April 30, 2013
Early warning is not simply a matter of spotting a trend. It also involves taking that trend out several steps to uncover major oncoming tsunamis or strategic opportunities. For good example of that, I suggest you read elements of a special report, in the recent issue of The Economist, dealing with the future of the car.
One of the most interesting pieces in it was a “report” describing what the personal automotive industry will look like in 20 years. That is a pretty good example of how this works. Can you do that for your industry now? Probably not.
Within that special report is an early warning item. Ask yourself the question: how will the emergence of driverless cars impact the insurance industry and the stock market?
The article answers the first part of the question, but not the second. It points out that most of the cost today for automobile insurance is to cover liability for accidents and posits the fact that, with driverless cars, accidents become substantially less frequent. That in turn means that costs will decline, so that revenues to the auto insurance companies will also decline. However, if this process allows more people to use cars, then more people would need auto insurance, although they would also pay less because automobiles were not have to have so many safety features. That in turn would reduce revenues. And, overall, auto insurance would become even more of a commodity product than it is now.
Today, according to the Insurance Information Institute, the auto insurance industry takes in over $164 billion a year, an amount which recently has been growing at a 2-3% rate. So the driverless car means a significant decline in its income over time.
Take it one step further. The auto insurance industry keeps its investments in forms that are relatively quick to cash out, often stocks and some kinds of bonds. If auto insurance companies do not have as much revenue and potential claims, then they do not need such reserves, so this may impact on the amount of cash flowing into the stock markets as well as the overall composition of investors and stock markets in the future.
That is what we mean about early warning. Think about it.
With the next blog, I will move onto other topics.
April 22, 2013
One problem with conducting early warning research is that the things you’re looking for not appear major at the time they occur. Think of a tsunami. What we are really concerned about is when a wave will hit a particularly shore area and how big it will be when it hits. To estimate that, we have to understand where and when the tsunami wave started, when it was merely a swell in the ocean. To understand that, in turn, we have to determine where and when the underlying seismic event, typically an earthquake, occurred and how that will affect the water above. In short, the most important event, the seismic event, is the least visible and furthest away. In addition, not every seismic event causes a swell in the ocean, and every such swell in the ocean results in a tsunami.
What is the lesson for early warning systems? It is that you look too far ahead, you cannot possibly see the impact of current events on the future. Conversely, if you look too closely at the present, you cannot really understand what will happen in the future.
To make that cryptic statement little clearer, I direct your attention to book review about Strange Rebels: 1979 and the Birth of the 21st Century. That book makes the case in 1979 was a “turning point” in world history, particularly with respect to the forces of the marketplace and of religion. The author argues that the election of Margaret Thatcher, the beginning of the Deng Xiaoping’s liberalization of the Chinese economy, Ayatollah Khomeini’s establishment of the Iranian Islamic Republic, the election of Pope John Paul II, and the Afghanistan fight against the army of the Soviet Union, with the support of the United States, all began new, powerful trends that profoundly affect our world today.
Whether or not you agree with that analysis is not relevant. The question is whether, in 1979, you could’ve seen that these events would have the impact 34 years later that they have had. The answer — of course not.
The lead time between these events and their global impacts is too long into and too indirect. So, in conducting your early warning work, do not be tricked into looking for and analyzing such long-term trends. If you can do so accurately, you should seek employment as a fortune teller.
What you have to do is look for important (not necessarily large) changes in existing trends that will impact your firm within the next five to no more than 10 years. Very few companies care to look out beyond 10 years. Why? Because today’s management will not be there in 10 years. As a matter fact it may not be there in five years. So providing management with a prediction, even if it is correct, of events that will impact the firm in 15 or 20 years is worse than useless; from management’s point of view, it is basically noise. And what do you do with noise? You block it out.
April 18, 2013
We have a little idea of what does not work. So, let’s start at the beginning, and focus on what works, not what sounds good. What kinds of forces are we looking for early warnings on? The answer is we don’t know. If we did, we would not need a warning – we would already be watching. So how do we compensate for that?
One option is not to designate one specific officer will be in charge of doing this and with coming around with a Cassandra-like view of long-term trends (and who will soon vanish back into the wood work). It is the job of everyone involved with the business to consider what long-range forces will affect the business. And by this, I do not mean the situation where something that is everyone’s job is really no one’s job. What I mean is that people in strategic planning and competitive intelligence, at a minimum, have to be involved with this – in addition to everything else.
So where do you start?
How about looking into the past? What shocks have hit your business in the past five years, whether for good or for bad. Now, which of these were foreseeable at the time and, more specifically, which were actually foreseen by anyone. Those which were not foreseen may still be logical early warning targets. Those which were not foreseeable in the past may be foreseeable now – think about that.
Now look throughout your own enterprise. Where are there other groups of persons that are looking forward and what are they doing? By looking forward, I mean, not only competitive intelligence, but people involved with strategic (long-range) planning, research and development, regulatory compliance, and finance. You should meet and work with these people and try to find out what forces and trends they are worried about that are not being monitored, that is, which ones are falling between the cracks.
Now take a look at adjacent industries. By that, I mean suppliers, customers, distributors, potential entrants into your market space, companies that make substitute or complementary products, and industries with similar technologies and regulatory issues. What long-term trends are they worried about? Here, consider things such as technology, regulations and legislation, terrorism, aspects of the global economy, outsourcing, changes in industry structures, and constraints on natural resources such as water and power. If people in those adjacent industries are concerned about these, should you be watching them as well?
Now – stop! Don’t allow yourself to become overburdened — this could become an endless (and pointless) chase.
Feel better? Looking at your own industry’s publications may be little helpful, but that is not likely. So, do not spend a lot of time there. Better, consider publications in the adjacent industries. They can sometimes useful, particularly if you look for opinions and editorials where people are more than happy to pontificate.
Now go outside your industry and its adjacent industries. Look at global publications such as The Economist, trans-industry alert services, or futurology type resources such as those of the World Future Society’s.
In addition, keep your eyes open where ever you are. Trust me, experience shows that you will have a better idea of the long run threats that face your industry and what should be the subject of early warning surveillance than someone whose job is to create teams and report back on a one-time basis.
April 16, 2013
Continuing on this occasional topic, yesterday I was reading a profile of the company that was touting its early warning system. The company described how it’s set up a team to monitor and deal with “megatrends”, trends at least 5 years out that could have a material impact on the business. To summarize it, a senior officer was selected to identify these overarching trends and their potential impact on the business. Following the definition of the trends, a team analyzed the impact of the trends on the company’s strategic planning and how it would affect its efforts in the future. The entire company’s planning team was then taken through a series of workshops on the process to integrate the megatrends into their planning, to identify potential successes and the routes to get there.
There are at least three things wrong with this, maybe more:
- First is the process of identifying the so-called “megatrends”. Without more on the process, it seems very introverted and therefore likely to miss the trends that really matter, because they are almost by definition the trends that are not being noticed by the company at present.
- Second, this process is relatively static, in that it appears that the identification of the “megatrends” is a one time or, optimistically, an annual effort. However, megatrends do not show up and grow on schedule. For a case example of that, witness the relatively fast creative destruction of the American newspaper and magazine industry by the Internet.
- Third the whole process seems to be premised on the fact that if the company can identify megatrends then it can identify new opportunities for the future. It totally ignores the fact that some megatrends may well provide only threats not opportunities.
The first stages of the early process are among the most important, and require not a top-down team, but an integrated effort using employees from across the company as well as consultation with outside experts. This example is one that will not go well.
April 5, 2013
Continuing on the subject, the next place you should be watching, beyond key suppliers and key customers, are other firms with which you have a different, lateral, relationship. By that, I mean your “partners”, whether through joint ventures, research and development agreements, minority investment in an existing business, or some other more exotic form.
I understand that these relationships carry with them nondisclosure covenants, confidentiality agreements, and the like. But the fact of the matter is that once information is in an individual’s head, that information stays there – as economists say it is “sticky”. This means you have to be particularly careful about the people that are engaged in this “partnership”. Why?
Because after a period of time, whatever is a part of our environment becomes familiar, and therefore is ignored. That means that the people you work with every day in this venture become your associates, and you stop thinking them as being “them” and start thinking of them as being “us”. So, over time, you will drop your guard as to what you talk about. This does not mean that they are seeking, nor does it mean you are willfully disclosing, competitively sensitive information. However that can happen in the course of normal, everyday conversations.
For example, a comment that someone will have to cover for you for a couple of weeks because of a temporary assignment may seem innocuous – to you. But to someone outside your firm, it may be a tipoff, involuntary, that something important is happening.
Admittedly, this just leaves an impression someone’s mind, but that impression may be competitively sensitive and come back to haunt you in the future. Just remember, keep your eye on the people close to you, those whose loyalty lies not with your firm, regardless of the reason they are working for or with you. And add to your CI targets their ultimate employers.
This does not mean you focus on a “partner” with the same intensity you do a direct competitor. As indicated before, you must be measured in the amount of time and effort you apply, but do not allow there to be a blind spot here. Devote time and the energy to at least glancing at a “partner”.
Think of it like driving your car. Most of the time you are staring ahead. But safety demands that you are continually checking your side view mirrors and your rearview mirror. You do not stare at them full-time, but you do not ignore them. Competitive safety requires that you focus most of your competitive intelligence attentions on your direct and indirect competitors, but that you at least glance, from time to time, at your “partners”. As with your key suppliers and customers, the depth and duration of your research is more limited, but should be focused on a longer view.
This will lead us in the near future to talk about early warning or environmental scanning as a part of, or least an adjunct to, your own competitive intelligence efforts.