Strategy is critical. It is every organization’s North Star, regardless of industry, market or customer base; it sets your direction. It determines your priorities, the allocation of your resources and the myriad decisions that you make every day.
Blockbuster, Kodak, Yahoo, Nokia … the past 20 years are littered with big name companies that have seen their fortunes flounder on the back of subpar strategic decisions. Meanwhile, the likes of Google, Apple, Tesla and Amazon have gone from strength to market dominance with strategies buoyant and resilient enough to withstand disruption, global crises and the unwavering march of time.
So what makes one strategy future-proof and another fail? What makes one organization more adept than another at sustaining competitive advantage, entering a new market or driving a new initiative, while continuing to create unique value and position itself distinctively in its field?
In this series, we detail four foundational analytical tools to help any organization future-proof its strategy.
Consider this scenario: Kate is making money selling T-shirts outside the University of Virginia basketball arena. Within days, however, other vendors show up, spot the opportunity and start selling similar T-shirts. As the supply of T-Shirts ramps up, all the vendors now have to drop their prices to compete. The profits from selling T-Shirts outside the arena diminish.
For Kate to have thrived, there would have had to be some barrier to competition in place that would stop other vendors entering her market and imitating her strategy. This could have been restrictions on permission to sell outside the arena — a license or permit, say. Copyright and trademarks could also have served as barriers to imitation of her designs.
Sustaining your stream of economic profits in the future depends on there being certain barriers to entry and imitation to reduce competitive pressures further down the line. You need a thorough strategic analysis that identifies and analyzes your direct competitors to forecast your future cash flows and calculate an expected market value for your business.
The Competitor Analysis Tool is a critical starting point for thinking about the competitive dynamics in your industry and how other firms compete for market share.
This step-by-step framework empowers you to:
- Assess your own competitive advantage
- Predict how your competitors might respond to your strategic actions
- Spot opportunities to influence rivals’ behaviors to your advantage
- Make better strategic decisions
How do we use it?
Step 1: Identify competitors.
Not every player in your industry will be a direct competitor. Compare a Kia sedan to a Porsche. Both are types of car, but they rarely compete for the same type of customer or customer need.
There are two common ways for you to identify direct competition.
The customer’s viewpoint: Look at the industry and group all firms providing a similar product or service to consumers. The larger the increase in demand, the more two products are substitutes and therefore rivals. Between pairs of products, try to identify the cross-price elasticity — the relationship between the change in price for one good and the demand for another. For example, an increase in the price of butter may increase the demand for margarine.
The company’s viewpoint: Carry out a detailed analysis of industry players and group firms with similar strategies as competitors. Take the U.S. steel industry. Here you could create three strategic groups: large steel mills, minimills and foreign importers. By clustering competitors into strategic groups, you can prioritize your intelligence gathering, focusing first and foremost on those rivals most closely related to your firm, while also being cognizant of more distant competitors.
Step 2: Gather intelligence.
Now you need to collect information to get useful insights into your competitors. This could include shareholder reports or SEC filings, press releases, media coverage, or events and interviews with executives or analysts. Study recent performance, existing strategy and organizational capabilities by looking at your competitors’ hiring patterns, research and development activity, capital investments and strategic partnerships. Log your findings in a simple spreadsheet.
Step 3: Analyze rivals.
The final step is to analyze the competitive positions of your rivals and compare their relative strengths and weaknesses.
Think about two things: First, what are the objectives and operating assumptions driving your competitors? And second, what are their capabilities? How do their strategy and resources enable them to compete — both now and in the future?
Competitor analysis can provide invaluable insights into the longer-term sustainability of your own firm’s competitive advantage, as well as how your rivals may respond to specific strategic decisions and actions you take further down the line.
The preceding is drawn from Future-Proof Your Strategy: 4 Essential Tools, a white paper that details foundational tools that can be used in strategic analysis — oftentimes the difference between a company’s success, resilience and failure.
Follow-up entries on Darden Ideas to Action will address Tools 2–4, tackling environmental analysis, capabilities analysis and scenario planning.