While your company may be in fine form today, sustainability issues can always crop up. The following is a look at competitive analysis, or the art of sizing up the competition… and then putting that knowledge to good use.

Legendary investor Warren Buffett has a bias for companies known for continued outperformance of industry peers. The Oracle of Omaha makes no bones about his strategy: he’s looking for “economic castles protected by unbreachable ‘moats.’” Under this theory, business leaders seek the strongest possible competitive edge to prevent rivals from eating away at their market share. Failure to heed this advice is a cautionary tale: one need only think of the hotel business and its inability to foresee the spectacular rise of Airbnb.

This is precisely why a competitive analysis is so important. Rival business practices constitute a wealth of information for determining the sustainability of your competitive advantage. While your products and services may sometimes have points in common with rival offerings, competitors may employ more innovative business practices. A competitive analysis serves to identify the key success factors in your industry. Although a number of different approaches exist, four steps are typically required from the outset.

1. Identify all your direct and indirect competitors

Who are your competitors? The competition is not just the companies offering the same types of products in the same jurisdiction—indirect competitors also require attention.

Although the products sold by indirect competitors are different, they can still meet the needs of your target customer base.

Be sure to combine a number of data collection methods to ensure no opponents are left off the list. Put yourself in your customers’ shoes: where would you go to find a popular item or service? Check out social media and search engines. By performing keyword searches on your target market and products and services, you can uncover competitors that might otherwise have slipped under your radar. Getting the lay of the land in this step is essential, as it forms the basis of the steps that follow!

2. Make a comparison table of your competitors

Next, data collection is essential to create a description of every competitor identified in the previous step. To add structure to your approach, it’s advisable to draw up a comparison table on the competition. The criteria to be analyzed are added in the rows down the first column. The names of competitors are added to the top of each successive column.

Since the goal of the competitive analysis is to anticipate any potential changes that could jeopardize your competitive edge, rival profiles must be combed through carefully. Key criteria should include:

• Distinctive product/service characteristics.
• Pricing policy.
• Marketing approach.
• Market share.

Other data can also shed additional light on the subject, such as:  

• Sales revenue.
• Profitability.
• Employee headcount.
• Warranty policy.

In some cases, the information you need can be harder to track down. If your competitor is a publicly listed company, finding the information in their quarterly financial reporting is a snap. For others, try looking them up in the annual rankings of trade publications, akin to a “Top 500 SMEs of the Year.” Local business news can also prove useful, as well as placing a call to your industry association or umbrella group.

3 Analyze the listed data

Once your data is collected, you can choose from a host of tools for a deep-dive analysis. Michael Porter’s competitive analysis method is still perhaps the most well known. There is abundant literature on the subject. This method highlights the five areas companies can focus on to optimize their competitive advantage. The analysis will reveal:

• Current competitive landscape.
• Potential market entrants, potentially poised to beat barriers to entry and become competitors.
• Availability of alternatives able to supplant an existing product.
• Customer bargaining power: are alternatives available to them?
• Vendor bargaining power: does a SME have the leverage to command favourable supply chain terms?

A SWOT analysis—strengths, weaknesses, opportunities and threats—is another method for reaching the same goal. An analysis is conducted first on your business, then on each of your competitors. The resulting SWOT matrix simply summarizes the internal and external success drivers for your business. Listing your competitors’ strengths and the ways you can outperform them is a key step, as well as analyzing any exploitable weaknesses. Any exposure to potential competitor opportunities or threats must be identified, as well as any ways to leverage or guard against them.

4. Draw up an action plan

Now it’s time to draw some conclusions. Looking to deploy a new strategy to tap into a hot new market? Need to map out potential competitor reactions to an upcoming acquisition? And if a rival puts the business up for sale, can you seize the opportunity? Regardless of the scenario you have in mind, prepare an action plan. This will help you stay the course against the headwinds and protect your economic castle!