Whilst companies should focus on their own strategy, resources and opportunities, it is important to recognise that other companies will often be carrying out similar analyses, and hence trying to exploit the same opportunities. As such, any business strategy needs to consider what the firm’s competitors are doing and how this will impact on the firm itself. Whilst this may not be as important for fragmented industries with a large number of smaller competitors, in industries with one or more major players the actions of competitors will play a vital role in successful strategic planning.
There are two key aspect of competitor analysis. The first is obtaining information about the resources, behaviour and success of the firm’s most important competitors and the second is using the available information to attempt to predict and pre-empt the future strategies and behaviour of said competitors. As such, a company needs to determine which competitors it will compete with and which it will avoid. The company will achieve this by determining its competitors’ current and likely future strategies and actions, as well as how these competitors may respond to the actions of the firm itself. As part of this, the firm can also consider how it could try to influence the behaviour of its competitors and potential competitors to its competitive advantage, perhaps by discouraging future market entrants. In general, this cannot be achieve using casual or anecdotal knowledge, and requires a planned and systematic investigation into, and analysis of, competitors to gather a wide range of information and use it to make valuable strategic decisions.
Competitor Analysis Framework
Michael Porter developed a framework through which companies can analyse their competitors based on what Porter believed were the four key aspects driving a business. These aspects are the objectives of the business; the assumptions made by the business; the strategy of the business and the capabilities and resources of the business. Of these, the objectives are the factors that determine what the business is aiming for, the strategy and capabilities determine how it will try to get there, and the assumptions drive how the competitor may react to both foreseen and unforeseen events. In order to be useful, a competitor analysis should focus on the most important existing competitors and on any potential competitors which may enter the market or move into the market segments where the company carrying out the analysis is operating.
It is important to understand what objectives a competitor has, as this will enable a company to predict what the competitor will do in the future, and how their behaviour can be altered. For example, if a company knows that one of its competitors is pursuing profit margin and rate of return goals, then they may be unwilling to respond if the company undercuts their products, as reducing their price would reduce their profit margins and rates of return. As such, the company may be able to aggressively grab market share from the competitor by taking a cost leadership strategy. However, if a competitor is looking to pursue market share goals, then they are more likely to aggressively defend against any attacks on their markets and cut prices to drive the new entrant out. Competitor objectives may also focus on attaining a certain rate of growth or achieving technology leadership. The competitor may also have different objectives for each business unit, and functional level, hence it can be difficult to accurately determine what the objectives are.
Companies can attempt to determine their competitors’ objectives by analysing their organisational structure. For example, a business unit which reports to the chief financial officer may have a financial focus, whilst one which reports to the chief information officer may be responsible for attaining technology leadership. Examining the prior behaviour of the competitor can also provide some indication of its objectives, including previous levels of risk tolerance; the management incentive structure; the composition of the board of directors; and the stated goals and objectives in the financial statements. In addition, any recent strategic changes by the competitor may indicate whether or not it is meeting its objectives.
Similar to the objectives, it is possible to gain some understanding of a competitor’s strategy based on its current business performance, as well as any announcements made by a competitor. For example, the competitor’s annual reports will often indicate what the company’s current strategy is and how close the company is to fulfilling it. Similar information can also be obtained from press releases and analyst reports. However, the stated strategy may be subtly different from the actual strategy being pursued by the competitor, as the competitor may be looking to disguise its actual strategic goals. As such, it is necessary to look at the current use of capital and cash flow to determine what the actual strategic goal may be. In addition, the competitor’s current recruitment activity; any mergers and acquisitions; and any marketing activity may indicate what its current strategy is.
Whilst it is important to understand the objectives and strategy of a competitor, to understand how it may act in future and may respond to the company’s actions, it is also important to determine what its resources are, and what capabilities it has to respond effectively to market changes. In general, the resources of a competitor will often be quite well known, as they will be the factors that the firm is using to generate its current profits. It is important for a company to look at the most important resources that its competitors have, as well as any areas of weakness that could be exploited.
As a result, an analysis of a competitor’s resources is much like a SWOT analysis, and also analysing the competitor’s main market strengths can help to define its capabilities. However, the company also needs to consider what actions the competitor could take to increase its resources to defend against an attack: something which will likely depend on the company’s financial status and its stated strategy. Indeed, as the competitive environment tends to be dynamic, it is also important to analyse the ability of the competitor to react quickly to any changes. Some firms will not have the resources to react quickly to an aggressive competitive attack, and hence the company will be able to target these competitors and gain significant market share before they respond. Other competitors may be able to respond quickly to any attack on their market, making them unprofitable targets.
Whilst a competitor’s resources will define the actions that the competitor is capable of, the competitor’s assumptions about the market and their own business will influence the actions that they will tend to make. For example, if previous products in a market have failed, competitors may assume that any other types of product will fail. For example, the failure of electric cars to provide viable substitutes to petrol driven cars in the past may have slowed the development of future electric cars. However, sometimes these assumptions create opportunities; such as Honda being able to obtain a significant market share in the US motorbike market because US manufacturers did not view Honda’s smaller motorcycles as serious competitive threats.
Competitor Response Profile
Once the information around a competitor’s objectives, strategy, resources and assumptions has been obtained, it can be used by the company to create a response profile for the competitor. This profile details all the potential moves which the competitor may make in response to the company’s strategy, and how effective and significant these moves would be. The profile can include offensive moves which the competitor may make into a new market, as well as defensive moves if a company attacks one of the competitor’s existing markets. This profile can help the company to predict its competitors’ behaviour, as well as attempting to influence this behaviour to the company’s advantage.
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