Competitive analysis is a vast subject. Like many business topics, it means different things to different people.
For graduates of an MBA program, the term most likely conjures up vague memories of Porter’s Five Forces, and the difference between structural analysis of an industry versus the competitiveness of a business within that industry.
For others it means something rather different – invariably the dirtying of hands to gain insight into a specific variable common to a set of competitors. This might be price benchmarking, churn in customers or staff, marketing strategies and sales processes. This is more of a competitor analysis, and is distince from competitive analysis in many important ways.
This article will be the starting point in a (long) series of articles on performing the competitive analysis effectively. Throughout this series we will cover both the theory and the practise. We will also delve into the dark arts of competitor analysis, encompassing both direct competitors and indirect competitors.
This article will provide a brief primer on competitor analysis:
- What it is and why you should do it
- Frameworks for competitive analysis
- Macro versus Micro
- Competitor analysis
What is competitive analysis and why do it?
The business school definition of competitive analysis is centered around the structure of an industry, and the forces within that industry that influence the ability of companies within it to compete profitably. Competitive analysis is therefore the process of assessing an industry as a whole. It is a fundamental prerequisite for the formulation of effective business strategy, and can save new entrants to a market a lot of time and heartache – not to mention money.
The point of the exercise is to relate a company to its environment. The structure of an industry strongly affects the rules of the game. This in turn influences the strategies available to a company within its market.
Understanding the rules, both how to stick within them and how to usefully bend them in your favour, is a core requirement to effectively compete. With barriers to competition being lowered across industries all the time through technology and automation, thorough competitive analysis has never been more important.
This is not some throwaway point either. As barriers to competition get lowered, the increased competition works constantly to drive down the rate of return on capital. The closer your industry becomes to a perfectly competitive industry, the lower that rate of return will be. It doesn’t matter if you’re a venture or PE backed founder, or a business owner using their own funds to grow the business with no intention of taking on outside investment. The closer your rate of return on capital invested gets to an economic floor, the less your potential profits, the lower the ‘enterprise value’ (saleable value) of your business.
None of us involved in building businesses want to find ourselves in a situation where our competitive advantage is so eroded that profitability becomes impossible, and the value of the asset we’ve created over years of blood, sweat, tears and sleepless nights creeps closer to zero with every day that passes.
In MBA-speak, this economic floor is defined as the yield on long-term government bonds adjusted up to account for the risk of capital loss inherent in a riskier enterprise (all enterprises are riskier than US government securities).
Frameworks for competitive analysis
There are a number of frameworks you should be aware of for performing competitive analysis. Some of these will be familiar – specifically those that look at a specific company’s competitive advantage, such as a SWOT analysis. Within these there are specific competitor analysis tools for assessing competitors’ businesses, establishing a pricing strategy, assessing competitors’ position, assessing your market share percentage and generally making your own marketing strategies more effective. We look at a few of these below. All of these are equally applicable whether you sell products or services.
Porter’s Five Forces
Porter’s Five Forces is a legendary framework created by a Harvard Business School professor in the 70s. This legendary status is in no small part due to the fact that – unlike much of what is learned at business school – this model is useful and works in the real world for performing a comprehensive competitive analysis.
We will look at this model in detail in a future post, however, the 5 forces can be briefly summarized as follows:
- The level of industry competition – both direct and indirect competitors.
- New players in the industry – their ability to capture market share.
- Supplier (seller) power – less suppliers or sellers means greater power for market incumbents.
- Customer (buyer) power – small or powerful audiences can negotiate to drive down prices.
- Substitution threat – the easier a product or service can be substituted the greater the threat to profitability.
The PESTLE framework is a macro analysis framework for determining how external factors will affect the trajectory of your business and industry. More specifically, it looks at how national or marketplace factors affect the consumer of specific goods or services.
PESTLE stands for:
These factors provide a framework for assessing the factors beyond the company or industry’s control that none-the-less impact the industry and company’s ability to do business. Recognising these macroeconomic headwinds and tailwinds allows teams to be early to industry trends, better understand the competitive landscape, and adjust their marketing strategy to fit their environment.
With VRIO we start to look more introspectively at the company itself. This is a strategic framework for analysing your company’s strengths and weaknesses opportunities and threats. Like all of the other frameworks, it’s applicable whether you sell products or services.
This framework is designed to look at your specific resources and capabilities to understand your competitive advantage.
VRIO stands for:
Where a resource or capability meets all four of the VRIO criteria, it has the potential to be a source of sustainable competitive advantage. This is the core purpose of the VRIO model, versus say the SWOT analysis. VRIO is very much an internally-focused exercise aimed at assessing capabilities and resources to identify areas of competitive strength. Where as VRIO goes deep, SWOT goes broad.
Ah, the SWOT analysis, at long last. We’re all pretty familiar with this one. It’s more or less a right of passage for any business owner, strategist, investor, or marketer to create a SWOT analysis somewhere along the line. Again, whether you sell a product or service, SWOT analysis can be helpful in matching your goals and capabilities to the market in which you operate. It is not by itself a tool for understanding the market in which you operate. The other market research frameworks outlined above are an important prerequisite for building this knowledge base.
SWOT stands for:
Variations of the SWOT analysis now abound, with any number of acronyms expressing much the same functional objectives as SWOT. We won’t be covering these in detail here or elsewhere, as they are functionally interchangeable with SWOT – more a matter of preference than outcome. They include NOISE (Needs, Opportunities, Improvements, Strengths, Exceptions) and SOAR (Strengths, Opportunities, Aspirations, Results).
Macro vs Micro
Choosing the right framework is often a matter of identifying your ‘known unknowns’. Good competitive market analysis relies first on a frank assessment of your level of market knowledge.
Gaining a competitive edge first requires a clear understanding of the macro factors affecting your industry – the industry trends that will drive the environment you operate in. This could be factors external to the industry, that none the less influence outcomes for those in the industry. This is where a PESTLE analysis could be helpful, particularly for industries that are highly politicised or face significant government legislation. This type of analysis captures broader trends at a national level, impacting things like consumer spending.
Competitive analysis to determine the structure of an industry is essential, both as a prerequisite for entry for new players, and periodically as a sanity check for incumbents. You do not want to be trying to play checkers when everyone else is playing chess, yet for many businesses this is their reality. This is where a deep, thoughtful exploration of the industry itself using a framework like Porter’s Five Forces is crucial to effective competition.
As part of this exercise, you will inevitably identify competitors, learn about your target customer in more detail, start to intuit marketing strategies that are likely to be effective, get a feel for available market share, understand the capacity for future growth and how much revenue might be possible as a new market entrant.
Once this macro work is done, it’s possible to inch towards the micro. The somewhat hybrid approach of VRIO, and the more introspective SWOT analysis bring you into the realm of detail. Once the rules of the game are clear, once you really understand the game you are playing, it becomes a strategic and tactical battle to gain the upper hand through superior access to information and insight, and superior execution.
This is what most people think of when they think of competitive analysis. They think of their direct competitors, their indirect competitors, and the competitive landscape as they already understand it – the day to day battle for market share, to reach their target customers better, refine their marketing tactics, and their company’s strengths and weaknesses relative to their primary competitors.
For me, this is the domain of tactics, not strategy. How you handle pricing, how you look to compete against specific competitors, how you set up your sales process and marketing channels to outcompete your major competitors – all these are tactical considerations based on higher level market understanding, and detailed competitor analysis.
There are many ways to collect the information needed to be more effective within your target market. We spend a lot of time building holistic systems for competitor analysis for our clients. Typically this involves three primary research streams:
Research stream one
The first is programmatic research pulling data automatically from social media channels to understand competitor social media strategy and customer feedback. We make use of APIs provided by the various social media channels to capture customer sentiment around competitors’ customer service, the competitors’ offer, and the competitors’ strengths and weaknesses.
Research stream two
The second covers more traditional forms of intelligence gathering such as voice of customer interviews – both yours and your competitors – and mystery shopping your relevant competitors to understand your competitors’ pricing and how they position themselves. It is often instructive to assess both direct competitors and indirect ones too with this form of competitive analysis. Competitors outside your vertical, what you might think of as horizontal competitors, often have interesting lessons and techniques that can be usefully applied inside your vertical.
research stream three
The third form of research is the more traditional desktop research that people generally call market research. This looks to assess things like available market share – sometimes described as total addressable market and total serviceable market, the quality of a competitor’s product or service, your competitors’ offer and how they are targeting customers, the competitor landscape more generally, what social media platforms they are active on, the makeup of their sales team and their sales process, and myriad other data points.
Combining these three research streams is the key to creating a more efficient marketing strategy, and capturing market share by reaching target customers more effectively than your major competitors can.
This type of competitor research can be extremely helpful in identifying strengths and weaknesses within your own company, as well as how to beat out direct competitors for the attention of your target audience.
Competitive analysis is primarily an exercise designed to assess the underlying structure of an industry. It starts with a macro assessment of the headwinds and tailwinds affecting the market as a whole. These are core predictors of the potential for future growth nationally and within your chosen market.
The next step in competitive analysis is to dig deep into the structure of the industry, and understand the rules of the game. The overarching goal for this research is to relate a company to its environment, such that an effective strategy for future growth can be created.
From there, the company itself can be brought into sharper focus through more familiar forms of competitive analysis – such as SWOT analysis and its derivatives.
The final form of competitive analysis is the tactical, and is more of a competitor analysis. This looks at other companies operating in the same market – primary and secondary competitors. It could cover anything from the strengths and weaknesses of these companies, to the quality of their product or service, how they price and position themselves, or even how quickly they turn over staff.
Conducting a comprehensive competitive analysis is a time consuming and complex process, but is essential if you are to create an effective growth strategy and use limited resources to make the right moves in the right areas.
What is competitive analysis and why is it important?
Competitive analysis is the process of understanding the macro and micro factors impacting an environment, industry and business.
What are the 6 steps of competitive analysis?
Traditionally there are five steps, or Five Forces, that impact the competitive environment surrounding an industry vertical. These are: Industry Competition, New Players, Supplier Strength, Consumer Strength, and the Threat of Substitution. More recently, a sixth step or force has been posited by professors at Yale School of Business. This factor is based on game theory, and considers Complimentors. A Complimentor is a product or service that’s best used in conjunction with a product or service provided by a rival competitor. It suggests a certain symbiotic relationship between companies that, on the surface, would be competitors.
Why is competitor analysis important in marketing?
Competitor analysis is particularly important in marketing as the positioning of your competitors affects how you communicate with your target audience. When your competitors’ target a similar target audience to you, when you both chase the same customer, small differences in price, positioning, frequency and process can be the difference between making the sale and losing out to your competition. Competitor analysis lets you know how competitors are selling against you, and how you can position yourself to be more competitive with potential customers.