Competitive analysis is the practice of analyzing the competitive environment in which your business operates (or wishes to operate), including strengths and weaknesses of the businesses with which you compete, strengths and weaknesses of your own company, demographics and desires of marketplace customers, strategies that can improve your position in the marketplace, impediments that prevent you from entering new markets, and barriers that you can erect to prevent others from eroding your own place in the market.
Competitive analysis has long been a cornerstone of overall competitive strategy for multinational conglomerates and "mom and pop" stores alike. Moreover, business experts note that competitive analysis transcends industry areas; indeed, the practice is deeply relevant to all industries. For example, Folio contributor Bruce Sheiman provided a synopsis of the importance of competitive analysis to the magazine industry that is fairly representative: "First, it is critical to discover whether a competitor is encroaching on your proposed magazine's editorial or market franchise—or, indeed, whether a competitor renders your magazine idea superfluous. Second, competition helps to define a magazine's market position. I've seen business plans stating that the proposed magazine would have no competition. This is naive. Every magazine has competition—and needs competition. Third, competitive magazines give you benchmarks. By studying your competitors, you can learn much about developing your magazine's editorial, circulation, and advertising strategies. And you can determine your revenue and profitability prospects." Competitive analysis is of similar importance to muffler shops, office furniture manufacturers, photofinishing laboratories, and countless other types of business enterprises.
Despite this, however, business experts say that while established businesses commonly practice competitive analysis on a regular basis, new businesses too often are derelict in this area. "Every business has competition," wrote Rhonda Abrams in The Successful Business Plan: Secrets and Strategies. "Those currently operating a company are all too aware of the many competitors for a customer's dollar. But many people new to business—excited about their concept and motivated by a perceived opening in the market—tend to underestimate the actual extent of competition and fail to properly assess the impact of that competition on their business."
ELEMENTS OF COMPETITIVE ANALYSIS
There are several important elements of competitive analysis, each of which need to be carefully studied if one hopes to transform competitive analysis activities into business profitability. Major aspects of competitive analysis include the following:
DEFINING COMPETITORS "The first step [in competitive analysis] is to define your universe of competitors," wrote Sheiman, who warned that both unduly broad definitions and excessively narrow definitions of competition can compromise the effectiveness of competitive analysis. Some businesses may offer products or services that largely mirror those offered by your own company, while others may only dispense one or two products/services that compete with your company's offerings. The business conducting the competitive analysis has to decide whether latter examples of competition are incidental or whether they present a potential threat (either now or in the future) to the business's financial well-being. Consultants and business experts also recommend that small business owners scan the horizon for potential as well as current competitors. As Management Review's Oren Harari stated, "the gumption of entrepreneurs coupled with the 24-hour electronic flows of capital they can access worldwide means that competitors suddenly turn up out of nowhere, and traditional barriers to entry in any business fall like bricks in an earthquake."
ANALYSIS OF COMPETITOR STRENGTHS AND WEAKNESSES Once a company's universe of competitors has been defined and identified, it can start on the process of identifying the strengths and weaknesses of those competitors. Abrams cautioned that many small business owners are tempted to place undue weight on the quality of the product or service they offer (or plan to offer, in the case of new businesses). This may be a comforting thought, admitted Abrams, but it betrays a fundamental misunderstanding of how business works: "The objective features of your product or service may be a relatively small part of the competitive picture. In fact, all the components of customer preference, including price, service, and location, are only half of the competitive analysis. The other half of the equation is examining the internal strength of your competitors' companies. In the long run, companies with significant financial resources, highly motivated or creative personnel, and other operational assets will prove to be tough, enduring competition."
There are two main questions that cut to the heart of this element of competitive analysis: What key advantages do the competing businesses possess in the realms of production management, marketing, service reputation, and other aspects of business operation? What key vulnerabilities or weaknesses do the competing firms have in these same areas?
Of course, examination of a competitor's strengths and weaknesses also requires separating important advantages (intense customer loyalty, for instance) and disadvantages (reputation as a polluter) from less important advantages (a larger parking lot, perhaps) and disadvantages (older forklift machinery). Writing in his book Developing Business Strategies, David Aaker suggested that business owners should concentrate their analysis efforts in four major areas:
* Studying the reasons behind the successes—and failures—of competitive firms
* Major issues that motivate customers
* Major component costs
* Barriers to mobility within the industry
ANALYSIS OF INTERNAL STRENGTHS AND WEAKNESSES Another important element of competitive analysis is determining what your own company's strengths and weaknesses are. What aspects of the company's operation convey an advantage in the marketplace? Is your sales force composed of bright, ambitious individuals? Does your company have an advanced inventory management system in place? Do you have an employee with a talent for advertising and/or marketing? Once a company has determined its strengths, it can go about the process of utilizing those strengths to improve its position in the marketplace. Conversely, an examination of internal weaknesses (uninspired product presentation, recalcitrant work force, bad physical location, etc.) should spur initiatives designed to address those shortcomings.
ANALYSIS OF CUSTOMER NEEDS AND WANTS
Learning about customer needs and wants is an important part of competitive analysis as well. Customer priorities should become your business's priorities. In addition, small businesses should take care that they not limit their study to priorities that are already manifested in the marketplace. Indeed, new product development and new innovations in service are essential to business success in any industry. Business owners and managers need to study—and thus anticipate—future customer needs and wants as well those needs and wants that are currently being addressed.
STUDYING IMPEDIMENTS TO MARKET FOR YOU AND YOUR COMPETITION Businesses seeking to enter new markets typically have to grapple with several different barriers. Some of these can be surmounted without inordinate difficulty, while others may be so imposing that they preclude launching a campaign. Abrams cited several common barriers to entry for new competition:
* Patents—These provide some protection for new products or processes
* High start-up costs—In many cases, this barrier is the most daunting one for small businesses
* Knowledge—Lack of technical, manufacturing, marketing, or engineering expertise can all be a significant obstacle to successful market entry
* Market saturation—It is a basic reality that it is more difficult to carve out a niche in a crowded market than it is to establish a presence in a market marked by relatively light competition
"Realistically, few barriers to entry last very long, particularly in newer industries," concluded Abrams. "Even patents do not provide nearly as much protection as is generally assumed. Thus, you need to realistically project the period of time by which new competitors will breach these barriers."
BUILDING STRATEGIC PLANS TO IMPROVE MARKETPLACE POSITION Once a small business owner has attended to the above requirements of competitive analysis, he or she can proceed with the final element of the practice: building a strategic plan that reflects the findings. Strategic plans should touch on all areas of a business's operations, including production of goods and/or services, distribution of those goods and/or services, pricing of goods and/or services, and marketing of goods and/or services.
CRITICISMS OF COMPETITIVE ANALYSIS
While the practice of competitive analysis is generally recognized as an important component of longterm business success, some voices do offer cautions about flawed competitive analysis practices. They note that competitive analyses that are incomplete or based on incorrect data can lead businesses to construct faulty business strategies. Analysts have also pointed out that traditional competitive analysis has become more complex and potentially time-consuming, since so many businesses offer diversified products and services. Still others contend that excessive preoccupation with keeping pace with the strategies, products, and services of other competitors can result in atrophy in internal originality of production and design.
Other observers, meanwhile, argue that judging your company's performance strictly on the basis of how you are performing against chief competitors can retard your business's profitability and lead to a false sense of security. "As long as we appear to be doing better than someone else, we can feel that we must be doing well, so we don't need to change," wrote James R. Lucas in Fatal Illusions. "These illusions can begin when we compare ourselves with our own past performance …or with the performance of other organizations. The companies we're comparing ourselves to may all be performing at lower levels than the market requires. They may all be doing it wrong. Since every organization is unique, another company's solutions may not apply to us…. If we've grown at an annual rate of 15 percent compared with an industry average of 5 percent, we may be wildly successful—unless a new competitor from an unexpected direction or unrelated industry finds a way to deliver our service at 60 percent of our cost."
Finally, some experts contend that preoccupation with competitive analysis too often leads companies to spend too little time looking ahead. "Effective strategy formulation and implementation relies on concepts like uniqueness, differentiation and standing out in a very, very crowded marketplace. Ineffective strategy formulation and implementation relies on concepts like imitation, caution and blending in with the rest of the pack. Competitive analysis does a great job in fostering the latter," wrote Oren Harari in Management Review. "I have no problems in performing a quick, occasional scan of what today's competitors are doing. That is just plain prudent management…. The problem is that executives can easily wind up sinking big resources and becoming hypnotized into tracking the movements of today's solutions for yesterday's customers." Harari contended that "traditional competitor analysis is often shortsighted in depth, range, and possibility….If you'res pending a lot of valuable time tracking your competitors' movements, you're not only running in circles, but you're probably paying too much attention to the wrong guys. It's the folks that you can't track—the ones that don't exist yet either as competitors, or even as companies—who are your real problems. That's because they're not worrying about tracking you.
They're moving ahead with new offerings, redefining and reinventing the marketplace as they go along."