Competitive Analysis


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Competitive Analysis

  1. 1. Excerpted from FastTrac® NewVenture™ Competitive Analysis Understanding as much as possible about the competition helps you define your position in the marketplace. When you determine how to enter the market with your product or service, you’ll want to feel confident about how you will differentiate your business from competitors. This distinction is called your competitive advantage. In conducting market research, you identified real or potential competitors that may be threats to your business’s success. Now, you will analyze these competitors’ strengths and weaknesses, and determine how you can compete against them effectively. Competitive Advantage In any industry, businesses can develop a competitive advantage through price or the market. A price or cost advantage is tied directly to production costs, efficiency, or available technology. A competitive advantage in the market requires you to develop market differentiation—the aspect of your business that sets you apart from the competitors in your industry. Your industry research should reveal to you which arena is central to the competition in your market. As you learn the basis for competition in your industry, analyze your competitors’ strengths and weaknesses to better position your own competitive advantage. Your competitors will not likely volunteer this information. You will need to employ some creativity to find it out. For example, ask a friend to call or visit some competitors with a specific need in mind. Suggest that your friend find out what the service will cost, how quickly the service may be performed, and whether service providers exhibit distinctive characteristics that separate them from their competition. After conducting your research, pinpoint your competitive advantage before developing your marketing strategy. All your marketing energies will be directed at reminding potential customers why they should buy from you instead of someone else. Consider the following ways to define your competitive advantage through market differentiation or price. Competing by Market Differentiation If your business can offer superior service, quality, or benefits to the customer that your competition does not provide, you have developed market differentiation—your T i p a market Before pursuing competitive advantage that separates you from others in your market. Your product or differentiation strategy, determine if customers service may have special features that appeal to customers and help them decide to value the differentiator. buy it for reasons other than price. As a result, your business may be able to sell more units or charge a premium price. Customers may also be more loyal because they value the service, quality, or perceived benefits. © 2007 Ewing Marion Kauffman Foundation. All Rights Reserved.
  2. 2. Business Planning Competitive Analysis You can achieve competitive advantage through a variety of means including: Perceived quality – The perceived quality of the product is so superior to competitors’ products that the customer will pay more money for it. Customer service – The treatment the customer receives from the business is more important to them than the price. Benefits – The customer perceives greater benefits from the product and, therefore, will pay more to purchase it. T i p will achieve A business market differentiation only Reputation – The business has a good reputation in the marketplace. if its product or service offers to the customer Brand equity – The business has established a brand that people trust or that indicates a a benefit greater than quality product or service. its cost. Niche focus – The business chooses to serve a niche, a narrow portion of the market, where the customers have special needs or preferences that do not appeal to the broad market. This niche could be defined by geography, serving customers in a specific area. It could also be defined by how the product or service is used or other benefits perceived by customers. Each of these well-known brands has grown because of a competitive advantage strategy centered on an alternative uniqueness. Unique Product/ Unique Combination of Unique Way to Meet Unique Method Service Products/Services Needs of Target Group of Delivery Apple® (Macintosh®) FedEx Kinko’s® Subway®® First commercial Suite of office products Fast food for the health Books, music, and much computer with a and services conscious more via the Web graphic user interface MP3 files Logitech® Starbucks Coffee® XM® Radio A music file that can Extensive line of Relaxing hangout for Satellite radio service to easily be moved and computer peripherals coffee aficionados subscribing customers stored on computers By positioning its toothpaste as a natural product, Tom’s of Maine created a new category in the toothpaste market. At the time, no other toothpaste filled this need, so the company was able to charge a premium price and consumers who buy organic or all natural products gladly paid for it. Consider how you can develop a competitive advantage for your product or service— through market differentiation. © 2007 Ewing Marion Kauffman Foundation. All Rights Reserved. 2
  3. 3. Business Planning Competitive Analysis Competing on Price You can also create a competitive advantage when you offer a similar product or service and benefits to customers at a lower price than other businesses. Be aware, however, that many new businesses cannot compete solely on price because a strong competitor can copy methods and regain the advantage. Large, established product-based competitors are often better at being low-cost providers because they buy items in bulk. If you want to explore the possibility of competing on price, businesses use a variety of means: Efficient production – Your business produces products or services more efficiently and in less time than competitors. This cost savings is passed on to the customer in the price. Technology – Your business uses the most up-to-date technology and has developed more efficient processes with vendors, customers, shipping and distribution, online sales, or in other operational areas. You pass on the cost savings to the customer in the price. Innovation – Your business invests in innovation and continues to develop a better product or service at a similar or lower price. Innovation may help improve technology as well as productivity and, therefore, affects the price to customers. Lower overhead – Your business experiences lower overhead costs in the area of rent, employee turnover, salaries, benefits, or other operational costs. This savings could be dependent on location, type of employees (part-time vs. full-time), or outsourced functions. You pass on the cost savings to the customer. A newcomer cannot usually compete directly against the market leader on price. For example, it would be next to impossible for any new start-up to compete with Wal-Mart® on price. Many consumers are price sensitive, however, and will shop around. Using other techniques such as coupons, frequent buyer clubs, financing, or a hassle free, money-back guarantee, you could offer price benefits to the consumer that Wal-Mart does not. The result could attract new customers. Although not all business concepts can compete on price, consider in the planning stage whether or not price can be your competitive advantage. If you rule out price, then you will need to determine what competitive edge you have in the market based on market differentiators. Use the Reality Check Competitive Advantage to think about your own advantage in the marketplace. Another way to determine your competitive advantage is to look at the critical success factors in your industry and develop a competitive advantage based on one of those factors. © 2007 Ewing Marion Kauffman Foundation. All Rights Reserved.
  4. 4. Business Planning Competitive Analysis Reality Competitive Advantage Check ✔ Your new business will have many of the characteristics below. Pick the one upon which you will base your competitive advantage. You will use this one element in your marketing materials to separate you from your closest competitors. Competing on Market Differentiation Competing on Price ✔ Perceived quality ✔ Efficient production ✔ Customer service ✔ Technology ✔ Benefits ✔ Innovation ✔ Reputation ✔ Lower overhead ✔ Brand equity ✔ Other _____________________________________ ✔ Niche focus ✔ Other _____________________________________ Explain precisely how you see your competitive advantage in the area identified. What specifically is different about your product/service in that area? How will this competitive advantage affect the research you do on your market and competition? Critical Success Factors Critical success factors are the basic activities your company must do well to compete effectively in your market. They are the characteristics of businesses that customers look at when they are choosing where to buy. Critical success factors directly impact customer satisfaction. Satisfied customers become loyal customers who prefer to buy from you. You may have a clearly defined competitive advantage, but learning the critical success factors in your market improves your chances for success. The market will determine your company’s critical success factors. For example, an auto repair shop may find that most customers choose auto services based on price, reliability of repairs, and convenience. Knowing that these are the most important factors to prospective customers, this auto repair shop must meet customers’ basic expectations for each factor to stay competitive. It may develop a competitive advantage based on one of these factors, but at the minimum it must maintain and manage all of the critical factors. The auto repair shop might offer a competitive advantage that benefits customers above and beyond these critical success factors, but if it does not at least provide reliable and convenient repairs at a good price, its competitive advantage as the shop owners have defined it will be irrelevant. Their ability to compete in the market will slip away. © 2007 Ewing Marion Kauffman Foundation. All Rights Reserved.
  5. 5. Business Planning Competitive Analysis To determine the critical success factors in your market, consider the following questions: • How do prospective and current customers perceive or rate my competitors? • What factor seems to be the most important to customers who buy this product/ service? • How do competitors compete for business in the market? Do they compete on price, product/service quality, convenience, location, or other factors? • What do competitors say is unique about their product/service? How do they differentiate themselves from others? The most common critical success factors important to customers across industries include: • Perceived quality • Treatment by staff • Convenience • Reputation in the market • Price • Variety of products/services • Reliability • Skill or expertise • Availability • Guarantee You will notice that many of these critical success factors are also listed in the previous section as possible competitive advantages, depending on your product or service and its market. The question to ask about critical success factors is what does the customer value? Then you will know which of these factors is critical to success and which you can build on as your competitive advantage over others who provide similar products or services. Reality Critical Success Factors Check ✔ What factors about my product or service do I think are most important to my customers? Rank the factors below in order of importance to your potential customers. ____ Quality ____ Availability ____ Skill or expertise ____ Convenience ____ Treatment by staff ____ Guarantee ____ Price ____ Reputation in the market ____ Other ____ Reliability ____ Variety of products/services How can I find out what customers really want? Once you know which critical success factors are important to your prospective customers, what your competitive advantage is, and how other competitors rate, you can compare the strengths and weaknesses of competitors in your market. From there, you can determine how to enter the market. You can promote your company’s strengths and develop a plan to improve its weaknesses. © 2007 Ewing Marion Kauffman Foundation. All Rights Reserved.
  6. 6. Business Planning Competitive Analysis Competitive Profile You do not do business in a vacuum. While you focus on your competitive advantage and sharpen your business’s response to critical success factors, your competition is T i p entrepreneur A successful recognizes the need to doing the same. Just as athletes learn how competitors train, what their approach to change in order to stay the sport is, and where their weaknesses lie, so do businesses. This information is your ahead of the competition. competitive profile. Entrepreneurs plan for change. To compile a competitive profile, explore key information for every significant competitor that poses a threat to your business. Some competitors might react very aggressively to any challenge to their market position. Other competitors may take a more tolerant view of newcomers in the industry. Identify which companies will provide the most significant competition and anticipate what they will likely do if a newcomer enters their market. Every competitor has strengths and weaknesses. Study them. Your competitors’ weaknesses may become your competitive advantage. Many larger competitors are not able to make rapid decisions, allocate resources, and respond to changing market needs as quickly as smaller ones. Because of this weakness, smaller companies can often gain market advantage until larger companies respond. On the other hand, smaller companies have a hard time competing with the financial resources of larger competitors. For examples, a local beverage manufacturer may not offer as many flavors or new products as larger soft drink companies. The smaller company may need to focus on unique flavors and depend on local strategic alliances with restaurants to keep its market share. To find more information about your competition, refer to the market research you have already done, using the new questions you have encountered here. Remember, your local librarian may be the best resource for finding additional secondary sources. Once you have gathered information about your competition, you will want to compare that information to the needs and wants of your target market. The key is to research which advantages are critical success factors, and which other factors are important enough to your target market that they would choose to buy from you. Once you have discovered what advantages are important to your target market, you can build on and promote a competitive advantage the market values and your competition does not deliver. © 2007 Ewing Marion Kauffman Foundation. All Rights Reserved.