What is Competitor Analysis?

Introduction
This article focuses on the key aspects of competitor analysis.  It defines competitor analysis and gives suggestions on how to write a good competitor analysis.  The article identifies sources on where to find information for a good competitor analysis, and also gives organisational examples to provide good illustrations of utilising information for competitor analysis.

Competitor analysis is a critical part of a firm's activities.  It is an assessment of the strengths and weaknesses of current and potential competitors, which may encompass firms not only in their own sectors but also in other sectors.  Directly or indirectly, competitor analysis is a driver of a firm's strategy and impacts on how firms act or react in their sectors.  Gluck, Kaufman and Walleck (2000) showed that competitor analysis is one of two components that give a firm a strong market understanding (see figure 1).  This drives the formulation of a strategy and it applies whether a firm formulates a strategy through strategic thinking, formal strategic planning, or opportunistic strategic decision making.  Competitor analysis, together with an understanding of major environmental trends, is a key input in strategy formulation and should be developed properly.

Figure 1

In utilising competitor analysis as part of strategy formulation, firms are able to adapt or build their own strategies and be able to compete effectively, improve performance and gain market share in their businesses.  In a large number of instances, firms are able to tap new markets or build new niches.  For example, after European air travel was deregulated in the mid-1990s, Ryanair and Easyjet focused on the no-frills market and provided low-cost travel across Europe after figuring out through competitor analysis, where the opportunities were emerging (Binggeli and Pompeo, 2002).  The authors showed that, at the point in time, Ryanair and Easyjet were performing better than their competitors with operating margins of 26% and 9.5% respectively, which were significantly better than the operating margins achieved by the traditional airlines.

MAIN ASPECTS OF COMPETITOR ANALYSIS
The key objectives in competitor analysis are to develop a greater understanding of what competitors have in place in terms of resources and capabilities, what they plan to do in their businesses, and how the competitors may react to various situations in reaction to what the firm does.  Michael Porter has defined a competitor analysis framework that focused on four key aspects (Porter, 1980 cited in netmba.com): competitor's objectives, competitor's assumptions, competitor's strategy, and competitor's resources and capabilities.  These four aspects of competitor analysis are the areas critical for a firm to understand and they should pursue this knowledge not only for current competitors but also for other potential competitors in the business.
There are other competitor analysis frameworks that firms can utilise.  An example is an international competitor analysis framework presented by Garsombke (1989) but the foundations follow Porter's framework with additional components relating to the understanding of the "international" marketplace.  Others focus on specific components and thus become a subset of the framework.  For example, Slater and Narver (1994) looked at this through the value to customers and identified three components in the analysis: customer orientation, competitor focus and cross-functional coordination.
  Rather than compare various competitor analysis frameworks, the focus from hereon is Porter's framework (see figure 2) for competitor analysis.  This framework is broken into two parts.  The competitor's objectives and assumptions drive the competitor while the competitor's strategy and resources and capabilities define what the competitor is doing or is capable of doing.  Together, these four aspects define a competitor response profile which gives the firm an understanding of what actions a competitor may take.  Taking this analysis across a firm's key competitors will give the firm a viewpoint on where the sector is heading, and provides the firm with a basis for developing their strategy and actions.  The key aspects of competitor analysis and the resulting competitor response profile are defined further below.

Figure 2: Key components of competitor analysis (source: netmba.com, 2007)
Figure 2

Competitor's Objectives
In competitor analysis there are two key factors to note in building knowledge of a competitor's objectives.  The first factor is to know the actual objectives of a competitor.  This could range from building market share in a specific market or overall business, entering a new market or even just maintaining profitability.  This should also look at not only current competitors but also potential competitors.  For example, in Denmark's telecommunications sector in 2000, a new entrant Telmore targeted college students with a specific promotion catering to their requirements (Dahlstrom, Deprez and Steil, 1994).  The authors mentioned that by 2004, Telmore already captured about 20% of the national mobile market.

The second factor is to know if the competitor is actually achieving their stated (or sometimes unstated but implied) objectives.  Looking at these two factors will provide a firm with an opinion on a competitor's potential actions to changes in the sector.  As part of a comprehensive competitor analysis piece, firms should identify their key competitors and be able to define the objectives of each competitor and their likelihood of achieving their objectives. 

An example we can look at is Apple which recently launched its iPhone product.  Knowing the innovation in Apple, one could sense that the eventual goal of Apple would be to have a product that combines the iPhone capabilities and the iPod features, or have an iPhone with other capabilities such as a global positioning system (Baig, 2007).  With the recent success of Apple in various markets, there would be no doubt that Apple would be able to achieve this.
Some of the questions to ask for the competitor's strategic objectives are: What are the short-term and long-term objectives?  What are the financial objectives?  Where is the competitor investing?

Competitor's Assumptions
Another key aspect in competitor analysis is an understanding of  competitors' assumptions about the overall market (trends in the market, products, and consumers).  For example, competitors could define their actions based on what their assumptions are on the growth of the market.  In a cyclical industry (say pulp and paper or shipping sectors), investments decided by players in the industry should be driven by when competitors expect the industry to be at their peak, as timing is critical for players in the industry to meet demand.  However, this is not what usually happens.  Typically, shipping companies such as China Cosco (largest shipping line in China) tends to invest and order new ships when the industry is at its peak, and financing is not an issue (Stanley, 2006).  As shipbuilding takes a number of years, by the time the ships are ready, the industry is at the other end of the cycle or in decline already.  For a proper competitor analysis work, the assumptions made by competitors on the industry and other players should be indicated, but as seen in the example, the validity of these assumptions should be challenged.

Federal Express is a good example to highlight.  When FedEx considered overnight delivery, they assumed that demand would reach high levels and that it would change the mail-and-package delivery industry (Courtney, Kirkland and Viguerie, 2000).  FedEx turned out to be correct and this changed the industry with other competitors following suit to offer the same service.  In this example, FedEx made a strong assumption on the industry behaviour and was able to establish a presence in overnight delivery quickly.

Some questions to address for this aspect include: What is the competitor's viewpoint on the market and development?  Who are the key consumers or clients who the competitor feels will be most profitable?

Competitor's Strategy
A third aspect in competitor analysis is the understanding of a competitor's strategy.  In most cases, this strategy will be defined and stated, particularly for public firms.  In other cases, it may not be openly stated what competitors' strategies are but these can be understood by utilising a number of sources available to firms from analysing a competitor's behaviour in certain situations to discussing with industry experts to get their viewpoints. 

For example, bookmaker Ladbrokes has clearly been expanding their international presence through joint ventures in other markets.  This strategy was pursued after the firm split from the Hilton Group in 2006 (Attwood, 2007).  By observing Ladbrokes' activities, one can determine what the firm's strategy has been since the split.  Another example is Southwest Airlines, which pursued a "no-frills, point-to-point service and which turned out to be a highly innovative, industry-changing and value-creating strategy" (Courtney, Kirkland and Vihuerie, 2000).  These two examples indicate the value of having an understanding of competitors' strategies and their focus.

A number of questions that need to be addressed are: What are the strategy and plans of competitors in their key markets?  Which markets and products will the competitor focus on?

Competitor's Resources and Capabilities
Finally, a competitor analysis should also include an understanding of a competitor's resources and capabilities as these would give a firm an idea of how a competitor can achieve its strategy and objectives, and also give a firm a timeline for when it would expect competitors to pursue certain activities.  For this aspect, a large part of information can be gleaned from press articles and news.  An example is the increase in orders of the Airbus A380, the largest commercial aircraft in the world, by Dubai-based Emirates Airlines from the current 55 to double the number (Dow Jones, 2007).  This indicates several thoughts: (1) Emirates Airlines has large funding capability, and (2) Emirates Airlines will be expanding its international business and presence once these aircraft are received.
Another example is Lanier Business Products.  A leading manufacturer of dictating machines, the firm leveraged its marketing strength to successfully expand into another product, word processors, which they sourced from another firm (Bales et al., 2000).  This shows how important it is to understand a competitor's resources and capabilities, and their strengths. 
Several questions that can be raised in this respect are: What is the level of resources available to the competitor for their investments?  What are the areas of strength for the competitor?

Competitor Response Profile
The results of the analysis from the four aspects of competitor analysis, as defined above, lead to a competitor response profile.  In this profile, a firm can define its thoughts on what actions competitors may purse depending on the understanding given by the competitor analysis.  This provides a firm with a better grounding and preparation to react to competitor actions.

HOW TO WRITE A GOOD COMPETITOR ANALYSIS
There are several principles to follow in writing a good competitor analysis.  These principles are:

  • Understand the key aims in pursuing a competitor analysis – While these follow the objectives mentioned in the previous section, a competitor analysis can be pursued with a specific aim in mind.  This could be as specific as defining a competitor's strategy, understanding a firm's competitive advantages versus a particular competitor, or just keeping management informed of any recent developments that need to be highlighted.
  • Utilise comprehensive sources of information relevant to the particular aim – As will be discussed in the next section, there is much information available for carrying out a competitor analysis.  The key point is to ensure that the relevant ones are included for the specific analysis needed.
  • Analyse the information relative to the firm and also relative to other competitors – It is important to analyse the information within the context of the sector or the other players.  For example, having a pre-tax ROIC of 27.2% does not mean anything on its own.  It can only become an important figure when presented versus other benchmarks or information from competitors (see figure 3), with further analysis explaining these. 

Figure 3: ROIC comparison (source: The McKinsey Quarterly, 1994)Figure 3

FINDING INFORMATION FOR A GOOD COMPETITOR ANALYSIS
There are good sources of information existing already in order to do a good competitor analysis.  Possibly up to approximately 90% of the information needed for a proper competitor analysis and related assessment and decisions already exists in the public domain (McGonagle and Vella, 2002).  The information can be organised across a number of different groupings.  One way is to look at what the competitor presents about them and what other sources external to the competitor present about the competitor.  Some examples of these are shown below:

  • Company reports – annual reports, regulatory filings (e.g. financials), investor presentations, patent applications
  • Company advertisements – TV and print advertisements, sales literature, company website, product literature
  • Company news – press releases, general news articles
  • External reports – equity/analyst reports (for public companies), ratings agencies reports (for credit-rated companies), industry associations, government publications
  • External, but common, network – buyers and suppliers, third-party affiliates, industry experts

Most of the information mentioned above can be accessed through the internet already.  The last point on external, but common, network is a source that will require interaction as this requires getting the viewpoints of other people.  While this would comprise only a small part of the competitor analysis, this may actually prove to be quite insightful as different viewpoints are received from other people who would have had interaction as well with the competitor.

Limitations
The limitations of competitor analysis are linked to the information gathered from various sources and the interpretation of the information. Also, with the exception of a few information sources (e.g. patent applications, forecast financial statements), most of the other printed information shows historical information and may not necessarily give a good indication of a competitor going forward. This is particularly the case if there are a lot of structural changes happening in a sector and all players are expected to have dynamic strategies to capture their market.

CONCLUSION
Competitor analysis is an important part of a firm's development of its strategy.  Its importance lies in the understanding of competitors, their strategy, and resources and capabilities.  More specifically, competitor analysis also allows a firm to assess its own firm versus competitors and plan for what competitors' actions may be as a reaction to actions the firm may take.

A competitor analysis provides a firm with the knowledge to leverage its strengths and address its weaknesses and, conversely, take advantage of weaknesses of competitors and counter their strengths.  Finally, competitor analysis also gives a firm a better understanding not only of the competitors but also their overall sector and where the emerging opportunities may be.

If you found this article useful please have a look at the other articles we have written: Ansoff analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, Pest Analysis, Balanced Scorecard, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.

References
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McGonagle J. and Vella, C., 2002.  A case for competitive intelligence.  Information Management Journal.  [online].  36 (4).  Available from: http://www.factiva.com.  [cited 7 September 2007].

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