Competitor Analysis Framework

Competitor Analysis Framework

Even the simplest competitive analysis displays two critical dimensions: the competitors and the criteria, or what we’ll call the competitive framework. The purpose of the competitive framework is to present the data in a way that makes it easy to compare the various sites across the different criteria.

Michael Porter presented a framework for analyzing competitors. This framework is based on the following four key aspects of a competitor:

• Competitor’s objectives
  
• Competitor’s assumptions
  
• Competitor’s strategy
  
• Competitor’s capabilities

Objectives and assumptions are what drive the competitor, and strategy and capabilities are what the competitor is doing or is capable of doing. These components can be depicted.

Competitor’s Current Strategy

The two main sources of information about a competitor’s strategy are what the competitor says and what it does. What a competitor is saying about its strategy is revealed in:

• Annual shareholder reports
  
• 10K reports
  
• Interviews with analysts
  
• Statements by managers
  
• Press releases

However, this stated strategy often differs from what the competitor is doing. What the competitor is doing is evident in where its cash flow is directed, such as in the following tangible actions:

• Hiring activity
  
• R&D projects
  
• Capital investments
  
• Promotional campaigns
  
• Strategic partnerships
  
• Mergers and acquisitions

Competitor’s Objectives

Knowledge of a competitor’s objectives facilitates a better prediction of the competitor’s reaction to different competitive moves. For example, a competitor that is focused on reaching short-term financial goals might not be willing to spend much money responding to a competitive attack.

Rather, such a competitor might favor focusing on the products that hold positions that better can be defended. On the other hand, a company that has no short-term profitability objectives might be willing to participate in destructive price competition in which neither firm earns a profit.

Competitor objectives may be financial or other types. Some examples include growth rate, market share, and technology leadership.

The competitor’s organizational structure provides clues as to which functions of the company are deemed to be the more important. For example, those functions that report directly to the chief executive officer are likely to be given priority over those that report to a senior vice president.

Other aspects of the competitor that serve as indicators of its objectives include risk tolerance, management incentives, backgrounds of the executives, the composition of the board of directors, legal or contractual restrictions, and any additional corporate-level goals that may influence the competing business unit. Whether the competitor is meeting its objectives indicates how likely it is to change its strategy.

Competitor’s Assumptions

The assumptions that a competitor’s managers hold about their firm and their industry help to define the moves that they will consider. For example, if in the past the industry introduced a new type of product that failed, the industry executives may assume that there is no market for the product. Such assumptions are not always accurate and if incorrect may present opportunities.

For example, new entrants may have the opportunity to introduce a product similar to a previously unsuccessful one without retaliation because incumbent firms may not take their threat seriously. Honda was able to enter the U.S. motorcycle market with a small motorbike because U.S. manufacturers had assumed that there was no market for small bikes based on their experience.

A competitor’s assumptions may be based on several factors, including any of the following:

• Beliefs about its competitive position
  
• Experience with a product
  
• Regional factors
  
• Industry trends
  
• Rules of thumb

A thorough competitor analysis also would include assumptions that a competitor makes about its competitors and whether that assessment is accurate.

Competitor’s Resources and Capabilities

Knowledge of the competitor’s assumptions, objectives, and current strategy is useful in understanding how the competitor might want to respond to a competitive attack. However, its resources and capabilities determine its ability to respond effectively.

A competitor’s capabilities can be analyzed according to its strengths and weaknesses in various functional areas, as is done in a SWOT analysis. The competitor’s strengths define its capabilities. The analysis can be taken further to evaluate the competitor’s ability to increase its capabilities in certain areas. A financial analysis can be performed to reveal its sustainable growth rate.

Finally, since the competitive environment is dynamic, the competitor’s ability to react swiftly to change should be evaluated. Some firms have heavy momentum and may continue for many years in the same direction before adapting. Others can mobilize and adapt very quickly. Factors that slow a company down include low cash reserves, large investments in fixed assets, and an organizational structure that hinders quick action.

Competitor Response Profile

Information from an analysis of the competitor’s objectives, assumptions, strategy, and capabilities can be compiled into a response profile of possible moves that might be made by the competitor. This profile includes both potential offensive and defensive moves. The specific moves and their expected strength can be estimated using information gleaned from the analysis.