More on Early Warning

February 21, 2018

Fortune magazine recently did a piece on Shell, one of the pioneers in developing and using early warning systems. At Shell, the outputs are called “scenarios”.

The article indicated that the Shell early warning team “concluded that global demand for oil might peak in as little as a decade – essentially tomorrow in an industry that plans in quarter-century increments.” The piece goes on to detail what Shell is doing: “making some big strategic bets.”

What is of interest is that the rest of the oil industry now knows what She’ll is and will be doing. That raises an interesting issue: by acting and revealing what actions Shell, a dominant force in the oil industry, will take, Shell is giving its competitors, suppliers, and customers insights into its own contributions to making the oil industry look different from today. And that is also changing the future Shell has projected. That means that, if Shell is right about its scenario, by acting and broadcasting those actions, it may, nay will, cause the future to be different from what it would be absent it’s actions.

Of course, this means that, in a decade, when Shell measures it’s accuracy in predicting the future, it may find it was wrong. But, this is because it did\could not factor in the direct and indirect consequences of its response to what was then still in the future as well as the responses of others in this business ecosystem to its responses, etc. Yet, the scenario could still be extremely invaluable, even if they cannot prove it.

Is your brain still on straight? Welcome to a brave new world.


Early Warning

I am a proponent of the “early warning” use of competitive intelligence. However, any early warning program requires an inclusive, rather than selective, definition of competitors and what constitutes potential competitors.

Let’s look at a recent event from the perspective of the health insurance market.

“Two mega-health insurance mergers terminated” [1].

Would/could early warning pick that up? Almost certainly. Why? Because these transactions involved the 4 dominant players in the group health insurance market. Any/every health insurer should have been watching all 4 of these firms and should have been on top of the legal and financial drivers which might enable/hinder these transactions, probably without much additional research.

What about these two other recent events impacting the same market?

 “CVS Health [owners of the pharmacy company] to Acquire Aetna; Combination to Provide Consumers with a Better Experience, Reduced Costs and Improved Access to Health Care Experts in Homes and Communities Across the Country”[2].

“Amazon, Berkshire Hathaway, JPMorgan Chase to tackle employee health care costs, delivery”[3].

I doubt that any early warning mechanisms in this market  picked these up, for any one or more of several reasons (disclosure, before coming to CI, I previously worked in the health insurance industry):

It is unlikely that most firms in this market have heavily invested in early warning activities because their regulatory structure establish high barriers to entry. Firms regard this as virtually eliminating the entry of new or expansion of existing competitors, at least without some notice from monitoring filings with state regulators.

People move relatively freely from one competitor firm to another, producing an underlying sense that “we sort of know what is probably going on”. That undermines the effort to advance early warning, at least by limiting its focus to the “usual suspects”.

The focus of the industry has been on monitoring the political and regulatory activities at the state and federal level, inducing and supporting a short-term vision of structure and marketing. Short-term stress does not work well with long-term early warning.

The same focus would preclude any early warning system from considering the likelihood that non-insurance firms could/would take steps that might fundamentally change the health insurance industry.

The CI focus in the industry is most often on new products and their marketing, technology acquisitions, and changes in relationships with brokers and agents. Did you see the concept of structural change or existential threat? I didn’t.

Lesson? Come to an early warning system with as few preconceptions as possible. Recall the analogy of the lookout at sea: the lookout surveys all directions (not just on either side), constantly (not only periodically), and for anything that could become a potential threat (not merely any anticipated and identified threat).

[1] https://www.bizjournals.com/milwaukee/news/2017/02/14/two-mega-health-insurance-mergers-terminated.html.

[2] https://cvshealth.com/newsroom/press-releases/cvs-health-acquire-aetna-combination-provide-consumers-better-experience.

[3] https://www.usatoday.com/story/money/americasmarkets/2018/01/30/amazon-berkshire-hathaway-jpmorgan-chase-tackle-employee-health-care-costs-delivery/1077866001/. This event reportedly caused an immediate 5% drop in the stock prices of major health insurers.


Just connect the dots?

May 10, 2017

I just finished re-reading a mystery written just before the horrible events of 9/11. It made me reflect on the difficultly of satisfying the oft-repeated (but rarely fully appreciated) mantra to “connect the dots” and how difficult that can be, particularly in the context of any early warning process[1].

Let me give you a taste of a few things that leapt out at me from this story:

  • The tale revolves about  Islamic terrorism impacting the US.
  • The mission involves hijacking a passenger jet.
  • One individual notes these jets pose an explosive danger “within a hundred-yard radius” of the plane.
  • The author, commenting on the then lax security at airports, has a character note that “America wasn’t ready for any of this.”
  • The terrorist mission is religiously justified.
  • In one chilling scene, the terrorist is driven over the Verrazano Bridge, and sees the two World Trade center towers. His associate, not a terrorist, says, referring to the towers, “Maybe next time”, to which he replies, “God willing.”

Amazing, isn’t it? This is an author who was talking about, or at least predicting, the then-forthcoming attack on the World Trade Center towers, right?

No.

These elements connect with 9/11 only in the way I put it. These “dots” are a very few among the hundreds of others in the fine 1,000 page novel by Nelson DeMille, The Lion (2000).

In this case, these specific dots did not predict or foreshadow 9/11. Take them in turn:

  • The Islamic terrorist who comes to the US comes from Libya, not Saudi Arabia, and is associated with the Libyan government. His mission involves killing former US Air Force personnel while he is in the US. There is no team.
  • The passenger jet hijacking gets the single terrorist into the US, where it is landed via autopilot. It is not flown into a target.
  • The person noting the explosive power associated with jets is the hero, in law enforcement, not the terrorist.
  • The comment “America wasn’t ready for any of this” refers to the hijacking, which resulted in the deaths of all passengers and crew due to poison gas.
  • While the terrorist sees his mission as religiously justified, it is also very personal and political.
  • The reference to the two World Trade center towers and “next time” recalls the failed 1993 attempt to blow up the south tower, and not to the terrorist planning to assault the towers again. In fact, the terrorist thinks the 1993 attack was cowardly.

The lesson? it is very easy to connect the dots in retrospect. Way too easy. Conversely, it can be almost impossible to figure out which dots to connect in advance, much less how they do connect. And the selection of which dots to connect is can too often be an exercise in proving what the analyst already believes is likely.

[1] Just a brief commercial message. Early warning systems are dealt with in a forthcoming book which I co-authored with my significantly better half: Carolyn M. Vella and John J. McGonagle, Competitive Intelligence Rescue: Getting It Right, Praeger, August 2017.


A Little Different Look at Strategy

May 8, 2015

At the recent conference, I suggested a change – a tweak if you will – in strategy development[1]. I advocated adding a risk management approach to strategy development and monitoring. Let me give you a very high level summary of that.

Specifically, I suggested using the ISO 31000 framework[2] for risk management to fine-tune and continually refresh strategy development programs. Why?

I believe that strategy development professionals can markedly enhance the value of their work product by integrating the principles and methods of risk management into developing and then monitoring global strategy.

Today, while some senior managers may be involved with strategic risk management efforts, it is usually seen as very separate from strategy development. However, using ISO 31000’s risk management principles in strategy development provides all levels of management with a proven set of powerful tools not previously used by them.

To summarize, a risk management approach provides key principles that would be useful, very useful, for every strategy development effort:

  • Identify and then assess the risk in every
  • Avoid being paralyzed by the existence/presence of risk. Risk is everywhere. You cannot avoid it.
  • Continually seek out new data, especially after decisions have been made and plans launched.
  • Evaluate your options both before and after decisions are made.
  • Continuously monitor your own actions and the risk factors that you face.
  • Use the ISO 31000 framework to fine-tune and continually refresh your strategy development and monitoring.

How do you use that ISO 31000 framework?

  • First, employ risk identification techniques to disclose threats/opportunities – this gives a new focus. This also helps prioritize actions. But, it is critical to understand a key element of this approach. “Risk” is no longer to be seen as merely the “chance or probability of loss“. It is now to be seen as “the effect of uncertainty on objectives”. What is the difference? “Risk” should now encompass positive as well as negative probabilities. In other words, uncover not just threats, but also opportunities. To do this, those in strategy development has to learn to look for early warnings out many months, even years both before and after the strategy is developed. Unfortunately, most strategy development does not usually look that far ahead. Here, incorporating strategic/competitive intelligence early warning techniques and personnel is critical[3].
  • As a part of this, the strategy development team must learn to define targets that have not emerged. In other words, strategy development does not end with the launch of the plan – it is just beginning there.
  • Third, under ISO 31000, there is a constant interface with senior management – as opposed to only with more “tactical” customers downstream. Strategy development teams should piggy-back that access and keep senior management continuously involved in defining and developing corporate responses. Compare this with the “fundamental disconnect” of most 3rd party planning – AKA command and control.

[1] This blog is based on the presentation, “Globalizing Your Strategy Process by Integrating Risk Management into Strategy Formulation and Monitoring”, I gave at the 25th Annual Conference of the Association for Strategic Planning, May 7, 2015.

[2] For more on ISO 31000, see http://www.iso.org/iso/home/standards/iso31000.htm.

[3] Here I tip my hat to Dr. Ben Gilad who, as far as I now, was the first to suggest a connection between competitive/strategic intelligence and strategic risk in Ben Gilad, Early Warning, AMACOM, 2004.


Macro versus micro

February 18, 2015

I’ve been very critical of efforts to conduct true, long-range, strategic intelligence. I am not going to list all of my references here, but they’re easy to find. I’ve been thinking more about it and wondering why we do not seem to have much success in terms of applying CI techniques to generate truly long-range intelligence.

Let me touch on a couple of issues:

  1. Do we know whether high-level long-range strategic intelligence actually works or not? Does it produce actionable intelligence? A friend of mine once told me (I hope my memory is correct, and I’m not having a Brian Williams moment) that when his firm reviewed its long-range intelligence estimates, it was unable to tell whether or not the CI team was correct. Why? Because so much had changed in the several years that had passed; in other words, what might have been an accurate forecast on day 1 had no relationship to what was going on day 2000. It could not determine that the intelligence was either a hit or miss.
  2. Can other disciplines do this?
    1. Going to economics, we find that there is an intellectual disconnect between macro-level and micro-level economics. First, we had yet to come up with an economic theory that is demonstrably correct, and that fully links and integrates micro to macro or vice versa. Second, while micro-level tends to have a fairly high predictive value, macro-level theories seem to have real problems there. When I was studying economics, there was an ongoing joke that a particularly well-known econometric forecasting firm’s macro-economic model was so accurate that it successfully predicted “seven of the last five recessions”.
    2. We are always fascinated with the concept of using historical trends or psychology to predict the actions of large groups of people[1]. One of the most interesting expositions of both is in the “Foundation” series by the late Dr. Isaac Asimov. That series relies on the concept of “Psychohistory” – being able to chart and even control the direction of large masses of people over long periods of time by tweaking the actions of small groups of people or even of individuals. However, that concept, even though developed by a scientist, was in fact pure fiction.

My question then is, if other disciplines and thinkers cannot generate consistently reliable, demonstrably predictive analyses at the macro-level covering extended periods of time, why then should we think that we can do better in competitive intelligence?

Now, I am not saying that conducting a long-range/early warning/very strategic forecasting process is not without value. While it is not likely to be actionable, it certainly is educational – training executives to be able to react to (now) unforeseen circumstances. However, in this world, actionable gets budget, but educational get cut.

[1] See for example, http://cliodynamics.info/, Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (Farrar, Stray and Giroux, NY 1932), Erich Fromm, Escape From Freedom  (Discus Books, New York, 1941), and almost anything on mob/mass psychology, the Nazis, or the Butterfly effect in Chaos theory.


Predictions

March 7, 2014

 I recently finished rereading The Rise and Fall of the Great Powers by Paul Kennedy. In light of the current events in Ukraine and Crimea (when did we drop “The”?), it makes a powerful case for those who believe that history repeats itself.

Professor Kennedy seems to be spot on when calling our attention to “Muslim fundamentalism”, and America’s “number one” position among world powers which he said puts it in the position of global overreach – where the sum totals of our global interests and obligations is far larger than our power to defend them all at once (Ukraine again). However, a closer look at this book, finished in 1986, show the danger of going on the record with any prophecy (or as we less honestly call it in intelligence, a prediction, projection, assessment, early warning, or scenario). For example, he completely dismissed the possibility of what was then starting the economic collapse of the Soviet Union.

These differences illustrate how difficult it is to predict the future. As he frankly said “Unforeseen happenings, sheer accidents, the halting of a trend, can ruin the most plausible of forecasts; if they do not, then the forecaster is merely lucky.” Or, as Yogi Berra, the great Yankee baseball player put it, “The future ain’t what it used to be.


Can Early Warning Be Too Early?

February 12, 2014

Just because you can see a trend coming does not mean that you – or anyone else – can or will act on it. 

Let me give you an example.  I was listening to the radio where the audience was discussing a walk-out at a local school. The reason is unimportant. But what followed was a discussion of when, if at all, the listeners had been involved in something similar.

 Of course, most of them were angels – never, never, did such a thing.

But one caller admitted that, in 1963, she and some high school classmates had staged a walk out over the failure of the high school to establish – ready – a smoking room for seniors. Wow! Things have really changed. And that is the point.

In the past week, the Acting Surgeon General of the US called for a drop in the adult smoking rate from its current low of 18% to under 10% in the next decade. And smoking rates for US teenagers are at record lows. How did we get from there to here?

That question provides an interesting look at early warning. Consider the following partial time-line:

1963 – A group of Pennsylvania high school seniors calls for a smoking room for them. According to the Robert Wood Johnson Foundation, per capita consumption of cigarettes, which was rising during the 1950s, reaches its peak.

1964 – The US Surgeon General reports that cigarette smoking is a “health hazard”. Per capita cigarette consumption falls by 15% following the report.

1970 – Cigarette ads are banned from US television and radio.

1984 – The US Surgeon General calls for a “smoke-free” society by 2000.

1994 – Prices of cigarettes begin a two-decade long increase, driven by higher taxes. The Associated Press reports that “on average a pack of cigarettes that would have sold for about $1.75 20 years ago [in 1994] would cost more than triple that now [in 2014].”

1995 – California becomes the first state to ban smoking in public buildings.

1998 – The major US tobacco companies settle a case brought by 40+ states seeking compensation for the costs of treating smoking-related illnesses; smoking is banned on domestic US airline flights.

2014 – The US Surgeon General links smoking to diabetes, colorectal cancer and other problems. 

OK – cigarettes in the US are in trouble. When should the early warning have been sounded? 1964, 1970, 1994, this year?

 Probably in 1964. But, if you have sounded that alarm, who would have cared. Who would have acted? And what, if anything would they have done? In fact, why would they do anything? The eventual, inevitable decline would not take hold until well after they all had retired or died. So why should they act?

What I am trying to indicate is that an early warning system has to view the future in a time frame when you (and your firm) can and will take action. Look too far out and maybe you can see the future clearly. But no one else may care.