How Corporations Snoop To Conquer

As rivalry gets ever more ferocious, Corporate America is turning to "competitive intelligence"

It was a brutal internal corporate battle. On one side: anxious marketing managers at Monsanto Co.'s Nutrasweet unit. On the other: the subsidiary's secretive competitive intelligence (CI) operation.

According to sources familiar with the events, customers told Nutrasweet sales reps in 1991 that the U.S. Food & Drug Administration was about to approve a rival sweetener from Johnson & Johnson, called sucralose. So Nutrasweet managers proposed to then-Chairman and Chief Executive Robert E. Flynn a three-year, $84 million defensive ad blitz to help preserve Nutrasweet's two-thirds share of the $1.5 billion market.

Then Nutrasweet's CI unit stepped forward. Like the Central Intelligence Agency analysts whose techniques they borrow, the corporate snoops had carefully cultivated contacts among regulators at the FDA and in Canada, which had already approved sucralose. The sources helped the analysts conclude that FDA approval wasn't imminent--and that the outlay would be a waste of money. The recommendation created internal friction, forcing Flynn to make a tough choice. Siding with the intelligence analysts, he delayed the advertising. It was a good call: Five years later, the FDA still hasn't O.K.'d sucralose.

"IMPERATIVE." The tale of how competitive intelligence saved a company millions is unusual only because people were willing to discuss it. Indeed, one of Corporate America's biggest secrets is that more and more companies have in-house operations to keep tabs on rivals. The number of large corporations with CI units has tripled since 1988 to about 10%, estimates David H. Harkleroad, director of business intelligence for the Futures Group Inc., a Glastonbury (Conn.) consulting firm. CI "is an imperative for survival," declares Robert C. Mauch, retired president and CEO of UGI Corp.'s AmeriGas Propane Inc., a $1 billion Valley Forge (Pa.) gas marketer.

What is competitive intelligence? It's not illegal spying or theft of trade secrets. Rather, it is much like the classic intelligence gathering that has long been used to guide public policy. But in the corporate world, CI experts have a more prosaic goal: to give executives a systematic way to collect and analyze public information about rivals and use it to make decisions. "I don't ever want to be in a fair fight," says Quaker State Corp. Chairman and CEO Herbert M. Baum. "I want an edge everyplace I go."

CI can be used both tactically and strategically. It borrows tools and methods from strategic planning, which takes a broad view of the market and how a company hopes to position itself, and from market research, which is more focused on customers' desires. Corporate snoops--including anyone from librarians to ex-government spooks--focus on the broad competitive environment, adding an analytical twist: the anticipation of a rival's move. CI serves as a radar screen, spotting new opportunities or helping avert disaster. It's also controversial. Murky ethical and legal boundaries have kept many away from the practice.

Using techniques that range from Internet surfing to rooting through trash bins, analysts dig up everything from rivals' new products and manufacturing costs to profiles of executives and their decision-making. The oddest things can come in handy. Anne E. Selgas, Eastman Kodak Co.'s director of competitive intelligence, regularly reads an extensive list of publications that even she considers a tad bizarre. Her favorite is The Transylvania Times, a semiweekly out of tiny Brevard, in North Carolina's Transylvania County. A medical-film rival--Sterling Diagnostic Imaging Inc.--has a plant there, and Selgas says the paper has lots of hiring and layoff news that helps her understand what's going on.

DATA GLUT. Yet it's not enough simply to obtain piles of data. Thanks to the Internet and computer databases, information is now a commodity, cheap and widely available. Good CI helps filter through that noise to find and analyze the relevant facts. "We no longer live in the age of information," says Larry Kahaner, author of Competitive Intelligence, a new book that sold out its entire 20,000-copy printing six weeks after it hit the shelves. "We live in the age of intelligence."

Although long accepted in Europe and Asia, CI is only now taking hold in the U.S. That's partly because of the globalization of the economy, which requires better intelligence to anticipate threats from abroad and to penetrate overseas markets. The quickening pace of technological change and deregulation also is fueling the trend. It's easier than ever to be blindsided by a competitor who can take the lead with a single innovation. In fast-deregulating and restructuring industries, such as utilities and financial services, tomorrow's archrival may not even be on the playing field today. "The past isn't as relevant," says Vance D. Coffman, president and COO of Lockheed Martin Corp. "Hockey players skate to where the puck is going to be. You have to play the game that way."

Increased competition prompted discount brokerage Charles Schwab & Co. to create a CI program in 1994. Schwab keeps track of both traditional and new competitors by paying consultants to visit rivals' facilities, hiring competing firms' workers, and quizzing customers. "Our antenna is much more attuned to our competitive environment," notes William S. Baughman, senior vice-president of strategic marketing.

The payoff can be handsome. Nutrasweet's Flynn, who retired last year, has estimated his intelligence unit was worth at least $50 million a year in sales gained or revenues not lost. Still, one of CI's highest hurdles is misunderstanding. When gas utility Pacific Enterprises created its unit, its "James Bondish type of fame" soon gave way to employees' realization that "there's nobody talking to telephones in the bottoms of shoes," recalls Charles B. Rooney, director of business strategies.

The shady image is buttressed by companies that allegedly crossed the line. Example: the industrial espionage case Boehringer Mannheim Corp. filed June 19, accusing Johnson & Johnson's LifeScan Inc. of stealing confidential data and eavesdropping on a sales meeting to learn about the performance of Accu-Easy, a Boehringer blood-monitoring device. Boehringer is suing for triple actual damages and punitive damages. J&J admits to some improper activities (BW--July 8), but denies other charges and hopes to settle the dispute. And the costs of missteps just got steeper. On Oct. 11, President Clinton signed legislation making industrial espionage a federal crime carrying penalties of up to 15 years in jail and $10 million in fines.

Yet most of what corporate snoops do is completely legal, nerdy work. They spend hours attending trade shows and talking to securities analysts and suppliers. A gift for finding nuggets in obscure places is a big asset. Last year, a client hired Cambridge (Mass.) consultant Fuld & Co. to study a competitor's manufacturing capacity. Fuld found a publicly available Uniform Commercial Code filing the company had submitted to the state--containing a detailed listing of every bit of equipment in the plant. "We hit a gold mine," says Fuld Senior Vice-President Michael A. Sandman.

NO GUARANTEE. Using competitive intelligence is no guarantee of success, of course. In 1992 Merck's Mevacor cholesterol-lowering drug was suffering from a marketing arrangement between Bristol-Myers Squibb Co. and drug distributor Medco Containment Services Inc. that substituted Bristol-Myers' Pravachol for Mevacor. Merck's intelligence unit learned that Bristol-Myers was discussing a possible merger with Medco. The company hired consultant Booz Allen Hamilton & Co. to run simulations, which found that Merck's pricing power would shrink as the clout of Medco and other new forces grew. Merck concluded the only option was to buy Medco. But one source familiar with the events says the CI unit missed a key tidbit: Bristol-Myers had already lost interest. So Merck paid $6.6 billion for Medco in 1993--a price many think inflated. Merck declined a specific response but says Medco was "a highly successful acquisition."

Intelligence can also be thwarted by rivals' countermeasures, as is illustrated in a tale of intrigue involving Kodak and Xerox Corp. In early 1995, a Kodak copier salesman told a Xerox technician that he was being trained to service Xerox products. The Xerox employee told his boss, who passed the news to the intelligence unit. Using such clues as a classified ad Kodak placed seeking people with Xerox product experience, they verified Kodak's plan--code-named Ulysses--to service Xerox copiers.

Kodak drew blood first, growing into the largest independent servicer of Xerox copiers and shrinking Xerox' margins. But the warning allowed Xerox to devise a scheme to reemphasize its service and Total Satisfaction Guarantee, which allows copier returns for any reason as long as Xerox does the servicing. By May, 1995, when Kodak launched its plan, Xerox had been trumpeting its line for three months.

Kodak parried. Its corporate snoops had anticipated Xerox' move, so it pledged to honor its rival's guarantee. Yet in the end, Ulysses' servicing gains didn't offset Kodak's lagging profitability from copier sales. Xerox' margins bounced back in the second quarter of 1996. Says Xerox spokesman Jeffrey J. Simek: "We were able to mitigate any incursions into our market share." In September, Kodak agreed to sell most of its copier business to Danka Business Systems PLC. Xerox' CI folks had anticipated that deal too, and had a press response ready: They'd target Kodak customers.

While that battle was above board, some CI forays end up in gray areas. Consider a "competitive ambush" that J. Nile Wendorf, a senior partner at Oak Park (Ill.)-based Tactical Marketing Associates (TMA), undertook three years ago for a food-industry client. Its goal was to grab share by surprising a rival with a steep price cut. Wendorf's first task was to analyze the target's decision-making structure, which gave the rivals' sales reps some leeway to cut deals on the spot with retailers.

First, Wendorf's team interviewed retailers and ex-employees to find out where sales reps' discretion ended and higher-ups had to sign off on a discount. Then they used CD-ROM databases to track down phone numbers of top execs' neighbors. The snoops weren't shy. One investigator told an executive's neighbor she wanted to speak with the executive's wife at a Brownies' meeting. The neighbor said the couple would be in Europe. It turned out that several senior managers were going on a European plant tour, and Wendorf's team located their travel agent--who provided the itinerary.

That gave Wendorf's client the opening it needed. The price cuts were launched when its rival's executives were several time zones away. It took days for each rung of the competitor's U.S. management to O.K. matching prices, and more time was lost because of time differences. Wendorf says many retailers switched because the other company couldn't take orders quickly enough. Integrating information into a plan of attack was key, he adds: "Until you do that consistently, you haven't really exploited the full value of CI."

Such techniques have detractors. Talking to the travel agent is "short of looking into somebody's briefcase, but not much," sniffs W. Michael Hoffman, head of the Center for Business Ethics at Bentley College in Waltham, Mass. Even Wendorf admits he would consider the call to the neighbor "an invasion of personal privacy," saying that sort of thing is used as a "last resort."

Indeed, as the use of intelligence spreads, it faces major obstacles, from skeptical executives to cautious lawyers. One barrier is cultural. Unlike executives in Japan and France, where many companies pursue CI and sometimes even industrial espionage with gusto, some U.S. managers consider the process unsavory. Emmanuel A. Kampouris, CEO of $5.2 billion American Standard Inc., which makes toilets, brakes, and air conditioners, says he won't go much beyond studying the press, financial reports, and market research. "This is not warfare," he says. "I don't consider our competitors as communists or Hitler."

Other execs see intelligence as a must in a cutthroat world. In his book Staples for Success, Staples Inc. Chairman Thomas G. Stemberg tells of having his wife, Dola, apply for a job with archrival Office Depot Inc.'s Atlanta delivery-order center. Staples, which has since announced plans to buy Office Depot, was considering starting its own delivery service. Dola halted the process before an interview--but not before learning some training methods. While some experts disapprove, Todd Krasnow, Staples' executive vice-president of marketing who oversees competitive research, responds that job ads are an invitation to ask for information, and that Dola asked questions any applicant would.

ANTITRUST? Indeed, there is a fine and not always clear line between nosiness and illegality. Some companies could fall into legal booby traps even if they aren't stealing secrets. Companies with large market share have the most to fear, says Carole Basri, a Deloitte & Touche consultant and professor at the University of Pennsylvania Law School. She says a market leader might run afoul of antitrust laws if it gets pricing or raw-material cost information and uses it in anticompetitive ways. Companies with less market clout run fewer risks.

Legal constraints are less of an issue for companies using technology to collect the vast quantities of public data. Web pages contain new-product information that once took days to ferret out, and databases have turned what was once an information famine into an equally confounding feast. Companies such as Real World Intelligence Inc. have sprung up to help sort through the maze. Founded by ex-CIA official Herbert E. Meyer and software expert Michael S. Pincus, the Chesterland (Ohio)-based company offers customized software developed for the CIA. M. Lee Smith Publishers LLC of Nashville used the package--which searches by concepts instead of tracking keywords--to help it gauge demand for publications on privacy and telecommuting.

Many companies have stitched together electronic networks to gather news from the field. Pacific Enterprises created an online system in July, using Lotus Notes and an Intranet to let employees funnel information into a central location. It also published information-gathering guidelines as part of the code of conduct. Ryder System Inc. CI Chief Faye Brill tells all employees that their insights are essential. "Eighty percent of what you need to know is inside your company," she explains.

To cover their tracks, many companies hire consultants. Targets may keep mum if a competitor calls but be more open with consultants who say they are doing benchmarking. This has helped turn a cottage industry into a mushrooming business. Real World Intelligence, for example, has doubled its earnings every year for the past five years, and Kaiser Associates Inc. in Vienna, Va., has doubled revenues in the past two years to about $20 million. It expects to double its size in 1997 and 1998. Consultants also help companies defend themselves from snoops (table) without stifling the information flow needed to recruit employees and spur innovation.

In the end, the best defense may be a good intelligence offense, as AT&T, Motorola, and the few other companies that have had CI operations for years know. In the 1970s, Motorola Corp.'s Robert W. Galvin served on the White House Foreign Intelligence Advisory Board and was so impressed that he hired ex-CIA and military-intelligence folks to set up a unit. Companies such as Xerox learned the hard way. Flummoxed by the entrance into the copier market of Japanese rivals such as Canon Inc. in the early 1980s, Xerox officials concluded they needed an intelligence operation to halt market share losses. Whatever the impetus, more companies are learning that competitive intelligence sure beats competitive stupidity.

    Before it's here, it's on the Bloomberg Terminal.