Module 13: Perfect Competition

 

“Sandakan Sabah Shell-Station” photo by CEphoto, Uwe Aranas, available on commons.wikipedia.organd is licensed under CC BY-SA

THE POLICY QUESTION
SHOULD THE GOVERNMENT ALLOW OIL COMPANIES TO MERGE RETAIL GAS STATIONS?

In the late 1990s and early 2000s, there were a number of mergers of big oil companies in the United States: Exxon acquired Mobil, BP Amoco acquired ARCO, Chevron acquired Texaco, and Phillips merged with Conoco. This led to massive consolidation in the oil business. In response, US government regulators required the sell-off of some refineries to maintain competitiveness in regional refined gas markets. For the most part, however, the same regulators were unconcerned about the reduction in competition in the retail gas market. In this chapter, we will explore perfectly competitive markets and, in so doing, will be able to better understand why regulators were relatively unconcerned about concentration in the retail gas industry.

EXPLORING THE POLICY QUESTION

1. Why were retail gas stations not considered a main concern of regulators?
2. Does the merger of major oil companies necessarily lead to higher gas prices? Why or why not?

13.1 CONDITIONS FOR PERFECT COMPETITION

Learning Objective 13.1: Describe the characteristics of a perfectly competitive market.

In perfectly competitive markets, firms and consumers are all price takers: their supply and purchasing decisions have no impact on the market price. This means that the market is so big and any one individual seller or buyer is such a small part of the overall market, their individual decisions are inconsequential to the market as a whole. It is worth mentioning here at the start that this is a very strong assumption, and thus this is considered an almost purely theoretical extreme, along with monopolies at the other extreme. We can and will describe markets that come pretty close to the assumptions underlying perfect completion, but most markets will lie somewhere in between purely competitive and monopolistic. It is important to study these extremes to better understand the full range of markets and their outcomes.

Before we describe in detail perfectly competitive markets, let’s consider how we categorize market structure, the competitive environments in which firms and consumers interact. There are three main metrics by which we measure a market’s structure:

1. The number of firms.
2. More firms mean more competition and more places to which consumers can turn to purchase a good.
3. The similarity of goods.
4. The more similar the goods sold in the market are, the more easily consumers can switch firms, and the more competitive the market is.
5. The barriers to entry.
6. The more difficult it is to enter a market for a new firm, the less competitive it is.

The first is relatively straightforward; more firms mean more competition in the sense that it is hard to charge more for a product that consumers can find easily from other sellers. The second is a little subtler because products can be differentiated by something as simple as a brand or more tangible aspects like colors, features, and other characteristics. Finally, the third can be barriers of law like patents or technology, even if not covered by legal patent protection, or more natural barriers like a very high cost of starting up a firm that is not justified by the expected revenue.

We will study four market types in more detail where these metrics will be discussed further, but for now, they are described along the three metrics in table 13.1.

Table 13.1 The four basic market structures described

The Four Basic Market Structures Described
Name	Perfect competition	Monopolistic competition	Oligopoly	Monopoly
Number of firms	Many	Many	Few	One
Similarity of goods	Identical	Differentiated	Identical or differentiated	Unique
Barriers to entry	None	None	Some	Many
Chapter	13	20	19	15

Table 13.1 The four basic market structures described

	The Four Basic Market Structures Described
Name	Perfect competition	Monopolistic competition	Oligopoly	Monopoly
Number of firms	Many	Many	Few	One
Similarity of goods	Identical	Differentiated	Identical or differentiated	Unique
Barriers to entry	None	None	Some	Many
Chapter	13	20	19	15

With this categorization in place, we can turn to the definition of perfect competition. Perfect competition is a market with many firms, an identical product, and no barriers to entry. Let’s take these three metrics one by one.

Many Firms

Having many firms means that from the perspective of one individual firm, there is no way to raise or lower the market price for a good. This is because the individual firm’s output is such a small part of the overall market that it does not make a difference in terms of price. Firms are, therefore, price takers, meaning that their decision is simply how much to sell at the market price. If they try to sell for a higher price, no one will buy from them, and they could sell for a lower price, but if they did so, they would only be hurting themselves because it would not affect their quantity sold. Thus from an individual firm’s perspective, they face a horizontal demand curve. We assume they can sell as much as they want but only at the market price. This is an extreme assumption, as mentioned before, but there are some markets that resemble this description. Take the market for corn in the United States. The annual US corn crop is roughly twelve billion bushels, and there are roughly 315,000 corn farms in the country. Thus average output per farm is about thirty-eight thousand bushels annually, or about 0.000003 percent of the total supply of corn in the United States. If one farmer of average corn acreage decided to withhold output, there would not likely be any effect on the market price. It is also true that consumers are price takers as well, meaning no one consumer has a large enough impact to affect prices.

Identical Goods

The existence of identical goods means there is nothing to distinguish one firm’s goods from another. To use the corn example, once all the corn is dumped into the grain elevator, there is absolutely no way to tell from which farm a particular kernel of corn came. This means there is no way for one seller to differentiate their output to try to sell it at a different price on the premise that it is different. Contrast this to the automotive market, where the products are heterogeneous. Cars manufactured by Audi are very different than cars manufactured by Kia. An Audi A6 is very different than a Kia Optima in many substantive ways. Even when there is very little substance that is different, branding can be used to differentiate. Take, for example, polo shirts from Lacoste and Ralph Lauren. The shirt might be almost identical in terms of style, fabric, color, and so on, but by branding them with a logo—a crocodile or polo player—the manufacturers are able to differentiate them in the minds of consumers.

Barriers to Entry

It is very easy for firms to start and stop selling in this market. For example, if a farmer decides to plant corn instead of soybeans, there is nothing preventing them from doing so. Likewise, a farmer who wishes to plant soybeans instead of corn faces no barriers. In general, free entry and exit mean that there are no legal barriers to entry, like needing a special permit only given to a limited number of firms, and no major cost obstacles, like needing to invest millions of dollars in a manufacturing plant, as a new car manufacturer would. This ensures that firms remain price takers even when demand increases. If there is suddenly more demand for corn, perhaps from ethanol producers, farmers can quickly adjust their crops so existing growers do not have an opportunity to raise prices. Free exit is important as well because if firms know they cannot exit easily, they might be reluctant to enter in the first place.

There are two other implicit assumptions worth mentioning here. The first is that we assume that buyers and sellers have full information, meaning that they know the prices charged by every firm. This is important because without it, a firm could possibly charge an uninformed consumer more, and this violates the price-taker condition. The second is that there are negligible transaction costs, meaning it is easy for customers to switch sellers and vice versa. This is also important to ensure price taking, for if transactions costs were high, customers might accept higher prices from existing suppliers to avoid the cost of initiating a new transaction with another supplier at a lower price.

Take a moment and think about the policy example, retail gas, and how well it matches our definition of a perfectly competitive market.

• Are there many sellers?
• Is the product identical?
• Are there barriers to entry?

Your answers to these questions will be the basis of our evaluation of the policy stance the federal government took in assessing the oil company mergers.

In chapter 9, we studied profit maximization for a price-taking firm. We now know in what type of market we find price-taking firms: perfectly competitive markets. In the three other market types we will consider, firms will all have some control over the price of the goods they sell. It is worth taking a moment to review the principles of profit maximization for price-taking firms.

We now know clearly what leads a firm’s demand curve to be horizontal and thus the same as the marginal revenue curve: the fact that the firm is in a perfectly competitive market and has no influence on prices.

13.2 PERFECT COMPETITION AND EFFICIENCY

Learning Objective 13.2: Explain how perfectly competitive markets lead to Pareto-efficient outcomes.

In chapter 10.4, we studied the concepts of consumer and producer surplus and defined Pareto efficiency. We saw how prices adjust to conditions of excess supply and excess demand until a price that equates to supply and demand is reached. What this means is that the market ensures that everyone who values the good more than or equal to the marginal cost of producing it will find a seller willing to sell the good and that all opportunities for consumer and producer surplus will be exploited. This is how we know that total surplus is maximized.

In a perfectly competitive market, neither consumers nor producers have any influence over prices in the market, leaving them free to adjust to supply and demand excesses. Because of this, there is no deadweight loss, total surplus is maximized, and the outcome of the market is Pareto efficient. Prices in competitive markets act as demand and supply signals that are independent of institutional control and ensure that in the end, there are no mutually beneficial trades that do not happen. By mutually beneficial, we mean that buyers and sellers wish to engage in them because they will both be made better off.

It is in this sense that “free” markets are considered efficient. By “free,” we mean that prices freely adjust—there are no institutional or competitive controls that prevent prices from adjusting to equilibrate the market until the efficient outcome is achieved. By efficient, we mean Pareto efficient—there is no deadweight loss. With this chapter, we understand the conditions that must hold for a market to achieve the efficient outcome. There must be many buyers and sellers, the good must be homogenous, there must be free entry and exit, and there must be complete information about the good and prices on the part of buyers and no transactions costs. If this sounds like a lot, it is. In later chapters, we will examine the effects of other market structures and when assumptions like complete information fail to hold.

13.3 POLICY EXAMPLE
SHOULD THE GOVERNMENT ALLOW OIL COMPANIES TO MERGE RETAIL GAS STATIONS?

Learning Objective 13.3: Use the perfectly competitive market model to evaluate the decision to allow the consolidation of retail gas stations under fewer brands.

We are now well equipped to address our policy example. What we need to do is evaluate the retail gas market using the description of a perfectly competitive market to try to decide how closely it resembles a perfectly competitive market. We then need to determine if the market looks like a competitive one pre-merger and if that would change significantly after the merger.

Number of Firms

Overall, there are many retail gas stations in the United States—more than 150,000 in 2012. But the United States is too big a geographical area to use for our purposes. For most consumers of retail gas, a reasonable example of a market is the metropolitan area in which they live if they live in urban areas or perhaps a ten-mile radius for rural residents. The number of major branded gas stations was reduced from ten to five with the mergers, but there are also a number of independent or non-name brand gas stations in most retail markets. Post-merger, most communities affected by the merger, those that had stations that represented each of the company brands that merged, still had more than one competing station. But how many competing stations is enough? We will study this question in more detail in chapter 19.

Identical Goods

Retail gas is essentially identical, but major brands do a lot of advertising to try to convince customers that their brand is better. How successful they are at this strategy is beyond our analysis here, but one clue to this is how much more the major branded stations charge over independent stations. However, in this case, the question is how much major brands are able to charge. Casual observation suggests that the answer is not very much. Major branded stations located close to each other almost always charge prices very close to each other, suggesting that though consumers consider their gas higher quality than that of the independent brands, they consider all major branded gas essentially identical.

Free Entry and Exit of Firms

The market for retail gas is fairly open but with some particular aspects. The first is that retail gas requires buried tanks, which often require special permitting. There may also be more zoning restrictions than for other businesses in some areas. But in general, there are few restrictions that prevent new stations to open and existing stations to close.

Retail gas is also one of the most transparent markets in terms of pricing. Most stations prominently display their prices on signs seen easily from the roadway, so the assumption about full information is more apt here than for most retail markets. There are also few transactions costs. There is virtually no cost to purchasing from one station or switching to another. The major gas brands try to create some frictions by establishing loyalty programs or credit card tie-ins that qualify customers for lower prices, but the extent of these programs is clearly limited based on the price matching that most stations do that are located close together.

It appears, then, that the retail gas market is fairly close to a competitive market, if not quite perfect, and that it remains fairly competitive even after the string of mergers. To fully answer the question of whether total surplus is reduced by the merger, we would need to look more closely at real-world price data, but on the face of it, the mergers of retail gas station brands appear relatively benign.

https://open.oregonstate.education/

Four-Stage Model of Operation and Competitiveness

 

Service firms that have reinvented themselves to sustain their leadership position have shared a common approach; like successful manufacturing firms they have structured their operations according to a four-stage model of competitiveness, where they have applied manufacturing strategy concepts, focus and integration as they moved from lower to higher stages.

After Four Stages of the Hayes and Wheelwright Model

Stage 1: Internal Neutrality - Fix the Worst Problems

This is the stage at which the operations function is attempting to reach a certain minimum standard and is generally considered to be at the very poorest level of contribution by the operations function. The other business functions view it as a hindrance when it comes to the delivery of competitive advantage. Its goal at this stage is to be largely ignored, focusing on avoiding mistakes, it tends to be reactive and somewhat in-ward looking.

Stage 2: External Neutrality - Adopt Best Practice

Here as a first step of breaking out of stage 1 the operations function must compare its performance with competitor organisations. Bench-marking its performance against its competitors will enable the business to identify and adopt best industry practice. The operations function can then attempt to be externally neutral by trying to match the benchmarks it has identified. 

Bench-marking promotes superior performance by providing an organised framework through which organisations learn how the "best in class" do things, understand how these best practices differ from their own, and implement change to close the gap, the essence of bench-marking is the process of borrowing ideas and adapting them to gain competitive advantage (Besterfield et al., 2003).

Stage 3: Internally Supportive - Link Strategy with Operations

In reaching stage 3 the business operations will be broadly up there with the best having reached the ‘first division’ in their market and by linking strategy with operations, they will have aspirations to continue to improve in order to become clearly and unambiguously the very best in the market. 

Stage 4: Externally Supportive - Give an Operations Advantage

At stage 4 the company will be looking to the future, the vision for the operations function at this stage will be to provide the foundation for future competitive success by taking a lead role in strategy formulation. Over time it will develop operations-based capabilities by organising resources in innovative ways and deliver strategic flexibility which will allow the business to adapt as markets change.

Starting at Stage 1 a review of the internal processes will allow managers to set minimum performance standards for the operations function of their business. Moving to a higher stage to regain competitive advantage in their local market, bench-marking with immediate competitors will allow them to identify and adopt best practise. It will also enable them as process managers to implement strategies to increase service, operations and process capacity within their business. With these industry and competitive analysis in mind they can set out to carve a distinctive strategic position where they can outperform their rivals by building competitive advantage.

Author: Nigel Chetty | MBA https://cutt.ly/N9SrPFb

Capability and Maturity

Hayes and Wheelwright describe four stages of manufacturing competitiveness:

Stage I

Stage I companies consider their manufacturing organisation to be internally neutral, in that its role is simply to "make the stuff", without any surprises. Such companies believe that their product designs are so unusual or their marketing organisation so powerful that if the product can simply be delivered to customers, as advertised, the company will be successful.

 

Stage II

Stage II companies look outward and ask their manufacturing organisation to be externally neutral, that is, able to meet the standards imposed by their major competitors. Such companies tend to adhere to industry practice and industry standards. They buy their parts, materials and production equipment from the same suppliers that their competitors use, follow similar approaches to quality and inventory control, establish similar relationships with their workforce, and regard technicians and managers as interchangeable parts - hiring both, as needed, from other companies in the industry.

 

Stage III

Stage III companies have a manufacturing organisation that is internally supportive of other parts of the company, with a co-ordinated set of manufacturing structural and infrastructural decisions tailored to their specific competitive strategy.

 

Stage IV

Stage IV companies regard their manufacturing organisation as externally supportive, that is, playing a key role in helping the whole company achieve an edge over its competitors. Such companies are not content simply to copy their competitors, or even to be the "toughest kid on the block" in their own neighbourhood. They seek to be as good as anybody in the world at the things they have chosen to be good at - that is, world-class.

 

References

• Hayes, Robert H., and Wheelwright, Steven C., "Restoring Our Competitive Edge: Competing Through Manufacturing". New York: John Wiley, 1984.

What's a Competitive Analysis & How Do You Conduct One?

  

Christine White

"When was the last time you ran a competitive analysis for your brand? And most importantly, do you know how to do one efficiently?

If you're not sure, or if the last "analysis" you ran was a quick perusal of a competitor's website and social media presence, you're likely missing out on important intelligence that could help your brand grow.

In this detailed guide, you'll learn how to conduct a competitive analysis that will give your business a competitive advantage in the market.

What is a competitive market analysis?

A competitive analysis is a strategy that involves researching major competitors to gain insight into their products, sales, and marketing tactics. Implementing stronger business strategies, warding off competitors, and capturing market share are just a few benefits of conducting a competitive market analysis.

A competitive analysis can help you learn the ins and outs of how your competition works, and identify potential opportunities where you can out-perform them.

It also enables you to stay atop of industry trends and ensure your product is consistently meeting — and exceeding — industry standards.

Let's dive into a few more benefits of conducting competitive analyses:

• Helps you identify your product's unique value proposition and what makes your product different from the competitors', which can inform future marketing efforts.
• Enables you to identify what your competitor is doing right. This information is critical for staying relevant and ensuring both your product and your marketing campaigns are outperforming industry standards.
• Tells you where your competitors are falling short — which helps you identify areas of opportunities in the marketplace, and test out new, unique marketing strategies they haven't taken advantage of.
• Learn through customer reviews what's missing in a competitor's product, and consider how you might add features to your own product to meet those needs.
• Provides you with a benchmark against which you can measure your growth.

What is competitive market research?

Competitive market research focuses on finding and comparing key market metrics that help identify differences between your products and services and those of your competitors.

Comprehensive market research helps establish the foundation for an effective sales and marketing strategy that helps your company stand out from the crowd.

Next, let's dive into how you can conduct a competitive analysis for your own company.

Competitive Analysis in Marketing

Every brand can benefit from regular competitor analysis. By performing a competitor analysis, you'll be able to:

• Identify gaps in the market
• Develop new products and services
• Uncover market trends
• Market and sell more effectively

As you can see, learning any of these four components will lead your brand down the path of achievement.

Next, let's dive into some steps you can take to conduct a comprehensive competitive analysis.

How to do a Competitive Analysis

1. Determine who your competitors are.
2. Determine what products your competitors offer.
3. Research your competitors' sales tactics and results.
4. Take a look at your competitors' pricing, as well as any perks they offer.
5. Ensure you're meeting competitive shipping costs.
6. Analyze how your competitors market their products.
7. Take note of your competition's content strategy.
8. Learn what technology stack your competitors' use.
9. Analyze the level of engagement on your competitors' content.
10. Observe how they promote marketing content.
11. Look at their social media presence, strategies, and go-to platforms.
12. Perform a SWOT Analysis to learn their strengths, weaknesses, opportunities, and threats.

To run a complete and effective competitive analysis, use these ten templates, which range in purpose from sales, to marketing, to product strategy.

1. Determine who your competitors are.

First, you'll need to figure out who you're really competing with so you can compare the data accurately. What works in a business similar to yours may not work for your brand.

So how can you do this?

Divide your “competitors” into two categories: direct and indirect.

Direct competitors are businesses that offer a product or service that could pass as a similar substitute for yours, and that operate in your same geographic area.

On the flip side, an indirect competitor provides products that are not the same but could satisfy the same customer need or solve the same problem.

It seems simple enough on paper, but these two terms are often misused.

When comparing your brand, you should only focus on your direct competitors. This is something many brands get wrong.

Let's use an example: Stitch Fix and Fabletics are both subscription-based services that sell clothes on a monthly basis and serve a similar target audience.

But as we look deeper, we can see that the actual product (clothes in this case) are not the same; one brand focuses on stylish everyday outfits while the other is workout-centric attire only.

Yes, these brands satisfy the same need for women (having trendy clothes delivered right to their doorstep each month), but they do so with completely different types of clothing, making them indirect competitors.

This means Kate Hudson's team at Fabletics would not want to spend their time studying Stitch Fix too closely since their audiences probably vary quite a bit. Even if it's only slightly, this tiny variation is enough to make a big difference.

Now, this doesn't mean you should toss your indirect competitors out the window completely.

Keep these brands on your radar since they could shift positions at any time and cross over into the direct competitor zone. Using our example, Stitch Fix could start a workout line, which would certainly change things for Fabletics.

This is also one of the reasons why you'll want to routinely run a competitor analysis. The market can and will shift at any time, and if you're not constantly scoping it out, you won't be aware of these changes until it's too late.

2. Determine what products your competitors offer.

At the heart of any business is its product or service, which is what makes this a good place to start.

You'll want to analyze your competitor's complete product line and the quality of the products or services they're offering.

You should also take note of their pricing and any discounts they're offering customers.

Some questions to consider include:

• Are they a low-cost or high-cost provider?
• Are they working mainly on volume sales or one-off purchases?
• What is their market share?
• What are the characteristics and needs of their ideal customers?
• Are they using different pricing strategies for online purchases versus brick and mortar?
• How does the company differentiate itself from its competitors?
• How do they distribute their products/services?

3. Research your competitors' sales tactics and results.

Running a sales analysis of your competitors can be a bit tricky.

You'll want to track down the answers to questions such as:

• What does the sales process look like?
• What channels are they selling through?
• Do they have multiple locations and how does this give them an advantage?
• Are they expanding? Scaling down?
• Do they have partner reselling programs?
• What are their customers' reasons for not buying? For ending their relationship with the company?
• What are their revenues each year? What about total sales volume?
• Do they regularly discount their products or services?
• How involved is a salesperson in the process?

These helpful pieces of information will give you an idea of how competitive the sales process is, and what information you need to prepare your sales reps with to compete during the final buy stage.

For publicly held companies, you can find annual reports online, but you'll have to do some sleuthing to find this info from privately owned businesses.

You could find some of this information by searching through your CRM and reaching out to those customers who mentioned they were considering your competitor. Find out what made them choose your product or service over others out there.

To do this, run a report that shows all prospective deals where there was an identified competitor.

If this data is not something you currently record, talk to marketing and sales to implement a system where prospects are questioned about the other companies they are considering.

Essentially, they'll need to ask their leads (either through a form field or during a one-on-one sales conversation) to identify who their current service providers are, who they've used in the past, and who else they are considering during the buying process.

When a competitor is identified, have your sales team dive deeper by asking why they are considering switching to your product. If you've already lost the deal, be sure to follow up with the prospect to determine why you lost to your competitor. What services or features attracted the prospect? Was it about price? What's the prospect's impression of your sales process? If they've already made the switch, find out why they made this decision.

By asking open-ended questions, you'll have honest feedback about what customers find appealing about your brand and what might be turning customers away.

Once you've answered these questions, you can start scoping out your competitor's marketing efforts.

4. Take a look at your competitors' pricing, as well as any perks they offer.

There are a few major factors that go into correctly pricing your product — and one major one is understanding how much your competitors are charging for a similar product or service.

If you feel your product offers superior features compared to those of a competitor, you might consider making your product or service more expensive than industry standards. However, if you do that, you'll want to ensure your sales reps are ready to explain why your product is worth the additional cost.

Alternatively, perhaps you feel there's a gap in your industry for affordable products. If that's the case, you might aim to charge less than competitors and appeal to prospects who aren't looking to break the bank for a high-quality product.

Of course, other factors go into correctly pricing a product, but it's critical you stay on top of industry pricing to ensure you're pricing your product in a way that feels reasonable to prospects.

Additionally, take a look at any perks your competitors' offer and how you might match those perks to compete. For instance, perhaps your competitors offer a major referral discount or a month-long free trial version. These perks could be the reason you're losing customers, so if it feels reasonable for your brand, consider where you might match those perks — or provide some unique perks of your own if competitors' don't offer any.

5. Ensure you're meeting competitive shipping costs.

Did you know expensive shipping is the number one reason for cart abandonment?

Nowadays, free shipping is a major perk that can attract consumers to choose one brand over another. If you work in an industry where shipping is a major factor — like ecommerce — you'll want to take a look at competitors' shipping costs and ensure you're meeting (if not exceeding) those prices.

If most of your competitors' offer free shipping, you'll want to look into the option for your own company. If free shipping isn't a practical option for your business, consider how you might differentiate in other ways — including loyalty programs, holiday discounts, or giveaways on social media.

6. Analyze how your competitors market their products.

Analyzing your competitor's website is the fastest way to gauge their marketing efforts. Take note of any of the following items and copy down the specific URL for future reference:

• Do they have a blog?
• Are they creating whitepapers or ebooks?
• Do they post videos or webinars?
• Do they have a podcast?
• Are they using static visual content such as infographics and cartoons?
• What about slide decks?
• Do they have a FAQs section?
• Are there featured articles?
• Do you see press releases?
• Do they have a media kit?
• What about case studies?
• Do they publish buying guides and data sheets?
• What online and offline advertising campaigns are they running?

7. Take note of your competition's content strategy.

Then, take a look at the quantity of these items. Do they have several hundred blog posts or a small handful? Are there five white papers and just one ebook?

Next, determine the frequency of these content assets. Are they publishing something new each week or once a month? How often does a new ebook or case study come out?

Chances are if you come across a robust archive of content, your competitor has been publishing regularly. Depending on the topics they're discussing, this content may help you hone in on their lead-generating strategies.

From there, you should move on to evaluating the quality of their content. After all, if the quality is lacking, it won't matter how often they post since their target audience won't find much value in it.

Choose a small handful of samples to review instead of tackling every single piece to make the process more manageable.

Your sampler should include content pieces covering a variety of topics so you'll have a fairly complete picture of what your competitor shares with their target audience.

When analyzing your competitor's content, consider the following questions:

• How accurate is their content?
• Are spelling or grammar errors present?
• How in-depth does their content go? (Is it at the introductory level that just scratches the surface or does it include more advanced topics with high-level ideas?)
• What tone do they use?
• Is the content structured for readability? (Are they using bullet points, bold headings, and numbered lists?)
• Is their content free and available to anyone or do their readers need to opt-in?
• Who is writing their content? (In-house team? One person? Multiple contributors?)
• Is there a visible byline or bio attached to their articles?

As you continue to scan the content, pay attention to the photos and imagery your competitors are using.

Do you quickly scroll past generic stock photos or are you impressed by custom illustrations and images? If they're using stock photos, do they at least have overlays of text quotes or calls-to-action that are specific to their business?

If their photos are custom, are they sourced from outside graphic professionals or do they appear to be done in-house?

When you have a solid understanding of your competitor's content marketing strategy, it's time to find out if it's truly working for them.

8. Learn what technology stack your competitors' use.

Understanding what types of technology your competitors' use can be critical for helping your own company reduce friction and increase momentum within your organization.

For instance, perhaps you've seen positive reviews about a competitor's customer service — as you're conducting research, you learn the customer uses powerful customer service software you haven't been taking advantage of. This information should arm you with the opportunity to outperform your competitors' processes.

To figure out which software your competitors' use, type the company's URL into Built With, an effective tool for unveiling what technology your competitors' site runs on, along with third-party plugins ranging from analytics systems to CRMs.

Alternatively, you might consider looking at competitors' job listings, particularly for engineer or web developer roles. The job listing will likely mention which tools a candidate needs to be familiar with — a creative way to gain intel into the technology your competitors' use.

9. Analyze the level of engagement on your competitor's content.

To gauge how engaging your competitor's content is to their readers, you'll need to see how their target audience responds to what they're posting.

Check the average number of comments, shares, and likes on your competitor's content and find out if:

• Certain topics resonate better than others
• The comments are negative, positive, or a mix
• People are tweeting about specific topics more than others
• Readers respond better to Facebook updates about certain content
• Don't forget to note if your competitor categorizes their content using tags, and if they have social media follow and share buttons attached to each piece of content.

10. Observe how they promote their marketing content.

From engagement, you'll move right along to your competitor's content promotion strategy.

• Keyword density in the copy itself
• Image ALT text tags
• Use of internal linking

The following questions can also help you prioritize and focus on what to pay attention to:

• Which keywords are your competitors focusing on that you still haven't tapped into?
• What content of theirs is highly shared and linked to? How does your content compare?
• Which social media platforms are your target audience using?
• What other sites are linking back to your competitor's site, but not yours?
• Who else is sharing what your competitors are publishing?
• Who is referring traffic to your competitor's site?
• For the keywords you want to focus on, what is the difficulty level? There are several free (and paid) tools that will give you a comprehensive evaluation of your competitor's search engine optimization.

11. Look at their social media presence, strategies, and go-to platforms

The last area you'll want to evaluate when it comes to marketing is your competitor's social media presence and engagement rates.

How does your competition drive engagement with their brand through social media? Do you see social sharing buttons with each article? Does your competitor have links to their social media channels in the header, footer, or somewhere else? Are these clearly visible? Do they use calls-to-action with these buttons?

If your competitors are using a social network that you may not be on, it's worth learning more about how that platform may be able to help your business, too. To determine if a new social media platform is worth your time, check your competitor's engagement rates on those sites. First, visit the following sites to see if your competition has an account on these platforms:

• Facebook
• Twitter
• Instagram
• Snapchat
• LinkedIn
• YouTube
• Pinterest

Then, take note of the following quantitative items from each platform:

• Number of fans/followers
• Posting frequency and consistency
• Content engagement (Are users leaving comments or sharing their posts?)
• Content virality (How many shares, repins, and retweets do their posts get?)

With the same critical eye you used to gauge your competition's content marketing strategy, take a fine-toothed comb to analyze their social media strategy.

What kind of content are they posting? Are they more focused on driving people to landing pages, resulting in new leads? Or are they posting visual content to promote engagement and brand awareness?

How much of this content is original? Do they share curated content from other sources? Are these sources regular contributors? What is the overall tone of the content?

How does your competition interact with its followers? How frequently do their followers interact with their content?

After you collect this data, generate an overall grade for the quality of your competitor's content. This will help you compare the rest of your competitors using a similar grading scale.

12. Perform a SWOT Analysis to learn their strengths, weaknesses, opportunities, and threats

As you evaluate each component in your competitor analysis (business, sales, and marketing), get into the habit of performing a simplified SWOT analysis at the same time.

This means you'll take note of your competitor's strengths, weaknesses, opportunities, and threats any time you assess an overall grade.

Some questions to get you started include:

• What is your competitor doing well? (Products, content marketing, social
• Where does your competitor have the advantage over your brand?
• What is the weakest area for your competitor?
• Where does your brand have the advantage over your competitor?
• What could they do better with?
• In what areas would you consider this competitor a threat?
• Are there opportunities in the market that your competitor has identified?

You'll be able to compare their weaknesses against your strengths and vice versa. By doing this, you can better position your company, and you'll start to uncover areas for improvement within your own brand.

 

Competitive Product Analysis

Product analysis drills down to discover key differences and similarities in products that share the same general market. This type of analysis if you have a competitor selling products in a similar market niche to your own - you want to make sure that wherever possible, you aren’t losing market share to the competition.

Leveraging the example above, we can drill down and discover some of the key differentiators in product offerings.

Step 1: Assess your current product pricing.

The first step in any product analysis is to assess current pricing.

Nintendo offers three models of its Switch console: The smaller lite version is priced at $199, the standard version is $299, and the new OLED version is $349.

Sony, meanwhile, offers two versions of its Playstation 5 console: The standard edition costs $499 and the digital version, which doesn’t include a disc drive, is $399.

Step 2: Compare key features

Next is a comparison of key features. In the case of our console example, this means comparing features like processing power, memory, and hard drive space.

Feature	PS5 Standard	Nintendo Switch
Hard drive space	825 GB	32 GB
RAM	16 GB	4 GB
USB ports	4 ports	1 USB 3.0, 2 USB 2.0
Ethernet connection	Gigabit	None

Step 3: Pinpoint differentiators

With basic features compared, it’s time to dive deeper with differentiators. While a glance at the chart above seems to indicate that the PS5 is outperforming its competition, this data only tells part of the story.

Here’s why: The big selling point of the standard and OLED Switch models is that they can be played as either handheld consoles or docked with a base station connected to a TV. What’s more, this “switching” happens seamlessly, allowing players to play whenever, wherever.

The Playstation offering, meanwhile, has leaned into market-exclusive games that are only available on its system to help differentiate them from their competitors.

Step 4: Identify market gaps

The last step in a competitive product analysis is looking for gaps in the market that could help your company get ahead. When it comes to the console market, one potential opportunity gaining traction is the delivery of games via cloud-based services rather than physical hardware. Companies like Nvidia and Google have already made inroads in this space and if they can overcome issues with bandwidth and latency, it could change the market at scale.

Competitive Analysis Example

How do you stack up against the competition? Where are you similar, and what sets you apart? This is the goal of competitive analysis. By understanding where your brand and competitors overlap and diverge, you’re better positioned to make strategic decisions that can help grow your brand.

Of course, it’s one thing to understand the benefits of competitive analysis, and it’s another to actually carry out an analysis that yields actionable results. Don’t worry - we’ve got you covered with a quick example.

Sony vs. Nintendo: Not all fun and games

Let’s take a look at popular gaming system companies Sony and Nintendo. Sony’s newest offering - the Playstation 5 - recently hit the market but has been plagued by supply shortages. Nintendo’s Switch console, meanwhile, has been around for several years but remains a consistent seller, especially among teens and children. This scenario is familiar for many companies on both sides of the coin; some have introduced new products designed to compete with established market leaders, while others are looking to ensure that reliable sales don’t fall.

Using some of the steps listed above, here’s a quick competitive analysis example.

1. Determine who your competitors are.

In our example, it’s Sony vs Nintendo, but it’s also worth considering Microsoft’s Xbox, which occupies the same general market vertical. This is critical for effective analysis; even if you’re focused on specific competitors and how they compare, it’s worth considering other similar market offerings.

2. Determine what products your competitors offer.

Playstation offers two PS5 versions, digital and standard, at different price points, while Nintendo offers three versions of its console. Both companies also sell peripherals - for example, Sony sells virtual reality (VR) add-ons while Nintendo sells gaming peripherals such as steering wheels, tennis rackets, and differing controller configurations.

3. Research your competitors' sales tactics and results.

When it comes to sales tactics and marketing, Sony and Nintendo have very different approaches.

In part thanks to the recent semiconductor shortage, Sony has driven up demand via scarcity - very low volumes of PS5 consoles remain available. Nintendo, meanwhile, has adopted a broader approach by targeting families as their primary customer base. This effort is bolstered by the Switch Lite product line, which is smaller and less expensive, making it a popular choice for children.

The numbers tell the tale: Through September 2021, Nintendo sold 14.3 million consoles, while Sony sold 7.8 million.

4. Take a look at your competitors' pricing, as well as any perks they offer.

Sony has the higher price point: Their standard PS5 sells for $499, while Nintendo’s most expensive offering comes in at $349. Both offer robust digital marketplaces and the ability to easily download new games or services.

Here, the key differentiators are flexibility and fidelity. The Switch is flexible - users can dock it with their television and play it like a standard console, or pick it up and take it anywhere as a handheld gaming system. The PS5, meanwhile, has superior graphics hardware and processing power for gamers who want the highest-fidelity experience.

5. Analyze how your competitors market their products.

If you compare the marketing efforts of Nintendo and Sony, the difference is immediately apparent: Sony’s ads feature realistic in-game footage and speak to the exclusive nature of their game titles; the company has managed to secure deals with several high-profile game developers for exclusive access to new and existing IPs.

Nintendo, meanwhile, uses brightly-lit ads showing happy families playing together or children using their smaller Switches while traveling.

6. Analyze the level of engagement on your competitor's content.

Engagement helps drive sales and encourage repeat purchases. While there are several ways to measure engagement, social media is one of the most straightforward: In general, more followers equates to more engagement and greater market impact.

When it comes to our example, Sony enjoys a significant lead over Nintendo: While the official Playstation Facebook page has 38 million followers, Nintendo has just 5 million.

Competitive Analysis Templates

Competitive analysis is complex, especially when you’re assessing multiple companies and products simultaneously. To help streamline the process, we’ve created 10 free templates that make it possible to see how you stack up against the competition - and what you can do to increase market share.

Let’s break down our SWOT analysis template. Here’s what it looks like:

Strengths - Identify your strengths. These may include specific pieces of intellectual property, products that are unique to the market, or a workforce that outperforms the competition.

Weaknesses - Here, it’s worth considering potential issues around pricing, leadership, staff turnover, and new competitors in the market.

Opportunities - This part of the SWOT analysis can focus on new market niches, evolving consumer preferences, or new technologies being developed by your company.

Threats - These might include new taxes or regulations on existing products or an increasing number of similar products in the same market space that could negatively affect your overall share.

How Does Your Business Stack Up?

Before you accurately compare your competition, you need to establish a baseline. This also helps when it comes time to perform a SWOT analysis.

Take an objective look at your business, sales, and marketing reports through the same metrics you use to evaluate your competition.

Record this information just like you would with a competitor and use this as your baseline to compare across the board.

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