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Competitive Analysis

How will your business compete? Explain it well in your business plan's competitive analysis.

The competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market, strategies that will provide you with a distinct advantage, the barriers that can be developed in order to prevent competition from entering your market, and any weaknesses that can be exploited within the product development cycle.

The first step in a competitor analysis is to identify the current and potential competition. As mentioned in the "Market Strategies" chapter, there are essentially two ways you can identify competitors. The first is to look at the market from the customer's viewpoint and group all your competitors by the degree to which they contend for the buyer's dollar. The second method is to group competitors according to their various competitive strategies so you understand what motivates them.

Once you have grouped your competitors, you can start to analyze their strategies and identify the areas where they are most vulnerable. This can be done through an examination of your competitors' weaknesses and strengths. A competitor's strengths and weaknesses are usually based on the presence and absence of key assets and skills needed to compete in the market.

To determine just what constitutes a key asset or skill within an industry, David A. Aaker in his book, Developing Business Strategies suggests concentrating your efforts in four areas:

1. The reasons behind successful as well as unsuccessful firms

2. Prime customer motivators

3. Major component costs

4. Industry mobility barriers

According to theory, the performance of a company within a market is directly related to the possession of key assets and skills. Therefore, an analysis of strong performers should reveal the causes behind such a successful track record. This analysis, in conjunction with an examination of unsuccessful companies and the reasons behind their failure, should provide a good idea of just what key assets and skills are needed to be successful within a given industry and market segment.

For instance, in the personal-computer operating-system software market, Microsoft reigns supreme with DOS and Windows. It has been able to establish its dominance in this industry because of superior marketing and research as well strategic partnerships with a large majority of the hardware vendors that produce personal computers. This has allowed DOS and Windows to become the operating environment, maybe not of choice, but of necessity for the majority of personal computers on the market.

Microsoft's primary competitors, Apple and IBM, both have competing operating systems with a great deal of marketing to accompany them; however, both suffer from weaknesses that Microsoft has been able to exploit. Apple's operating system for its Macintosh line of computers, while superior in many ways to DOS and Windows, is limited to the Macintosh personal computers; therefore, it doesn't run many of the popular business applications that are readily available to DOS and Windows. To an extent, IBM's OS/2 operating system suffers from the same problem. While it will run on all of the personal computers DOS and Windows can run on and even handle Windows applications, the number of programs produced for OS/2 in its native environment is very small. This is the type of detailed analysis you need in analyzing an industry.

Through your competitor analysis you will also have to create a marketing strategy that will generate an asset or skill competitors do not have, which will provide you with a distinct and enduring competitive advantage. Since competitive advantages are developed from key assets and skills, you should sit down and put together a competitive strength grid. This is a scale that lists all your major competitors or strategic groups based upon their applicable assets and skills and how your own company fits on this scale.

To put together a competitive strength grid, list all the key assets and skills down the left margin of a piece of paper. Along the top, write down two column headers: "weakness" and "strength." In each asset or skill category, place all the competitors that have weaknesses in that particular category under the weakness column, and all those that have strengths in that specific category in the strength column. After you've finished, you'll be able to determine just where you stand in relation to the other firms competing in your industry.

Once you've established the key assets and skills necessary to succeed in this business and have defined your distinct competitive advantage, you need to communicate them in a strategic form that will attract market share as well as defend it. Competitive strategies usually fall into these five areas:

.Product

.Distribution

.Pricing

.Promotion

.Advertising

Many of the factors leading to the formation of a strategy should already have been highlighted in previous sections, specifically in marketing strategies. Strategies primarily revolve around establishing the point of entry in the product life cycle and an endurable competitive advantage. As we've already discussed, this involves defining the elements that will set your product or service apart from your competitors or strategic groups. You need to establish this competitive advantage clearly so the reader understands not only how you will accomplish your goals, but why your strategy will work.

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