Sunday, March 2, 2014

Why Competitive Analysis Is Important For Small Businesses

image This article was written by John Rau, SCORE Orange County Business Mentor

Every business has competition. Unless a business has an absolute monopoly on a life-essential product or service, there will be competitors offering alternative and substitute products or services. In this regard, the different types of competitors your business can expect to face include the following:

  1. Direct competitors: These are businesses that currently offer identical or similar products or services as your business. These are companies that customers can easily buy from instead of from you. (Note: These are generally easy to identify.)
  2. Indirect competitors: These are businesses that are offering products or services that are close substitutes. A good way to characterize these competitors is that they are probably targeting your markets with a same or similar value proposition, but delivering a different product. You can expect that as soon as an indirect competitor sees you having success in their area with a different product or service, they may try to duplicate your offerings and, as a result, they become a direct competitor. (Note: These are generally a little harder to identify.)
  3. Future competitors: These are existing companies that are not yet in your marketplace, but could move there at any time, directly or indirectly. (Note: These potential competitors are much more difficult to identify.)
  4. Game Changer competitors: These are the companies with the ability to introduce products or services in your marketplace that effectively eliminate the need for your products or services. For example, if your business was focused on selling cathode ray tube televisions and parts only, the new plasma screen technology just put you out of business! One wonders how many companies may no longer be in business because of the introduction of the various mobile applications into smartphone technology. (Note: These competitors are probably the most difficult to identify without carefully tracking consumer needs and preferences as well as technology development trends.)

Identifying all existing and potential sources of competition is an impossible task, but here is what you can do with regard to existing competitors that you already know about and where competitive information is generally more readily available. Susan Ward in her article “6 Ways to Find Out What Your Competition Is Up To-How to Gather Competitive Intelligence on Your Competitors” (see http://sbinfocanad.about.com) suggests the following key steps:

(1) Pay attention to their ads—Your competitor’s ads can tell you a lot about the particular audience they’re trying to target and what particular products or services they’re trying to promote (Note: Useful information when you’re planning your own promotions or advertising campaigns.)

(2) Visit Regularly—If your competitors have brick-and-mortar stores, make it a point to make regular visits. Dropping by is a great way to keep your eye on what products or services are being promoted, check on prices, and even get display ideas. If they publish any newsletters, sign up. That’s another way to keep abreast of what they are doing. If your competition has a web site, visit it regularly also.

For competitive information about indirect competitors and potential future competitors, there are three key things you need to do, namely: (1) you must be able to define your industry as well as know it, (2) you must know who your current and potential customers are, and (3) you must know specifically what types of customers need your products and/or services. It is in this context that you will assess and evaluate your competition. Your first step then would be to look for companies that are in your industry area and that provide products and/or services to your types of customers. An obvious good starting point would be to use the Internet, go to Google (or any other search engine) and type in such simple phrases as “companies that manufacture products of type X” or “companies that provide services of type Y”. You can expect to get many “hits”, perhaps 100+ or even thousands. These results will get you started and going to their web sites you will be able to “drill down” to get more information. Keep in mind, the more specific your search criteria, the better the quality and likelihood of finding the information you are looking for.

The easy part is the Internet search, but you shouldn’t stop there. Other sources of competitor information include:

  • Trade association reports, magazines and other related publications for those associations related to your industry
  • Published market research reports that you can find on the Web or in your local library
  • Public records databases and government published information. Examples would include census data for various types of industries, statistical reports from various government agencies, and the Security Exchange Commission (SEC) filings relative to company business data and financial performance.
  • Subscribe to or fee based information services such as provided by Dun and Bradstreet and its Hoover’s subsidiary which collectively provide a global database that is the largest single source of business information anywhere in the world.

Generally speaking, you can expect to find many of the above-cited sources available to you at your local library--in many cases for free as part of the library service. Thus, start there before you spend money to buy reports and subscribe to information services. Think of your local library as “your best friend” when conducting any type of market research and competitive information gathering.

In business, you always need to know what your competitors are doing. To survive you must perform competitive intelligence activities and monitor the broader market for new developments that could affect your company, your products and brands, suppliers and distributors. Gathering information about the competition and analyzing it is an important part of working through your business plan, but competitive intelligence is also just as important to established businesses. New competitors may move into your marketplace and existing competitors may change their practices, thus altering the competitive landscape.

As pointed out by Wikipedia (see http://en.wikipedia.org/wiki/Competitor_analysis), the entrance of new competitors is likely when:

  • There are high profit margins in the industry
  • There is unmet demand (insufficient supply) in the industry
  • There are no major barriers to entry
  • There is future growth potential
  • Competitive rivalry is not intense
  • Gaining a competitive advantage over existing firms is feasible

In summary, as pointed out by intel.com (see www.primary-intel.com) “Business is like a game of chess where the #1 goal is to out-strategize and outmaneuver each of your competitors. You do this by knowing and anticipating your competitors’ moves. The more you understand about your competitors, the more often you win. Competitive analysis helps you gain comprehensive insight into all the facets of your competition.”