e-Business Plan: Competitor Analysis
Every business has competition and prospective business owners ignore competitors at their peril. Unless a business has an absolute monopoly on a life-essential product, there will be competitors offering alternative and substitute products and services. That level of competition is revealed in the competitor analysis section of your e-business plan.
A competitor analysis is an important requirement in any business plan because it (a) reveals the firm's competitive position in the "marketspace" (on-line marketplace), (b) assists you to develop strategies to be competitive, and (c) investors and other readers of the business plan will expect it. If you ignore or minimize the impact competition will have on your business prospects, then you have an unrealistic business plan.
After giving some background about the type of competitors your business will face this lesson helps you identify and analyze your major competitors -- those most likely to impact on the success of your business. The analysis uses a variation of SWOT, a popular strategic planning tool, to help you identify strengths and weaknesses of competitors, and then opportunities and threats for your business. The lesson concludes with a statement of your company's sources of competitive advantage in the e-commerce marketplace.
The lesson outline is:
Who is Your Competition?
--Identifying your competitors
--Finding your competitors
Analyzing Your Competition
--Creating a competitor analysis grid
--Writing up the results of your analysis
--Web site critiques
Defining Your Competitive Position
Who is Your Competition?
Identifying your competitors: The first step in conducting a competitor analysis is to identify your competitors. Begin this process by considering the range of competition in your marketspace because not all competition is the same, there are different types of competitors your business will face.
Direct competitors are businesses that are offering identical or similar products or services as your business. These are companies that customers can easily buy from instead of from you, so these companies represent your most intense competition. Additionally, they have some degree of first-mover advantage that you will have to confront. For example, Purma Top Gifts will be competing with other retailers who are already on the Web selling handicrafts, artwork, and similar products either made in Purma or about Purma.
Indirect competitors are businesses that are offering products and services that are close substitutes. These competitors are probably targeting your markets with a same or similar value proposition, but delivering a different product. A classic example is a survey General Motors conducted of new Corvette car buyers. When asked what products the buyers considered instead of a Corvette, the usual sports cars were on the list, but so was the Sea Ray, a sleek, fast boat. The Sea Ray was fulfilling the same basic need as a Corvette -- a sporty vehicle that made the buyer feel young and would impress friends, especially of the opposite sex. Similarly, television and the Internet itself are Amazon.com's indirect competitors because each product competes for attention in a consumer's leisure time.
Future competitors are existing companies that are not yet in the marketplace that you intend to occupy, but could move there at any time. For Purma Top Gifts, a future competitor is an existing bricks-and-mortar gift shop in Purma that decides to start selling products on-line. One obvious source of future competition is an indirect competitor. As soon as an indirect competitor sees you having success in their area with a different product, they may try to duplicate your offerings and so they become a direct, perhaps formidable, competitor.
Identifying all existing and potential sources of competition is an impossible task, indirect and future competitors can number in the tens, hundreds, or even thousands. Instead, you will have to draw the line somewhere when it comes to identifying major competitors -- the ones that are going to have a real impact on your business over time.
While the nature of competition in your industry will determine the number of major competitors you must consider in the competitor analysis, we recommend you identify 7-10 direct competitors (if you can) and 3-5 indirect and future competitors. From this list, 2-3 direct competitors and 1 indirect and 1 future competitor should be analyzed in depth. The number of competitors you analyze is not as important as their competitive positioning and the depth of your analysis. A comprehensive analysis will convince a potential investor that your strategy is soundly based.
Finding your competitors: Who are your competitors? How do you find them? Because you are developing an e-business, the Internet is the perfect place to seek out your competition. Not only are there advanced search tools available to assist you in finding competitors, but their motivation to have a high profile on the Internet makes it impossible for competitors to hide from your searching efforts. So, the most logical and best place to start looking for competitors is on the World Wide Web.
Currently the world's most popular search engine is Google, but other highly recommended ones are Alta Vista, Lycos, and Hotbot. The main problem with search engines may not be finding enough competitors, but finding too many (e.g., "Results 1 - 10 of about 7,222"). If you are frustrated with too many "hits" in your searches and want to be more effective in your search strategy, explore the underlying tools and options most search engines offer. For example, in Google, increase the keywords you use in the "search within results" box and/or use Google's advanced search feature. You should already know other search engine basics such as using quote marks to search for specific phrases (i.e., words adjacent to each other). If not, spend some time exploring the help or "hints and tips" pages of your favorite search engine.
Another useful Internet search tool is Yahoo!. Because Yahoo! is a directory, not a search engine, it may already have, in one nicely organized list, a directory of competitors in your industry. Once you have used a search engine to find one or two major competitors, enter these into the Yahoo! search box. If you are lucky, the results will point you to a page of competitors. The WWW Virtual Library and About the Human Internet are also popular directories of Web sites.
Want to learn more about search engines? A good tutorial to learn more about searching the Internet is the University of California-Berkeley Library Internet Guide. The single best site for information about search engines is Search Engine Watch. An excellent article about the use of search engines is Web Search Engines FAQs: Questions, Answers, and Issues by Gary Price.
You should not stop your competitor search here. Some of the resources you used in your industry analysis and market analysis research will prove useful here too. For example, visit the Web sites or published directories of trade and professional associations in your industry. Especially, future competitors that currently are not on the Web may be found in these resources. You may want to complete your search for competitors in Internet chat rooms and in other communications with prospective customers.
In your explorations, look for and remember where these competitors appear on the Web. For example, which category in Yahoo! lists your competitors? What competitor ranks highest in search engines? This information is useful because in a short time your business will want to be there too.
In conducting these searches, what keywords or search terms should you be using? Consider the exercises you conducted when you wrote your mission statement. You were asked to conduct brainstorming exercises to list words and phrases that describe your business and your company's ideal image from a customer's point-of-view. The keywords of most importance here are those that reflect the customer's point-of-view because in the competitive marketspace the customer perspective comes first. With this in mind, refine this initial list by considering:
As each competitor is identified, visit their Web site and form some initial impressions about how much of a major competitor they are. Your focus here is on same or similar target markets, products, and value propositions; don't let a flashy Web site convince you that this is a major competitor when the value proposition is all wrong.
Sort competitors into three groups -- direct, indirect, or future. Within each group, develop a "quick and dirty" ranking scheme (e.g., rate on a scale of 1-10, how similar are their target markets, products and services, and value proposition to yours). Your goal in this first step is to produce a ranked short list of major competitors.
Assignment 11: Find, list, and rank 7-10 direct competitors, or fewer if less than seven major competitors can be found. Find, list, and rank 3-5 indirect competitors and 3-5 future competitors for your e-business. Follow the guidance provided by your instructor to submit, present, or save these lists.
Analyzing Your Competition
Creating a competitor analysis grid: With a list of competitors in hand, the next step is to conduct a methodical analysis of their strengths and weaknesses. Why is this important? It is a widely-accepted fact that a company achieves success through the assets, skills, and competitive advantages that it brings into the marketplace. An analysis of successful competitors should reveal these sources of prosperity and assist you in structuring your business idea. Searching for weaknesses not only provides insight into what others may be doing wrong, but reveals where opportunities for success may lie.
A competitor analysis grid is a valuable tool to compare competitors from a number of perspectives -- company information, product/service information, customer information, and sources of competitive advantage.
Basically, a competitor analysis grid is a large table. In the first column of the table is a list of criteria used to identify differences and similarities in competitors, everything from directory information such as the URL to competitive strategy information such as how the business locks in suppliers or customers. In each of the other columns is the corresponding information about each of the competitors you are analyzing.
Next, designate one of the columns for your business and put in your company's information, as best is known at this time. This provides a useful comparison between your e-business and your competitors, telling you where your business is positioned in relation to other firms competing in your industry.
A competitor analysis grid template has been prepared for your use in this analysis. You should add, delete, and change the items in this grid as necessary to fit the requirements of your competitor analysis and your course assignment (i.e., consult with your instructor if necessary). To use this grid, fill in each cell in the grid as completely and accurately as possible, even if you have to make a conjecture because the answer isn't obvious.
How many competitors should you analyze? This is a difficult question to answer because so much depends on your business and the competitive marketspace in which your business will operate. As a general rule of thumb, attempt to complete the analysis for 2-3 direct competitors,1 indirect competitor, and 1 future competitor.
Where do you get the data to complete the grid? The principal source of this information is the competitor's Web site. Other sources of information include:
Assignment 12: From the lists you complied in assignment 11, complete the competitor analysis grid for 2-3 direct competitors, 1 indirect competitor, and 1 future competitor for your e-business. Follow the guidance provided by your instructor to submit, present, or save this competitor analysis grid.
Writing up the results of your analysis: Should these analyses appear in the main text of your e-business plan? The answer to this question is "probably not". The grid tables will fill more than a few pages and the e-business plan readers are unlikely to be interested in all of the results. Instead:
Assignment 13: Write up the results of your competitor search and analysis for inclusion in your e-business plan. Follow the guidance provided by your instructor to submit, present, or save this competitor analysis.
Web site critiques: Another form of competitor analysis that is both informative and fun is to critique a competitor's Web site. The competitive analysis grid offers more substantial information for determining your own position vis-a-vis competitors, but critiquing a competitor's Web site reveals strengths and weaknesses in the way a competitor presents itself to customers and can give a new business a baseline for developing their own Web site. This exercise becomes more important if, as part of your course assignment, you must build a Web site for your new business.
Which sites are you going to critique? At first thought, the Web sites of your most significant direct competitors seems like a logical choice. However another option is to critique sites that have the most popular appeal to your target markets, even if this includes an indirect competitor. Why? If your primary objective is to learn what site features and design appeal to your target market, it makes sense to critique the sites that have been the most successful at this.
How do you determine which sites are most popular with your target markets? Direct evidence such as surveys or clickstream data is best. Otherwise indirect evidence is the ranking of the Web sites in the Google search engine. This is because Google ranks sites according to link popularity (e.g., the more pages that link to the site, the higher the ranking). To the extent that link popularity correlates with target market popularity, this is a criterion to consider in site selection.
In completing this task you are interested in:
Because a critique of competitors' Web sites is not of interest to an investor or most other business plan readers you would rarely, if ever, include this critique in the e-business plan. Accordingly, this exercise is optional (i.e., you may want to do a Web site critique for reasons other than inclusion in the e-business plan). Consider the requirements of your course assignment (e.g., do you have to build a prototype Web site?) and seek guidance from your instructor about whether you should complete assignment 14.
Assignment 14: Identify 1-3 competitors who are popular with your target markets. Conduct a critique of their Web sites using resources such as those listed above. Follow the guidance provided by your instructor to submit, present, or save this critique.
Defining Your Competitive Position
The competitor analysis is necessary background research for what the business plan reader regards as the most important outcome of the competitor analysis section -- a description of your sources of endurable competitive advantage. In this final portion of the competitor analysis your focus turns away from competitors to your business. Specifically, what factors will set your product or service apart from your competitors?
By the time you reach this part of the tutorial many of the potential sources of competitive advantage have been highlighted in previous lessons (e.g., writing a mission statement, conducting the market analysis, determining the value proposition) and in the competitor analysis above. Your primary task here is to examine this material closely, formalize the sources of competitive advantage, and write the position statement in a convincing and easily understood manner.
There are at least two approaches available for you to explain your sources of competitive advantage.
Opportunities and threats: The competitor analysis grid reveals the strengths and weaknesses of your competitors. The other half of a SWOT analysis is to look for opportunities and threats that your company can use. For example, a weakness-opportunity strategy would create an opportunity for your business based on a weakness found in competitors. Or a strength-threat strategy focuses on risk avoidance by initiating a strategy that minimizes a threat caused by a competitor's strength. More information about this SWOT analysis approach can be found in most strategic management textbooks.
Tell the reader specifically what will give your business a competitive edge in contrast to other competitors. For example, your business will provide a full range of products, competitors A and C don't. Or your business will provide after-purchase customer service, something only competitor C does. Or your merchandise will be of a higher quality and include a money-back guarantee, something no other competitor does. Or competitors B and C sell the best widgets, but your site will sell the best gadgets.
Competitive strategies: A classic approach to thinking about and writing this section is to use the competitive strategies found in the strategic management literature. For example, look at your product, pricing, promotion, distribution, and service and ask the following questions (adapted from the competitor analysis grid):
There may also be opportunities for you to:
The answers to these questions might reveal sources of competitive advantage such as patents, branding (e.g., a marketable domain name such as plumber.com), innovative product sales techniques, better and/or cheaper sources of supply than competitors, more entrepreneurial management, and superior customer relationship management strategies.
Whether you use the opportunities-and-threats approach, competitive strategies approach, or a combination, you will find that a company's competitive positioning strategy is affected by a variety of factors that are related to the motivations and requirements of the consumers in the target market, as well as the offerings and positioning strategies of competitors.
The resulting positioning statement does not have to be lengthy or pretentious, as long as it points out exactly how your product or service will be perceived by customers as different, and better, than what is offered by your competitors. State this in a way the reader understands not only what your competitive strategy is, but also why your strategy will work.
Assignment 15: Use one or both of the approaches described above to identify at least one (hopefully more) sources of competitive advantage for your business. Write this up so a reader of your e-business plan will understand how you expect to use these to achieve commercial success. Follow the guidance provided by your instructor to submit, present, or save this analysis.
The completion of this lesson is an appropriate time for you to begin writing the executive summary. A reminder: in the Executive Summary lesson we suggested you begin writing the executive summary in the middle of the business plan writing process, and then finish it last. Before proceeding to the next lesson, take some time to write a draft executive summary and then continue to make improvements on it as you finish writing the business plan.
Navigation Guide for the e-Business Plan Tutorial
Introduction to the E-Business Plan Tutorial
--Top Ten Resources for Writing an e-Business Plan
Fundamentals of e-Business Planning
Writing a "Read Right" Plan
Making an Effective Business Plan Presentation
Appendix: e-Business Plan Tutorial Assignments