One of the first items on the to-do list for an entrepreneur who is about to launch a new company is to conduct competitor research. Failing to analyze the competition in business would be like failing to monitor the weather before a day cruise on a small boat – the long-term ramifications could leave the company figuratively shipwrecked and stranded on a virtual desert island.
The United States Small Business Administration (SBA) recommends competitor research be conducted early in the process of forming a new company. This enables business owners to identify potential competitors and determine the following key information:
- Potential market share for the new company
- The existing and potential strengths and weaknesses of the new company
- The proper window of opportunity to enter the market
- The importance of the new company’s target clientele to competitors
- Potential obstacles to overcome when entering the market
- Other potential competitors that might not have been obvious at first
In conducting a thorough market analysis, business owners should, according to the SBA, create benchmarks against existing companies; physically (and digitally) map where competitors do business and where customers are located; and determine the best places to advertise.
All of this requires structured, well-informed analysis. Without analyzing competitor research, a new business owner is essentially operating in the dark. Without proper analysis, an entrepreneur will not know how to act on competitor and market research.
The Porter’s Five Forces Model
A well-known guide for conducting and analyzing competitor research is the Porter’s Five Forces model for competitive position analysis. It was developed by Michael Porter of Harvard Business School to determine potential profitability based on the strengths and weaknesses of other companies in a shared industry.
It’s a measurement of the “balance of power” among competitors, as well as a system to identify hidden opportunities within an industry. Porter’s operating premise when he wrote about the five forces in 1979 was that profitability is driven exclusively by industry structure. Porter posited that this truism did not shift from industry to industry, but remained a driving force across the economic spectrum.
Benign forces, Porter wrote, were more amenable to profit, whereas intense forces yielded almost no attractive return on investment. Industries with benign forces include software, soft drinks and toiletries, Porter wrote. Industries with intense forces include airlines, textiles and hotels.
The five forces determine or reveal:
- The competitive structure of an industry
- The industry’s overall profitability
- A company’s relative position within an industry
- Shifts in competition
- Better strategic positions within an industry
The five forces themselves are analyzed independently, as are the ways the forces interact and determine market conditions. The five forces are:
- Bargaining power of buyers – the power of consumers to dictate price and quality
- Bargaining power of suppliers – the power of the supplier of a service or product to control pricing
- Threat of new entrants – the ease or difficulty of new competitors to enter the industry
- Threat of substitute products or services – the ease or difficulty for consumers to switch to a competitor’s service or product
- Rivalry among existing competitors – the intensity and balance of competition among current companies in the industry
Because the intensity and interaction among the five forces change as industry structure evolves, business owners must conduct competitor research on a regular basis. Last year’s solutions will not necessarily solve this year’s challenges. Staying aware of the changes in the five forces can help a business stay nimble, adaptable and profitable.
How to Conduct Competitor Research
Competitor research is also known as competitor analysis, competitive analysis, market research, competitor profiling and other terms. All of these are the means with which a business owner attempts to understand the place of the company within the industry, which provides guidance for action moving forward.
To gather thorough dossiers on competitors, company owners should produce a report that answers these and other questions:
- Who are my competitors in the industry?
- What products and/or services do they create and sell?
- What is the market share of each of the existing competitors?
- What strategies and tactics have they used in the past and do they use now to earn and maintain their market share?
- How and where do they advertise and market their services and products, and how much money do they spend on it?
- What are the strengths and weaknesses of existing competitors?
- What threats do existing competitors present to the new company?
- What opportunities can be identified based on what you know about your competitors?
The SBA provides a number of suggestions for resources to help conduct competitor research. Among the data that should be collected are:
- General business statistics that relate to the chosen industry and the location of the company
- Consumer statistics such as demographic makeup and income information
- Economic indicators such as employment trends in the chosen market
- Demand, costs and consumer spending related to the service or product being sold
- Statistics within related industries, such as suppliers and distributors
Armed with this information, a business owner can proceed with confidence in the knowledge that he or she will not be caught by surprise when market conditions shift or competitors make threatening strategic moves.
Learn more about how to collect and act on competitor research as you earn a 100% online MBA from Jacksonville University’s Davis College of Business.