Related Terms: Barriers to Market Entry
Small businesses keep track of the competition. In large corporations the activity is formalized. Operating managers within large companies usually conduct competitive analysis as part of preparing annual plans. Competitive analysis may also involve elaborate brand studies from time to time; some industries practice reverse-engineering to discover how a competitor's technology or software works. Indeed, competitive analysis can reach a staggeringly high level of sophistication. However, as many sectors of the U.S. economy illustrate—autos are a recent example—high sophistication may not be sufficient to save an industry from competitive impacts. Both small and large businesses must go beyond analysis and do something to protect their operations. As Peter Drucker, the late management guru, never tired of pointing out, effective business practice and sophisticated business practice do not necessarily mean the same thing.
Key aspects of this activity are when to do it and what to look at. Consultants, writers, and business schools uniformly urge that competitive analysis must be routine—much as dentists urge flossing thrice daily. In the usual environment of small business, concentrated competitive analysis tends to start after a triggering event produces awareness of trouble—the actual or looming loss of sales. Until then the tracking of competition will be low-key and routine. Once early signs of trouble appear, analysis begins with looking for causes. These may be complex. "Competition" may take many different forms. The following list identifies some of the things to look at:
The foregoing reveals that competitive analysis is in a way indistinguishable from effective management, which means keeping in close touch with the market and all those factors that influence it. Competitors need to be known and watched attentively. It is important to keep oneself informed of the internal affairs and plans of a commercial or institutional customer. Trends need watching; products and services must be kept up to date; and fall-back positions must be prepared if the economy can deprive a business of its core earnings. All this must be done continuously and with the right level of intensity. For the small business formal competitive analysis may be a luxury, but the activities that enter into it must be carried out.
The U.S. Small Business Administration, on its Web site entitled "Competitive Analysis," provides an excellent list of fundamentals. SBA suggests that small businesses answer six questions: 1) Who are your five nearest direct competitors? 2) Who are your indirect competitors? 3) Is their business growing, steady, or declining? 4) What can you learn from their operations or from their advertising? 5) What are their strengths and weaknesses? and 6) How does their product or service differ from yours?
The SBA's emphasis is on competitors, which is appropriate but may be too narrow. The small business needs to expand this list to include data on the internal operations of its commercial customers and vendors as well and include information on trends in the market.
Many of the questions posed by SBA are very difficult to answer. Appropriately the agency suggests a process which is well adapted to the operation of a small business. SBA recommends that owners establish and keep files on competitors and that they review these from time to time. Precise answers may never be available to all the questions, but a general pattern will emerge. It is important consciously to make time for looking at what data are available by way of feeding one's awareness.
Important sources for information recommended by SBA are the following:
To this list might be added two or three other classes of informants. First are sales reps who call on the small business organization. The same sales people who call on this business also call on the owner's competitors. Gossip flows and will invariably contain interesting matters which, combined with other information, will produce new insights into trends, competitive plans, and even the kinds of problems competitors are struggling to solve. Principals of vendor organizations are an excellent source of broader market trends. The vendors sell to the entire range of people participating in a market and, as such, watch the health of all competitors. Finally, and this is easiest to achieve at trade shows, competitors themselves are an excellent source of information on what they do—and what others are doing. It is a truism of all intelligence work that information begets information. Sharing problems can result in gaining solutions.
Cohen, Heidi. "Competitive Intelligence: What You Don't Know Can Hurt You." ClickZ Network. Available from http://www.clickz.com/experts/crm/actionable_analysis/article.php/3511216. 9 June 2005.
U.S. Small Business Administration. "Competitive Analysis." Available from http://www.sba.gov/starting_business/marketing/analysis.html. Retrieved on 23 January 2006.