The first step in a competitive analysis is to determine who the competition is. This is more difficult than one might think. For example, take a company such as 1-800-FLOWERS. Primarily, the company sells flowers. But 1-800-FLOWERS is not only in the flower business; in fact because flowers are often given for gifts, the company is also in the gift business. If the company sees itself in the gift business rather than just the flower business, it has a broader set of competitors and opportunities to consider. In addition, some firms sell products or services that straddle more than one industry. For example, a company that makes computer software for dentists’ offices operates in both the computer software industry and the health care industry. Again, a company like this has more potential competitors but also more opportunities to consider.
The three groups of competitors a new firm will face.
1. Direct competitors
These are businesses that offer products identical or similar to those of the firm completing the analysis. These competitors are the most important because they are going after the same customers as the new firm. A new firm faces winning over the loyal followers of its major competitors, which is difficult to do, even when the new firm has a better product.
2. Indirect competitors
These competitors offer close substitutes to the product the firm completing the analysis sells. These firms’ products are also important in that they target the same basic need that is being met by the new firm’s product. For example, when people told Roberto Goizueta, the late CEO of Coca-Cola, that Coke’s market share was at a maximum, he countered by saying that Coke accounted for less than 2 percent of the 64 ounces of fluid that the average person drinks each day. “The enemy is coffee, milk, tea [and] water,” he once said.
3. Future competitors
These are companies that are not yet direct or indirect competitors but could move into one of these roles at any time. Firms are always concerned about strong competitors moving into their markets. For example, think of how the world has changed for Barnes & Noble, Borders and other brick-and-mortar bookstores since Amazon.com was founded. And, think of how smartphone technology continues changing the nature of competition for a variety of firms including those selling entertainment services, telephone services, and the like.
It is impossible for a firm to identify all its direct and indirect competitors, let alone its future competitors. However, identifying its top 5 to 10 direct competitors and its top 5 to 10 indirect and future competitors makes it easier for the firm to complete its competitive analysis grid.
If a firm does not have a direct competitor, it shouldn’t forget that the status quo can be the toughest competitor of all. In general, people are resistant to change and can always keep their money rather than spend it. A product or service’s utility must rise above its cost, not only in monetary terms but also in terms of the hassles associated with switching or learning something new, to motivate someone to buy a new product or service.
Sources of Competitive Intelligence
To complete a meaningful competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors. The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence. Obtaining sound competitive intelligence is not always a simple task. If a competitor is a publicly traded firm, a description of the firm’s business and its financial information is available through annual reports filed with the Securities and Exchange Commission (SEC). These reports are public records and are available at the SEC’s Web site (www.sec.gov). If one or more of the competitors is a private company, the task is more difficult given that private companies are not required to divulge information to the public. There are a number of ways that a firm can ethically obtain information about its competitors. A sample of the most common techniques is listed below
• Attend conferences and trade shows
• Participants talk about the latest trends in the industry and display their most current products.
• Purchase competitors’ products
• Purchasing and using a competitor’s products can provide insight into their benefits and shortcomings. The purchase process itself can provide data about how a competitor treats its customers.
• Study competitors’ Web sites
• Many companies put a lot of information on their Web sites, including product information and the latest news about the company
• Set up Google and Yahoo! e-mail alerts
• E-mail alerts are updates of the latest Google or Yahoo! results,
including press releases, news articles, and blog posts, on any keywords of interest. You can set up e-mail alerts using your company’s name or the name of a competitor.
• Read industry-related books, magazines, and websites
• Many of these sources contain articles or features that contain information about competitors.
• Talk to customers about what motivated them to buy your product as opposed to your competitor’s product
• Customers can provide a wealth of information about the advantages and disadvantages of competing products.
Completing a Competitive Analysis Grid
As we mentioned previously, a competitive analysis grid is a tool for organizing the information a firm collects about its competitors. It can help a firm see how it stacks up against its competitors, provide ideas for markets to pursue, and, perhaps most importantly, identify its primary sources of competitive advantage. To be a viable company, a new venture must have at least one clear competitive advantage over its major competitors.
An example of a competitive analysis grid is provided in the Table above. This grid is for Element Bars, the energy bar start-up company. The main competitive factors in the industry are nutritional value, taste, freshness, price, and packaging. Some industry participants, such as Clif Bar, also engage in philanthropy (Clif Bar gives away 1 percent of its revenue to community causes). These factors are placed on the vertical axis of Element Bars’ competitive analysis grid. The horizontal axis contains Element Bars and its five main competitors. In each box, Element Bars rates itself against its main competitors. The purpose of this exercise is for a company to see how it stacks up against its competitors and to illustrate the areas in which it has an advantage (and has a disadvantage). For example, Element Bars rates itself as superior to its competitors in terms of nutritional value and freshness. It will likely use this information in its advertising and promotions. An additional benefit of completing a competitive analysis grid is that it helps a company fine-tune its offering. For example, Element Bars rates itself at a disadvantage to its competitors on price. Its bars are roughly two and a half times the cost of a Clif Bar or a Balance Bar. It may want to confront this issue head-on in its advertising and promotions, by acknowledging that it’s not the cheapest bar but has the most nutritional value, is the freshest, and is the only bar that’s customizable. It can back up its freshness claim by explaining that all Element Bars are “made to order,” and are shipped just several days after they come out of the oven.
Reference: Entrepreneurship, Successfully Launching New Ventures