Nowadays, analysing competition is crucial for managers in order to understand the environment in which the business evolves

Nowadays, analysing competition is crucial for managers in order to understand the environment in which the business evolves, its competitors (their goals, plans etc) as well as implement strategies and position their companies. They can use a wide variety of techniques, each having its strengths and weaknesses. According to Prescott and Grant (1988), to select the appropriate techniques, managers have to know the different techniques available, how they are related to each other, the focus and scope of the area and the constraints limiting the extent of analysis. To analyse competition efficiently, they have to combine some of the different techniques available as they all have a specific aim. However, there are limitations that managers have to take into consideration in order to provide a clear and effective work.

This essay outlines and evaluates the main weaknesses when understanding the business environment. They vary by nature. They can come from the interpretation of the managers and from the models themselves. However, they are in relation to each other, one flaw leading to another one.

When analysing competition, the starting point is to precisely define the industry the firm belongs to and its boundaries. Managers may focus on the market of their company, narrowing their definition of the industry. They then forget or less consider other segments that can change quickly and have impact on the whole industry. According to Zahra and Chaples( 1993) “an effective definition of industry boundaries requires consideration of four interrelated issues: domain (where does the industry begin and end), customer group (sector to be served and their specific needs), customer functions (customer need and specific patterns) and critical technology (production, marketing and administrative system)”. Each point enables to define the competition more and more precisely. In addition to these issues, managers have to take time into consideration. Reviewing their business’ definition, the shape of the industry and the market over the time is crucial as industries change. Prahalad (1995) states that “many industries are undergoing massive transformation. Deregulation, global excess capacity, global competition, mergers and acquisitions, changing customer expectations, technological discontinuities […] are changing industries, creating new industries and opening up new and large growth markets for existing businesses.” For instance, chemical companies enter the pharmaceutical industry by making alliances with young biotechnology companies, not considered as a threat by the pharmaceutical companies. This change in the industry led the pharmaceutical companies to redefine the industry and its boundaries as well as their strategy.

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Managers need to be vigilant in identifying its competitors. A poor identification leads to a wrong positioning and a possible long time response to the different actions coming from those undetected rivals. This identification is dependent on the managers’ perceptions and how they define the industry and its boundaries. Clark and Montgomery (1999) say that “an understanding on how managers construe their competitive environment is highly relevant to any understanding of competitor interaction.” The problem with most competitive analysis is that they tend to focus on well-established companies while ignoring potential competition from other companies and thereby limiting the scope of the analysis. Competitors are not only companies with same goals, structure and/or resources. They can be smaller and ‘invisible’ but viable companies, possibly coming from abroad as well. With globalisation and industry changes, the number of potential competitors is consequently growing. An example illustrating this weakness is Apple which did not consider IBM as a potential threat when IBM made its entrance in the PC market. This was a fatal mistake on the part of Apple as IBM went on to rule the market in the forthcoming years.

Weaknesses coming from the models themselves can be related to those two above. Managers have to keep in mind that the different models used only provide a snapshot of the current state of the industry. It means that models have to be reanalysed after a period of time as they assume the environment to be relatively static. Flower (2004) states that “these relatively static structure do not fit well with today’s rapid changes in technology.”

Managers should not only lay emphasis on their competitors’ visible functions. Ignoring the less visible aspects of their competitors leads to an incomplete set of strengths and weaknesses. This would result in the company underestimating the competences of its rivals and this would eventually lead to a late realisation of the competitors’ strategic moves. Data may not be easy to collect and evaluate as the value of some competences is not easy to measure. Indeed, it is difficult to analyse till which point they contribute to the success of a company. Bagshaw (2000) states that “traditionally, companies have been valued according to their tangible assets, such as property and equipment. This is still important, but the intangible assets such as knowledge, brand and relationship with the customer, are coming into their own.” An example of this weakness is that IBM and Merck laid importance on the advantage they could gain from their “specialised skills and capability of their personnel.” (Zahra and Chaples)

It is also important for a manager not only to focus on where the other firms compete but how they compete as well. This issue deals with how competitors use their skills to position themselves. This point is closely linked with the one above as when a firm has outlined and evaluated the visible and invisible functions of its rivals, it has a more precise knowledge on its competences. Zahra and Chaples (1993) underline the fact that forecasting rivals’ decisions and intent is not easy, but managers have to focus on what their rivals can do with their skills. An example is Motorola and Texas Instrument which used new technology to compete on different market segments whereas their competitors thought they would not extend further than their initial market segment.

Related to the competences of the firms and on how they compete, some prominent weaknesses that need to be addressed is that models are often over simplified and can be applied to simple market structure, with industries having single products. Nowadays with the dynamic environment, companies diversify themselves, compete on more diverse segments and can have different strategies according to the countries in which they are implemented, the type of customers etc, which means that models have to be applied to the different business units of the rivals. The frameworks also do not directly underline why and how some companies manage to sustain their position and others do not. They do not also provide any precise advice at the end of the analysis. According to Fleisher and Bensoussan (2003), “analysis will not give the decision maker specific answers”, but provide simple advice such as carrying on the activity, stopping it or diversifying it.

In analysing competition, managers can have faulty assumptions about their competitors. It means that what they think about another one in term of behaviour, actions etc can not reflect the reality (anymore). However, assumptions are made because data about competitors are not always available or up to date or because of the companies fail to see the need to make constructive assumptions: for instance, Zahra and Chaples (1993) underline the possible dogmatic belief of some managers and/or the influence of the organisational culture and /or the way companies are viewing competition. They give an example of the US producers assuming that the only advantage their Japanese competitors had over them was low wages. They then relocated part of their production in order to gain this advantage. They ignored the technological and production improvements which formed the actual basis of their advantage.

Another factor that needs attention is the data collected, their analysis and interpretation. Managers may focus on collecting too much data, leading to the problem of identifying which are relevant for the analysis and which are not. The result of this process is also a problem in analysing and interpreting them. This leads to a confusing and unclear analysis. Liu (1998) states that “the increased availability of information threatens to exceed our abilities (especially intuitive managing and understanding capabilities) to quickly sort and choose, to find the right information, and more importantly, to absorb and understand properly its implications.” This weakness is a consequence of a poor definition of the industry boundaries and rivals’ competences. Zahra and Chaples (1993) give the example of Procter and Gamble that tested and retested over and over their new cookies even when the initial tests were successful. They then had to face stronger competition when they launched the products because of the loss of time.

Keeping in mind the above flaw, it is essential that the focus and the scope of the analysis should be in accordance to the different models, taking into consideration constraints such as time, money and skill that vary with different organisations and models. If not evaluated, they can clearly limit the extent of the analysis (even if they already do it as time and money are limited resources), which can have a relevant impact on the work. Prescott and Grant (1988) in A Managers’ Guide for Evaluating Competitive Analysis Technique evaluate the different techniques a manager can use along several dimensions. Their table sums up the different criteria among them the constraints cited above. Resources required for the different models vary depending on the requirements of the models and their decision criteria. It is important to evaluate them in order to avoid stagnation and obtain qualitative results.

As a conclusion, analysing competition is not a simple task. If well orientated, its benefits are numerous as it enables a better understanding of the business environment; however managers have to be vigilant when doing so. Some weaknesses come from the definition of the different variables and their interpretation of the data collected. If they fail in precisely setting some basis, it will lead to an incomplete and/or inaccurate analysis of the situation, their industry and competitors, thus leading to incorrect decisions (some of them can be disastrous for the future of the company) as well as loss of time and money. Weaknesses also come from the models. They require current and specific data which is not easily available.

Despite the advantages a company gains by analysing competition, Harari (2004) states that competitive analysis must not hypnotize managers. “The successful organisation conducts brief periodic scans that include what today’s competitors are doing, but the primary attention is on doing whatever it takes to lead the race.”

References and bibliography

E-journals

Bagshaw M. (2000) Why knowledge management is here to stay in Industrial and Commercial Training, volume 32, issue 5
Clark B.H. and Montgomery D.B. (1999) Managerial Identification of Competitors in Journal of Marketing, volume 63, issue 3
Feurer R. and Chaharbaghi K. (1994) Defining Competitiveness: A Holistic Approach in Management Decision, volume 32, issue 2
Flower E. (2004) Competition, Technology and Planning: Preparing for Tomorrow’s Library Environment in Information Technologies and Libraries, volume 23, issue 2
Harari O. (1994) The hypnotic danger of competitive analysis in Management Review, volume 83, issue 8
Liu S. (1998) Strategic scanning and interpretation revisiting: Part 1: understanding the concept and context of strategic scanning in Industrial Management and Data Systems, volume 98, issue 7/8
MacAvoy R.E. (1983) Corporate Strategy and the Power of Competitive Analysis in Management Review, volume 72, issue 7
Panagiotou G. (2003) Bringing SWOT into focus in Business Strategy Review, volume 14, issue 2
Prahalad C.K. (1995) Weak Signals Versus Strong Paradigms in Journal of Marketing Research, volume 32, issue 3
Prescott J. and Grant J (1988) A Manager’s Guide for Evaluating Competitive Analysis Techniques in Interfaces, volume 18, issue 3
Zahra S. and Chaples S. (1993) Blind spots in competitive analysis in Academy of Management Executive, volume 7, issue 2