From the July 2003 issue of Entrepreneur

Do you know what your competition is up to? If not, you could be headed for trouble. A study by professors at UCLA and Stanford University showed that most business owners are clueless about the competition. Almost 80 percent were blind to their opponents' actions--which means lost customers and market share that can cripple a business before it even gets off the ground.

The first step to understanding your competition is to know who they are. While this may seem obvious, it's more complicated than you think. There are two ways to define competitors. One is by strategic groups--competitors who use similar marketing strategies, sell similar products or have similar skills. By this definition, you might group Nissan and Toyota as competitors within the car industry.

The second, less obvious way to group competitors is by customer-how strongly do they compete for the same customers' dollars? Using this method gives you a wider view of your competitors and the challenges they could pose to your new business.

Suppose you're considering opening a family entertainment center. If there are no family entertainment centers in your area, you might think you have no competitors. Wrong! Any business that vies for customers' leisure time and entertainment dollars is a competitor. That means children's play centers, amusement parks and arcades are all your competitors. So are businesses that don't appear to be similar, like movie theaters, bookstores and malls. You may even face competition from nonprofit entities, like public parks, libraries and beaches. In short, anything that families might do in their leisure time is your "competition."

As you do the research on your industry and your target market that's necessary for start-up, a clearer picture of both types of competitors will emerge. Follow these tips to "know thy enemies"--and outwit them:

  • Examine the number of competitors on a local and, if relevant, national scale. Study their strategies and operations. Your analysis should supply a clear picture of potential threats and opportunities, and of the weaknesses and strengths of the competition facing your new business.
  • When looking at the competition, try to see what trends have been established in the industry you want to enter and whether there's an opportunity or advantage for your business.
  • Use the library, the Internet and other secondary research sources--such as government data, reference books and industry associations-to dig up as much as you can on competitors, their tactics and their goals.
  • Read articles on the companies you'll be competing with. If you're researching publicly owned companies, contact them and get copies of their annual reports. These show not only how successful a company is, but also what products or services it plans to emphasize in the future.
  • Role-play. Get in the trenches, and put yourself in your competitors' shoes. Visit their stores, and assess their strategies and operations through a consumer's eyes.
  • Never underestimate the number of competitors out there. Keep an eye out for potential future competitors as well as current ones.
  • Don't limit yourself to the obvious definitions of competition, and you'll be less likely to get sideswiped by an unexpected rival.

Adapted from Start Your Own Business: The Only Start-Up Book You'll Ever Need by Rieva Lesonsky and the staff of Entrepreneur magazine