Creating a Competitive Analysis

Your competitors are those businesses who want to sell your target customers the same types of goods you want them to buy from you.
Don’t think you can skip this step if no one does exactly what you do. If you don’t identify competitors, your bank or investors may come to the conclusion that there is no market for what you are proposing.

Each industry is different in terms of who your real competitors are. In some industries there are few but very dominant business – such as the petroleum industry. The “independent” gasoline station is all but nonexistent, with the major players being Chevron, Texaco, Mobil and Shell. However, if you were in the Pet Supplies industry, you would find that there are large companies that are dominant nationally such as PETsMART and Petco, but with many small local pet stores still in existence. Finally, if you were to decided to go into the dry cleaning business, you would find virtually no national or regional competitors, but many, many small businesses confined to a single geographical area.

If there are national, and regional companies dominant in your industry, even if you don’t feel you compete directly with them, they should still be analyzed as competitors. Not to mention Starbucks in a business plan launching a local coffee house would signal to the reader that you aren’t at all savvy about your market. Using our Pet Supply Stores example, you might say something like this: “ The two dominant companies in the Pet Supply Industry are PETsMART and Petco. Petco has approximately 600 stores nationwide and is privately owned. PETsMART, based in Phoenix, also has approximately 600 stores nationwide, is publicly traded, and employees about 20,000 nationally. Both stores have a presence in the metropolitan area I serve, with Petco approximately 10 miles from my store and PETsMART about 13 miles away. By having a higher end selection catering to the demographics of my immediate area, I can successfully compete with the larger chains.”

General Competitor Comparisons

Besides the overall data, when you can obtain it, include specific data comparing competitors’:

• company structure (do they have good leadership, are they well financed, what are their revenues, who owns the company, how big are they, are they growing or shrinking?)
• marketing efforts (their pricing, distribution strategies, locations), and
• customer service (reputation, ease of buying).

Try the simplest methods of accessing the competition first: look them up in the yellow pages, find them on the Internet, and call or visit their stores. Also check for articles written about them in trade periodicals or newspapers. Read their advertisements, get their promotional e-mails.

Don’t ever use rumor or hearsay about competitors in your business plan - stick only to facts you can document. And give the competitors their due - they must be doing something right to be in business. Listing their strengths will make your business plan more credible than if you only list their weaknesses. You might provide this information in the plan with a chart, such as the worksheet at the end of the chapter, or by doing bulleted items in the plan. You don’t need a lot of detail.

As you grow your business, keep ongoing files on each of your competitors. File every advertising piece or other information you get on them. You will refer to it often as your business grows and you need to reevaluate your position compared to that of your competitors.

Specific Product or Service Comparison Data

The crux of the competitor data is knowledge about the competitors’ product or service offerings, and their strengths and weaknesses. What do you know, as an insider to the industry that defines the hidden opportunity in your business? What weaknesses in product or service do you know about that represent the next big opportunity in the industry? For years, everyone using a typewriter knew that you had to do it right the first time, because mistakes were very easy to detect. We used white paint to cover up mistakes, and finally had self-correcting typewriters to use. But what if you wanted to move a whole sentence or take out a paragraph – you had no choice but to start over. Word processing equipment and finally personal computers leapfrogged over this problem and eliminated many others as well.

What is the obvious or maybe not so obvious need in your industry? Most new products or services are not those that revolutionize the industry. Most are just a cut above the last generation, but make enough of a difference to take away market share from competitors. And that difference could be your quality, value for the price, customization, location, brand cache, personalized service, ambiance of the store or the packaging, user friendliness, or new technology.

Be as detailed and specific as you can in this section because financers want to know (and want to know that you know) what is underneath all the hype in your plan. Do you really have a product or service to offer that will stand the test of time against competitors who already dominate the market? What is it that will allow you take market share from those who have come before you? This is where you take your product or service description that you developed in a previous chapter and stand it toe to toe with the other players in your industry.

Describing the Industry Your Business Is In

Every business is part of a larger industry. An industry is made up of similar businesses such as restaurants, dry cleaners, real estate, music stores, etc. Some businesses are simpler than others are and the amount of market research will obviously be less. For a neighborhood dry cleaner, there will be many fewer questions that need to be answered than for a web site selling fine jewelry. But it is still important to show you know something about the type of business you intend to run. Putting your industry and market information into your plan is about your ability to prove your knowledge of the industry and to make plans to counter difficulties resulting from challenges faced by members of that industry.

You can start by identifying your own industry classification code. This used to be called a businesses’ SIC code, but a few years ago the government revamped this system to make it more relevant to today’s business types, now calling this an NAICS code. Knowing your business’s NAICS code will allow you to find industry data and compare your business with others who might be competitors.

If you intend to start a local market, it is important to know that you are part of the grocery industry. Most industries are segmented, meaning that they are made up of smaller groupings. They may be segmented into large or small operations, by retail or wholesale segments, by high priced/high end versus quantity or less expensive offerings, or by location or specialty. In this case, your subset would be called Food and Beverage Stores, and more specifically Convenience Stores.

For instance, using our grocery example, you should know the trends in the larger grocery industry, perhaps toward small, local cultural-specialty markets or toward higher end specialty markets (such as just meats, or just produce) or toward high volume stores of the Costco variety or toward home delivery. What are the opportunities in the market segments that are growing? For example, you might say: “ Pete’s Super Mart is a part of the Food and Beverage Industry called Convenience Stores. Our NAICS code is 445120 we are part of the trend of consumers with less time who want to quickly buy a few items on the way home from work at fair prices. Convenience Stores make up about 20% of the total retail grocery market, and increase of 5% from 5 years ago.”

It is also vital to a successful plan that you demonstrate that you are entering a growth industry or market. If your industry is declining, it does not bode well for your long-term profitability or ability to survive. What would your chances of success be if you invented the world’s best typewriter today?

Is your industry newer? Has it been or is it likely to be affected by technology, government regulations, and the economy? Do any of these mean that there are or will be needs generated by the changes that your product or service can fill?

There are a number of sources from which to find industry trends. Now that you know the industry classification code for your business and the name of the industry in which it falls, you can check that name on the Internet and find the trade association that represents your industry. Trade associations are groups that lobby for and keep statistics about a given industry. Most trade associations have web sites and trade magazines which are a wealth of information about trends, problems, and opportunities in that industry. And don’t forget to use the services of reference librarians in your larger public libraries. Make sure credit the source of your information when you cite the statistics.

Following our grocery example above, there was a National Association of Convenience Stores that I found easily by entering Convenience Stores in my Internet browser. Their web site was a wealth of information on industry trends, sample human resource policies, and current challenges in the industry. Read through all the information you can find and pick statistics that support your business. Your industry section might continue: “ According to the National Association of Convenience Stores, 33% of Americans say they shop at least twice a month at convenience markets, up from 22% five years ago.” If you found statistics that support your exact product offering, you might choose to go back to your product or service description section and give statistics in that section as well.

Key to this section is to remember that the business plan is a sales document. You aren’t required to use all the statistical information you find – use only the information that backs up what you want to say. If your industry has been in a slump the past two years nationwide, you may still be able to find statistical information that shows the same industry is booming in your geographical location.