There are some dangerous thoughts out there amongst some startups. Armed with their shiny new, staggeringly clever, unique idea the naïve startup believes that they have no competitors worth worrying about, or (even more dangerously) that they don’t have any competitors at all. Try answering this question then, name a successful organisation that doesn’t have competition. Pretty tough, isn’t it?
Whether you have competition now, or whether they’re lurking on the horizon, having a strong understanding your competitors is one of the most important aspects of business strategy. For startups, knowing the landscape before you enter the marketplace and being able to catch any approaching changes is priceless.
Why Competitor Analysis?
Keeping an eye on competitors provides you with valuable information on what other businesses are up to, and most importantly, what they are likely to do in the future.
A competitor analysis will help you understand:
- Which competitors you are competing with
- Your competitors’ strategies and planned actions
- How competitors might react to your business’ actions
- How to influence competitor behaviour to your advantage
Getting the most from the competitor analysis process, involves taking the time to gather tangible intelligence from a wide array of sources and making informed analysis. It’s not enough to rely on anecdotal stories or industry gossip.
Competitor Analysis Framework
Michael Porter is the leading authority on competitive strategy and the author of “the bible” of competitive analysis, Competitive Advantage. Porter developed a framework for analysing competitors based on four key aspects:
- Competitor’s objectives
- Competitor’s assumptions
- Competitor’s strategy
- Competitor’s capabilities
In this framework, objectives and assumptions are what drive the competitor. Strategy and capabilities are what the competitor is doing, or is capable of doing.
Adapted from Michael E. Porter, Competitive Strategy, 1980, p. 49.
When thinking about who your competitors are, make sure you also consider any new competitors who may enter the industry in the future.
How to Analyse a competitor
Competitor’s Current Strategy
When considering your competitors current strategy, you may find two conflicting sources of information. Competitors publicise their strategies through public documents, thus revealing what they say they are doing. But in most situations, the most revealing information comes from what a competitor is actually doing.
To gather an understanding of what a firm says it is doing, look for:
- Annual shareholder reports
- Financial Reporting
- Interviews with analysts
- Statements by managers
- Press releases
Following where the cash flow goes will give you a hint as to a competitor’s real strategy. Have a look for:
- Hiring activity
- R & D projects
- Capital investments
- Promotional campaigns
- Strategic partnerships
- Mergers and acquisitions
A competitor that is focused on reaching short-term financial goals might not be willing to spend money responding to a competitive attack. Instead, preferring to focus on holding its position with current products. On the other hand, a company that has no short-term profitability objectives might be willing to participate in destructive price competition. This scenario results in difficulties for both you and your competitor.
Knowledge of a competitor’s objectives will make it easier to predict how they will respond to competitive moves. Other aspects of objectives include risk tolerance, management incentives, the background of executives, composition of the board of directors and legal or contractual restrictions.
Having an understanding of how the management team of a competitor think can help pre-empt behaviour. For example, Honda was able to enter the U.S. motorcycle market with a small motorbike because U.S. manufacturers had assumed that there was no market for small bikes based on their past experience.
A competitor’s assumptions may be based on a number of factors, including:
- Beliefs about its competitive position
- Past experience with a product
- Regional factors
- Industry trends
- Rules of thumb
Competitor’s Resources and Capabilities
A competitor’s resources and capabilities determine its ability to respond effectively.
A SWOT analysis can determine a competitor’s strengths, therefore its capabilities. A similar analysis can also be used to determine the competitor’s ability to increase its capabilities in certain areas. A financial analysis can reveal its sustainable growth rate.
Some competitors may have a better ability react swiftly than others. Some firms have heavy momentum and may continue for many years in the same direction before adapting. Others can mobilise and adapt very quickly. Factors that slow a company down include low cash reserves, large investments in fixed assets, and an organisational structure that hinders quick action.
Improving the odds
A thorough competitor analysis gives you the improved ability to predict the behaviour, resources and capabilities of those businesses you are directly competing with. It will also give you the ability to influence the behaviour of your competitors, giving you a huge competitive advantage.
Having large, well-established competitors shouldn’t be a deterrent to entering the marketplace. If anything, having tough competitors will bring out the best in your strategy and your performance. Tough competitors will expose your vulnerabilities, which should only serve to make you stronger in the long term. Competing with the best, will make you better.