Intelligence failures:

Competitive Intelligence
and Strategic Surprises
By Avner Barnea, Ono Academic College, Israel

In 1962, Roberta Wohlstetter published a book failure. Israel has paid dearly in human life and in military
on the Japanese attack in Hawaii in 1941. This attack equipment (Bar and Schaeffer 2008).
led President Franklin Roosevelt to decide that United
States would join the Second World War and open its Far
Eastern Front (Wohlstetter 1962). The US administration
had a good and accurate picture of Japanese intentions, PREVENTING SURPRISES
based on information collected by US intelligence. Sixty-nine years after Pearl Harbor and 37 years after
However, senior level decision makers in the military and the Yom Kippur war, the subject of handling information
political areas, including the president himself, failed to and prevention surprises, in both the national intelligence
pay attention to the warnings prior to this attack, leading and business environments, are still concerning decision-
to a major strategic surprise. Although many years have makers in both areas. Avoiding intelligence failures
passed since its publication, the Wohlstetter book is still demand timely warning. The nature of warning is
considered important in the field of intelligence failures. determined by two parameters:
Wohlstetter was the first to distinguish between
“signals” (information quality) and “noise” (information • Clarity: Are the signals received evident enough to
not relevant that can be misleading). For the first time convince decision makers?
an important discussion was held regarding the question:
Why did U.S. intelligence, which held good information, • Timing: Is the time gap sufficient to take measures
fail to evaluate the Japanese intentions and why did to encounter the threat?
the decision makers not recognize the threat and make
appropriate plans? In retrospect, the information already
A high quality early warning delivered to the decision
obtained indicated that the Japanese intended to attack
makers must meet these two demands.
imminently.
As the information revolution becomes more
On October 1973, Egypt and Syria launched a major
pronounced, the page of change in the competitive
military attack on Israel known as the Yom Kippur war.
environment quickens, and competition becomes more
Despite much early warning information on the coming
global, we are seeing additional growth in academic
attack, Israel was caught unprepared due to intelligence
intelligence research and education. While academic
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intelligence failures: competitive intelligence and strategic surprises

research in national intelligence began 50 years ago, evaluate the external business periphery and participate
competitive intelligence was a more recent introduction, actively in planning for the strategic challenges.
becoming more mature in the 1990s. One of the distinct differences between national
The business realm has a growing awareness of intelligence and competitive intelligence is the degree of
the importance of understanding intelligence failures, importance attributed to intelligence products by decision-
with more attention devoted to this topic by academic makers. For many years, an intelligence capability has
researchers (Gilad 2004). Numerous examples exist been known as an integral part of the basic capabilities
of companies, including some of the large global of the state. Decision-makers recognize the importance
corporations, misreading “signals” and being severely of receiving ongoing intelligence and assessments, and
damaged or even ceasing to exist. are aware that intelligence is an important element of
While strategic surprises are well researched in decision-making.
national intelligence, in business they are is much less There was generally no wide-spread acceptance of
studied. Let’s look into both fields to learn about their the need for competitive intelligence in business before
causes and characteristics. 1990. Managers took positions in organizations where
competitive intelligence was not institutionalized. As
the advanced in their firms, they learned to rely on their
accumulative experience, on incomplete information, and
THE CHARACTERISTICS OF NATIONAL AND frequently on their intuition rather than on established
COMPETITIVE INTELLIGENCE intelligence.
The role of national intelligence is to collect In recent years the recognition that competitive
information on threats, assess their significance and intelligence is one of the core capabilities of a firm has
prepare final products (assessments) for the attention been growing. It is now becoming perceived as one of
of decision makers. Competitive intelligence operates the essential capabilities in this competitive environment,
according to this discipline, but in comparison to national along with marketing, sales, research and development,
intelligence it has limited resources, resulting in fewer logistics management, human resources management, etc.
abilities to monitor mass information and analyze topics
of interest. Traditionally major business failures are Research of business failures often does not relate
attributed to various management causes and very rarely to intelligence problems, but to other causes such as
to intelligence failures in understanding the external unsuitable products, wrong pricing, slow response to
environment, which narrows the ability to respond in time competitors’ initiatives, personal failures of managers,
and to take the right measures. etc. In most cases, even in major business failures, it was
possible to repair losses within a reasonable time and
Changes in the national intelligence establishment return to profitability. Only in exceptional cases was the
are often implemented immediately, while this kind of price of failure irreversible, such as the closing of a firm or
changes happen in the business sector over the course of inability to return to level of significant profitable activity.
a generation of management (Emmons 2007). (See the
difference between the immediate establishment of the Conventional solutions of replacing senior
National Counterterrism Center as a result of the 9/11 management and implementing internal organizational
Commission Report and the urgent action required to save changes usually ignored main problems like lacking
IBM in the early 1990s when it took IBM few years to intelligence or overlooking available information, and
move from hardware to software and services and find its focused on common issues as the firm’s organizational
new identity.) failures and its inferior performance.
Competitive intelligence is seeking its appropriate Significant national intelligence failures were usually
place and the attention of decision makers. For many followed by comprehensive investigations of the reasons
years, competitive intelligence focused mainly on tactical for the event and their implications to avoid them in the
information, monitoring competitor’s actions and future. Generally, the investigative report was accompanied
evaluating what could happen in the short term. In recent by a disclosure to the public of the failure’s causes and
years a growing recognition that the firm’s competitive its consequences. Changes in national intelligence
advantage is sustained by the intelligence support of establishment were usually executed immediately.
business strategy has assisted firms to recognize and

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 intelligence failures: competitive intelligence and strategic surprises

In business a comprehensive review of internal (Watkins and Bazerman 2003). One cannot succeed in
process and learning lessons are less frequent. Changes identifying a surprise without recognition by the firm’s
in the business sector would happen over a longer senior executives to identify the threats, give priority
time, occasionally taking almost a full generation of to internal examination and, if necessary, prepare and
management (Emmons 2007). mobilize appropriate resources to stop it. A fault in any
The awareness that business intelligence can help of these stages -- recognition, prioritizing and mobilizing
avoid failures in the competitive environment is gradually resources – means exposes the firm to “predictable
expanding, together with identification of the difficulty of surprise.”
tracking changes in the operational business environment. The senior management bears responsibility not
In addition, internal “islands” of quality intelligence only to identify the danger or threat based on analysis
still exist, available to individuals but not brought to the of the information, but also what they did in practice to
attention of senior decision makers. be prepared. Many studies indicate that policy makers
in business, as well as in national security, do not give
warning signals sufficient attention.

HOW TO WARN OF SURPRISES

One of the ways that firms attempt to become aware
of possible surprises is to develop early warning alerts, WHY IS SIGNIFICANT INFORMATION
in part by using advanced data collection technologies. OVERLOOKED?
But in many situations these solutions are not effective. Cognitive biases have a strong influence on decision
The problem lies not in a lack of information, but makers and on internal processes in firms. Various studies
considerable cognitive biases that often disrupt the ability show that the way we process information depends on
of the warnings to “sink in” and be properly evaluated. our individual cognitive biases, which leads to ignoring
In addition, meaningful information can be erroneously relevant information, or not giving it proper weight. This
identified as “noise” when, in fact, they are “signals” and contributes to surprises and a lack of preparedness:
vice versa.
Leonard Fuld’s survey of strategic planning executives • We tend to assess the situation as better than it is.
in 140 companies found that two-thirds of them had at We conclude that problems are unlikely to develop
least three significant surprise events over five years (Fuld and therefore action is not required.
2003). The vast majority believed that their companies will
continue to suffer from “competitive shock” as a result of • We tend to give higher weight to information
significant business surprises in the near future. However, that strengthens the current assumptions and
few senior managers made decisions that factored in ignore information that is not “appropriate” to our
intelligence analysis, and only slightly more had prepared opinion.
in advance an appropriate response to potential strategic • We tend to ignore or not to give weight to what
business surprises. other firms are already doing or planning to do, so
Almost every firm is vulnerable to strategic surprise. we ignore their potential surprise.
In retrospect the firm, or individuals within it, had • We tend to give great weight (often incorrectly) to
information that indicated this surprise might happen. analyzing and understanding the present and assume
For example, a rival was viewed as insignificant, but the that the current situation will continue, so we have
company later found out that its new technology changed less motivation to prevent future “disasters” that
the rules of the game. A strategic client is “suddenly” seem distant and impractical.
in financial difficulties that endangers its existence. An • We find it difficult to cope with threats that we have
important supplier cannot provide the product quality not already experienced, especially if they are not
required. A new drug does not meet the medical criteria presented convincingly. Typically, we tend to act
although it has the required approvals, and therefore more often when the possible situation might affect
cannot continue to be sold. us personally.
Preventing intelligence failures is not related
necessarily to the quality information, the comprehension
of the analysis, or the delivery to the decision-makers

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intelligence failures: competitive intelligence and strategic surprises

The overall result is that we perceive the external but the quality of analysis (Lovello & Sibony 2010). Nobel
world as we would like to see it and not as it is. This flaw laureate Daniel Kahneman said recently in an interview:
of bounded awareness, about what is happening around
us, harms our ability to see the whole picture.
I’m really not optimistic. Most decision makers
will trust their own intuitions because they think
More information is not better they see the situation clearly”….It’s when you decide
Studies show that the expansion of information what information needs to be collected. That’s an
gathering is not necessarily improving the decision process absolutely critical step. If you’re starting with a

Sidebar 1: How Bratz surprised Barbie

An interesting example of an unexpected surprise by a

small firm which came from “nowhere” and managed to Barbie’s business strategy was to continue shaping
surprise a huge company, is the emergence of Bratz dolls, contemporary fashion dolls stemmed from concern that
posed a real threat to world leader Barbie. the change could hurt critically and cannibalize existing
dolls, which built the company’s success for many years.
For many years, Barbie dolls led the global market without The corporate culture of Barbie’s parent company was to
being threatened by any company. Many tried and failed. maintain the existing focus on reinforcement of the brand.
During the years of market leadership, Barbie targeted For example, Barbie’s product manual which included
herself the population of girls ages 3-11. In the late ‘90s, about 100 pages, and served directors as “the Bible” of the
the market was changed and the target market become company – covered about all aspects of production and
younger crowd, ages 3-6. strengthening the brand. There’s nothing about product
promotion and dealing with competitors.
Since the early 2000s, Barbie has lost considerable market
share to unfamiliar Bratz dolls. Bratz’s success was due Barbie’s managers did not “listen” to information presented
to recognition of the market trend and the ability to to them on the market changes, including the rapid
understand that the dolls have to look contemporary and rise of Bratz, assumed that the Barbie brand power will
stylish. However, unlike their mirror Barbie dolls hardly successfully compete against any threat, as many times
changed for years. After a process lasting several years, before.
Barbie dolls have become less relevant and their demand
fell. Structural problems within the company, Mattel, the maker
of Barbie, prevented cooperation among all segments of
What were the reasons that Barbie did not read the corporation. Despite that the company had good internal
“signals” and yielded to cognitive bias? Here are some information system; it rarely used it because of the
reasons for failure: complexity of a permit to run it. Relationship between sales
and production was sets of loose, as the sales, marketing
Barbie focused on production and was largely production- and R&D. And so the company lost touch with what goes
oriented company, while invested much effort in optimizing on in the industry, she continued to operate out of inertia,
production processes and lower the costs. based on the past.
Barbie’s parent company, Mattel, dealt with the process of
acquisition of other companies turned out problems that In retrospect, it is clear that Barbie’s managers had no
require paying close attention by the senior executives. shortage of intelligence on what is happening in the market.
The management was focused on the process of M&A, The problem was the continuing failure by reading the
especially in the financial aspects. “signals” and their meaning regarding the changes in the
market. It turns out that the Bratz, which was established
In the midst of these problems has the parent company only in the second part of the ‘90s, had similar information
Mattel appointed a new CEO, who did not have previous as of Barbie, but Barbie’s executives failed to correctly
experience with the toy industry. The main issues which analyze it, especially, to take actions that would enable to
focused on were cost cutting efficiency measures, business keep its significant competitive advantage. The business
development and marketing innovation. giant, Barbie refused to read the picture.

30 www.scip.org Competitive Intelligence

 intelligence failures: competitive intelligence and strategic surprises

hypothesis and planning to collect information, The logic may not always be understandable, but every
make sure that the process is systematic and the employee knows: “That’s the way we do things here”.
information high quality. This should take place Usually no one challenges these success factors, even in
fairly early (McKinsey Quarterly 2010). emergencies, when the competitors are closing the gap.
Reports about unknown emerging rivals that change
Many executives still claim that consumers don’t industries are often an exaggeration. Competitors
change quickly, that existing products are superior, that usually emerge slowly because of the time required for
people won’t give up on familiar experiences, and so on. technology development, new business model fulfillment
Richard Tendlow’s recent book describes how executives and consumers adoption. However, companies often
remain in denial and don’t accept in time the need for acknowledge new rivals only after they have become
change (Tedlow 2010). Why do people practice denial? significant threats, and loose the time required to carry out
Because it is often easier, safer, and more profitable in transformations in an organized way.
the short run, and more comfortable than confronting a
problem, a poor decision made by a superior, a difficult
personnel decision, or a failing strategy.
Achieving Peripheral Vision
In their book “Peripheral Vision: Detecting the
Weak Signals That Will Make or Break Your Company”
Difficulty in Monitoring George Day and Paul Schoemaker note that only 20% of
Companies also have a hard time knowing what to companies have developed effective peripheral vision that
monitor. Given the wide range of industry participants allows them to anticipate their competitors and identify
and conditions that can be at the root of external threats, processes as early as possible. Day and Schoemaker
firms struggle just to determine what is significant. As a defined the term “peripheral vision” as:
result, many companies attempt to monitor everything,
and build elaborate “environmental scanning” systems that
crumble under the weight of the mountains of information • A portfolio of scanning methods to capture and
they accumulate. amplify the weak signals within targeted zones of the
periphery: inside the firm, customers and channels;
Even if companies are able to isolate those external the competitive space; technologies, political, social
conditions that pose a threat, few effective means exist to and economic forces; and influencers and shapers.
monitor those conditions. News alerts and filters usually
are not precise enough to capture information that is truly
diagnostic for assessing a developing threat. At the same This is the ongoing ability of the firm to examine
time, management efforts to encourage employees to share what was happening in its external environment, including
information and observations related to strategic threats detection, analysis, and action on the basis of received
have, for the most part, been a failure. information. Some examples are an early deployment
The moment executives spot signs of change, they against a new competitor, responding with a new product,
must decide what they can preserve and what they must or preparing for the entry of competitor into a new
change. Companies should not stop looking at threats and technological field. Peripheral vision states that because
opportunities but at the same time they have to prepare you never know where the surprise will come from, you
how to transform the organization. need to have a regular and ongoing process of monitoring
the external environment.
One of the most important success factors of
Existing Beliefs and Practices peripheral vision is “pushing” the issue to senior
Successful enterprises create distinct business management. The founder of Intel, Andy Grove, pointed
ideologies such as the Toyota Way and the Xerox Way. out how he personally encouraged employees not only
These doctrines include specific ideas about how to to examine the events in the external environment, but
compete, performance measures, and organizational also to report them to relevant managers and often to
structures. They also include how we look at the market Grove himself (Grove 1999). He tells how Intel has
and competitors and whom to reward. These beliefs and created a culture of continuous observation on the
practices constitute a company’s dominant reasoning. external environment, assuming that without continuous

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intelligence failures: competitive intelligence and strategic surprises

monitoring it’s impossible to succeed. In his opinion, PERIPHERAL VISION IN BUSINESS CULTURE
one of the most important issues is to make employees Several requirements for successful integration of
feel comfortable when transferring information, even it is peripheral vision in the firm’s business culture include:
not clear to them the significance of their contribution.
Intel is not the only corporation which has implemented
the culture of peripheral vision -- a wide range of global • Backing by senior management, which encourages
companies have adopted a similar course of action curiosity and interest in the external environment
including Johnson & Johnson, Anheuser Busch, Citibank, affairs.
JP Morgan Chase and many others. • Encouraging employees and managers to proactively
be interested in the external environment as an
integral part of their job and to report their findings.
• Providing appropriate organizational solutions
HOW CEOS INCREASE THEIR VISION
that enable relevant information to be quickly sent
What subjects should peripheral vision focused
to both the competitive intelligence unit and the
on? The assumption is that you target your search to
attention of senior managers.
see the most significant issue, although in practice this
is not easy. The solution lies in a multi-dimensional • Providing positive feedback to those who supplied
balance of information the firm receives from internal good information.
sources, especially employees who have access to external  
information. To better focus and set priorities, companies
should use scenario analysis. The goal is to examine the  Peripheral vision is an appropriate solution to improve
possible solutions to scenarios based on the gathered monitoring of the external environment and to prevent
information and check whether or not the firm has an surprises. It should be institutionalized within the firm as a
appropriate answer to such scenarios. function of competitive intelligence.
One consequence of this process is a decision to The question “What are the surprises that can hurt
focus on the evaluated scenarios that are likely to have us?” is not asked frequently enough by firms. Often
damaging implications on the firm’s activities. One result employees on various levels are aware of approaching
is strengthening the focus of information collection, dangers, but they do not pass information on it to others.
examining the likelihood of specific scenarios, and testing A firm must look beyond the visible current situation,
the ability to respond appropriately, including a surprise to ask how the future business environment will look
counter-attack to competitors. Such moves require a wide and what surprises and opportunities may appear.
internal collaboration and sharing of information between Implementing the necessary organizational culture
different divisions at the firm, with the full backing of the encourages employees to raise issues for discussion, and
senior management. senior executives are expected to lead the process.
During their research, Day and Schoemaker tested
the performance of 170 CEOs of large companies which
operated in different sectors, and found that about 90% of SUMMARY
them actually focus on operational management to achieve Competitive Intelligence professionals can learn from
short-term goals for the coming year or two. Only 10% the experience gained by national intelligence experts,
plan for a longer period and this is what is expected of especially in confronting complex situations in the analysis
those in the CEO position. stage. Intelligence breakdowns are more widespread than
It is impossible to develop a peripheral vision without companies tend to admit -- their internal investigation
the backing of the firm’s leadership. Creating the right process looks more towards the “conventional” managerial
atmosphere will happen when, for example, executives ask reasons for failures rather than on intelligence misfortunes.
about the external environment when they meet with their Some of the reasons for failures in national and
employees. This creates a sense of openness and interest in business intelligence may be similar, often based on
this subject, showing that it is not only legitimate but also cognitive biases by the intelligence personnel and the
essential. The expectation is that employees and managers decision makers. Another factor is the unconscious refusal
will not keep information obtained to themselves, but
rather will send “signals” to the relevant people.

32 www.scip.org Competitive Intelligence

 intelligence failures: competitive intelligence and strategic surprises

to face changes in the external environment, especially Gilad, Benjamin (2004). Early Warning: Using
when those changes are not identical with individuals’ Competitive Intelligence to Anticipate Market
mindsets. Shifts, Control Risk and Create Powerful Strategies.
The more successful companies become, the more NY: AMACOM. http://www.amazon.com/Early-
difficult it is for them to recognize when they must Warning-Competitive-Intelligence-Anticipate/
change. Why do companies find it so tough to tackle dp/0814407862/
the obvious? To change faster than their competitors, Grove, Andy (1999). Only the Paranoid Survive: How
enterprises must: to Exploit the Crisis Points That Challenge Every
Company, Broadway Business. http://www.amazon.
com/Only-Paranoid-Survive-Exploit-Challenge/
• Evaluate correctly the emerging competitive reality dp/0385483821/
and its implications for the bottom line.
Lovello, Dan; Sibony, Oliver (2010). “The case of
• Identify gaps in capabilities and fill them quickly. behavioral strategy.” McKinsey Quarterly. http://www.
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strategy_2551
Watkins, Michael; Bazerman Max (2003). “Predictable
The basis of a business early warning effort should
surprises: the disasters you should have seen
be similar to the national intelligence practice that
coming.” Harvard Business Review March OnPoint
allows analysts to provide credible warning of external
collection. http://brownelllandrum.com/wp-content/
threats, thereby minimizing the effect that surprise has on
uploads/2010/02/HO5-HBRMarch2003-Predictable-
executives’ ability to respond.
Surprises.pdf
And finally, intelligence professionals both in national
Wohlstter, Roberta (1962). Pearl Harbor- Warning
intelligence and in business have to prepare the minds of
and Decision, Stanford University Press, Stanford,
the decision-makers to believe in an uncertain future and,
California. http://www.amazon.com/Pearl-Harbor-
most important, to plan for it.
Decision-Roberta-Wohlstetter/dp/0804705984/
“Strategic decisions: When can you trust your gut?
Nobel laureate Daniel Kahneman and psychologist
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