A Framework for Competitor Analysis

A central aspect of strategy formulation is preceptive competitor analysis. There are four diagnostic
components to a competitor analysis: future goals, current strategy, assumptions, and
capabilities. A basic framework for performing individual competitive analysis has been postulated
by Michael Porter.

Future Goals

As can be seen, two factors must be analyzed to determine what drivers the competitor. First, its
future goals must be identified. A knowledge of goals will alow predictions about whether or not
each competitor is satisfied with its position and financial results, and how likely that competitor is
to change strategy.
The following diagnostic questions help to determine a competitor's present and future goals:
• What have the competitors's major goals been in the relatively recent past?
• Have these goals been achieved?
• What strategies has the competitor employed in the relatively recent past?
• Have these strategies been successful?

Assumptions

The second crucial component in competitors analysis is identifying each competitors's assumptions.
These fall into two major categories:
• The competitor's assumptions about itself
• The competitors's assumptions about the industry and the other companies in it.

Answers to the following questions help identify a competitor's assumption:

1. What does the competitor appear to believe about its relative position - in cost, product
quality, technological sophistication, and other key aspects of its business - based on its
public statements, claims of management and sales force, and other indications? What does
it see as its strengths and weaknesses? Are these accurate?
2. Does the competitor have strong historical or emotional identification with particular
products or with particular functional policies, such as an approach to product design,
desire for product quality, manufacturing location, selling approach, distribution
arrangements, and so on, which will be strongly held to?
3. Are there cultural, regional, or national differences that will affect the way in which
competitors perceive and assign significance to events?
4. Are there organizational values or canons which have been strongly institutionalized and
will affect the way events are viewed? Are there some policies that the company's founder
believed in strongly that may still linger?
5. What does the competitor appear to believe about future demand for the product and
about the significance of industry trends? Will it be hesitant to add capacity because of
unfounded uncertainties about demand, or likely overbuild for the opposite reasons? Is it
prone to misestimate the importance of particular trends? Does it believe the industry is
concentrating, for example, when it may not be?
6. What does the competitor appear to believe about the goals and capabilities of its
competitors? Will it over- or underestimate any of them?
7. Does the competitor seem to believe in industry "conventional wisdom" or historic rules of
thumb and common industry approaches that do not reflect new market conditions?
History as and Indicator of Goals and Assumptions

Answers to the following questions provide a historical basis for looking at what are a competitor's
goal and assumptions:
1. What is the competitor's current financial performance and market share, compared to that
of the relatively recent past?
2. What has been the competitors's history in the marketplace over time? Where has it failed
or been beaten, and thus perhaps not likely to tread again?
3. In what areas has the competitor starred or succeeded as a company? In new product
introductions? Innovative marketing techniques? Others?
4. How has the competitor reacted to particular strategic moves or industry events in the
past? Rationally? Emotionally? Slowly? Quickly? What approaches have been employed? To
what sorts of events has the competitor reacted poorly, and why?

Current Strategy

The third component of competitor analysis is developing statements of the current strategy of each
competitor.

Capabilities
A realistic appraisal of each competitor's capabilities - its strengths and weaknesses- is the final
diagnostic step in competitor analysis. Its strengths and weaknesses will determine its ability to
initiate or react to strategic moves and to deals with environmental or industry events that occur.

Putting the Four Components together

After the competitor's future goals, assumptions, current strategies, and capabilities are analyzed, a
competitor response profile is developed. This profile, designed to indicate how a competitor is
likely to respond in its competitive environment, is based on the answers to four questions:
1. Is the competitor satisfied with its current position?
2. What likely moves or strategy shifts will the competitor make?
3. Where is the competitor vulnerable?
4. What will provoke the greatest and most effective retaliation by the competitor? (Michael
E. Porter).