How to Assess a Competitor’s Propensity toward Risk in Competitive Intelligence

The bigger the risk an individual or organization takes, the bigger the chances of failure or success. Your competitive intelligence team can often predict an organization’s decisions based on the level of risk it tends to take in the area of product innovation:

  • Level 1: Continually improves existing products.

  • Level 2: Seeks to innovate in the existing product area — looking for the next little thing and rarely the next big thing

  • Level 3: Engages in both related innovation (the first two levels) and unrelated innovation (totally new and different product areas)

Note that the level of risk rises with each level of innovation. In many ways, Steve Jobs might be best described as the leader who was willing to engage in unrelated diversification, succeeding in several different industries: computers, cellphones, and even the music industry.

Knowing your competitors’ propensity toward risk significantly improves your ability to predict their likelihood of pursuing future initiatives.

How to use historical innovation efforts to predict future efforts

Assuming an organization hasn’t had a recent shake-up in its leadership, you can often predict its future course according to any changes in direction it has made in the past. As you research your competitors, keep a list of products they’ve introduced to the market over the past couple years. You should see one of the following three patterns:

  • One-hit wonder: The organization won big with its first product and hasn’t done anything creative since then.

  • Me-too innovation: The organization introduces a new product only in response to innovative products introduced by its competitors. This organization is likely to remain behind the curve.

  • Existing product innovation: The organization continues to improve its current products but rarely, if ever, introduces a new product line and only when forced to by its competitors.

  • First mover: The organization almost always beats its competitors to the punch, leaving them questioning, “Why didn’t we think of that?”

As you examine your competitors’ history of innovation, keep an eye on their agility index. A company with a poor history of innovation would require a significant improvement in its agility index in order to move from being a me-too innovator to a first mover.

For example, suppose your intelligence indicates that a competitor has decided to emulate 3M and create internal initiatives to stimulate high levels of related and unrelated diversification.

A quick look at the company’s agility index reveals just how capable the firm is of executing that initiative. If its agility index is 27 percent, for instance, it has little chance of success unless, of course, it takes big steps to overcome its deficiencies, such as replacing the CEO or hiring a leading expert in critical technology.

Before you put too much stock in a CEO’s history of innovative decisions, do an in-depth analysis of the state of the firm:

  • If the firm has stable earnings, you’re safe in predicting future actions based on the past.

  • If the firm is in a declining stage, approach the CEO’s history of innovation with some degree of skepticism because the CEO may try to change direction to turn things around.

  • If the firm is in crisis stage, don’t be surprised if the CEO totally changes her approach to innovation. After all, desperate times call for desperate measures.

How to mine annual reports to predict future efforts

A publicly traded company’s annual report tends to be more about self-promotion and less about painting a true picture of the state of the firm, but you should still keep an eye on these reports to stay abreast of any changes in the organization that indicate a change in direction related to risk taking and innovation, such as the following:

  • A change in leadership from a risk-averse CEO to someone who has a track record of making bold decisions or vice versa

  • A decision to invest significantly more or less in research and development

  • Hiring of innovative designers, programmers, engineers, and so on

Perform a variance analysis of the firm’s income statement and balance sheet. In other words, look at how the numbers have changed from one quarter to the next.

For example, if a competitor’s R&D costs increase by 25 percent, that variance can indicate that the firm has adopted an entirely new strategic approach. By calculating changes as percentages, you can quickly pick up on how the firm is allocating its funds (and possibly better understand its strategies).

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