Competitive intelligence, corporate security and the virtual organization.

ABSTRACT

This paper seeks to document a variety of competitive intelligence (CI) vulnerabilities which (1) are common to most organizations; and (2) have a unique and adverse effect on virtual firms due to their reliance on subcontracting and information technologies. A 7 stage competitive counterintelligence program (identified by the FOG-PACT acronym) is developed in order to remedy many of these CI problems.

INTRODUCTION

Competitive Intelligence (CI) represents a systematic process initiated by organizations in order to gather and analyze information about competitors, suppliers, customers and the general socio-political/economic environment of the firm (Kahaner, 1996; Wright and Roy, 1999; Fitzpatrick, 2000). The purpose of CI programs is to harness disparate information resources in order to enhance the competitiveness of the firm while eroding the competitive advantage of its rivals (Helms, Ettkin and Morris, 2000). This information is often acquired through legitimate/ethical means and covert methodologies involving economic espionage [e.g., theft and/or unauthorized duplication/possesstion of trade secrets, proprietary technologies, etc.] (Fuld, 1985; Winkler, 1997; Wright and Roy, 1999; Gallagher, 1998). Organizations in a variety of industries (i.e.: aerospace, biotechnology, electronic, petrochemicals, and information technologies) or those possessing significant intellectual properties have been identified as having an increased risk for becoming the target of CI activities (Wright and Roy, 1999). The lure of enhancing competitiveness through the appropriation of proprietary technologies, business plans or intellectual properties, has driven many organizations and at least 23 nations to initiate hostile CI penetrations of American firms (Freeh, 1998). Financial losses from these CI intrusions have steadily increased. In 1996, the American Society for Industrial Security (ASIS) reported that CI losses among American firms were valued at approximately $63 billion (Gallagher, 1998). More recently, the FBI has estimated that the financial consequences of competitive intelligence leakages to U.S. firms may amount to $250 billion annually (Shanley and Crabb, 1998). A survey of Fortune 1000 firms by ASIS indicated that the four most significant outcomes of CI leakages include losses in competitive advantage, lost market share, increased R&D costs and higher insurance premiums (ASIS/PricewaterhouseCoopers, 1999).

Given the financial and adverse competitive consequences which may derive from CI and economic espionage activities, this paper seeks to: (1) identify CI vulnerabilities/threats common to many organizations; (2) discuss some of the unique CI vulnerabilities experienced by virtual organizations because of their extensive reliance on outsourcing and information technologies; and (3) outline a 7-stage competitive counterintelligence program that can assist virtual organizations in enhancing their corporate security and minimizing the competitive/financial losses attributable to the CI activities of other firms/governments.

COMPETITIVE INTELLIGENCE VULNERABILITIES OF TRADITIONAL AND VIRTUAL ORGANIZATIONS

Characteristics of Virtual Organizations

Virtual organizations constitute the antithesis of traditional vertical integration strategies. Rather than seeking to control value chain activities through direct ownership of businesses, virtual organizations acquire resources or strategic capabilities by creating "a temporary network of independent companies, suppliers, customers, even erstwhile rivals--linked by information technology to share skills, cost and access to one another's markets" (Byrne, 1993: 99). A common feature associated with virtual firms is an organizational artifact known as a HUB. Dickerson (1998) proposes that the HUB is the irreducible core of the virtual firm. This core contains all the basic organizational functions or infrastructure needed to supervise the allocation, management and coordination of subcontractors or strategic partners as work progresses through the value chain (Dickerson, 1998). HUBS generally retain only those organizational functions that are critical to their distinctive competencies and/or cannot be more efficiently/effectively performed by subcontractors. Furthermore, to enhance strategic flexibility and competitiveness, virtual organizations may be expected to frequently change subcontraCtors or outsourcers in order to leverage their unique situational capabilities and competitive advantages (Galbraith, 1995; Fitzpatrick and Burke, 2000a). The leveraging of these capabilities among members of this virtual network requires both HUBs and their partner cadre to develop open communication systems and high levels of mutual trust. This is essential in order to facilitate the transfers of information, intellectual properties/technologies and to provide an interorganizational climate promoting competitive synergies (Rackham, Freidman and Ruff, 1996). Once the competitive objectives of the HUB and its network partners have been accomplished, this adhocracy of organizational and subcontracted relationships is dissolved (Christie and Levary, 1998; Galbraith, 1995).

Competitive Intelligence Vulnerabilities of Virtual Organizations

Competitive intelligence practitioners have estimated that approximately 95 percent of the intelligence on targeted firms may be derived from publicly available sources of information (Barndt, 1994; Kahaner, 1996). For both virtual and non-virtual companies, these sources include government filings, competitive data bases and information obtained from the print media (Fuld, 1985; Kahaner, 1996; Fitzpatrick, 2000). Of these sources, routine corporate filings mandated by government authorities constitute a wealth of competitive information. This information is readily available or easily accessible by filing a Freedom of Information Request with the government agency that is the repository for the required document. Data mining of these government filings/documents permit companies to acquire a range of CI on targeted firms including: (a) equipment purchases with borrowed money; (b) R & D expenditures, innovations and patent activity; (e) proposed expansions or changes in operations; (d) process technologies, product improvements, sources/uses of raw material and equipment used in specific facilities; (e) corporate revenues, tax base, asset value, depreciation and other expenses; and (f) plant/facility layout & numbers of employees/shifts (Fuld, 1985; Fitzpatrick, 2000; Kahaner, 1996).

The 1999 ASIS survey on proprietary information losses indicates that organizations are increasingly relying on two structural features of virtual organizations in order to enhance competitiveness. These structural characteristics are the use of subcontracting and information technology (IT). Irrespective of industry, the survey suggests that organizational reliance on both the internet and computers have created new threats and risk factors in the protection of proprietary information and technologies. The survey also reports that on-site contractors and original equipment manufacturers represent the greatest single threat to corporate security. As noted by the study, "The new on-line and increasingly outsource business environment is moving rapidly to global supply chains that involve tens or hundreds of companies working transparently to design, manufacture, and deliver goods and services around the world. Most respondents apparently believe that business partners are not doing as much to protect the company's information as they themselves do" (ASIS/PricewaterhouseCoopers, 1999:18). Thus, these two important characteristics (i.e.: subcontracting and IT) which serve to bolster the competitiveness of virtual organizations may also increase their competitive intelligence vulnerabilities.

Competitive Intelligence Vulnerabilities, Subcontractor Management And The Serial/Long-Linked Form