Competitor Analysis the GE Way

5/18/2018 Competitor Analysis the GE Way

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Competitor analysis: the

missing link in strategy

William E. Rothschild

No top m anager w ould deny that com petitor focus is an

essen tial e lemen t in developing corporate strateg y in today s

cut and thru st for larger shares of often dim inishing m ark ets.

Yet al though m any com panies go throug h the m otions of

keeping an eye on com petitor m ov es, the real m essa ge behind

th e data they co llect is all to o often m issed . In thi s article

GE strategist su gg ests what question s to ask ahou t

com petitors, how to ohtain the answ ers and how to interpret

tho se answers to the best strategic ad van tage .

Over the past two decades, American companies have experienced

dram atic changes in their dom estic com petitiye enyironm ent. Sm al

specialist competitors have exitedorbeen swallowed up by larg er

multi-industry companies resultinginoften stron ger , financially

solvent, butmore unpred ictable com petition. Foreign andmu lti-

national competitors have taken aim at the critical and more

profitable US markets, which are easier to penetrate and pivotal to

worldwide success, while building andm aintaining in their own

home markets barriers

to

the entry

of

US companies. T his foreign

invasion has taken many forms, including importing, acquiring US


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eglected task

All these facts are well known to readers of the business press. Yet

competitor analysis has remained a largely neglected managerial

task. Far too little emphasis has been placed on answering such

:>asic questions as:

Who is the competition now and who will it be in the future ?

W hat are the key com petitors' strateg ies, objectives and goals?

How important is a specific market to the competitors and are

they committed enough to continue to invest?

W hat unique strengths do the competitors have?

Do they haye any weaknesses that make them vulneral)le?

What changes are likely in the competitors' future strategies?

What are the implications of competitors' strategies on the

market, the industry and one's own company?

On the surface these questions appear to be logical and straight-

forward. Yet; th e answ ers ar e usually lack ing , for a variety of

reasons:

Overconfidence

M any m anag ers who lead profitable businesses tend

to be overconfident. Because of their past success in winning the

competitive battle, they begin to believe either that the competitor

S inept or that they are superior.

onfusion Some business managers are simply confused. They are


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Concern A third cause of ineffectiye competitor review is fear that

the company will be forced to employ illegal or unethical tactics to

obtain the data it seeks. This concern is completely unwarranted:

the strateg ic data required to make effective analyses are available

from legal, ethical and relatively conven ient sou rces. The desire to

tell the world and influence investors usually leads competitors to

broadcast their investment priorities and strategy in a variety of

ways.

Another concern that sidetracks management from competitor

review is that intelligence will be misinterpreted, resulting in

wrong decisions. Of course, this is a risk in any analysis or plan ning

- data can be misinterpreted, and misinterpretation can lead to

failure. But a leader must assume some calculated risk.

o

a r e t h e y?

Now let us retu rn to our list of basic que stion s. The first to consider

is deceptively simple: Who is the competition now? Who will it be

fiye years from now?

Covering all possibilities Competition for your customers' dis

cretionary and nondiscretionary dollars comes in many shapes and

forms; there are many ways to satisfy the customers' needs and

wa nts in the a reas you serve. So we are led to the further qu estion s

' 'W ha t is the customer bu yin g? and W ha t are all the ways the

custom er can be satisfied in achieving this need or w a n t? If a

consumer wants entertainment and you are in the television

market, you should consider all the forms of entertainment on

which a consumer might choose to spend his money: radio, stereo

home m ovies, hobb ies, games, in-home sp orts, and so on. (The t ru

scope of competition here was painfully learned by radio consol

manufacturers when television entered the scene.)

Industry profile A second way to examine competition is to draw


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How the

competition changes

omp ny

type

Single industry

Multi industry

Conglomerate

Marke t focus

US Foreign

MNC

A

B

D

E

F

G

H

J

reseni

Single industry

Multi industry

Conglomerate

us;

Foreign

MNC

E

F

G

B

C L

O K

H J

us

A

Foreign

M N C


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Single industry

should be classified as domestically focused, participating abroad

on a selective or opportunistic basis: foreign focused; or multi-

national worldwide. Combining these two assessments of company

type and market focus provides a graphic display that can be used

to describe the competitive position in the industry in the past and

the present and to anticipate likely changes in the future.

Exhibit I shows the changes that have occurred oyer the past fiye

years and that may take place oyer the next fiye-year period in one

industry. Fiye years ago, this industry included a number of single

indu stry spe cialists companies A to D) th at acco unted for approx

imately 50 percent of the m ark et; the othe r major partic ipan ts w ere

diyisions of large r multi-indu stry companies E to H ); m ad dition

the Japanese were beginning to make their moye, with two com

panies I and J) leading the way. Today, only one competito

remains in the single-industry category, and eyen this competito

is under attack and could be forced to merge or sell out to another

company. A number of the companies baye been acquired or haye

merged into Japanese and European companies. Thus, the com

petitiye game in this industry has significantly changed and may

continue to do so, with the possibility that two companies will exi

completely in the next few years.

Change of role A

third yiew of competitors focuses on potentia

changes by reviewing the total system of interactions from supply

to user. Could any of the participants in the system expand thei

role and become competitors? The suppliers of components o

materials, for instance, may decide to integrate forward and

compete with you - or distributors may decide to integrate back

ward. For example, when Ford announced th at it was discontinuing

the manufacture of Philco appliances, Philco distributors were lef

empty-handed. Since the other major producers already had in

dependent wholesalers, or sold direct, they were faced with

choice - get a new product line or quit. They decided they would

band together, form a buying pool, and obtain a private label line


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acquired component manufacturers and became competitors in the

components field.

What are they up to

Having established the identity of the major competitors, the next

question to ask is: What are the major competitors' investment

priorities and objectives? A listing or graphic display of the

competition and major competitors isn't sufficient. It is important

to understand their total corporate situation and intentions, a task

that will yary in complexity depending on whether a competitor is

a spe cialist, diyersified, dom estic, or worldwide in scope. In essence,

we wish to know th e com petitors' total financial situa tion , deter-

mine whether they haye profitable and balanced portfolios, and

identify any serious problems they may have and the opportunities

they are trying to pursue.

Single-industry specialists are the easiest to evaluate since they

are dedicated to one industry. Often they are ' 'niche -oriented and

distinguish themselves by innoyation, quality, or dependability.

Further, they are often led by an aggressive, strong-willed, even

autocra tic entrepren eur which may be both a strength and a

limitation.

Multi-industry diversified companies have a variety of business

options. Each business should have its own investment and cor-

porate purpose, and it is important to understand each one.

It IS useful to asce rtain how a com petitor d escribes each of its

businesses in order to determine th e b alance and viability of its to tal

portfolio. Is the competitor trying to grow in too many segments

simultaneously? Does it haye a sufficient number of earnings and

cash generators? Will tbe total achieve desired results? Multi-

mdustry c-ompanies rarely have management depth sufficient to

lead all their businesses effectively and, therefore, often appoint


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profits through low-cost government loans, tax concessions, o

infiated profits on government projects.

The objectives and investment priorities of multinational com

panies are even more difficult for an American domestic compan

to comprehend. Multinational companies may sacrifice profits i

one country to penetrate or gain position while using profits from

another country to support this aggressiveness. They have th

ability to work with governments, select the least costly source o

supply, and even negotiate favorable trade concessions.

ndustry commitment

Next, you should consider how important your industry is to th

com petitor and w hat its strategic p urpose is. It is essential to asses

a com petitor's overall goals, bu t you should try to p inpoin t you

competitor's purpose in your own industry. Its commitment may b

based on rational judgments or on emotions. On the rational side

it may be the anticipation of growth, strong customer needs, o

some unique product or market strength - i.e., your industry ma

be im po rtant to the com petitor's future grow th, earnin gs pe

formance, or cash-flow position. A rational basis is normally to b

preferred, since the competitor's behavior is most likely to b

consistent and logical. For example, if the competitor is dependin

on your industry to finance its other ventures, then it will figh

hard to protect this cash-flow position.

Often, however, emotions play a significant part in decision mak

ing. The competitor's commitment may be based on such shallow

reasons as : Th e CEO grew up in the indu stry and is emotionall

attached to it , 'T h e business is the core from which the tot

corpo ration gr ew , or T he indu stry is considered glamorous an

ex citin g. Investm ents are consequently made th at are unjustifie

or even detrim ental

such as adding capacity when the re is alread

overcapacity, introducing new expensive modifications prem


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turely, or cutting prices to gain share in a declining market.

If the competitor wishes to gain share by innovation, does it have

the proper skills to do the job? These will be different from those

required to hold position, maximizing earnings via a low-cost

position. Thus one must look at critical resources required by a

competitor and ask if it can obtain what is required in both

quantity and timing.

The major resource areas that should be assessed for each com-

petitor are management, innovation, financing, production and

marketing.

Management Who are the key leaders and decision makers? How

quickly can decisions be made? Is the management team know-

ledgeable or experienced in the industry? Are they risk takers? Is

there depth in the management ranks?

The answers to these questions will reveal managerial skills,

flexibilities, values and longevity, thus enabling you to determine

the competitor's managerial fit with the strategy it is pursuing. If

the strategy requires flexihility and rapid decision making, but the

management team is risk-ayerse, slow and deliberate, the com-

petitor vail have a major problem in executing its desired strategy.

If the strategy is aimed a t m aximizing cash flow by a slow harv est,

but the management is aggressive and growth-oriented, then there

is a serious mismatch that may be unresolvable,

Innovation

Assessment here must identify the driving forces he-

hind th e com petitor 's innoy ation record. It is not un usu al to find a

few key individuals as the driving forces behind innovation or to

find the entire compj^ny's success built upon a few key patents. In

svich a case, the competitor's ability to continue this track

record must be determined. Financing of innovation should also be

studied to find out where the financing came from and how con-

sistent it has been.


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Here one must attempt to understand the competitor's ability t

generate financing both internally and externally at the right tim

and in sufficient quantity. If a strategy requires large but cyclic

volumes of cash and the competitor isn't able to obtain them, th

strategy won't be successful. If a competitor wants to increase it

worldwide sales but isn't able to provide long-term, low-co

financing, its results will be disappointing.

Production. This requires an evaluation of efficiency, cost reduc

tion, and capacity and supply situations, along with an understand

ing of the competitor's total resources for production - human an

material. Some useful questions to probe are:

1 Does the com petitor m anufacture in a high- or low-cost labo

area?

1 Is its plant and equipment efficient?

T Is its flexibility or response to market demands inhibited by to

much integration, capital intensity, or overdependence on on

technology?

T How sensitive is its break-even to capacity utilization?

\ How skilled is it in m aintain ing q uality ?

II How is it affected by

OSH

and EEO regulations?

Marketing. How do the competitor's marketing abilities compar

to the requirem ents imposed by its strategy or m ark et? Some strate

gies require the ability to anticipate and/or create customer needs

while others are more dependent on providing pre- and post-sal

service. If the key skills aren't available, the competitor will hav

less than optimal resu lts. M arketing skills, like any other reso urce


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must be carefully nurtured and preserved and thus require con

' h i

Checklist for competitor resource analysis

Management

Key people

Objectives and

priorities

Values

Reward

systems

Decision

making

Location

Type

Speed

Planning

Type

Emphasis

Time span

Staffing

Longevity and

turnover

Experience

Replacemern:

policies

Organization

Centralization

Functions

Use

of staff

Innovation

Technical

resources

Concepts

Patents and

copyrighls

Technological

sophistication

Technical

integration

Human

resources

Keypeople and

skills

Use of external

technical groups

Funding

Total

Percentage o

sates

Consistency

overtime

Internally

generated

Government-

supplied

Financing

Long term

Debt/equity ratio

Cost of debt

Short term

Line of credit

Type of debt

Cost of debt

Liquidity

Cash flo w

Days

of receivables

Inventory turnover

Accounting

practices

Human

resources

Keypeople and

skills

Turnover

Systems

Budgeting

Forecasting

Controlling

Product ion

Physical

resources

Capaci ty

Plant

Size

Location

- A g e

Equipment

- A u t o m a t i o n

- M a i n t e n a n c e

Flexibility

Processes

Uniqueness

Flexibility

Degree

of

integrat ion

Human

resources

Key people and

skills

Workforce

-Skills mx

Unions

Turnover

Marketing

Sales force

Skills

Size

Type

Location

Distribution

network

Research

Skills

Type

Service and

sales policies

dvertising

Skills

Type

Human

resources

Key peopleand

skills

Turnover

Funding

Total

Consistency

ove r t ime

Percentage

of sales

Reward systems

nl l r iHi 'd t ? ' ' V ^ ' ^ ^^l ^

f

businesses (sizes, priorities, importance to company) and resources

provided by parent company.\ f foreign, examine national prioritiesof home country, degree of governm ent

own ership, supports, incentives, hom


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ources of competitor information

Public

Trade professionals overnm ent Investors

W h a t

compet i t o rs

say about

tf iemselves

What o thers

say about

them

Advertising

Promotional

materials

Pressreleases

Speeches

Books

Articles

Personnelchanges

W an t ads

Books

A rticles

ase

studies

Consultants

Newspaper reporters

Environmental

groups

Consumergroups

Unions

W ho's Who

Recruitingfirms

Manuals

Tech nical papers

Licenses

Patents

Courses

Seminars

Suppliers/vendors

Trade press

Industry study

Customers

Subcontractors

SE reports

FIC

Testimony

Lawsuits

Antitrust

Lawsuits

Antitrust

S tate/federal

agencies

National plans

Government

programs

Annual m eetin

Ann ual reports

Prospectuses

Stock/bond

issues

Security analy

reports

Industry studie

Creditreports

The key is to develop

a

profile of com pe titors , test for valid ity a

identify areas of agreement and disagreement.

It

is surprising j

how muchisknow n and w hat can be deduced from com petito

actions. Exhibit III outlines these sources of data.

mplicat ions

o

change

Another question that must be considered is: What could cau

a change

in

com petitors' p riorities, strateg ies

or

resources? A

significant change

in the

external ' 'ma cro environment

h

government, society,

or

the economy) or

in

the internal m icr

environm ent ca n cause a change in competitive behavior. L ikewi

the acquisition

of a

company may strengthen

or

weaken

it

some cases, the mergeris sodisruptive th at it causes the co

petitor actually

to

lose streng th).

At

other times,

a

competi


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petitor s bu t, because they fail to interr elate their assessm ents, they

never see the consequences of one competitor interacting with

another.

The importance of this composite picture is seen in the case of one

industry segment, a high break-even business requiring high

capacity utilization. Four of the five competitors were aiming to

grow an d the leader had vowed to hold its position, so a toug h ba ttle

was expected and a lot of red ink was likely to flow. Two of the

companies were planning to add capacity, which could mean there

w^ould be excess capacity. Investment was likely to be heavy,

rang in g from 90 million to 250 million over five ye ars . The

combination of aggression, possible excess capacity and high

capital investments meant the going would be expensive.

The final step is to determine how the competitors can affect your

company and the worth of your strategy. If a company expects to

compete in the segment just described but doesn't wish to expend

heavily on capacity, then it must learn to specialize, or risk

extinction.

As an aid in determining and reviewing strategy, competitor

analysis is increasing in complexity and importance. If it is to have

the influence it deserves, top managers must insist on a disciplined,

comprehensive and strategically focused effort to assess each

major competitor and the total interaction between competitors

and the corporation.


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Competitor Analysis the GE Way

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