If you are writing a business plan, hopefully by this point you’ve conducted thorough market research to identify industry trends and identified the target market for your business. Now it’s time to conduct a competitor analysis. This section is included in virtually every business plan, and the information you include will depend on several factors such as how many competitors there are, what they offer, and how large they are in comparison to your company.
What is a Competitive Analysis?
A competitive analysis is a type of market research that identifies your competitors, their strengths and weaknesses, the strategies they are using to compete with you, and what makes your business unique. Before writing this section it’s important to have all the information you collected during your market research phase. This may include market data such as revenue figures, cost trends, and the size of the industry.
Why Do You Need the Competitive Analysis?
If you are planning to raise capital, the investor will require a business plan that includes the competitive analysis section. This section will also come in handy if your company is considering increasing prices or adding new products and services. You can use the information you find to determine how well-positioned your business is to perform in the competitive landscape.
3 Steps to Writing a Competitive Analysis
The steps to developing the competitive analysis section of your business plan include:
- Identify your competition.
- Select the appropriate competitors to analyze.
- Determine your competitive advantage.
1. Identify Your Competition
To start, you must align your definition of competition with that of investors. Investors define competition as to any service or product that a customer can use to fulfill the same need(s) as the company fulfills. This includes companies that offer similar products, substitute products, and other customer options (such as performing the service or building the product themselves). Under this broad definition, any business plan that claims there are no competitors greatly undermines the credibility of the management team.
When identifying competitors, companies often find themselves in a difficult position. On one hand, you may want to show that the business is unique (even under the investors’ broad definition) and list few or no competitors. However, this has a negative connotation. If no or few companies are in a market space, it implies that there may not be a large enough base of potential customers to support the company’s products and/or services.
2. Select the Appropriate Competitors to Analyze
Once your competition has been identified, you want to consider selecting the most appropriate competitors to analyze. Investors will expect that not all competitors are “apples-to-apples” (i.e., they do not offer identical products or services) and therefore will understand if you chose only companies that are closest in nature. So, you must detail both direct and, when applicable, indirect competitors.
Direct competitors are those that serve the same potential customers with similar products and services. If you sell your products or services online, your direct competitors would also include companies whose website ranks in the top 5 positions for your same target keyword on Google Search.
For example, if you are a home-based candle-making company, you would consider direct competitors to be other candle makers that offer similar products at similar prices. Online competitors would also include companies who rank for the following keywords: “homemade candles”, “handmade candles”, or “custom candles.”
Indirect competitors are those that serve the same target market with different products and services or a different target market with similar products and services.
In some cases, you can identify indirect competitors by looking at alternative channels of distribution. For example, a small business selling a product online may compete with a big-box retailer that sells similar products at a lower price.
After selecting the appropriate competitors, you must describe them. In doing so, you must also objectively analyze each of their strengths and weaknesses and the key drivers of competitive differentiation in the same market.
For each competitor, perform a SWOT Analysis and include the following information:
- Competitor’s Name
- Overview of Competitor (where are they located; how long have they been operating)
- Competitor’s Product or Service
- Competitor’s Pricing
- Estimated Market Share
- Potential Customers (Geographies & Segments)
- Competitor’s Strengths
- Competitor’s Weaknesses
By understanding what your competitors offer and how customers perceive them, you can determine your company’s competitive advantage against each competitor.
3. Determine Your Competitive Advantage
Perhaps most importantly, you must describe your company’s competitive advantages over the other companies in the space, and ideally how the company’s business model creates barriers to entry. “Barriers to entry” are reasons why it would be difficult for new companies to enter into or compete in the same market.
For instance, you may have a patent that provides value to your customers and makes them less likely to switch suppliers, which protects your business from potential competitors. Or, you may have more resources than the competition and thus be able to provide superior customer service.
Below is a list of areas in which you might have a competitive advantage:
- Size of the Company – Large companies have more resources and can usually offer lower prices than smaller businesses. This is a significant barrier to entry, as starting a small business and competing with a larger company may be difficult.
- Product or Service Differentiation – If your product or service is unique in some way, this will make it less likely that customers will switch to a competitor.
- Experience & Expertise – Experience and knowledge are valuable attributes that can help differentiate you from the competition.
- Location – If you are located in an area where there is high demand for your product or service, this can be a barrier to entry because competitors will not want to open new locations.
- Patents & Copyrights – Protecting intellectual property can prevent others from entering the same market and competing with your company.
- Brand Recognition – Customers are loyal to brands they have come to trust, which protects the company from new competitors.
- Customer Service – Providing excellent customer service can help you retain customers and prevent them from switching suppliers.
- Lowest Cost Offerings – If you can offer a lower price than your competitors, this makes it more difficult for them to compete with you.
- Technology – New technology that enables you to provide a better product or service than your competitors can be an advantage.
- Strategic Partnerships & Alliances – Collaborating with a company that your customers want to work with can help keep them from switching.
- Human Resources – If you have a highly skilled and talented workforce, it can be difficult for competitors to find and employ the same skills.
- Operational Systems – Strong operational systems that lead to greater efficiencies can protect your business from the competition.
- Marketing Strategy – Investing in strong marketing campaigns can make your business difficult to compete with.
For instance, you could say that your [enter any of the bullets from above] is better than your competitors because [insert reason].
The competitive landscape is one of the most important considerations in developing a business plan since it sets the stage by providing information on past and current competitors and their respective strengths and weaknesses. A strong understanding of the competitive landscape is needed before you can develop a strategy for differentiating your company from the competition.
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