What is a Competitive Analysis?
A competitive (or “strategic“) analysis collects and reviews information about your competitors, both direct and indirect, to better understand their strategy as well as their strengths and weaknesses in relation to your strategy.
To test the defensibility of your strategy, you have to benchmark your operations against those of other companies, especially potential competitors, to gauge whether they would have cost advantages delivering YOUR value proposition with THEIR value chain.
In other words, could your closest competitors make the same products that you make – but cheaper – if they wanted to?
This type of introspective analysis can help you understand how much of your performance has to do with a cost advantage and how much is due to differentiation.
For example, if you realized that a potential competitor would have a cost advantage delivering a product that’s identical to yours, that would be a signal that the sustainability of your market position could be at risk.
In response, you could help protect your position against a potential attack by investing more in non-product (i.e. market positioning) efforts such as branding and promotion, or by improving relationships with strategic customers.
A competitive analysis can help you understand the
This information is critical in the creation of your strategy as it may help you identify a market position for your products and services that is both profitable and defendable, which is, at the end of the day, the goal of strategy.
The steps to conduct a competitive analysis will vary based on your particular industry and previous experience, but in general, it should include the following:
- Identify your potential competitor and define the scope of the analysis
- Understanding the strategic capabilities of the relevant players
- Analyzing the impact of current trends on each competitor group
- Analyze competitors’ strategy
- Select a defendable and profitable position for your business
There is a lot to cover in a competitive analysis, so let’s review each step in more detail.
Identifying Competitors and Defining the Boundaries of the Industry
The first step in a competitive analysis is the identification of the companies, “competitors” if you ill, that you will analyze in it.
As we explain in our strategy principles the real goal of
That means that, when doing your competitive analysis, you must look beyond obvious competitors and include other companies that compete with you for the same “profits.”
Through our research, we have found that Michael Porter’s Five Forces model provides a great categorization of the different “types” of competition that you could face within a particular market, so you could use his framework to define the boundaries of your competitive analysis.
Porter identified the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, substitute products and the rivalry among competitors, as the five forces that prescribe how profits will be distributed among the players of a given industry.
Therefore, we will use these forces as the five categories of companies that we will include in the competitive analysis, that is, you will include your buyers, suppliers, market rivals, potential market entrants and substitute products as the groups of competitors to evaluate.
We know it may sound a bit strange calling these group of companies competitors, but in the end that’s what they are, since they compete with your company in trying to retain a bigger share of the value that your company creates.
Powerful buyers, for example, will try to use their power to pay less for your products and get more value from them, while powerful vendors will try to get paid more for theirs and give you less value.
So in essence, the five forces model describes a power play where industry participants compete with each other to claim a bigger piece of the profits the industry creates, and each player’s success depends on how well it is positioned in its respective industry.
At a preliminary level, you may do a competitive analysis at the “category” level, for example, analyzing your vendors or your suppliers as a group, but we recommend that to make strategic decisions you do the analysis at the company level, where you identify specific companies within those categories and analyze their particular strategy.
With that being said, the first step in your competitive analysis is to narrow down the scope of the analysis either the categories or the companies that you will analyze, and with that you are ready to move on to the next step.
Understanding the Strategic Capabilities of Each Player
Once you have identified the relevant players to include in your competitive analysis, the next step is to gather information that helps you better understand their competitive capabilities and strategic goals.
At a minimum, you must collect information in five critical areas:
- Their strategic goals and aspirations
- Their strategy to achieve these goals
- Their assumptions and views about the market
- Their metrics of success
- Their capabilities (people, assets, resources, relationships, strengths, and weaknesses)
You may learn about the first four areas from their website, earning calls and from their 10-K forms if they are public companies.
For private companies, you may have to rely on the information you find on their website and press releases, or through services like Dun & Bradstreet.
That information can start giving you a good idea about the competitive capabilities of each player and the nature of competition in your industry.
To analyze their competitive capabilities, we recommend that you break down and analyze their value chain, and try to identify core different with YOUR own value chain. The process to do this is as follows:
First, you break down their value chain and to the best of your knowledge you find the similarities and differences with respect to your value chain.
Second, you evaluate the existing “asymmetry” between their value chains and yours:
- What are the things that they are good at and you are not?
- What are the things that you are good at and they are not?
- Can you find some of the things they are good at which we would like to improve on?
- Can you find some of the things that you are good at which you could outsource?
In those differences you will find the factors on which each company’s strategy is based on, and the “bets” that each company is betting its future on.
Analyzing the Impact of Current Trends on Each Competitor Group
Markets are dynamic and so must be your strategy. That’s why no competitive analysis is complete unless it considers the effect that current trends may have in the profitability of your industry over time, something we call Environmental Analysis.
For example, it would be important to understand whether increasing competition among vendors will drive the price of a key input down, or whether trade wars with China will make a commodity scarce and more expensive.
Trends, as we use the term herein, are factors that move in a well-known direction.
For example, we all know that computing power in smartphones is increasing, that consumers are increasingly more interested in electric vehicles, that tobacco sales are shrinking and that renewable energy is getting cheaper.
All of those are trends where we know clearly where they are heading.
While you may not be able to quantify the influence that a particular trend will have on a market, you can clearly see its direction.
You can see whether it is going up, down or if it has stalled, and it is very important that you understand how known trends will affect your ability to remain profitable in the long run.
That is the goal of this step. To identify the existing trends in your industry and see how they could affect your profitability.
If during this step you run into factors that are important but that you can’t predict, things like the results of a presidential election, the content of new legislation, or the standards that an industry will adopt, then you may need to run your strategy through the lenses of different scenarios, a technique called Scenario Planning which is very popular in companies like Royal Dutch Shell and Microsoft among others.
Analyzing Competitors’ Strategy
The next step in this process is to analyze the strategy of your competitors. A good place to start, is Michael Porter’s endurance tests, asking the following questions for each competitor:
Do they have a unique Value Proposition?: A good strategy is based on a clear understanding of how a company’s solution delivers value for customers. As we saw, a good value proposition aligns customers, benefits
Do they have a distinctive Value Chain?: A value network (a concept of which the value chain is part) must be deliberately and specifically tailored to satisfy the needs of a particular customer segment.
A Value Proposition that can be delivered without a distinctive value chain, Porter says, can be copied by anyone – thus it will not produce a sustainable advantage.
What are the things they have decided not to do: Strategy is fundamentally about deliberate choices, and these choices involve not doing things that others are doing, while doing some things that others aren’t. BMW, for example, has decided not to make a cheap car, while Porsche has decided not to make a sedan.
Choices about what not to do produce a remarkable distinction for products and provide focus to the business.
What are the things that your competitors have decided not to do, and why?
How aligned is their value chain: A Value Chain is a synergistic system where activities are linked together to produce a value proposition. Therefore, a value chain where people, processes and assets are arranged to work well together, and that is supported by selected good vendors and partners, will create more value for its members than a value chain that is too flexible or that is designed to accommodate a wide range of options.
In a budget airline, for example, everything from the online booking system to the availability of only a few destinations, lack of fancy in-flight meals and off-peak schedules produces a tight value chain that is very difficult to copy.
How consistent are your competitors on their strategy: If you change your strategy every year, you will not have enough time to build a value chain that is difficult to copy. Remember how economies of scale and learning curves for example help age a company’s value chain, but they need time to do that.
The more consistent you are in the pursuit of your strategy, the stronger the links in your value chain will be, the deeper the business will go down its learning curve, and the harder it will be for other companies to copy it.
Time, therefore, is the final ingredient that makes strategy happen, and if your competitor’s change their strategy all the time, they will very likely have a weak competitive performance in the future.
Finally, you must question the defendability and durability of their strategy with questions like:
- Which of their capabilities are based on intellectual property?
- Is their business protected by a particular legal framework or regulation in any way?
- Are they faster than you in the implementation and re-adjustment of their strategy?
- Can they maintain their capabilities over time, or will they degrade of become obsolete?
With those insights at hand, you are ready for the next step where you develop or improve your own strategy.
Select a Sustainable Market Position
A well-designed business strategy is the answer to the threats to profitability and risks that you have identified in the previous steps. For that reason, a competitive analysis is not complete unless you take action.
In this step, you take all the information and insights that you have collected and will try to find a market position for your products and services that
Here are some questions that can help you improve your strategy based on the information collected in the previous steps:
- What are the cost drivers in the factors that you have in common with your competitors? Should you try to reduce or eliminate those?
- What are the drivers of customer value that you have in common with your competitors? Should you try to increase those well above the market?
- Should you try to improve the things that you are good at, but your competitors aren’t (reinforce the asymmetry of your value chain)?
- Should you add features found in products used in combination with yours (complements) to your products to make them more complete?
- What capabilities in your competitors’ value chain you should try to improve on?
- What capabilities in your value chain are common enough that you can outsource and reduce your costs?
You don’t need to destroy a competitor to win in a competitive market. The beauty of strategy comes from its diversity, which is what allows multiple players to win at the same time within the same industry, and a competitive analysis can help you achieve just that.
For that reason, it must be part of your strategist toolkit.
This article has been extracted from Sun Wu’s book Strategy for Executives which can now be downloaded for free here.
Magretta, Joan. Understanding Michael Porter: The Essential Guide to Competition and Strategy. Harvard Business Review Press. Kindle Edition.
Harris, Jared; Lenox, Michael. The Strategist’s Toolkit. Kindle Edition.
Schoemaker, Paul J. H. Scenario Planning: A Tool for Strategic Thinking. MIT Sloan Management Review. January 1995. URL: https://sloanreview.mit.edu/article/scenario-planning-a-tool-for-strategic-thinking/