Once the external business environment has been analyzed for its suitability, industry competitors must be profiled to determine who your specific competitors are. Not all “players” in an industry will be in direct competition with your organization. (You don’t want to spend valuable resources on an in-depth competitive analysis of BMW and Mercedes if you sell Hyundais.) A robust competitive analysis will allow you to focus on those companies that will compete for customers in your target market.
A competitive analysis looks at competitors and tries to answer such questions as these in the following categories:
General Background: Who are my competitors? Where are they located?
Who are the key personalities? What type of organizational structure is it?
Financial: How profitable are they? Have they grown in the recent past? And any other data you can ethically discover.
Products: What products do they sell? Have they introduced new products and what is their success rate? What brands do they carry? Do they hold patents and licenses?
Customers: What market segment do they serve? What is the customer growth rate? How strong is the customer loyalty?
Advertising and Sales: What are their distribution channels? What is their promotional strategy? How large is their sales force? What is their pricing and discount structure?
Personnel: How many employees do they have? What is their compensation package including benefits? What kind of managers and what management style do they show? More importantly, what skills is the competition hiring? If a company is hiring experts in artificial intelligence, it tells the competition quite a bit about the plans for the future.
There are many more questions that would be relevant to this kind of in-depth analysis. The more you know about your competition, the better prepared you will be when you go up against it.
Now that you understand more about the environment that businesses operate in, let’s take a deeper look at exactly how they operate. Businesses exist to make profits by offering goods and services in the marketplace at prices that are higher than the costs they incurred creating those goods and services. Businesses rarely exist alone in an industry; competition is a usually a key part of any marketplace. This means that businesses must find ways to attract customers to their products and away from competitors’ products. Strategy is the process of planning and implementing actions that will lead to success in competition.
The analytical tools we discuss here are part of the strategic planning process. Managers cannot successfully plan to compete in an industry if they don’t understand its competitive landscape. It is also unlikely that a firm planning to launch a new product they are not equipped to make will be successful.
Porter’s Five Forces model is centered around rivalry, a synonym for competition. In any industry, multiple firms compete against each other for customers by offering better or cheaper products than their rivals. Firms use PESTEL to understand what consumers are interested in and use VRIO to evaluate their own resources and capabilities so that they can figure out how to offer products and services that match those consumer interests and that are better in quality and price than the products offered by their competitors.
A firm is described as having a competitive advantage when it successfully attracts more customers, earns more profit, or returns more value to its shareholders than rival firms do. A firm achieves a competitive advantage by adding value to its products and services or reducing its own costs more effectively than its rivals in the industry.
Management 2020 text remixed from multiple sources under a CC Attribution-NonCommercial-ShareAlike 4.0 International License. View a complete list of original sources.