A framework for competitor analysis

Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors. It follows that a central aspect of strategy formulation is perceptive competitor analysis. The objective of a competitor analysis is to de-velop a profile of the nature and success of the likely strategy changes each competitor might make, each competitor’s probable response to the range of feasible strategic moves other firms could initiate, and each competitor’s probable reaction to the array of in-dustry changes and broader environmental shifts that might occur. Sophisticated competitor analysis is needed to answer such questions as “Who should we pick a fight with in the industry, and with what sequence of moves?” “What is the meaning of that competitor’s strategic move and how seriously should we take it?” and “What areas should we avoid because the competitor’s response will be emotional or desperate?”

Despite the clear need for sophisticated competitor analysis in strategy formulation, such analysis is sometimes not done explicitly or comprehensively in practice. Dangerous assumptions can creep into managerial thinking about competitors: “Competitors cannot be systematically analyzed,” “We know all about our competitors because we compete with them every day.” Neither assumption is generally true. A further difficulty is that in-depth competitor analy-sis requires a great deal of data, much of which is not easy to find without considerable hard work. Many companies do not collect in-formation about competitors in a systematic fashion, but act on the basis of informal impressions, conjectures, and intuition gained through the tidbits of information about competitors every manager continually receives. Yet the lack of good information makes it very hard to do sophisticated competitor analysis.

There are four diagnostic components to a competitor analysis (see Figure 3-1): future goals, current strategy, assumptions, and capabilities. ‘ Understanding these four components will allow an in-formed prediction of the competitor’s response profile, as articu-lated in the key questions posed in Figure 3-1. Most companies develop at least an intuitive sense for their competitors’ current strategies and their strengths and weaknesses (shown on the right side of Figure 3-1). Much less attention is usually directed at the left side, or understanding what is really driving the behavior of a com-petitor—its future goals and the assumptions it holds about its own situation and the nature of its industry. These driving factors are much harder to observe than is actual competitor behavior, yet they often determine how a competitor will behave in the future.

This chapter will present a basic framework for competitor analysis, which will be extended or enriched in subsequent chapters. Each component of competitor analysis in Figure 3-1 will be treated in subsequent sections by developing a set of questions that can be asked about competitors, with somewhat more stress placed on diag-nosing competitor goals and assumptions. In these more subtle areas, it will be important to go beyond mere categorization to sug-gest some techniques and clues for identifying what a particular competitor’s goals and assumptions actually are. Having discussed each component of competitor analysis, we will then examine how the components can be put together to answer the questions posed in Figure 3-1. Finally, some concepts for collecting and analyzing com-petitor data will be briefly discussed, in view of the importance of the data-gathering task in competitor analysis.

Although the framework and questions presented here are stated in terms of competitors, the same ideas can also be turned around to provide a framework for self-analysis. The same concepts provide a company with a framework for probing its own position in its environment. And beyond this, going through such an exercise can help a company understand what conclusions its competitors are likely to draw about it. This is part of sophisticated competitor anal-ysis because these conclusions shape a competitor‘s assumptions and hence behavior, and are crucial to making competitive moves (see Chapter 5).

Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.

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