COMPETITOR IDENTIFICATION AND ANALYSIS - HOW DO YOU DO

YOURS?

ABSTRACT

Firms do not merely have to be good at meeting the needs of customers; it has to be better
than competitors. Just as customers need to be analysed and understood, so do
competitors. Competitor identification and analysis have taken on greater importance in
the planning activities of firms, primarily because of the global economic crisis that have
characterized many industries. This has compelled many firms to grow only by beating
others. Indeed, firms that focus on competitor’s actions have been found to achieve better
business performance than those who pay less attention to their competitors [Noble, C et
al, 2002]

However, undertaking competitor identification and analysis that add value to corporate
wealth has been a difficult task for many managers. Managerial myopia in identifying
competitive threats and opportunities is a well recognized phenomenon [Levitt, 1960,
Zajar and Bazerman, 1991]. The insufficient understanding may arise from
substitutability on the supply side only or on the demand side. Indeed, managers who
focus only on the product arena in scanning their competitive environment may fail to
notice threats and opportunities that are developing due to global growth in wealth,
technology, available range of products [goods and services] that can offer better
solutions customers need and the latent capabilities of all firms operating in the market.

The purpose of this paper is to provide an insight from the field of strategic management
in general and marketing in particular to identify competitors based on segment needs
served and geographic location operated on one hand, and the comparative market-based
resources of competing firms. This has help to define competitors to be primary,
secondary and tertiary.

Furthermore, a user friendly competitor analysis has been done by using the value chain
analysis to address the information needs in competitor analysis. This has helped to create
the needed analysis processes and practices to achieve valued competitor analysis.

KEYWORDS: COMPETITOR, MARKET- BASED ASSET AND MARKET NEEDS

SERVED

Electronic copy available at: http://ssrn.com/abstract=1653884

COMPETITOR IDENTIFICATION AND ANALYSIS - HOW DO YOU DO
YOURS?

The primary objective of any competitor identification and analysis is to understand and
predict the rivalry or interactive market behaviours thereby increasing the focal firm’s
awareness of the strengths and weaknesses of current and potential competitors on one
hand and the opportunities and threats likely to be gained from competition. Given that
competitor identification and analysis are an essential component of corporate strategy, it
is argued that most firms find it difficult to carry out in practice. Instead, many firms
operate on what is called ‘informal impressions, conjectures and intuition gained through
the tidbits of information about competitors’ [Fleisher and Bensoussan, 2007]. Further to
this, traditional competitor identification and analysis place many firms at risks of
dangerous competitor blind spots due to an inadequate knowledge by the focal firm on all
array of competitors.

Managerial myopia in identifying competitive threats and opportunities is a well

recognised phenomenon [Levitt, 1960, Zajar and Bazerman, 1991]. The insufficient
understanding may arise from substitutability on the supply side only or on the demand
side. Indeed, managers who focus only on the product arena in scanning their competitive
environment may fail to notice threats and opportunities that are developing due to global
growth in wealth, technology, available range of products [goods and services] that can
offer better solutions customer needs and the latent capabilities of all firms operating in
the market.

The purpose of this paper is to provide an insight from the field of strategic management
in general and marketing in particular to develop a working tool for managers to deal
with some of the difficulties of competitor identification. Again, this paper extends the
understanding of competitor analysis landscape that is consistent with and
complementary to the thinking in research stream thereby facilitating seamless
integration across the analytic tasks that contribute to a more complete overall model of
competitor analysis that create value to corporate wealth.

COMPETITOR IDENTIFICATION

In the world of business, customers buy solutions to the problems facing them but not
products for its product sake. The idea of this exchange was first proposed and developed
by Alderson [1957] and has become important to the value customers seek to gain by
consuming any product. The basic idea is that, I have got something you want, you have
got something I want, so let’s do a deal. For the most part, the exchange is a simple one.
The focal firm offers a product and the consumer offers a sum of money in return for it.
Coca Cola offers you a can of coke and you offer payment; you sign a contract to offer
your services as an employee and the organisation pays you salary; the hospital offers to
provide health care and the individual, through taxes or insurance premium, offers to

Electronic copy available at: http://ssrn.com/abstract=1653884

fund it. The underlying factor here is that, the customer faces a need that among others,
the focal firm’s product is one of the solutions to the need faced by the customer.

With this understanding, the customer like an investor wants to maximize his or her offer
by opting for the best deal. Therefore, this should put the focal firm to think through all
possible alternative solutions that can substitute what its offer provides. This approach
has the capacity of providing the tools to identify competitors on a broader scale which is
consistent to theoretical standpoint of the stream of literature in strategic management on
competitive dynamics [Smith et al, 1992, Chen et al, 1992, Miller and Chen, 1994,
Ferrier et al, 1999, Grimmand and Smith, 1997].

A variety of approaches have been developed to address the task of competitor

identification and analysis that are congruent with market definition. Sophisticated
quantitative approaches to defining markets include the analysis of cross-price elasticity
of residual demand curves of price correlations, and of trade flows using methods such as
the Elzinga-Hogarty approach [Elzinga and Hogarty, 1978].

Qualitative methods tend to be more ad hoc and are based on the idea that products are in
the same market if they are close substitutes. Products are judged to be closed substitute
when they are similar in terms of their performance characteristics, occasions for use, and
when they are sold in the same geographic market [Besanko et al, 1996]. Qualitative
methods derived from economics rest on the notion that a market is defined as a set of
suppliers and demanders whose trading establishes the price of a good [Stigler and
Sherwin, 1985].

Cognitive methods in which managers and/or customers are queried about which
products are in competition are more common in the field of organisation’s market
research in which they view markets as social constructs [Porac et al, 1985, Anty and
Easton, 1990].

As emphasized, regardless of the analytical approach employed, conceptually, it is

generally accepted that competitor identification and analysis requires the simultaneous
consideration of both demand side and supply side of putative competitors and their
domain [Abell, 1980, Day, 1981, Porac and Thomas, 1990, Scherer and Ross, 1990].

This competitor identification and analysis has developed an insight into demand side
considerations that ensure the level of product substitutability in the eyes of consumers
which influences the definition of competitor identification and analysis.

Indeed, competitor identification is essentially a categorization task [Rosch, 1978] that

involves classifying firms on the basis of relevant similarities. In addition, competitor
analysis is an evaluative task that goes beyond mere classification to compare rivals on
the basis of relevant dimensions.

To identify and classify the competitive set, this paper draws fundamental lessons from
Peteraf and Bergen [2001] and Chen et al [1996], to propose new framework for the
advanced development and more detailed discussions of competitor identification. In the
works of Peteraf and Beren [2001] and Chen et al [1996], competitor identification and
classification was based on similarities in terms of competitor’s resource endowments
and the market needs served. Their work was by asking the simple question of whether
two firms serve the same customer need presently or have the ability to do so in the near
future. The aim was to help managers to maximize their awareness of competitive threats
and to classify the types of competition that they face, so that they may develop a
hierarchy of competitor awareness that may be linked to competitor analysis. The second
approach used by Peteraf and Bergen [2001] to evaluate competitor identification was
how well two firms serve the need or how their capabilities compare. Their work
introduced the notion of resource equivalence to help managers assess the strength and
weaknesses of competition in terms of comparative capabilities.

Evaluative approaches to this analysis are;

i. What resources are being discussed that need to be compared? Different firms
and industries have varied resources relevant to competitive survival. Whiles
one firm’s resource is corporate brand, in the same industry, others may have
their strength in distribution or perhaps machinery, building or location. In the
light of this, it is important to quantify relevant resources that are important to
the industry for comparative analysis.

ii. Needs must be properly defined with respect to the solution for the customer.
In this vain, the solution can range from the purchase of physical goods to
services. For instance, a successful young enterprising person from an anglo-
saxon environment may face the need to display his or her success. This can
be done by buying the latest car model or by buying an expensive property in
a prime location. Indeed, an investigation into this need brings to bear a wide
range of solutions that help define competing products properly.

This approach contributes to redefining market competitor as the degree to which a given
firm overlaps with the focal firm in terms of customer needs served. This approach is
consistent with the marketing literature [Levitt, 1960, Cooper and Inouse, 1996] and
recognises that competitors may include firms that do not share the same technological
and market segment platforms. It is also consistent with the type of approach to market or
niche overlap utilised in the population ecology literature [McPherson, 1983, Baum and
Sigh, 1994, Baum and Korn, 1996].

This evaluative approach has help to assess the strength and weaknesses of competitors in
terms of comparative capabilities relevant to the industry in which the focal firm
operates. This again takes our framework into the realm of competitor analysis and
allows us to develop a proposition regarding the likelihood of attack and defense
responses from different types of competitors. Competitor identification can therefore be
carried out by defining market-based assets and market needs served.
MARKET-BASED ASSETS

In line with Chen [1996], market-based asset is explained as the extent to which a given
competitor possesses strategic endowments comparable, in terms of type and relevant to
the industry, to those of the focal firm. As a working tool, the marketing planner should,
as a first step, identify market-based assets in the industry and each main competitor
[including the focal firm] evaluated on each of those asset characteristics.

Figure 1: UNWEIGHTED MARKET-BASED ASSETS ASSESSMENT

MARKET-BASED ASSETS FOCAL FIRM RIVAL 1 RIVAL 2

Quality/Product Performance 8 5 9
Brand 8 7 10
Technological Skills 10 1 7
Distribution 9 4 8
Financial Strength 5 10 7
UNWEIGHTED OVERALL 40 27 41
STRENGTH RATING
Rating scale; 1 = very weak; 10 = very strong

From the total scores, it appears that Rival 2 is the strongest competitor with Rival 1
being the weakest. However, while the relative strength of each competing firm is clearly
visible in figure 1, there is no indication of how each asset is relevant to competitive
survival. For example, it may be that brand and technological skills are the most
important factors for competitive success within this industry. These priorities can be
indicated by assigning weights to each market-based asset as done in figure 2.

FIGURE 2: WEIGHTED COMPETITIVE STRENGTH ASSESSMENT

MARKET-BASED ASSETS WEIGHT FOCAL FIRM RIVAL 1 RIVAL 2

Quality/Product Performance 0.15 8/1.20 5/0.75 9/1.35
Brand 0.15 8/1.20 7/1.05 10/1.50
Technological Skills 0.25 10/2.50 1/0.25 7/1.75
Distribution 0.25 9/2.25 4/1.00 10/2.00
Financial Strength 0.20 5/1.00 10/2.00 7/1.40
SUM OF WEIGHT 1.00
UNWEIGHTED 8.15 5.05 8.00
OVERALL STRENGTH
RATING

Rating scale; 1 = very weak l; 10 = very strong

Weighting scale; 0.01 = very weak; 1.00 = very strong
From figure 2, it is now evident that the focal firm has strong resource base compared to
the Rival 1 and Rival 2. However, there is resource equivalence in resource strength
between the focal firm and Rival 2.

MARKET NEEDS SERVED

This defines the degree of presence in particular segment and geographic area of the focal
firm and competitor. This means that market needs served takes the perspective that firms
compete with one another to the extent that they satisfy the same customer segment needs
and/or in the same particular geographic location. Figure 3 illustrates the degree of needs
served in segments and geographic areas.

Figure 3: MARKET NEEDS SERVED

Geographic Area

same different

High market needs served Medium market needs served

same

Segment
Area

Medium market needs served Low market needs served

different

From figure 3, if a competitor serves the same market segment in the same geographic
area that a focal firm serves, then it is classified as high market needs served. On the
other hand, medium market needs serve is where a competitor who resides in focal firm’s
geographic market is to either service the same market segment in different geographic
market or in the same geographic area but served different market segment. Lastly, low
market needs served is when a competitor located outside the focal firm’s location serves
different market segment in another geographic area. In this case, the competitor is said
to be at the peripheral end of the need serviced.
Drawing from Peteraf and Bergen [2001] and Chen et al [1996] and using the above
construct, this study has proposed a framework to enhance managers understanding on
competitor identification.

Figure 4: FRAMEWORK FOR COMPETITOR IDENTIFICATION

Market Based Asset

Low High

Secondary Primary Competitor

Market High Competitor
Needs
Served

Medium Tertiary Competitor Secondary

Competitor

Low Tertiary Competitor Tertiary Competitor

From figure 4 above, competitors can be classified as primary, secondary and tertiary.
Primary competitors have high market needs served and high market-based asset.
Secondary competitors are those with either high market-based asset with medium
market needs served or high market needs served with low market-based asset. Lastly,
tertiary competitors have low market-based asset and medium to low market needs
served. However, sometimes tertiary competitors may have high market-based asset but
are always serve different market segments. Considerable attention should be given to
primary competitors as they pose the highest threat to the focal firms marketing
strategies. Strategic management resources should be allocated to both secondary and
tertiary competitors as market demands and global development can cause a change in
their strategic decisions.

PREMISE TO NOTE
As the competitor serves the same market segment in the same geographic area,
competition increases but very high when the two firms share relatively same market-
based assets, ceteris paribus. However, if the market based asset is extremely different
[thus low], the competitive rivalry is low. The reason for this is simple. Primary
competitors have the most in common with the focal firm, since there is similarity in
terms of both customer needs met and market-based asset type. This situation compels
primary competitors to struggle for better space in the market. The work by Reger and
Huff [1993], Lant and Baum [1995], Porac and Baden Fuller [1989] on how managers
perceive competitors provide empirical support to this claim.
Secondary competitors have either similar market based assets as the focal firm but serve
different market needs in the focal firm’s geographic market or serve different geographic
market but similar market segment or low market-based asset but serve the same market
need in the focal firm’s geographic area. Competitive rivalry in the short term may not be
strong but in the long term can turn to be high largely due to product and market
development activities.

Tertiary competitors can be any of these groups of competitors;

i. those with similar market based assets like the focal firm but operate in
different geographic market and serve similar or different segment needs
ii. firms with different market based assets [ thus low] and serve different
geographic market and segment in the focal firm’s geographic area.

Competition among tertiary competitors are low as they seem to have very little to
compete for in the focal firm’s business environment. However, they are significant to
identify and monitor due to possible change in strategic management and resource base.

An awareness of the level of competitors’ rivalry is essential since competitive rivalry is

one of the fundamental drivers of attack and defense strategies. The analysis of the
degree of market based assets and particularly market needs served determines focal
firm’s attacking and defense strategies. This premise provides a series of logical
propositions regarding competitor strategic actions.

COMPETITOR ANALYSIS USING VALUE CHAIN

Satisfying customers is a central tenet of the marketing concept, but it is not enough to
guarantee success due to competitors’ action. The real question is whether a firm can
satisfy customers better than the competition and achieve long-run profitability. Indeed,
firms that focus on competitor’s actions have been found to achieve better business
performance than those who pay less attention to their competitors [Noble, C et al, 2002]

The last 10 years have seen the emergence of a new type of competitors in different type
of competitive environment [Wilson et al, 2008]. This new environment is characterized
by;
i. generally higher levels and an increasing intensity of competition
ii. wider geographic sources of competition
iii. more frequent niche attacks and strategic alliances
iv. quickening of the pace of innovation
v. emergence of a greater number of ‘bad’ competitors [thus, those not adhering
to the traditional and unspoken rules of competitive behaviours within their
industries.
The implications of these changes, both individually and collectively, are significant and
demand far more analysis by firms if they are to survive and grow.
Competitor analysis needs to focus not just upon firm’s size, financial resources,
manufacturing capability, but also upon factors such as managerial cultures, priorities,
commitment to particular markets and market offerings, the assumptions they hold about
themselves and their markets and objectives and above all how the analysis will add
value to the firm’s overall offer.

This paper is providing an understanding of the quality of analysis that will seek to add
value to the overall corporate offer and an informed basis for developing future strategies
to sustain competitive advantage. Although managers and strategies acknowledge the
importance of competitive analysis, it has long been recognised that less effort is
typically put into detailed and formal analysis of the very analysis firms undertook. The
fact of this situation has been that most managers feel that they know enough about their
competitors simply as the result of competing against them on a day-to-day basis. In
other cases there is almost a sense of resignation with managers believing that it is rarely
possible to understand competitors in detail and that as long as the company’s
performance is acceptable, there is little reason to spend time collecting information. The
reality, however, is that competitors represent a major determinant of corporate success,
and any failure to take detailed account of their strengths, weaknesses, strategies, areas of
vulnerability and actually re-assessing focal firm’s own competitive tools is likely to lead
to not just a sub-optimal performance, but also to an unnecessarily greater exposure to
aggressive and unexpected competitive moves. Other probable consequences of failing to
take stock of focal firm’s competitive analysis include an increased likelihood of the
focal firm being strategically wearing out, its relegation to being a follower rather than a
leader, and to focus on short-term rather than more fundamental long-term issue. It is
apparent that competitor analysis and indeed analyzing focal firm’s competitive tools is
not a luxury but a necessity in order to survive and stay competitive. It follows that
analyzing focal firm’s competitive strategies should be central element of the strategic
marketing management process of every organisation with detailed attention being paid
to the outcome of what we do to other competitors.

Marketing planners should think about the ways in which competitive analysis can best
be used to contribute to the focal firm’s performance. In other words, how might this
analysis best be used as a means of gaining and achieving the optimum return on
investment? One of the ways in which competitive analysis can best be used to achieve
best return on investment is by applying value chain to all issues analysed.

Although value chain analysis has its origin in accounting and was designed to identify
the profit of each stage in a manufacturing process, it is equally applicable to competitive
analysis. The value chain disaggregates a firm into nine strategically significant activities,
which can be related to competitor analysis to improve value-laden decision. These nine
value activities consist of five primary activities and four support activities.

The five primary activities identified by Porter [1985] are;

i. Inbound logistics, are activities that concerned with the reception, storing and
internal distribution of the raw materials or components for assembly. In
 competitive analysis, this is about the information focal firm receives, stores
and distribute to other departments for usage. Indeed, if information received
are no news, sub-optimal and of no marketing significant, such activity will
add up to cost instead of adding value to the organisation. Information to be
received for analysed should be critical to the firm’s survival in the industry.

ii. Operations, is the conversion of raw materials into the final product. In the
manufacturing setting, conversion process is important particularly when the
item being converted is food or drug. In the same way, conversion of
information received by marketing manager can be affected by attitudinal
barriers like complacency, it can’t happen here, I don’t want to hear it, and we
have the information already or other perceived assumptions. On another
hand, does the focal firm have the human resources to convert information on
competitor to create competitive advantage?

iii. Outbound logistics is about distribution of product to customers. In the case of

a manufacturing operation, this would include warehousing, material handling
and transportation. For a service, this would involve the way in which
customers are brought to the location in which the service is to be delivered.
In competition, this involves how competitor’s information is shared among
relevant departments for their action towards the final product offered to
customers. This therefore means that, if the information is poorly shared
and/or not utilized by other departments, then competitor analysis will not
yield the needed benefit.

iv. Marketing and Sales also make sure that customers are aware of the product
and are able to buy it. The following issues need critical review;
a. are your internal members aware of the competitor’s information?
b. are those information what internal members need to accelerate performance?
c. does such information worth spending shareholders’ resource on?
d. will the use of such information contribute the achievement of corporate mission,
vision and objectives?

v. Service activities include installation, repair and training. This means that the
analysis should be done in areas where the focal firm can take action to create
the needed opportunity for competitive advantage.

Each of these primary activities is, in turn, linked to the support activities, which are
grouped under the following headings;

i. Procurement is the buying processes of competitor’s information. Firms must

be guided by the ethics of acquiring information on competitors so as to
enhance overall corporate image in the eyes of the public. Each individual
piece of data received does not have much value. What is important is to
 acquire as many of the pieces as possible within an acceptable economic and
social cost.

ii. Technology development also includes research and development, process

improvements and raw material improvements. Does the focal firm the state
of the art to acquire timely information and validate such information on
competitor before usage. To ensure reliability of firm’s strategic decision on
competitors, information used should be validated and confirmed for precision
and timely decisions.

iii. Human resource management involves recruitment, training, development and

rewarding of staff. Has the focal firm a motivated staff committed to the
continuous study of competitors? It is equally important that staffs, especially
Sales staff, which are key source of competitor information, are skillful
enough to manage competitor information well. Does focal firm the needed
human resource capacity to deal with competitor information

iv. The firm’s infrastructure and the approach to organisation, including the
systems, structures, managerial cultures and ways of doing business, are
relevant to successful competitor analysis. In an organisation culture where
competitors’ information are poorly received and analysed due to poor
managerial and systems failure, the benefit derived from analysis is very low.

Indeed, competitive advantage is determined to a very large extend by how each of these
elements is analysed and managed. This therefore means that value chain usefulness can
be used to benefit competitor analysis for enhanced strategic decisions.
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