The Pepperoni Puzzle: Corporate Spies on Rise

Competitive intelligence is legal and needed, experts say

A pepperoni company was in a financial fix: A rival was selling sausages so cheap that it was taking a big bite out of profits.

How to sniff out the problem? The company hired Fuld & Co. of Cambridge, Mass., a consulting firm specializing in competitive intelligence (CI), to find out why the other firm could keep prices low.

Firms like Fuld are part of a fast-growing CI industry, which does its sleuthing using everything from computer searches of news reports to hobnobbing at trade shows, plus lots of analysis.

"We don't live in the age of information. We now live in the age of intelligence," says CI expert Larry Kahaner.

So how did the pepperoni problem get sliced?

"This was one of our favorite cases," says Michael Sandman, senior vice president of Fuld. He toured the plant of his client - call it Company A - "and the powerful, pleasant smell will never leave my brain," he says.

After meats and spices are mixed and stuffed to make pepperoni, the links must hang for 30 days to cure. "It is not cooked. It cures in the way yogurt ferments by a bacterium," Mr. Sandman explains. This plant produces 10 million pounds of the stuff a year, so a space the size of an airplane hanger was needed to cure it.

Sticking it to the competition

Sandman and another analyst then visited the town hall in the home town of the target company, the other pepperoni firm. They got the building inspector to show them the building plans of the structure used by Company B and found it was much smaller than Company A's, though Company B also produced about 60 million pounds of pepperoni a year. They found from the building plans that a certain company, located half way across the United States, supplied unknown equipment for one corner of the plant. A researcher in Fuld's office later found the equipment to be commercial ovens.

Further investigation - a lot of it - turned up a little-known trick (but not a trade secret): Warm the product to a certain temperature early on and you can jump-start the curing process and save two weeks in production time.

That step saved lots of storage space for Company B, accounting for "almost all of the cost difference," Sandman says. Company A changed its curing methods and stayed in business.

"Everything we did here was legal and ethical," Sandman claims.

Fuld is in fact known in the CI world to be a highly ethical as well as effective firm. Its code of ethics is included in a new book by Mr. Kahaner being published this month "Competitive Intelligence" (Simon & Schuster). The guidelines all begin with "Thou shalt not ..." and include no lying, bribing, planting eavesdropping devices, or stealing trade secrets or employees.

While not new, CI efforts are growing quickly in the US and overseas.

The Society of Competitive Intelligence Professionals, based in Arlington, Va., now has 3,800 members, up from about 50 members in 1986 when SCIP got started. Membership crossed the 2,000 mark early in 1993. A spokesman says SCIP is still growing "at over 30 percent a year." Membership is individual. Most members list their corporate affiliation, however, and the spokesman says that "90 percent of US Fortune 500 companies now have CI units, many of whose members are members of SCIP." About 80 percent of these units are less than five years old.

About 20 percent of SCIP's members are overseas. In the US, telecommunications and pharmaceutical firms are represented most heavily.

Much more than pepperoni hangs in the balance, says author Kahaner. His book points out that Japan has done CI "for centuries, and very heavily since the 1960s." Firms in Sweden and France are frequent practitioners of CI.

Kahaner's book, some observers say, is the first broad, general-interest book on the subject, aimed at a large audience.

"The press often confuses CI with economic espionage," says Jan Herring, a former CIA analyst who headed Motorola's CI operation for four years before moving to full-time consulting. "Espionage is illegal, by definition," he says. "But CI is not."

He says "business intelligence," as he prefers to call CI, "must be done legally and ethically. A firm needs to get its legal department involved at the beginning."

Often, as with the pepperoni maker, the CI effort begins with a major challenge. Mr. Herring says AT&T "formed one of the best intelligence units in 1984, when it had to divest the Baby Bells, because it had to search out the best ways to go." With further deregulation hitting the industry, "All the Baby Bells now have CI units," he adds.

Three levels of information

Herring identifies three levels of CI information: libraries and other public sources; people - customers, employees, other analysts; and analytical information extrapolated by expert analysts from known data.

The business world, Herring says, has long debated whether failures are caused by poor implementation of a great strategy, or by not having a great strategy. "But they forget a third and basic point: Does a business have good intelligence about what's happening in the outside world?"

Kahaner says trade shows have become "prime opportunities for competitive intelligence activities." The reason? "While most companies try to hide the details of their products, they show this information boastfully during shows."