Competitor analysis

Some businesses think it is best to get on with their own plans and ignore the competition.
Others become obsessed with tracking the actions of competitors (often using underhand or
illegal methods). Many businesses are happy simply to track the competition, copying their
moves and reacting to changes.

Competitor analysis has several important roles in strategic planning:

• To help management understand their competitive advantages/disadvantages relative to

competitors

• To generate understanding of competitors’ past, present (and most importantly) future

strategies

• To provide an informed basis to develop strategies to achieve competitive advantage in the

future

• To help forecast the returns that may be made from future investments (e.g. how will
competitors respond to a new product or pricing strategy
strategy - value chain analysis

Introduction

Value Chain Analysis describes the activities that take place in a business and relates them to
an analysis of the competitive strength of the business. Influential work by Michael Porter
suggested that the activities of a business could be grouped under two headings:

(1) Primary Activities - those that are directly concerned with creating and delivering a
product (e.g. component assembly); and

(2) Support Activities, which whilst they are not directly involved in production, may increase
effectiveness or efficiency (e.g. human resource management). It is rare for a business to
undertake all primary and support activities.

Value Chain Analysis is one way of identifying which activities are best undertaken by a
business and which are best provided by others ("out sourced").

Linking Value Chain Analysis to Competitive Advantage

What activities a business undertakes is directly linked to achieving competitive advantage. For
example, a business which wishes to outperform its competitors through differentiating itself
through higher quality will have to perform its value chain activities better than the
opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in
the costs associated with the value chain activities, or a reduction in the total amount of
resources used.

Primary Activities

Primary value chain activities include:

Primary Activity Description

Inbound All those activities concerned with receiving and storing externally sourced
logistics materials
Operations The manufacture of products and services - the way in which resource inputs
(e.g. materials) are converted to outputs (e.g. products)
Outbound All those activities associated with getting finished goods and services to
logistics buyers
Marketing and Essentially an information activity - informing buyers and consumers about
sales products and services (benefits, use, price etc.)
Service All those activities associated with maintaining product performance after the
product has been sold

Support Activities

Support activities include:

Secondary Description
Activity
Procurement This concerns how resources are acquired for a business (e.g. sourcing and
negotiating with materials suppliers)
Human Resource Those activities concerned with recruiting, developing, motivating and
Management rewarding the workforce of a business
Technology Activities concerned with managing information processing and the
Development development and protection of "knowledge" in a business
Infrastructure Concerned with a wide range of support systems and functions such as
finance, planning, quality control and general senior management

Steps in Value Chain Analysis

Value chain analysis can be broken down into a three sequential steps:

(1) Break down a market/organisation into its key activities under each of the major headings
in the model;

(2) Assess the potential for adding value via cost advantage or differentiation, or identify
current activities where a business appears to be at a competitive disadvantage;

(3) Determine strategies built around focusing on activities where competitive advantage can
be sustained

strategy - the strategic audit

In our introduction to business strategy, we emphasised the role of the "business environment"
in shaping strategic thinking and decision-making.

The external environment in which a business operates can create opportunities which a
business can exploit, as well as threats which could damage a business. However, to be in a
position to exploit opportunities or respond to threats, a business needs to have the right
resources and capabilities in place.

An important part of business strategy is concerned with ensuring that these resources and
competencies are understood and evaluated - a process that is often known as a "Strategic
Audit".

The process of conducting a strategic audit can be summarised into the following stages:

(1) Resource Audit:

The resource audit identifies the resources available to a business. Some of these can be
owned (e.g. plant and machinery, trademarks, retail outlets) whereas other resources can be
obtained through partnerships, joint ventures or simply supplier arrangements with other
businesses. You can read more about resources here.

(2) Value Chain Analysis:

Value Chain Analysis describes the activities that take place in a business and relates them to
an analysis of the competitive strength of the business. Influential work by Michael Porter
suggested that the activities of a business could be grouped under two headings: (1) Primary
Activities - those that are directly concerned with creating and delivering a product (e.g.
component assembly); and (2) Support Activities, which whilst they are not directly involved in
production, may increase effectiveness or efficiency (e.g. human resource management). It is
rare for a business to undertake all primary and support activities. Value Chain Analysis is one
way of identifying which activities are best undertaken by a business and which are best
provided by others ("outsourced"). You can read more about Value Chain Analysis here.

(3) Core Competence Analysis:

Core competencies are those capabilities that are critical to a business achieving competitive
advantage. The starting point for analysing core competencies is recognising that competition
between businesses is as much a race for competence mastery as it is for market position and
market power. Senior management cannot focus on all activities of a business and the
competencies required to undertake them. So the goal is for management to focus attention on
competencies that really affect competitive advantage. You can read more about the concept
of Core Competencies here.

(4) Performance Analysis

The resource audit, value chain analysis and core competence analysis help to define the
strategic capabilities of a business. After completing such analysis, questions that can be asked
that evaluate the overall performance of the business. These questions include:

- How have the resources deployed in the business changed over time; this is "historical
analysis"
- How do the resources and capabilities of the business compare with others in the industry -
"industry norm analysis"
- How do the resources and capabilities of the business compare with "best-in-class" - wherever
that is to be found- "benchmarking"
- How has the financial performance of the business changed over time and how does it
compare with key competitors and the industry as a whole? - "ratio analysis"

(5) Portfolio Analysis:

Portfolio Analysis analyses the overall balance of the strategic business units of a business.
Most large businesses have operations in more than one market segment, and often in different
geographical markets. Larger, diversified groups often have several divisions (each containing
many business units) operating in quite distinct industries.

An important objective of a strategic audit is to ensure that the business portfolio is strong and
that business units requiring investment and management attention are highlighted. This is
important - a business should always consider which markets are most attractive and which
business units have the potential to achieve advantage in the most attractive markets.

Traditionally, two analytical models have been widely used to undertake portfolio analysis:

- The Boston Consulting Group Portfolio Matrix (the "Boston Box");

- The McKinsey/General Electric Growth Share Matrix

(6) SWOT Analysis:

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis
is an important tool for auditing the overall strategic position of a business and its environment