What is Competitive Analysis? – Strategic Marketing
Competitive analysis is a process of linking the company with its environment. Competitive analysis helps identify the strengths and weaknesses of the company as well as the opportunities and threats that affect within your target market. This analysis is the basis on which the strategy will be designed, for that we know or understand as soon as possible:
This analysis is the basis on which the strategy will be designed, for that we know or understand as soon as possible:
- The nature and success of the likely changes to be adopted by the competitor.
- Competitor’s likely response to potential strategic moves that other companies can start.
- The reaction and adaptation to potential environmental changes that may occur in the various competitors.
The competition consists of companies operating in the same market and perform the same function within the same group of customers regardless of the technology used for it. It is not, therefore, our competitor who manufactures a generic product like ours, but that meets the same needs as us regarding the same target audience or consumer.
To give an exact idea of the importance of competitive analysis, we must refer to the process of planning business strategy, which addresses three key questions:
- Where we are? Answering this question we are facing an analysis of the situation that answers our position.
- Where do we want to go? It involves a definition of the objectives we want to achieve and we need to move.
- How to get there? At this point it is where we must point out the development of actions or strategies that will carry out to achieve the objectives and if we can keep up.
Regarding the analysis of the situation, which we started to realize the strategic planning process, and we can identify opportunities and threats, weaknesses and strengths of the organization, we must focus, in turn, two types of analysis:
- External analysis. It involves the analysis of the environment, competition, market intermediaries and suppliers.
- Internal analysis. It involves analyzing the organizational structure of the company, and the resources and capabilities.
Analysis of competitive forces in Competitive Analysis
All competition depends on the five competitive forces that interact in the business world:
- Threat of new entrants.
- Rivalry between competitors.
- Bargaining power with suppliers.
- Bargaining power with customers.
- Threat of substitute products or services.
The joint action of these five competitive forces is what will determine the rivalry in the sector. The benefits obtained by individual companies will depend directly on the intensity of the rivalry between the companies, greater competition, lower profit. The key is to defend against these competitive forces and tilting them in our favor.
The crucial competition factors a company can be represented, according to Porter, as follows:
Figure 1. Analysis of the competitive forces – Competitive Analysis
Barriers to Entry and Exit
The threat of new entrants depends on the existing barriers to entry in the sector. These barriers pose a degree of difficulty for the company that wants to access a particular sector. As are higher entry barriers, the greater difficulty has access to the sector.
1. Entry barriers
There are six major sources of barriers to entry:
- Scale economics. They refer to the decrease in unit costs of a product when purchasing volume increases.
- Product differentiation. It means that firms have established brand recognition and customer loyalty, this creates a strong barrier to entry since it forces potential entrants to spend heavily in form a brand image.
- Capital requirements. Need to invest large financial resources, not only for the constitution of the company or facilities but also to provide credit to customers, have stocks , covering initial investments, etc.
- Access to distribution channels. Need to get your product distribution.
The company must persuade the channels to accept its product by decreasing price promotions … reducing benefits.
- Learning curve or experience. The know – how or expertise of any company marks an important limitation to potential competitors who have to go to that particular new market.
- Government policy. You can limit or even close the entry of products with controls, regulations, laws, etc.
2. Exit barriers
Exit barriers are economic strategic and emotional factors that make companies follow in a particular industrial sector, even earning low profits and even at a loss.
There are six main sources of exit barriers:
- labor regulations. Pose a high cost to the company.
- little or difficult realizable assets restructuring. Highly specialized assets with little liquidation value.
- long-term contractual commitments with customers. Why we stay longer in the sector, while maintaining the capacity for manufacturing, production costs, etc.
- emotional barriers. They are an emotional resistance from the direction of an output that is economically justified and do not want to carry out loyalty to employees, fearing the loss of prestige, pride, etc.
- strategic relationships. The interrelationships between business units and others in the company in terms of image, commercial building, access to financial markets … are the reason that the company places great strategic importance to be in a particular activity.
- social and governmental restrictions. The government’s refusal to output decisions due to the loss of jobs, regional economic effects, etc.
Substitutes limit the potential of a company. Substitutes policy is to seek others who can perform the same function as manufactured by the company in question. This concept is what makes it into direct competition with the product to which it is presented as a substitute, as it fulfills the same function in the market and meets the same need for the consumer. Substitutes entering increased competition are those that improve the price-performance ratio to the product of the company in question. A key example we have with generic products the pharmacy industry markets with the approval of the government.
Action strategy against competition
According to take a stand against the competition, we can distinguish four different types of strategies:
- Strategy leader. The leader is one who has a dominant market position recognized by the other companies. A leader faces three challenges: the development of generic demand, developing the entire market attracting new consumers or users of the product, developing new uses of the same or increasing consumption; protect market share with respect to which it can adopt various strategies such as innovation, intensive distribution, open confrontation regarding prices …; and expand market share, increasing profitability of their operations without incurring monopoly positions.
- Challenger strategy. Consisting want to replace the leader, because the market does not dominate. This aims to increase its market share through aggressive strategies. These may include:
= Frontage: using the same weapons as the leader.
= wing attacks: aiming at the weakest points of the competitor, may take several forms such as overflow, the approach, the guerrillas, etc.
- Follower strategy. The follower is one competitor has a market share smaller than the leader. Its strategy is to align its decisions with respect to the leader. No attacks, coexists with him to share the market. Try to develop generic demand focusing on market segments where it has a greater competitive advantage with its own strategy.
- Strategy specialist. The specialist is one who seeks a niche in the market that may have a dominant position without being attacked by competitors. It focuses on one market segment, dominating him and serve him with a great specialization and getting enough profit potential.
Crisis strategy: withdraw, resist or reinventing
The economic crisis at the beginning of the second decade of the century held in tension mainly countries of the European Union contributed three possible approaches and solutions to try to counter the competitive position of businesses:
- Backing out. Illiquidity and technological, social and cultural changes forced a significant number of companies to close their doors as they were unable to counteract the changes in the market or have enough cash to withstand the economic cycle.
- To resist. Companies that are not managed under a marketing perspective of the 21st century usually adopt this solution to try to compete in the market. Its aim is to try to compete “as is” until the crisis passes. This attitude has a significant mental, economic and professional wear and does not always.
- Reinvent itself. Under the philosophy that “failure is part of the way of success’ companies that are in a stage of crisis should establish a policy of change and innovation. Innovate in their strategies, their products or services, distribution channels, etc.They also have to pay close attention to their customers, vendors and fully adapt their management 3.0.
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