Competition is a fact of business life. Unless a business can develop strategies that help it compete successfully in the marketplace, it has practically no chance of growth, and will remain a tiny enterprise far below its potential. In an increasingly competitive business scenario, the ability to analyze competitors has become a core competency that enhances the success and growth potential of a business.
Competitive Analysis - The Big Picture
In his book on competitive strategy - Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980 - Porter identifies five major forces that determine the overall competitive scenario an individual business faces. These are:
- Rivalry: Competition among rival firms in the same industry with each firm seeking to gain a competitive advantage over the others, which is what we typically mean by competition. We focus on this type of competition in this article.
- Substitutes: Availability of substitutes that satisfy the same need as your product can restrict your ability to charge higher prices. Users might be willing to opt for a lower quality substitute if they consider your price too high (margarine for butter, for example).
- Buyer Power: Buyers can be powerful enough to dictate prices and other terms when there is just one buyer and many suppliers, as in the case of government department purchases. In the case of consumer products, however, buyers are typically large in numbers and distributed widely, and individual buyers have little influence over the producers. Your particular industry might face something in between these two extremes.
- Supplier Power: There are a number of factors that can make your suppliers powerful enough to fix their prices in a way that means you have to share your profits with them. On the other hand, if the suppliers are selling a standardized product that is produced by many firms, they have little bargaining power.
- New Entrants: If an industry is highly profitable, it tends to attract new players. And if entry barriers to the industry are low, they will enter and competition becomes more intense. In many industries, substantial entry barriers exist, such as patent protection for proprietary products, high levels of investment required in industry-specific assets (that cannot be used in other industries should the business prove unviable) and government regulations such as those in the utility industries. Existing players might also keep the prices low to make entry unattractive to new entrants.
Competitor Analysis in the same Industry
When we speak of competition, we generally speak of competition within an industry. Companies need to analyze their competitors to develop a clear context that will enable them find ways to compete effectively. Market analysis, industry analysis and company analysis can help existing and new players in an industry to identify successful strategies, such as developing offers targeted to a presently under-served market segment.
In the absence of an effective analysis, you might try to compete using inappropriate strategies such as a low price that might be easily countered by competitors who have high financial strength. A competitor analysis would have brought the financial strength of such competitors to your notice early enough. In general, a comprehensive competition analysis helps you:
- Develop strategies that exploit any weaknesses of your competitors, or tap a market segment ignored by them.
- Anticipate competitor responses to your own strategic actions.
- Identify the best approach and timing to deploy your strategy or employ counter strategies.
How to do Competition Analysis
The broad steps are:
- Look at your industry: Who are the customers? Are there different customer segments? What customer need does the industry meet? Is the demand growing? Are new competitors coming in?
- Identify your competitors: Who supplies to the customers you want to target? Are there indirect competitors who cater to the same need, e.g. entertainment need can be met in different ways, any of which might be chosen by a segment of customers.
- Identify the success factors: Factors such as economies of scale, extensive distribution network, established brand-name and customer service might be critical for success. SCORE provides mentoring assistance to new entrepreneurs in the US and has provided a template for analyzing competitors. The template suggests comparing competitors on Price, Quality, Selection, Service, Reliability, Stability, Expertise, Company Reputation, Location, Appearance, Sales Method, Credit Policies, Advertising and Image. Identify which factors are most important and assign a weight to each.
- Rate your competitors: Identify the strengths and weaknesses of each of your competitors for each of the critical success factors. Do this systematically by rating each competitor against each factor.
You can gather information about each competitor by visiting their website, and also from their advertisements in different media, product literature, online and print directories, trade associations and even personal calls/visits.
By assembling the data and completing the above exercise, you will gain in-depth insights into the market, including marketing methods typically used.
Competitive analysis is an essential task for businesses that seek to succeed and grow. By identifying and profiling competitors in your target market, you will gain an understanding of the market that will help you find ways to compete successfully. You might even decide against entering the market, which can be a sound decision in intensely competitive markets. Without such a competition analysis, you might get unpleasant surprises when you enter the market.
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