a longer

time, occasionally taking almost a full generation ofmanagement (Emmons 2007).

The awareness that business intelligence can helpavoid failures in the competitive environment is graduallyexpanding, together with identification of the difficulty oftracking changes in the operational business environment.In addition, internal islands of quality intelligencestill exist, available to individuals but not brought to theattention of senior decision makers.

HOW TO WARN OF SURPRISES

One of the ways that firms attempt to become awareof possible surprises is to develop early warning alerts,in part by using advanced data collection technologies.But in many situations these solutions are not effective.The problem lies not in a lack of information, butconsiderable cognitive biases that often disrupt the abilityof the warnings to sink in and be properly evaluated.In addition, meaningful information can be erroneouslyidentified as noise when, in fact, they are signals andvice versa.

Leonard Fulds survey of strategic planning executivesin 140 companies found that two-thirds of them had atleast three significant surprise events over five years (Fuld2003). The vast majority believed that their companies willcontinue to suffer from competitive shock as a result ofsignificant business surprises in the near future. However,few senior managers made decisions that factored inintelligence analysis, and only slightly more had preparedin advance an appropriate response to potential strategicbusiness surprises.

Almost every firm is vulnerable to strategic surprise.

In retrospect the firm, or individuals within it, hadinformation that indicated this surprise might happen.For example, a rival was viewed as insignificant, but thecompany later found out that its new technology changedthe rules of the game. A strategic client is suddenlyin financial difficulties that endangers its existence. Animportant supplier cannot provide the product qualityrequired. A new drug does not meet the medical criteriaalthough it has the required approvals, and thereforecannot continue to be sold.

Preventing intelligence failures is not relatednecessarily to the quality information, the comprehensionof the analysis, or the delivery to the decision-makers

(Watkins and Bazerman 2003). One cannot succeed inidentifying a surprise without recognition by the firmssenior executives to identify the threats, give priority

to internal examination and, if necessary, prepare andmobilize appropriate resources to stop it. A fault in anyof these stages -- recognition, prioritizing and mobilizingresources means exposes the firm to predictablesurprise.

The senior management bears responsibility notonly to identify the danger or threat based on analysisof the information, but also what they did in practice tobe prepared. Many studies indicate that policy makersin business, as well as in national security, do not givewarning signals sufficient attention.

WHY IS SIGNIFICANT INFORMATION

OVERLOOKED?

Cognitive biases have a strong influence on decisionmakers and on internal processes in firms. Various studiesshow that the way we process information depends onour individual cognitive biases, which leads to ignoringrelevant information, or not giving it proper weight. Thiscontributes to surprises and a lack of preparedness:

We tend to assess the situation as better than it is.We conclude that problems are unlikely to developand therefore action is not required.

We tend to give higher weight to informationthat strengthens the current assumptions andignore information that is not appropriate to ouropinion.

We tend to ignore or not to give weight to whatother firms are already doing or planning to do, sowe ignore their potential surprise.

We tend to give great weight (often incorrectly) toanalyzing and understanding the present and assumethat the current situation will continue, so we haveless motivation to prevent future disasters thatseem distant and impractical.

We find it difficult to cope with threats that we havenot already experienced, especially if they are notpresented convincingly. Typically, we tend to actmore often when the possible situation might affectus personally.




The overall result is that we perceive the externalworld as we would like to see it and not as it is. This flawof bounded awareness, about what is happening around

us, harms our ability to see the whole picture.

MORE INFORMATION IS NOT bETTER

Studies show that the expansion of informationgathering is not necessarily improving the decision process

An interesting example of an unexpected surprise by a

small firm which came from nowhere and managed to

surprise a huge company, is the emergence of Bratz dolls,posed a real threat to world leader Barbie.

For many years, Barbie dolls led the global market without

being threatened by any company. Many tried and failed.

During the years of market leadership, Barbie targeted

herself the population of girls ages 3-11. In the late 90s,

the market was changed and the target market become

younger crowd, ages 3-6.

Since the early 2000s, Barbie has lost considerable market

share to unfamiliar Bratz dolls. Bratzs success was due

to recognition of the market trend and the ability tounderstand that the dolls have to look contemporary and

stylish. However, unlike their mirror Barbie dolls hardly

changed for years. After a process lasting several years,

Barbie dolls have become less relevant and their demand

fell.

What were the reasons that Barbie did not read the

signals and yielded to cognitive bias? Here are some

reasons for failure:

Barbie focused on production and was largely production-

oriented company, while invested much effort in optimizing

production processes and lower the costs.

Barbies parent company, Mattel, dealt with the process of

acquisition of other companies turned out problems that

require paying close attention by the senior executives.

The management was focused on the process of M&A,

especially in the financial aspects.

In the midst of these problems has the parent company

Mattel appointed a new CEO, who did not have previous

experience with the toy industry. The main issues which

focused on were cost cutting efficiency measures, business

development and marketing innovation.

Barbies business strategy was to continue shaping

contemporary fashion dolls stemmed from concern thatthe change could hurt critically and cannibalize existing

dolls, which built the companys success for many years.

The corporate culture of Barbies parent company was to

maintain the existing focus on reinforcement of the brand.

For example, Barbies product manual which included

about 100 pages, and served directors as the Bible of the

company covered about all aspects of production and

strengthening the brand. Theres nothing about product

promotion and dealing with competitors.

Barbies managers did not listen to information presented

to them on the market changes, including the rapidrise of Bratz, assumed that the Barbie brand power will

successfully compete against any threat, as many times

before.

Structural problems within the company, Mattel, the maker

of Barbie, prevented cooperation among all segments of

corporation. Despite that the company had good internal

information system; it rarely used it because of the

complexity of a permit to run it. Relationship between sales

and production was sets of loose, as the sales, marketing

and R&D. And so the company lost touch with what goes

on in the industry, she continued to operate out of inertia,

based on the past.

In retrospect, it is clear that Barbies managers had no

shortage of intelligence on what is happening in the market.

The problem was the continuing failure by reading the

signals and their meaning regarding the changes in the

market. It turns out that the Bratz, which was established

only in the second part of the 90s, had similar information

as of Barbie, but Barbies executives failed to correctly

analyze it, especially, to take actions that would enable to

keep its significant competitive advantage. The business

giant, Barbie refused to read the picture.

SIDEbAR 1: HOW bRATz SURPRISED bARbIE

but the quality of analysis (Lovello & Sibony 2010). Nobellaureate Daniel Kahneman said recently in an interview:

Im really not optimistic. Most decision makerswill trust their own intuitions because they thinkthey see the situation clearly.Its when you decidewhat information needs to be collected. Thats anabsolutely critical step. If youre starting with a




hypothesis and planning to collect information,make sure that the process is systematic and theinformation high quality. This should take place

fairly early (McKinsey Quarterly 2010).

Many executives still claim that consumers dontchange quickly, that existing products are superior, thatpeople wont give up on familiar experiences, and so on.Richard Tendlows recent book describes how executivesremain in denial and dont accept in time the need forchange (Tedlow 2010). Why do people practice denial?Because it is often easier, safer, and more profitable inthe short run, and more comfortable than confronting aproblem, a poor decision made by a superior, a difficult

personnel decision, or a failing strategy.

DIFFICULTY IN MONITORING

Companies also have a hard time knowing what tomonitor. Given the wide range of industry participantsand conditions that can be at the root of external threats,firms struggle just to determine what is significant. As aresult, many companies attempt to monitor everything,and build elaborate environmental scanning systems thatcrumble under the weight of the mountains of information

they accumulate.Even if companies are able to isolate those external

conditions that pose a threat, few effective means exist tomonitor those conditions. News alerts and filters usuallyare not precise enough to capture information that is trulydiagnostic for assessing a developing threat. At the sametime, management efforts to encourage employees to shareinformation and observations related to strategic threatshave, for the most part, been a failure.

The moment executives spot signs of change, theymust decide what they can preserve and what they must

change. Companies should not stop looking at threats andopportunities but at the same time they have to preparehow to transform the organization.

ExISTING bELIEFS AND PRACTICES

Successful enterprises create distinct businessideologies such as the Toyota Way and the Xerox Way.These doctrines include specific ideas about how tocompete, performance measures, and organizationalstructures. They also include how we look at the marketand competitors and whom to reward. These beliefs and

practices constitute a companys dominant reasoning.

The logic may not always be understandable, but everyemployee knows: Thats the way we do things here.Usually no one challenges these success factors, even in

emergencies, when the competitors are closing the gap.Reports about unknown emerging rivals that change

industries are often an exaggeration. Competitorsusually emerge slowly because of the time required fortechnology development, new business model fulfillmentand consumers adoption. However, companies oftenacknowledge new rivals only after they have becomesignificant threats, and loose the time required to carry outtransformations in an organized way.

ACHIEVING PERIPHERAL VISION

In their book Peripheral Vision: Detecting theWeak Signals That Will Make or Break Your CompanyGeorge Day and Paul Schoemaker note that only 20% ofcompanies have developed effective peripheral vision thatallows them to anticipate their competitors and identifyprocesses as early as possible. Day and Schoemakerdefined the term peripheral vision as:

A portfolio of scanning methods to capture andamplify the weak signals within targeted zones of theperiphery: inside the firm, customers and channels;the competitive space; technologies, political, socialand economic forces; and influencers and shapers.

This is the ongoing ability of the firm to examinewhat was happening in its external environment, includingdetection, analysis, and action on the basis of receivedinformation. Some examples are an early deploymentagainst a new competitor, responding with a new product,or preparing for the entry of competitor into a newtechnological field. Peripheral vision states that becauseyou never know where the surprise will come from, youneed to have a regular and ongoing process of monitoringthe external environment.

One of the most important success factors ofperipheral vision is pushing the issue to seniormanagement. The founder of Intel, Andy Grove, pointedout how he personally encouraged employees not onlyto examine the events in the external environment, butalso to report them to relevant managers and often toGrove himself (Grove 1999). He tells how Intel hascreated a culture of continuous observation on the

external environment, assuming that without continuous




monitoring its impossible to succeed. In his opinion,one of the most important issues is to make employeesfeel comfortable when transferring information, even it is

not clear to them the significance of their contribution.Intel is not the only corporation which has implementedthe culture of peripheral vision -- a wide range of globalcompanies have adopted a similar course of actionincluding Johnson & Johnson, Anheuser Busch, Citibank,JP Morgan Chase and many others.

HOW CEOS INCREASE THEIR VISION

What subjects should peripheral vision focusedon? The assumption is that you target your search to

see the most significant issue, although in practice thisis not easy. The solution lies in a multi-dimensionalbalance of information the firm receives from internalsources, especially employees who have access to externalinformation. To better focus and set priorities, companiesshould use scenario analysis. The goal is to examine thepossible solutions to scenarios based on the gatheredinformation and check whether or not the firm has anappropriate answer to such scenarios.

One consequence of this process is a decision tofocus on the evaluated scenarios that are likely to have

damaging implications on the firms activities. One resultis strengthening the focus of information collection,examining the likelihood of specific scenarios, and testingthe ability to respond appropriately, including a surprisecounter-attack to competitors. Such moves require a wideinternal collaboration and sharing of information betweendifferent divisions at the firm, with the full backing of thesenior management.

During their research, Day and Schoemaker testedthe performance of 170 CEOs of large companies whichoperated in different sectors, and found that about 90% ofthem actually focus on operational management to achieveshort-term goals for the coming year or two. Only 10%plan for a longer period and this is what is expected ofthose in the CEO position.

It is impossible to develop a peripheral vision withoutthe backing of the firms leadership. Creating the rightatmosphere will happen when, for example, executives askabout the external environment when they meet with theiremployees. This creates a sense of openness and interest inthis subject, showing that it is not only legitimate but alsoessential. The expectation is that employees and managerswill not keep information obtained to themselves, but

rather will send signals to the relevant people.

PERIPHERAL VISION IN bUSINESS CULTURE

Several requirements for successful integration ofperipheral vision in the firms business culture include:

Backing by senior management, which encouragescuriosity and interest in the external environmentaffairs.

Encouraging employees and managers to proactivelybe interested in the external environment as anintegral part of their job and to report their findings.

Providing appropriate organizational solutionsthat enable relevant information to be quickly sentto both the competitive intelligence unit and the

attention of senior managers. Providing positive feedback to those who supplied

good information.

Peripheral vision is an appropriate solution to improvemonitoring of the external environment and to preventsurprises. It should be institutionalized within the firm as afunction of competitive intelligence.

The question What are the surprises that can hurtus? is not asked frequently enough by firms. Oftenemployees on various levels are aware of approaching

dangers, but they do not pass information on it to others.A firm must look beyond the visible current situation,to ask how the future business environment will lookand what surprises and opportunities may appear.Implementing the necessary organizational cultureencourages employees to raise issues for discussion, andsenior executives are expected to lead the process.

SUMMARY

Competitive Intelligence professionals can learn fromthe experience gained by national intelligence experts,especially in confronting complex situations in the analysisstage. Intelligence breakdowns are more widespread thancompanies tend to admit -- their internal investigationprocess looks more towards the conventional managerialreasons for failures rather than on intelligence misfortunes.

Some of the reasons for failures in national andbusiness intelligence may be similar, often based oncognitive biases by the intelligence personnel and thedecision makers. Another factor is the unconscious refusal




to face changes in the external environment, especiallywhen those changes are not identical with individualsmindsets.

The more successful companies become, the moredifficult it is for them to recognize when they mustchange. Why do companies find it so tough to tacklethe obvious? To change faster than their competitors,enterprises must:

Evaluate correctly the emerging competitive realityand its implications for the bottom line.

Identify gaps in capabilities and fill them quickly.

Promote executives that can lead in the new era.

The basis of a business early warning effort shouldbe similar to the national intelligence practice thatallows analysts to provide credible warning of externalthreats, thereby minimizing the effect that surprise has onexecutives ability to respond.

And finally, intelligence professionals both in nationalintelligence and in business have to prepare the minds ofthe decision-makers to believe in an uncertain future and,most important, to plan for it.

REFERENCES

Bar-Joseph; Sheaffer, Z. (2008). Surprise and itscauses in business administration and strategicstudies. International Journal of Intelligence andCounterintelligence v11n3, p331-349. http://direct.bl.uk/bld/PlaceOrder.do?UIN=053591322&ETOC=RN&from=searchengine

Day, George; Schoemaker, Paul (2006). Peripheral Vision:Detecting the Weak Signals That Will Make or Break

Your Company, Harvard Business Press. http://www.amazon.com/Peripheral-Vision-Detecting-Signals-Company/dp/1422101541/

Emmons, G., (2007), Working independently, WorkingTogether: The challenge of Managing NationalSecurity- Q&A with Jan Rivkin, http://hsbwk.hsb.edu/cgi-bin/print

Fuld, Leonard (2003) Be prepared, Harvard BusinessReview, November, Reprint F0311C. http://www.fuld.com/PDF/HBRWarn.pdf

Gilad, Benjamin (2004). Early Warning: UsingCompetitive Intelligence to Anticipate MarketShifts, Control Risk and Create Powerful Strategies.

NY: AMACOM. http://www.amazon.com/Early-Warning-Competitive-Intelligence-Anticipate/dp/0814407862/

Grove, Andy (1999). Only the Paranoid Survive: Howto Exploit the Crisis Points That Challenge EveryCompany, Broadway Business. http://www.amazon.com/Only-Paranoid-Survive-Exploit-Challenge/dp/0385483821/

Lovello, Dan; Sibony, Oliver (2010). The case ofbehavioral strategy. McKinsey Quarterly. http://www.mckinseyquarterly.com/The_case_for_behavioral_

strategy_2551Watkins, Michael; Bazerman Max (2003). Predictable

surprises: the disasters you should have seencoming. Harvard Business Review March OnPointcollection. http://brownelllandrum.com/wp-content/uploads/2010/02/HO5-HBRMarch2003-Predictable-Surprises.pdf

Wohlstter, Roberta (1962). Pearl Harbor- Warningand Decision, Stanford University Press, Stanford,California. http://www.amazon.com/Pearl-Harbor-Decision-Roberta-Wohlstetter/dp/0804705984/

Strategic decisions: When can you trust your gut?Nobel laureate Daniel Kahneman and psychologistGary Klein debate the power and perils of intuitionfor senior executives. McKinsey Quarterly, March2010. https://www.mckinseyquarterly.com/Strategy/Strategic_Thinking/Strategic_decisions_When_can_you_trust_your_gut_2557

Tedlow, Richard (2010). Denial: Why Business LeadersFail to Look Facts in the Faceand What to DoAbout It, New York: Penguin Portfolio http://www.amazon.com/Denial-Business-Leaders-Facts-Face/dp/

B0042P56D0/

Avner Barnea is a former senior member of the IsraeliIntelligence Community. Lecturer on Competitive Intelligencein the MBA program of Ono Academic College, Israel. Avnercan be reached at: [email protected]


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IntelligenceFailuresBy BarneaCIMoct-dec2010