How to conduct a competition analysis

A competition analysis helps companies to get an overview of which competitors are pursuing which strategies. The analysis also makes it easier to successfully position one’s own company within the market.

What is a competition analysis?

A competition analysis examines the methods, products and strategic positioning of other companies within a market segment. The behaviour of direct competitors is evaluated with the help of various analytical methods. From this analysis, companies can gain insights about the market and develop recommendations for their own strategic decision making.

The analysis of the competition helps to uncover a company’s own strengths and weaknesses as well as any unused potential. Important market developments, such as possible new market players, can also be identified at an early stage.

A competition analysis is not a one-off endeavour. It should be carried out regularly to determine or, if necessary, change one’s position in the market.

How to create a competition analysis

Different methods can be used to conduct an analysis of the competition. Such methods help to better define the company’s position, understand how it differentiates itself from competitors and formulate recommendation for action to be taken.

A competition analysis is comprised of the following steps:

Identify your direct competitors

First, you need to make a list of your direct competitors. This is usually the easy part, as most companies can clearly identify other companies that are in the same market. Whether it’s the second plumber business in town, the barber shop in the city centre or a medium-sized company leading the market, you are mostly like aware of them.

Direct competitors are companies or entrepreneurs who offer a similar product or service for a similar target group. If your business operates offline, you can use a radius to narrow down your selection. For example, you could use a radius of 5 miles, 15 miles or 40 miles to determine each relevant competitor in the area.

If your products or services can be ordered or used online, search for your competitors via Google or social media searches.

Identify your indirect competitors

Indirect competitors can be more difficult to identify. They don’t offer similar products or services and might not even operate in the same industry. In order to identify them, it’s important to know exactly why your target audience uses your products or services.

Often indirect competitors are competing for the resources of a company’s target group, specifically their time or money. For example, video games are a relevant indirect competitor for a streaming provider, since they are also competing for a consumer’s free time.

Prioritise your competitors

Once you’ve identified your direct and indirect competitors, the next step is to prioritise them. You can use different variables to do this. Some examples include product prices, geographical proximity to the target audience or the market position of the competitor in question. Product innovations and possible mergers within a market should also be considered when ranking competitors.

Analyse strengths and weaknesses

An analysis of the competitors’ strengths and weaknesses gives you a better picture of the competitive situation in your market. The focus should be on how well a service or product is accepted and used by a specific customer segment.

You can use the following questions to assess your competitors’ strengths and weaknesses:

• What kind of supplier partnerships do they have?
• What are the barriers to market entry for potential indirect competitors? Do they already offer substitute products?
• How do competitors price their products? Do they tend to focus on product quality or offering the cheapest price possible?
• Does the competition have a unique selling proposition (USP) due to key technological competencies or other factors?
• How strongly are the competitors affected by external factors, such as national laws or international regulations?
• Which sales channels do competitors use? Can any conclusions about the size of marketing budgets be drawn from them?
• Can any recent negative reports be found about the competitors? Have they experienced any waves of resignations lately?
• Do competitors already serve the needs of customers? What kind of ratings do they get on review websites?

Prioritise strengths

Lastly, you need to highlight the strengths of your competitors and those of your own company. You can emphasise different factors to do this. For example, if your company is going to launch a marketing campaign soon, you should consider the marketing activities of your competitors as well.

By prioritising strengths, you’ll be able to create concrete, actionable steps for your business to take. For instance, if you notice that competitors have a better standing with suppliers, your business can actively work on establishing new supplier relationships.

How to proceed with a competitor analysis

Although the terms competitor analysis and competition analysis are sometimes used interchangeably, competitor analysis is actually a part of a competition analysis. A competitor analysis is carried out in a similar way and focuses on evaluating a potential competitors’ strengths and weaknesses.

By analysing competitors, you can better plan investments, identify opportunities for collaboration and make short-term changes. It also gives you a timeframe for the strategic and operational steps that your company should take.

What kind of information should be used for analysing the competition?

Although by no means an exhaustive list, the following information can be used as the basis for conducting analysis:

• Economic situation of other suppliers on the market
• How the sales, marketing or recruiting departments are structured
• Positioning in the market: price oriented, quality oriented, or specialised in niche products
• Offer structure
• Supplier relationships

What is the goal of a competition analysis?

The goal of a competition or market analysis is to determine one’s own position in the market and to make short-term and long-term recommendations for action. These could include investments in areas such as sales and technologies or introducing new products to expand your business to new customer segments.

What tools can be used for an analysis of the competition?

Many tools and methods from strategical management are also suitable for analysing the competition. These include:

SWOT analysis

A SWOT analysis examines the strengths, weaknesses, opportunities and threats of a company as well as the competition in the market. The current market position can be precisely determined and opportunities for differentiation or expansion can also be identified. SWOT analysis is one of the most frequently used methods for competition analysis.

PESTEL analysis

A PESTEL analysis focuses on six different aspects that directly impact companies, namely political, economic, social, technological, environmental and legal factors.

Porter’s Five Forces

According to Porter, a market analysis should examine five competitive forces within an industry:

• Competitive rivalries
• Market entry of potential competitors
• Negotiating power of suppliers
• Negotiating power of customers
• Potential threat from substitute products

Which factors should be considered in a competition analysis?

A competition analysis can be broken down into internal and external factors. It’s important to pay attention to internal developments. At the same time, it’s also necessary to consider the complex situation of the market in its entirety. This way companies can obtain a better picture of all the forces that can impact their market position and create recommendations for action accordingly.

External factors: the situation around the company

External factors include:

• Government-related factors: regulations or legal requirements usually affect entire market segments. Examples include pricing guidelines and licensing restrictions.
• Customer: companies should always keep their customers in mind when conducting a competition analysis. How do product price, quality and availability affect them? Which distribution channels are being used?
• Alternative offerings: do your customers use products or services in the market that are indirectly competing with yours?
• Suppliers: what is the nature of supply and value chains in the market? Are certain individual suppliers in areas such as production so critical that supply bottlenecks can cause problems?
• Market entry possibility: are barriers such as required know-how making it hard for new companies to enter the market? Or is entry into the market relatively easy?

Internal factors: location, company culture etc.

A good corporate culture is the cornerstone of long-term business success. However, other factors influence a company’s direction and opportunities for further development as well. Changing internal factors often requires extensive change management projects.

• Location: where are production facilities, logistics centres and headquarters located? How well are they connected to the overall city or area infrastructure? This is not only an important factor regarding the transportation of products but also for the attractiveness of the company as a potential workplace.
• Number of employees: how large is the workforce? To what extent are marketing and sales able to operate?
• Specialisation of skilled workers: do the employees have the necessary skills or is it necessary to integrate new talent into the company, for example, in the areas of programming and software?
• Company culture as well as diversity and inclusion: how long do employees stay with the company? Are there enough opportunities for career advancement? Does the company have people with diverse backgrounds, identities and experiences? Are they represented in leadership positions?

When and how often should a competition analysis be done?

A competition analysis is the backbone of starting a business or reorienting an existing one. It should serve as a guide for all subsequent business activities.

Basic information about existing market conditions is even needed to launch new products or redesign a website. For this purpose, companies should always prepare an analysis of the competition.

A competition analysis should be carried out in regular intervals even if there are no plans for new product launches. It’s important to continuously evaluate the orientation of your company and, if necessary, adjust it based on the findings from the analysis.

It ensures that established companies stay up to date about changes in the market and are equipped to react and adapt accordingly. Regular competitor monitoring also helps companies to gain important updates on competitors’ activities. This can be done with the help of press releases or social media, for example.

What are the benefits of a competition analysis?

A comprehensive analysis of the competitors provides companies a clear picture of the internal and external factors impacting their business as well as giving them a better understanding of the requirements of the market. It can be seen as an early warning system that enables companies to react more effectively to changes within and outside the market.

A competition analysis helps companies with strategic planning by encouraging continuous evaluation of different dependencies, ranging from supplier relationships and raw material availability to the company’s reputation as an employer. It helps to determine market potential, identify potential new competitors in advance and even establish market leadership.