don't be blindsided: how an early-warning system helps you anticipate the future

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White Paper

Don’t Be Blind-Sided

By Industry Upheavals: How an Early-Warning System Helps You

Anticipate the Future

By Leonard Fuld

Fuld & Company

Cambridge, Massachusetts USA

Copyright © 2004



White Paper

Don’t Be Blind-Sided By Industry Upheavals:

How an Early-Warning System Helps You Anticipate the Future

By Leonard Fuld

One after another, major corporations are being caught off-guard by industry upheavals — hugeindustry upheavals. Kodak has been caught unprepared by the movement to digital photography. Sun

Microsystems is trying desperately to adjust to the trend toward open source software. Merck has been

thrown off balance by the movement in the pharmaceuticals arena to partnerships with biotechnologycompanies.

The problem of these and other large companies? A failure to anticipate the industry upheavalsearly enough to develop appropriate long-term strategies.

The solution: An “Early Warning System” keyed to both industry change and competitive actions.

Executives know they will be experiencing upheavals in their industries. They just seem to feel powerless to confront them.

According to a recent survey, more than 93% of strategists believe that their companies will

experience competitive shocks in the near future, yet only 3% of them have any kind of “Early Warning

System”. The results can be calamitous.

The combination of dangers confronting executives and the difficulty most have confronting these

dangers prompted me, on behalf of Fuld & Co., to provide insights into how to begin developing aneffective Early Warning System. In this paper I:

• Define what Early Warning is and is not (how it is NOT watching or monitoring).

• Provide case examples of companies that have effectively used Early Warning.• Describe the essential tools of an Early Warning System.

• Identify emerging upheavals for several important industries.

What is Early Warning?

First, what do I mean by “early warning”? It is not watching or monitoring — they are not thesame. Early warning is about seeing a few moves ahead of the current market. Monitoring is the task of

keeping watch on existing competition and competitive threats or opportunities. Wherever you have high

impact and a certain set of events, the problem or the opportunity is already at your doorstep. You musttrack it now, with all of your resources: databases, heard-on-the-street information, and other means of

monitoring.

If you believe, however, that a certain event has both high impact on your business and a great deal

of uncertainty surrounding it — mostly because it is a bit too far into the future — you have a perfect

candidate for implementing an early warning process. What makes such an early warning processessential is its ability to enable a company avoid driving itself toward one specific outcome, which

increases its chances of being wrong and failing. That’s risk. Taking the time to sketch three or four

Copyright © 2004



outcomes — and plan strategies that account for each outcome — gives a company a safety net. The

company will be prepared no matter how the future unfolds, and it won’t fail.

Case Examples of Effective Early Warning

Companies, as diverse as Shell, Visa International, and AstraZeneca, have benefited a great dealfrom early warning processes.

Visa International was concerned during 2000 with the potential invasion of the P2P (Peer-to-Peer)Internet alternative payment systems, which promised to make paying on the Net and elsewhere very easy.

Of course, at the same time, it threatened to marginalize the traditional credit card players – Visa and

Mastercard, among them.

Visa’s intelligence organization not only developed the scenarios, but also identified signals

necessary to track whichever roadmap would emerge. The signals included the P2Ps’ level of advertising

expenditures, their ability to sign up (and sign away) merchants, and even the level of capital the venture

funds were investing in these startups. Quarter after quarter, the intelligence team tracked the markers.By early 2001, the scenario that emerged was far less threatening. Monitoring and reporting on the

evolving nature of this potential threat also gave Visa management time to roll out a reasoned strategy thatwould both strengthen its market position and retain its customer base.

Three years ago, AstraZeneca’s strategy and intelligence organizations began to build a similar early warning process, which has enabled the firm to make changes in its business. The firm linked the

strategy creation and early warning processes and broke them down into six steps:

• Identify key drivers

• Build scenarios (roadmaps)

•

Determine strategic implications• Adjust company strategy

• Maintain learnings (early warning)

As with Visa, the AstraZeneca team spent a great deal of time at the beginning preparing the

foundation for each potential scenario. That foundation is a set of drivers — forces shaping whatever future world could emerge. They spent weeks interviewing panels of internal and external experts to elicit

these drivers, test them, and ultimately prioritize them.

The drivers were used to create a series of scenarios, which in turn had to be distilled to a small set

of plausible, if not always probable, visions that delineated the possible boundaries of the future. These

visions then became a “toolkit” for the management team to use in creation of its strategies. The earlywarning process is structured around understanding the continuous evolution of the driver set, how that

impacts the scenarios, and the associated strategies.

An Early Warning Toolkit

The tools of an early warning system are:

• Scenario analysis

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• Monitor trigger points that signal the likelihood of one scenario evolving over another

• An effective means to expedite decisions (when you can clearly see the shock approaching)

While the payoff can be enormous, management needs to have discipline and patience, the sametype of patience, e.g. that a pharmaceutical firm has in bringing a decade-long experimental drug to

market. Early warning is a process, not a quick fix.

Scenario analysis is an art, and most companies fail to connect the future roadmaps they created

through scenarios with a process to track those potential futures. Hence, surprises and shocks inevitably

arrive.

Upheavals that have arrived

An examination of several currently emerging upheavals tells us that some companies will actually

thrive on the changes, while others will wind up flat on their backs, fighting for survival. Here are three

examples:

• Software industry. Larry Ellison of Oracle saw the industry shock of consolidation rapidly

approaching in early 2003, when PeopleSoft moved to consolidate its industry by making anoffer to buy J.D. Edwards. He was ready and put a plan in motion. Sure, events haven’t

unfolded exactly the way he envisioned (i.e. he’s had to raise his bid twice already), but he’s

still in the game.

• Digital photography. Fujifilm’s CEO Minoru Ohnishi saw the possibilities for an emergingdigital revolution as early as the mid-1980’s and began to develop digital imaging capability;

Kodak did not. Quarter after quarter, Kodak has attempted to explain away its loss of market

share and revenues with less and less conviction. Kodak is now caught in the vortex,

struggling to climb out of the chemical film quagmire, its cash cow for more than a century.Fuji is riding out the storm quite nicely, leading Kodak in installation of U.S. retail digital

minilabs by 50-to-1.

• Pharmaceuticals. The power of Direct-to-Consumer marketing, particularly in the form of

Pfizer’s Lipitor, was an upheaval that caught Merck’s statin drug, Zocor, by surprise. Pfizer pushed its lower-dosage drug through well financed advertising, promotional and sales

channels. With the failure of Merck to sustain its pipeline, it and at least one or two other

major pharmaceutical companies will probably merge and continue the consolidation forced by pricing pressures and the increasing successes of biotechnology companies on the high end,

and generic incursions on the low end.

Industry upheavals almost on our doorstep

• 2005-2007: A multi-pronged telecom upheaval, involving — 1) High-speed wirelessthreatens to undermine cable operators and will accelerate the demise of neighborhood video

rental stores; 2) Long-distance carriers will find their revenue dropping precipitously from the

revenues shifting to wireless which themselves are undergoing withering price pressures, aswell as the Voice Over IP that will quickly drain revenue from the former long-distance cash

Copyright © 2004



cows. There will be a trial of 802.11g, a high speed wireless standard, either in a densely

populated downtown setting, or a new suburban development, in which video will be sent

wirelessly, thus circumventing cable. The upheaval is the threat to the cable monopoly onvideo, as video over wireless becomes an additional competitor. The trend to using the same

chips in TV displays as in computer displays is further evidence of the emergence of IP-based

entertainment devices, leading to the emergence of routable video and a lowering of barriers toentry in home video. We will start to see Wi-Fi hotspots link up to build informal metropolitan

area networks, offering high speed Internet access and VoIP calling, particularly for young

urban dwellers. While not enough to severely impact wireline and traditional wireless carriers,this is further bad news on top of the widespread emergence of VoIP for the wireline carriers.

• 2004-2007: Erosion of tax benefits on issuers of annuities threaten existence of a major

market for insurers (5-year timeframe): The federal tax code will wipe away the tax shelters

currently offered through this investment channel, and a major revenue source for most large

insurance carriers. Congress is currently working on tax legislation that includes tax cuts tohelp grow the economy and support job opportunities. Included among the proposals are tax

cuts on dividend income and capital gains for individuals, but it does not include similar taxrelief to variable annuities.

Although industry upheavals are cataclysmic changes, they signal their approach long before

arriving on the competitive scene. The challenges for executives lie in how they actually determine whichupheaval will be “foundation shakers,” and how they prepare their companies to turn the disruption into

opportunities. The key for executives to make effective decisions lies in a newly evolving form of

scenario modeling to anticipate potential futures, and then to monitor them on an ongoing basis so that

adjustments can be made as potential upheavals either gain or lose steam.

For more information, contact: North America: Leonard M. Fuld, [email protected] or +1 (617) 492-5900

Europe: Anthony Nagle, [email protected] , or +44 (207) 659-6999

Acknowledgements: The author would like to thank Ben Gilad for his pioneering work in early warning

and to Michael Sandman of Fuld & Company for this contributions in scenario analysis and war gaming.

Other sources to review:

“Be Prepared,” Leonard M. Fuld, The Harvard Business Review, November 2003

“War games in an Era of Collaboration,” Michael Sandman/Leonard M. Fuld, CriticalEYE , October-

November 2003

Leonard Fuld is president of Fuld & Company, a Cambridge, Massachusetts-based competitive

intelligence consulting firm and author of recently published Harvard Business Review article on early

warning.

Copyright © 2004

mailto:[email protected]




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