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What is competitive analysis, and why is it important?

Competitive analysis is a system for understanding your business' standing in the marketplace in relation to your competition. It is a strategy for gathering intelligence and putting that information to use. With a thorough competitive analysis as part of your initial business plan, you'll be positioned to outshine your rivals and draw loyal customers.

Executing a competitive analysis requires some planning, research and honest introspection. Take it step by step, and you may be surprised what you discover about the business environment in your neck of the woods.

Identify your competitors

On the surface, this seems like an easy step. A quick Google search reveals who else is selling similar items. But understanding competition requires a bit of thinking and nuance. First, you must understand the different varieties of competition you face.

Direct competitors are those rival businesses who sell goods and services identical or nearly identical to your own. If you sell funny t-shirts, you are in direct competition with other websites selling funny t-shirts as well as brick and mortar stores also selling funny t-shirts.

Indirect competitors sell good and services that are not the same as yours, but which satisfy the same customer need. For instance, a restaurant that sells pizza is in direct competition with another pizza parlor down the block, but it is indirectly competing with hamburger stands and catering companies. Potential customers want food, and they can satisfy that need in a variety of ways.

Finding your competition begins with research. Use keywords that describe your company in a Google search. Be thorough and search every term and combination of terms you can think of, taking care to include terms that cover your indirect competitors as well.

Identify the top search results for businesses in your product or service area. Determine how your offerings compare to theirs and what differences stand out. Dig deeper into your biggest competition by investigating:

  • Websites

  • Annual reports

  • Government reports and certifications

  • Prices

  • Promotions

If possible, contact their current and former employees. They provide invaluable insight into how a competitor's business strategies, best practices and potential pitfalls.

SWOT the competition

Once you've identified your main competitors, analyze their capabilities and the health of their businesses. A long-standing economic tool known as SWOT analysis focuses on four sectors to determine a company's viability: strengths, weaknesses, opportunities and threats. For each competitor, use a whiteboard, draw a large box and separate it into four equal parts. The top two quarters contain strengths and weaknesses, the bottom two contain opportunities and threats.

Strengths and weaknesses refer to real assets and tangible factors that affect a business. List the company's available resources and possible liabilities, such as:

  • Funding, income and investments

  • Profitability

  • Location, equipment and facilities

  • Employees, customer base and other human resources

  • Trademarks, patents and copyrights

  • Processes, employee programs and software systems

  • Fixed and variable costs

Opportunities and threats refer to external factors that can positively or negatively impact a business, such as:

  • New products entering the marketplace

  • A shift in technology or customer needs

  • Economic trends

  • Demographic changes

  • Changes in government regulation

  • Changes in supplier and partner relationships

This analysis provides a sharp picture of your competitors' health and where they may be vulnerable. Once you've performed a SWOT analysis for them, perform the same analysis for your own business.

Create product profiles

Now that you know your competitors' strength and weaknesses, assess their products or services in much the same way. If your products are similar, how are theirs better than yours? How are they worse? If your products are identical, what service do they provide to add value for customers?

This is the most important step in competitive analysis. By understanding what your competitors sell, you identify gaps in the market. Adapt your products or services to fill the gaps and create new customers.

Be systematic and begin by analyzing yourself.

1. Perform an honest assessment of your own products and services by rating several relevant metrics on a ten-point scale:

  • Price

  • Quality

  • Selection

  • Customer service

  • Location or market visibility

  • Business reputation

2. Perform the same ratings for your top competitors' products or services.

3. Examine where your product is strong in comparison to your competition and what your competition does better than you.

4. Use this information to change your product, offer new products or re-focus your promotional strategy to fill gaps in the market.

This process works on any scale and for many other aspects of business.

It is particularly valuable to create profiles for marketing and promotional strategies. Discover where your competition is not advertising and expand your marketing into those areas. Find new target demographics. Perhaps there are untapped populations who will form a solid customer base for your business. Reach out to them and let them know how your product or service will benefit them. Competitive analysis never ends. The marketplace continuously evolves. Businesses without a clear picture of the landscape fail to adapt. Use the tools outlined above at regular intervals to avoid surprises and keep a step ahead.

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