What is competition analysis? What is its objective? Who should conduct it? Which elements should be analysed? What should one pay attention to during the analysis? How to avoid the most common mistakes? How to increase the reliability of results?
As a consulting and research company on a daily basis we reply to numerous questions posed by our customers. One of the most frequent issues they ask about is competition analysis. Activities of market rivals usually spark a lot of interest. Without in-depth knowledge concerning competitive landscape every undertaken measure is at a risk of failing.
When analysing the situation of one’s own company as well as that of other entities operating on the market, managers ponder such questions as:
- What is the reason why products of competitors sell better than our offer?
- How is it possible that competitors who offer very low prices still record profits?
- Why does a competitive offer have a wider coverage on the market?
- What other companies are doing that without ATL and BTL advertisements their brands are so well recognisable in key target groups?
One can obtain answers to those and many other questions by performing a competition analysis. It is an effective tool for recognising market trends and it helps in developing a long-term competitive advantage.
Yet, to make results reliable one should make sure that the analysis is performed correctly. Too narrow group of analysed entities or failure to consider substitutes in the analysis – these are some of the most common mistakes made while conducting competition analysis. And they may result in misleading conclusions and wrong strategies.
What is competition analysis?
Competition analysis is a continuous process that includes identification of current and potential competitors. The concept provides for ongoing monitoring of actions undertaken by market rivals in all key aspects of their operation.
What is the objective of competition analysis?
The objective of competition analysis is to obtain thorough information about current as well as potential rivals. That knowledge should be as comprehensive as possible. It should possibly cover all important aspects of business activity.
The final element of competition analysis is the presentation of conclusions and inclusion of obtained results in the process of building competitive advantage. Conclusions may be used, among other things, for the development of market entry strategy, marketing and sales strategy or plans for the distribution.
Properly performed analysis also allows one to identify new market niches. This may lead, in turn, to developing a long-term competitive advantage through innovations.
What elements should be comprised in a competition analysis?
Each competition analysis should give rise to usable, practical business recommendations. In order to make it possible, the whole process must include the analysis of as many aspects of competitors’ operation as possible. The most important are:
- Offer – products and services, including their names, descriptions, functionalities, customers’ opinions, etc.
- Target group – customers, clients and users, including their number, characteristics, needs, etc.
- Business model – e.g. development strategy, product strategy, pricing strategy.
- Marketing and sales – including the strategy, tools and channels of communicating with the target group.
- Finances – financing model, financial efficiency model, investment plans (greenfield vs. acquisitions), etc.
- Strengths and weaknesses – with respect to the company as such as well as each of its products and services.
- Competitive advantages – unique features of offered products and services.
What are the most common mistakes in competition analysis and how to avoid them?
Over numerous years of market presence, researchers and consultants from PMR Research & Consulting have conducted hundreds of projects in the field of competition analysis. They have cooperated with entrepreneurs and managers exhibiting various attitudes to this area of business analysis. Many of them managed to avoid numerous pitfalls and problems in the course of this process thanks to the support from an external expert.
1. Narrowing the analysis to only a few companies
A serious but common mistake is considering only a few major players in the competition analysis. Sometimes, due to insufficient knowledge, experience or lack of time, companies omit in their analyses smaller and niche entities.
Such an approach makes it more difficult to perform a systematic market analysis (size and market value as well as market share of major players). It also acts as a hindrance in performing a dynamic analysis which should reflect market dynamics and structural changes. Additionally, those companies which are willing to cut corners are not able to prepare for competing with promising, innovative and niche enterprises.
2. Too narrow definition of competition
If the analysis comprises only the offer of the ‘same product categories’ one will be familiar with only a part of the market. In real life products and services come from various market segments. Mass-produced jam may successfully compete with an organic product and locally manufactured washing powder with its globally available counterpart.
The huge variety of companies, brands and offers taken into account in the analysis ensures a better, broader market insight. It allows one to get to know competition in terms of various costs and production technologies, promotion and distribution models as well communication and brand building strategies.
3. Failure to consider a substitute offer
It should be remembered that competition and substitutes are two closely intertwined concepts. The analysis of products which respond to the same demand in various ways forms the foundation for an effective development strategy. Going out to cinema may compete with going out to have a pizza, pasta may be an alternative to rice, and apartment on the Polish coast may compete with a cottage on the Adriatic coast or even a structured time deposit. It all depends on needs that particular products or services should satisfy.
4. Unfamiliarity with the point of view of customers
‘Voice of customer’ is an important element of competition analysis. It is not enough to gather data concerning market rivals. It is also essential to obtain information on how customers and users perceive particular companies, brands and products. Looking at competitors through customers’ eyes allows one to better understand key success factors, strategies and decisions. Failure to consider customers’ opinions may make one fall into a trap and create an offer that does not match their expectations.
5. Too narrow scope of the analysis
Competition analysis is a very broad process that comprises a number of various activities. The analysis should contain information from such above-mentioned areas as, among other things, product, price, market, distribution, finances, and technology. A report prepared at the end of this process should present the most comprehensive view of the market. Failure to consider one or several aspects may result in taking wrong business decisions.
Who should conduct competition analysis?
Every company will benefit from competition analysis – small as well as large, local as well as global, from every industry and sector. It is difficult to imagine effective market activities if they are not backed by careful consideration of competitors and the whole market as such. It is irrelevant whether a given company is just about to start its operations or is already well established on the market or considers expanding its activity.
Competition analysis may be conducted single-handedly. One may use own resources to allocate time and assign a person who will be responsible for competition analysis. Yet, the process requires thorough knowledge and experience in many fields. What may prove useful is market and consumer research skills as well as the ability to gather and harmonise data or sometimes even to create econometric models.
Competition analysis may also be conducted by a research or consulting company. If, within an organisation, time is of essence and expertise and experience are lacking it may be a good idea to involve a professional partner. What may determine success or failure in that case is the selection of an appropriate company. (Our articles will show you how to choose a suitable research agency or consulting company).