Whether a company is long established or in its start up phase, a key strategic issue is its competitive advantage the factor that gives it an edge over its competitors. The only way to establish, understand, and protect competitive advantage is to study the competition. Who is competing with the company for its customers’ time and money? Do they sell competitive products or potential substitutes? What are their strengths and weaknesses? How are they perceived in the market?
For Ray Kroc, the US entrepreneur behind the success of fast-food chain McDonalds, this reportedly involved inspecting competitors’ trash. But there is a range of more conventional tools to help companies to understand themselves, their markets, and their competition.
SWOT analysis
The most popular such tool is
SWOT analysis. Created by US
management consultant Albert
Humphrey in 1966, it is used to
identify internal strengths (S) and
weaknesses (W), and to analyze
external opportunities (O) and
threats (T). Internal factors that can
be considered as either strengths or
weaknesses include: the experience
and expertise of management; the
skill of a work force; product quality;
the company’s financial health; and
the strength of its brand. External
factors that might be opportunities
or threats include market growth;
new technologies; barriers to
entering markets; overseas sales
potential; and changing customer
demographics and preferences.
SWOT analysis is widely used
by businesses of all types, and it is
a staple of business management courses. It is a creative tool that
allows managers to assess a
company’s current position, and to
imagine possible future positions.
A practical tool
When well-executed, a SWOT
analysis should inform strategic
planning and decision-making. It
allows a company to identify what
it does better than rivals (or vice
versa), what changes it may need to
make to minimize threats, and what
opportunities may give the company
competitive advantage. The key to
strategic fit is to make sure that the
company’s internal and external
environments match: its internal
strengths must be aligned with the
external opportunities. Any internal
weaknesses should be addressed
so as to minimize the extent of
external threat.
When undertaking a SWOT
analysis, the views of staff and
even customers can be included it should provide an opportunity to
solicit views from all stakeholders.
The greater the number of views included, the deeper the analysis
and the more useful the findings.
However, there are limitations. While
a company may be able to judge its
internal weaknesses and strengths
accurately, projections about future
events and trends (which will affect
opportunities and threats) are
always subject to error. Different
stakeholders will also be privy to
different levels of information about
a company’s activities, and therefore
its current position. Balance is key, senior managers may have a full
view of the company, but their
perspective needs to be informed
by alternative views from all levels
of the organization.
As with all business tools, the
factor that governs the success of
SWOT analysis is whether or not
it leads to action. Even the most
comprehensive analysis is useless
unless its findings are translated
into well conceived plans, new
processes, and better performance.
Market mapping
A slightly narrower but more
sophisticated tool for analyzing a
company’s position and competition is “market mapping” (also known as
“perceptual mapping”). Market maps
are diagrams that represent a market
and the placement of products within
that market, providing a visual
means of studying the competition.
The process is useful both internally
(to help an organization understand
its own products) and externally (to
chart how consumers perceive the
brand in relation to the competition).
To draw up a market map, a
company identifies several consumer
purchase decision factors that
stand in opposition to one another.
In the fashion market, an example
might include “technology” vs.
“fashion,” and “performance” vs. “leisure.” Additional factors could
include the item’s price (high vs.
low), quality of production (high
vs. low), stylish vs. conservative,
or durable vs. disposable. Two of
these dimensions, or opposing
pairs, are then plotted onto a
horizontal or vertical axis.
Based on market research or the
knowledge of managers, all of the
products within a particular market
can be plotted onto the map. The
market share of each product can
be represented by the size of its
corresponding image on the map,
but more often, analysts choose to
simply make a rough sketch of the
market, ignoring market size.
A company may choose to
compile several market maps, each
of which depicts a different set of
variables, and then analyze them individually and in combination to gain an overall view of the
company’s position in the market.
Market mapping
plots opposing qualities of products
along two axes. By identifying the two main oppositional
factors for any product, it is easy to see gaps in the market.
Finding the gap
The goal of market mapping is
to identify opportunities where a
company can differentiate itself
from its competitors. These are
areas where the company offers
unique value, and they can be used
to inform marketing messages. The
map will also reveal overcrowded
segments, which signify
heightened competitive threat.
For a new start up, a market
map can be used to identify a
viable gap in the market a good
place to position a company when
it is struggling to establish itself.
Established businesses can use
market mapping combined with
SWOT analysis to discover
opportunities and decide whether
the company has the strengths to
exploit one of those opportunities.
The market map helps to inform
the strategy (the need to reposition
LEISURE a product away from competitors’offerings, for example) and the
tactics (moving from conservative
to sporty, for example) that will
help the company to achieve
that strategic goal.
Market analysis such as this may,
for example, have helped luxury
Singaporean tea shop TWG Tea
to identify an opportunity in the
market. Launched in 2008, TWG
targets a slightly older, wealthier
customer base than coffee shops
and other “lifestyle” cafés. TWG
has opened new locations across
the world, based on studying the
competition, identifying a market
gap, and designing its products
and services to fill that gap.
Internal focus As a company grows it might choose to draw up a map including just its own products. Analysis of the results can help identify any overlap between different products (informing decisions about which products to drop, and which to concentrate research and development and marketing spend, for example). It can also be used to ensure that the company’s marketing message stays on track, helping to avoid strategic drift.
Perceived as a technical
performance product, Speedo,
for example, needs to ensure that
its marketing reflects that view;
a campaign that promotes Speedo
as a fashionable label would risk
confusing customers and could
damage the brand.
The key to successful market
mapping is market research. While
it can be useful to compare internal
and external perceptions of a
product, and the products of the
competition, it is the customers’
views that matter most. When based on such data, even though
managers may disagree, the market
map cannot be “wrong” it simply
represents, for better or worse,
how the brand is perceived. The
challenge for management is to use
the map, and knowledge of internal
strengths and weaknesses, to plan
the appropriate strategic response.
Both SWOT analysis and market
mapping allow a company to better
understand itself, its market, and,
most importantly, the competition.
Equally, being aware of weaknesses
can help avoid costly strategic
mistakes, such as producing overly
ambitious products or making an
entry into a crowded market
position. An appreciation of the
opportunities and threats of the
market, and the relative and
shifting positions of competing
products, is essential to long-term
successful strategic planning. To
plan where you are going, it helps
to know where you are and where
your competitors are too.
