Use your intelligence to watch the competition
pharmafile | July 25, 2006 | Feature | Research and Development, Sales and Marketing |Â Â market researchÂ
One of the reasons the executives of ill-fated US energy group Enron were for a while 'the smartest guys in the room', as the best-selling book on the company's demise was titled, was their ability to manipulate accounting principles. The episode was a sobering reminder of the multitude of sins that can be obscured within financial figures.
In Enron's case, losses were hidden through a raft of special purpose vehicles (SPVs) in order to keep the air in their inflated share price. By carefully staying within statutory ownership percentage levels, they did not have to declare the existence of these SPVs in their consolidated accounts. Only when they slipped up on one of them, did the whole network of hidden companies start to unravel and Enron, formerly the seventh-largest corporation in the US, began the descent into bankruptcy.
In his new book 'Competitive Intelligence', Christopher Murphy highlights just this kind of off-balance-sheet finance, before presenting a guide to unpicking the company annual report. He first covers how to read the facts and figures, i.e. the balance sheet, profit and loss account and, the greatest of these, the cash flow statement. He then introduces and explains the more technical mechanisms that are sometimes contained in company accounts, for example, ratios such as debt:equity, which the professional analyst would certainly use to assess the conduct of the business and where it might be going.
Knowing what the opposition is doing
The premise behind Murphy's book, as set out by corporate crime writer Michael Ridpath in his introduction, is: "In business you cannot operate effectively unless you know what everyone else is doing. Too many businesses are inward looking, worrying about budgets and forecasts and inter-departmental squabbles."
The book demonstrates that it isn't just a matter of facts and figures but the strategy and motivations of your competitors, and customers, that are important. You have to look at all the factors that make a market what it is today and the factors that will indicate how it is likely to develop in the future. This is the world of 'competitive intelligence' (CI), of which competitor intelligence is a part.
So, if you were just looking at a competitor's accounts or those of a possible acquisition, you need to be able to read between the lines. First, all accounts are historical and not a predictor of the future. They are not just factual but governed by rules and principles, which are open to interpretation by compilers and this could be the difference between profit and loss
It is also important to differentiate between group and company accounts. You will need to know what is going on, not just in the parent company, but also in any subsidiaries. Pay particular attention to the notes to the accounts. They can give vital insight into decisions, changes and even off-balance-sheet issues.
As any company, but particularly any biotech company knows, cash is king. So you will need to ask yourself if the company under scrutiny has got the money to survive. Analysing its cash flow will show how cash came in and left the company during the whole of the previous year. However, a balance sheet can only be a snapshot of a company on one particular day. Despite this, there are some questions you can ask that may give a further idea of future performance:
* Have there been any sudden changes in the company's accounting, such as a revaluation of its property?"
* How is profit achieved? Is it just down to cutting costs?
Above all, in order to get a clear feel for long-term trends in the development of a business, you need a sufficient number of years of consistent historical comparisons.
Are you a sleeper or a warrior?
It's said that pharma is one of the most competitive industries there is. But how seriously does it take its competitiveness and what structures does it put in place to acquire the information needed to stay one step ahead of its rivals?
For the pharma industry, the holy grail is always to either find the next successful compound or licence in a winner. This means that all your rivals are also scouring the universities, journals and partnering conferences collecting information that will lead to the same lucky find.
People in companies are collecting information all the time, but the danger is a lot of it will never be used to full effect because it's kept in separate boxes or in people's heads. Changing this requires a corporate system for collating, analysing and channelling this information. It is vital that such a system has a board member to champion the process and convert the intelligence into strategic decisions.
Although we don't know how organised companies are at gathering competitive intelligence, the first UK survey on the subject, which was carried out in 2002 by Wright, Picton and Callow found that most companies thought CI was only about competitors – only five took a wider perspective, by trying to also understand their market environment, and only three adopted an integrated approach.
Another research company, Rouach and Santi, surveyed US and French companies. They categorised the different CI approaches as: sleeper, reactive, active, assault and, finally, warrior.
Interestingly, Rouach and Santi put Roche and L'Oreal in the warrior categories. Warriors had dedicated war rooms for the purpose, patents were actively checked and a dragnet used to trawl the world for copycat products.
Guarding the company's patents against infringement is, of course, taken seriously in the pharmaceutical business, especially since companies have started patenting genes, which could be involved in many compounds. But does competitor activity end there?
What are we looking for?
It is useful to organise the CI function along key intelligence topic lines. These fall into four broad groups:
* Strategic decisions – these should be based on a knowledge of the competitive environment. To embark on an acquisition is obviously a key decision for a company.
* Early warning topics – these are issues not presently included in management's assessment of their competitive situation. For pharma, such an issue could be any possible threat to the supply chain of essential materials, either resulting from political situations or the acquisition of suppliers by rivals.
* Descriptions of key players – the traditional use for competitor intelligence
* Counterintelligence – the tables can always be turned, and it's quite possible to create your own protective shield. On the principle of set a thief to catch a thief, the trained CI specialist is best placed to provide good advice here.
Executives setting the agenda for the CI process will need some schooling in setting reasonable tasks. Asking for everything on company X is a burdensome waste of time, if there is no strategic reason for the information, but many senior executives regard CI as a comfort blanket rather than a guide to better decision making. These members of senior management will tend to ask for a great deal of information, which gives them reassurance that they are alert and well briefed, but, ultimately, it has little influence on their actions.
So there have to be clear objectives, a plan and a framework and a useable outcome – such as a report that has the right information, analysed succinctly, and that can influence actions as a result, but one of the caveats in CI is knowing when to stop the search. Medical research gets a pat on the back in this department, and these are the useful lessons medical research offers CI.
In medical research, theories are crucially important in providing platforms to support the superstructure of research and even erroneous hypotheses serve as tools for discovering the truth. Research efforts can then be concentrated on the most promising lines of enquiry and not dissipated in 'let's see what happens' initiatives. Consequently, projects that are not making headway are then ruthlessly dropped. The opposite would be allowing emotional attachment to pet projects to take precendence as then there is a danger that analysis paralysis could set in.
But it is important not to rush at the data collection, but to work out the best sources. For example, author Liam Fahey says that 80% of the data needed for effective study of competitors, who have been active in the market for two to three years, is available in-house.
Knowing where to look
But if you were to build a profile of a whole market sector, where would you start? The first places to try would be trade associations, regulatory authorities, official statistics, individual companies, market research, brokers research, journals and monographs, which include reports and books.
However, monographs go out of date, so to get the latest information, run a literature search on the authors to see if they have followed up a specialist subject with other communications, such as articles, conference papers etc.
The British Library is an excellent source for published information (www.bl.uk), but, more interestingly, it also compiles a dossier of what is termed grey literature, or in other words, non-documented reports (visit www.bl.uk/services/ document/greylit. html).
For more in-depth data, market research reports are invaluable, but can be pricey. This is all standard stuff for the information officer, but for the raw recruit to competitive intelligence, it's all there on a plate.
While the UK may be a paradise for information once you know where to look, intelligence gathering on companies overseas can be a great deal harder.
In Germany, for instance, while there may be a legal requirement for public companies to file their accounts, the bulk of companies fall into the mittelsand of family-owned, private concerns. They are able to side-step the requirement by paying a modest fine. The net result of this is that, in practice, only 5% of German companies have to file their accounts.
Then there is the added problem of multiple registries. There's nothing neat like one centralised Companies House to which all companies can report. For smaller companies there are local registries – and there are some 500 of these in Germany and 100 in France. Countries in the EU also have different national accounting traditions, so local researchers are obviously indispensable in this sort of corporate minefield.
The US, on the face of it, appears to be very strictly regulated by the Securities and Exchange Commission (SEC). This body regulates public companies and those with assets over $10 million or more than 500 employees. The SEC runs a scheme called EDGAR whereby all companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically, which are then held as records. PricewaterhouseCoopers has a useful scheme called Edgarscan.
Private companies in the US, as is usually the case elsewhere, are more difficult to pin down and a little lateral thinking is called for. All applications for new-build, or licences for manufacturing plant are registered and there is a Sourcebook of State Public Records (or the Washington researchers bible of private companies), which covers all these documents, and gives more data than you would expect.
Simple observation
Companies do, of course, disseminate information on themselves quite willingly. Business development managers know publicity is vital for biotech companies to attract industry partners, and consequently their websites and press releases usually reveal a great deal of useful information.
Trade shows and, in the pharma world, this would include partnering and venture capital conferences, bring many business targets together. However, even going to trade shows should be a structured activity aimed at filling the gaps in existing knowledge. Wandering about on the off-chance of spotting something interesting is not the way to go.
It's also important to compare one year with another; for example, to note if last year's promising biotech product has suddenly taken a back seat for some reason – listening to other people's unguarded conversations in the hospitality suite is apparently an acceptable practice within CI.
The CI practitioner has to turn all the gathered information into something a senior executive can use in decision making. Various tools of analysis can be applied to data in order to draw some useful conclusions. He includes descriptions of quantitative predictions (e.g. on sales) and simulations of various scenarios.
Ultimately, if one company can get its act together on the CI front, so can its rivals, and, so it's essential to build your own protective shield to make sure that information isnt leaking out that could be sealed in. Companies do not benefit from being secretive, especially in these days of transparency, but it should take sensible steps to safeguard its intellectual property.
Competitive Intelligence: Gathering, Analysing and Putting it to Work by Christopher Murphy is available from online pharma business bookshop Piribo.
www.piribo.com
Competitors: outwitting, outmaneuvering and outperforming by Liam Fahey. Published by John Wiley & Sons Ltd
Edwin Bailey is managing director of Piribo. For more information tel: 020 7060 7474.
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