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2. Competitor Analysis
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What is it?
Competitor analysis is a framework for understanding and evaluating current or potential com-
petitors of a firm. While deceptively simple—and typically only an initial step in a robust strategic
analysis—a competitor analysis is an indispensable tool in any strategist’s toolkit.

When do we use it?

While competitor analysis is by nature only one component of a more robust strategic analysis that
employs multiple frameworks and tools, it can be a useful starting point for thinking about com-
petitive dynamics and analyzing the industry in greater detail. It helps identify the most relevant
competitors and gives a baseline understanding of how those firms compete.

Why do we use it?

A good strategic analysis requires a careful analysis of the firm’s competition in order to assess and
predict the durability of any competitive advantage, including the potential response of rivals to
various strategic actions the firm may be considering. Competitor analysis can help firms make
better-informed strategic decisions and gather competitive intelligence on the industry. A thorough
competitor analysis can even help firms recognize opportunities to influence their rivals’ behavior
to their own advantage.

When assessing a firm’s strategy and its capacity to create value for important stakeholders, keep in
mind the fundamental principle of competition: If everyone can do it, it is difficult to create value
from it. Strategy plays out in a competitive arena. How will competitors react to the strategic actions
of a business? Will competitors be able to easily imitate those moves? How will other stakehold-
ers—say, customers or the community—respond? Strategy must be formulated and implemented
“with an appreciation of these second-order effects.”iii

As a simple illustration of this fundamental principle of competition, consider a vendor, Kate, sell-
ing T-shirts outside the University of Virginia’s basketball arena. Suppose this vendor does quite
well for herself selling a quality T-shirt at a reasonable markup over costs; her enterprise provides
a good return for the vendor and a product that customers find desirable. But how do others re-
spond? Absent any barriers to entry and attracted by the opportunity, other T-shirt vendors may

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also soon appear outside the arena. Absent any barriers to imitation, they may, in fact, sell exact
replicas of the T-shirts Kate is currently selling. As the supply of T-shirts increases, the competition
for customers also increases, and vendors may start lowering their prices to attract customers. Soon
enough, prices may fall to the point that the next potential entrepreneur, Jack, elects not to enter the
parking lot T-shirt market because the opportunity cost is too high and his next best option for a
business venture is more attractive than becoming a T-shirt vendor. The remaining vendors may
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be currently profiting from their ventures, but such profits may not exceed their opportunity cost.
This is what economists refer to as economic profit or economic rents. It differs from accounting
profit in that it refers to profits in excess of the opportunity cost of capital. In practical terms, the
question for entrepreneurs is whether they can create more value entering a different market instead.
This document is authorized for use only by Widiana Safaat at Institut Teknologi Bandung.

The fundamental principle of competition suggests that a successful strategy requires some barrier
to competition that prevents others from entering a firm’s market and imitating its strategy. In the
case of Kate the T-shirt vendor, restrictions that require permission to sell outside the arena, in the
form of a license or permit, could serve as a barrier to entry. Copyright and trademarks could serve
as barriers to imitation of Kate’s T-shirt designs. Together, barriers to entry and barriers to imita-
tion can reduce competitive pressures and allow our T-shirt vendor to thrive. Only in the presence
of such barriers to competition can a firm be expected to earn a stream of economic profits in the
future. A thorough strategic analysis—one that identifies and analyzes the firm’s direct competi-
tors—can therefore help one forecast future cash flows for a firm and thus calculate an expected
market value for the firm.

How do we use it?

Step 1. Identify competitors.
While seemingly straightforward, competitor identification is a critical and often challenging first
step in a competitor analysis. Two companies in the same industry may vary significantly in the
degree to which they compete. They may compete in different geographic markets or target radi-
cally different customer segments. For example, is an analysis of Kia, a builder of low-cost sedans,
useful to Porsche, a luxury sports car manufacturer? In some cases, even identifying a company’s
industry can be difficult.

There are two common ways to identify competition. The first is to look at the industry from a
customer’s viewpoint and group all firms providing a similar product or service. Marketers have
developed various techniques such as perception mapping and brand-switching analyses to aid in
identifying the most relevant competitors. Point-of-sales and scanner data provide rich sources to
help with these analyses. The gold standard is to identify the cross-price elasticity between pairs of
products (i.e., the percentage increase in demand for one product given a percentage decrease in
price for another product). The larger the increase in demand, the more two products are substitutes,
and their makers are rivals. In practice, however, cross-price elasticity can be difficult to calculate.

The second approach is to carry out a detailed analysis of industry players and group firms with
similar strategies as competitors. For example, if analyzing the U.S. steel industry, it may be useful
to classify companies into three strategic groups: large integrated steel mills, minimills (which use

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a different technology), and foreign importers. It may also be worthwhile to collect data on those
who provide related products; for example, aluminum and plastic manufacturers as alternative
competitors in the case of the steel industry. By clustering competitors into strategic groups, you
can prioritize your intelligence gathering, focusing first and foremost on those rivals most closely
related to the focal firm while also being cognizant of more distant competitors. Strategic group
identification can be a quick and easy approach in many situations.
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Step 2. Gather intelligence.

Once the competition has been identified, data can be gathered to provide insight on the
This document is authorized for use only by Widiana Safaat at Institut Teknologi Bandung.

competitor(s). These include historical data such as shareholder reports or SEC filings as well as
press releases, media coverage, interviews with analysts and managers, and public relations events.
Recent performance, existing strategies, and organizational capabilities can also be studied by
examining the firm’s hiring activity and patterns, research and development activity, capital invest-
ments, and strategic partnerships.

Competitor information can be pulled together in a simple spreadsheet (Figure 2-1):

Figure 2-1. Competitor information spreadsheet.

Market R&D Strategic

Revenues ROA
Share Investment Partnerships
Focal Firm
Strategic Group 1
Competitor 1
Competitor 2
Competitor 3
Competitor 4
Strategic Group 2
Competitor 1
Competitor 2
Competitor 3
Competitor 4
Strategic Group 3
Competitor 1
Competitor 2
Competitor 3
Competitor 4

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Step 3. Analyze rivals.

The final step is analyzing the competitive positions of rivals and comparing their relative strengths
and weaknesses. The simple diagram in Figure 2-2 is a useful guidepost for thinking about com-
petitive responses. First, what drives a given competitor? What are its objectives and its operating
assumptions? Second, what is the competitor capable of doing? How do its strategy, resources, and
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capabilities allow it to compete now and in the future?

While this last part of a competitor analysis is the most subjective, it can provide useful insights
into the sustainability of a focal firm’s competitive advantage and how competitors may respond
to specific strategic actions by the focal firm.
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Figure 2-2. Competitor positions.

what the competitor

what drives the
is doing or is
competitor
capable of doing

Objectives Strategy

competitor
response
profile

Assumptions Resources & Capabilities

Adapted from Michael E. Porter, Competitive Strategy.

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