Chapter 3: A Framework for Competitor Analysis

Competitive strategy involves positioning a business to maximize the value of the

capabilities that distinguish it from its competitors. It follows that a central aspect of
strategy formulation is perceptive competitor analysis. The objective of a competitor
analysis is to develop a profile of the nature and success of the likely strategy changes
each competitor might make, each competitors probable response to the range of
feasible strategic moves other firms could initiate, and each competitors probable
reaction to the array of industry changes and broader environmental shifts that might
occur. Sophisticated competitor analysis is needed to answer such questions as Who
should we pick a fight with in the industry, and with what sequence of moves? What is
the meaning of that competitors strategic move and how seriously should we take it?
and What areas should we avoid because the competitors response will be emotional or
desperate?
Despite the clear need for sophisticated competitor analysis in strategy formulation, such
analysis is sometimes not done explicitly or comprehensively in practice. Dangerous
assumptions can creep into managerial thinking about competitors: Competitors cannot
be systematically analyzed, We know all about our competitors because we compete
with them every day. Neither assumption is generally true. A further difficulty is that
in-depth competitor analysis requires a great deal of data, much of which is not easy to
find without considerable hard work. Many companies do not collect information about
competitors in a systematic fashion, but act on the basis of informal impressions,
conjectures, and intuition gained through the tidbits of information about competitors
every manager continually receives. Yet the lack of good information makes it very hard
to do sophisticated competitor analysis.
There are four diagnostic components to a competitor analysis (see Figure 3-1): future
goals, current strategy, assumptions, and capabilities.1 Understanding these four
components will allow an informed prediction of the competitors response profile, as
articulated in the key questions posed in Figure 3-1. Most companies develop at least an
intuitive sense for their competitors current strategies and their strengths and
weaknesses (shown on the right side of Figure 3-1). Much less attention is usually
directed at the left side, or understanding what is really driving the behavior of a competitorits future goals and the assumptions it holds about its own situation and the
nature of its industry. These driving factors are much harder to observe than is actual
competitor behavior, yet they often determine how a competitor will behave in the
future
Although the framework and questions presented here are stated in terms of competitors,
the same ideas can also be turned around to provide a framework for self-analysis. The
same concepts provide a company with a framework for probing its own position in its
environment. And beyond this, going through such an exercise can help a company
understand what conclusions its competitors are likely to draw about it. This is part of
sophisticated competitor analysis because these conclusions shape a competitors
assumptions and hence behavior, and are crucial to making competitive moves (see
Chapter 5).

Although we usually treat future goals as part of strategy, it will be analytically useful to
separate goals and current strategy in competitor analysis.

What Drives the

Competitor

What the competitor is

doing and can do

FUTURE GOALS

CURRENT STRATEGY

At all levels of
management and in
multiple dimensions

How the business is

currently competing

COMPETITORS RESPONSE PROFILE

Is the competitor satisfied with its current position?
What likely moves or strategy shifts will the competitor make?
Where is the competitor vulnerable?
What will provoke the greatest and most effective retaliation by
the competitor?
ASSUMPTIONS

CAPABILITIES

Held about itself and the

industry

Both strengths and

weaknesses

FIGURE 3-1 The Components of a Competitor Analysis

From Competitive Strategy Techniques for Analyzing Industries and Competitors
by Michael E. Porter, The Free Press, 1998.