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At a meeting a few years ago, a manufacturing company executive dropped a bombshell: Word on the street was that its main competitor had laid off half its staff. The CEO immediately suggested slashing prices by 25 per cent to finish off the weakened rival. Everyone agreed, but the team decided to investigate first.

The person charged with the task started by verifying the rumour. He talked to people close to the rival company and counted the cars in the parking lot. The layoff confirmed, he went searching for reasons. Online, he checked for any press releases, blog entries or comments to the media that might hint at problems. He spoke to suppliers and clients to see whether anything had changed in their dealings with the company. At no point did he break legal or ethical boundaries, but his eventual findings had a dramatic effect on his employer's decision.

This is competitive intelligence, and Jonathan Calof, a professor at University of Ottawa's Telfer School of Management and a leading CI expert, says it's widely misunderstood.

Perhaps the biggest misconception is that competitive intelligence is too complex and expensive for small businesses to undertake. In fact, most CI techniques cost nothing but time, and the findings are vital to small business success, especially in tough times.

"Large companies have the capacity to absorb big mistakes," Dr. Calof notes. "If you're a small business and you miss a market change — you're done. The key is to figure out what in the environment is most important for you to understand so you can focus your resources."

Even the discipline's name is misleading. "It's a common misconception that competitive intelligence equals competitor intelligence," says Alli Marshall, a CI consultant who runs Strix Insights in Calgary.

"Competitive intelligence is the study of all aspects of a company's environment, everything from demographic shifts, technology changes and economic trends to studying industry participants like suppliers, customers and competitors."

The first step is to properly frame the issue you want to investigate. "The worst thing to do is to say, 'I'm in the sporting goods business, so I want to find out everything I can on Sport Chek,'|" says David Gibson, a CI consultant and educator in Toronto. "You can come back with tons of information that isn't particularly useful."

Instead, the retailer should pick a goal — finding a location for a new store, or boosting sales of certain products — and then pose focused questions: Where is Sport Chek opening stores? Which lines are doing well there and which aren't?

Many answers can be found online or in other public sources; the trick lies in locating and interpreting them. Permit or zoning applications may have been filed with city hall, hints dropped on discussion boards.

But it is primary research that is most powerful: asking questions of suppliers and clients or becoming a "mystery shopper" to see what it's like to be your rival's customer. And experts agree that the most valuable CI resource are your own employees. "Eighty per cent of what you need to know about the competition already resides within the four walls of your organization," Mr. Gibson says.

Tell employees what to look for: Are competitors dealing with new suppliers? Are they looking for R&D staff? Have they approached you? Is there a change in the nature of what your customers are asking for? These may all be signals, but unless they're shared and analyzed centrally, they are just snippets of data.

Jordan Banks, who runs an investment fund for startups in Toronto, recalls that when he was managing director of eBay Canada, it was part of every employee's job to monitor their counterparts at competing companies. "So if you were in the online marketing group, you'd make yourself interested in how rivals market themselves online or where they appear in search-engine results."

To find competitors' weak spots, he would track their press releases, listen in on analyst calls, set up Google Alerts for any mentions online and, most importantly, shop on their websites. "It's a great learning experience for free, just by virtue of having big ears and eyes," Mr. Banks says.

Business-to-business firms that have less access to their competitors' operations can find that a third party makes information gathering easier. When Ms. Marshall talks to her clients' customers and competitors, she can explain, accurately, that she is doing industry research for a company thinking of launching a new service.

The core of CI is deducing what the research means and how to act on it. "There's generally too much focus on finding one little 'aha' piece of data," Ms. Marshall says. "The 'aha' comes when you put the information together."

Yet chasing those details often pushes companies into ethically grey areas, and sometimes crosses into corporate espionage. Aside from respecting the law, CI industry guidelines forbid misrepresentation and the use of improper influence (such as offering business to a supplier in exchange for data on rivals).

Ms. Marshall suggests companies use the "newspaper rule": If what you're doing were reported on the front page tomorrow, would it embarrass your organization?

That still leaves lots of grey areas, however. Obtaining information from employees poached from competitors, for example, can range from legitimate probing for useful details to theft of trade secrets.

Ultimately, CI's intent is to find opportunities, sound warnings about threats — and keep executives from jumping to unwarranted conclusions.

When that manufacturing company examined the CI findings, the news was shocking: Far from weakened, its competitor had new technology that allowed it to triple production with half the staff. "We drop the price, we're the ones who're toast," the designated detective told the CEO. His recommendations: try to lock customers into long-term contracts and explore a merger with the rival. "It's a completely true story," Dr. Calof says.

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WHERE TO SNOOP

• Trade shows: Industry gatherings can provide lots of CI clues, from new individuals in new roles at rivals' booths, to speeches or panel discussions. To get the most out of these events, be methodical. Bob Fox, a CI consultant in Edmonton, notes, for example, that you can ask about three or four questions before you lose a person's interest or raise suspicions in a booth. "However, if you're a group of four and it's a three-day show, you already have 36 questions you can ask."
• Mystery shopping: Becoming a customer of your rival gives you first-hand experience of its offerings and services. Visit a store: Observe the colours, signage, music and background noise levels, aisle width, the length of the lineups — it's the details that count, advises Mark Healy, a partner at Torque Customer Strategy in Toronto. Go on a competitor's public facility tour.
• Recruiting: Look up job postings from your rivals in newspapers and online to discover their HR incentives and new skills requirements. Mr. Healy suggests attending a recruiting event: "The competitor is in selling mode, and it is in their best interest to speak clearly about the firm's work environment, compensation plans and role responsibilities."
• Just ask: Any number of outside sources may know things you want to glean, and have no confidentiality restrictions. Academics, trade association executives, rivals' former employees, outside consultants or suppliers, officials at chambers of commerce, and journalists are just a few options.
• Public information: Never underestimate what you can discover online. Companies have been caught stealing data they could have obtained from their rivals' websites. Some sources to tap: articles in trade magazines; industry conference presentations; social-networking pages and discussion boards; press releases; and patent database filings around the world. Business research departments at business schools and public reference libraries can direct you to the information you're seeking.

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HOW TO PROTECT YOUR SECRETS

Almost as important as gathering competitive intelligence on your business rivals is preventing others from gathering it on you.

"I've seen many Canadian companies victimized by competitive intelligence," says Jonathan Calof, a leading CI expert. "We have an international reputation as being naive — we answer everybody's questions."

That's where counter intelligence comes in, and Dr. Calof notes that it's one of the fastest growing areas in the CI field.

Start with figuring out what's core to your competitive advantage. Information about your business will get out in many ways, from regulatory filings to competitors talking to your customers, so don't exert energy trying to protect everything, he says.

When you know your key strengths, communicate them to your employees and make sure they understand their importance. Tell them that if they ever get a question touching on those areas, to inform you, the business owner, or a designated manager, he suggests. This way, "you create a buffer."

Another counterintelligence approach is to send false signals. Companies based on intellectual property have a great deal to lose if a rival discovers new avenues of research they're pursuing.

Some companies embark on elaborate false-signal operations. Dr. Calof tells of one U.S. company that was working on a new product and discovered that a competitor had identified it as the Generex project (the word was actually "genetic").

So the company set up a fake project under that name and began seeding information about it to make it credible. The competitor ended up launching a marketing campaign against a fake product that never materialized. "When the actual product came out, they were totally unprepared," he says.

Special to The Globe and Mail