The first step in competitive analysis is deciding who your competitors are. Sounds simple, right? Guess again. Fulton says entrepreneurs often have difficulty defining exactly who their competitors are. Start by identifying direct competitors--firms currently selling a similar product or service to the same customers you hope to reach.
Consider Jan Zobel's business. Zobel runs a successful tax-preparation firm in Oakland, California, that caters to the tax needs of individuals and small businesses. One obvious competitor for Zobel's business might appear to be H&R Block, the national chain of tax-preparation offices. Zobel, however, doesn't consider the company to be a direct competitor. "H&R Block is an entirely different kind of service," Zobel explains. She focuses on serving clients who want an ongoing, personalized, year-round relationship with a tax consultant, while H&R Block serves the needs of customers looking for once-a-year tax assistance. Although she still keeps tabs on H&R Block's pricing and marketing, Zobel considers her main competitors to be the firms that concentrate on serving the same market niche that she does.
On the other hand, Rice says that even though her business is entirely mail order, she still considers retail stores that sell similar products to be direct competitors. "I have to worry about competitors that have stores," she explains, "because people still go there to buy brownies."
How do you identify your direct competitors? Fulton says a look in the Yellow Pages or a call to your town's chamber of commerce can help identify local competitors. If you expect to sell to a national market, broaden your search for competitors. Industry associations, trade publications, and even a search on the Internet can help you turn up competitors. You can find listings of industry associations in Gale Research's Encyclopedia of Associations, while Ulrich's Guide to International Periodicals can help you locate trade magazines in your particular industry. One excellent place to spot competitors in a specific industry is in the Thomas Register of Manufacturers, available in bound volumes, on CD-ROM, and also over the Internet (http://www.thomasregister.com). All three directories are available at most public libraries. Asking your potential customers who they're currently buying from is another good way to get a handle on your rivals.
Once you've identified your direct competitors, dig deeper. Customers have to make choices about where and how to spend their money. Many businesses, therefore, also face indirect competition for customer dollars.
Fulton says he discovered this when he owned his own travel agency. "I thought my competitors would just be other travel agencies," he says. "But I found I wasn't just losing business to other travel agencies, but also to the local jewelry store and appliance store. I realized I had to worry just as much about my indirect competition."
Indirect competition can be particularly important if you're introducing a totally new product or service concept. To succeed, you'll have to convince consumers to spend their hard-earned money on your product instead of on something else. You must determine which customer spending habits you'll need to influence in order to get customers to buy your product.