YOU CAN LEARN ALL YOU NEED TO KNOW ABOUT THE COMPETITION’S OPERATION BY LOOKING IN HIS GARBAGE CANS STUDY THE COMPETITION
| IN CONTEXT FOCUS Analytical tools KEY DATES 1950s Harvard academics George Smith and C. Roland Christensen develop tools to analyze companies and competition. 1960s US management consultant Albert Humphrey leads a research project that yields SOFT analysis, the forerunner to his later SWOT analysis. 1982 US professor Heinz Weihrich develops the TOWS matrix which uses the threats to a company as the starting point for formulating strategy. 2006 Japanese academics Shinno, Yoshioka, Marpaung, and Hachiga develop computer software that combines SWOT analysis with AHP (Analytic Hierarchy Process). Whether a company is long established or in its start-up phase, a key strategic issue is its competitive advantage—the factor that gives it an edge over its competitors. The only way to establish, understand, and protect competitive advantage is to study the competition. Who is competing with the company for its customers’ time and money? Do they sell competitive products or potential substitutes? What are their strengths and weaknesses? How are they perceived in the market? For Ray Kroc, the US entrepreneur behind the success of fast-food chain McDonalds, this reportedly involved inspecting competitors’ | External factors that might be opportunities or threats include market growth; new technologies; barriers to entering markets; overseas sales potential; and changing customer demographics and preferences. SWOT analysis is widely used by businesses of all types, and it is a staple of business management courses. It is a creative tool that allows managers to assess a company’s current position, and to imagine possible future positions. A practical tool When well-executed, a SWOT analysis should inform strategic planning and decision-making. It allows a company to identify what it does better than rivals (or vice versa), what changes it may need to make to minimize threats, and what opportunities may give the company competitive advantage. The key to strategic fit is to make sure that the company’s internal and external environments match: its internal strengths must be aligned with the external opportunities. Any internal weaknesses should be addressed so as to minimize the extent of external threat. | But there is a range of more conventional tools to help companies to understand themselves, their markets, and their competition. SWOT analysis The most popular such tool is SWOT analysis. Created by US management consultant Albert Humphrey in 1966, it is used to identify internal strengths (S) and weaknesses (W), and to analyze external opportunities (O) and threats (T). Internal factors that can be considered as either strengths or weaknesses include: the experience and expertise of management; the skill of a work force; product quality; the company’s financial health; and the strength of its brand. trash. When undertaking a SWOT analysis, the views of staff and even customers can be included— it should provide an opportunity to solicit views from all stakeholders. The greater the number of views included, the deeper the analysis and the more useful the findings. However, there are limitations. While a company may be able to judge its internal weaknesses and strengths accurately, projections about future events and trends (which will affect opportunities and threats) are always subject to error. Different stakeholders will also be privy to different levels of information about a company’s activities, and therefore its current position. Balance is key; |
senior managers may have a full view of the company, but their perspective needs to be informed by alternative views from all levels of the organization. As with all business tools, the factor that governs the success of SWOT analysis is whether or not it leads to action. Even the most comprehensive analysis is useless unless its findings are translated into well-conceived plans, new processes, and better performance. Market mapping A slightly narrower but more sophisticated tool for analyzing a company’s position and competition is “market mapping” (also known as “perceptual mapping”). Market maps are diagrams that represent a market and the placement of products within that market, providing a visual means of studying the competition. The process is useful both internally (to help an organization understand its own products) and externally (to chart how consumers perceive the brand in relation to the competition). To draw up a market map, a company identifies several consumer purchase-decision factors that stand in opposition to one another. In the fashion market, an example might include “technology” vs. “fashion,” and “performance” vs.
Market mapping plots opposing qualities of products along two axes. By identifying the two main oppositional factors for any product, it is easy to see gaps in the market.
“leisure.” Additional factors could include the item’s price (high vs. low), quality of production (high vs. low), stylish vs. conservative, or durable vs. disposable. Two of these dimensions, or opposing pairs, are then plotted onto a horizontal or vertical axis. Based on market research or the knowledge of managers, all of the products within a particular market can be plotted onto the map. The market share of each product can be represented by the size of its corresponding image on the map, but more often, analysts choose to simply make a rough sketch of the market, ignoring market size. A company may choose to compile several market maps, each of which depicts a different set of variables, and then analyze them— individually and in combination— to gain an overall view of the company’s position in the market. Finding the gap The goal of market mapping is to identify opportunities where a company can differentiate itself from its competitors. These are areas where the company offers unique value, and they can be used to inform marketing messages. The map will also reveal overcrowded segments, which signify heightened competitive threat. For a new start-up, a market map can be used to identify a viable gap in the market—a good place to position a company when it is struggling to establish itself. Established businesses can use market mapping combined with SWOT analysis to discover opportunities and decide whether the company has the strengths to exploit one of those opportunities. The market map helps to inform the strategy (the need to reposition a product a LEISURE way from competitors’ offerings, for example) and the tactics (moving from conservative to sporty, for example) that will help the company to achieve that strategic goal. Market analysis such as this may, for example, have helped luxury Singaporean tea shop TWG Tea to identify an opportunity in the market. Launched in 2008, TWG targets a slightly older, wealthier customer base than coffee shops and other “lifestyle” cafés. TWG has opened new locations across the world, based on studying the competition, identifying a market gap, and designing its products and services to fill that gap. Internal focus As a company grows it might choose to draw up a map including just its own products. Analysis of the results can help identify any overlap between different products (informing decisions about which products to drop, and which to concentrate research and development and marketing spend, for example). It can also be used to ensure that the company’s marketing message stays on track, helping to avoid strategic drift. Perceived as a technical performance product, Speedo, for example, needs to ensure that its marketing reflects that view; a campaign that promotes Speedo as a fashionable label would risk confusing customers and could damage the brand. The key to successful market mapping is market research. While it can be useful to compare internal and external perceptions of a product, and the products of the competition, it is the customers’ views that matter most. When START SMALL, THINK BIG based on such data, even though managers may disagree, the market map cannot be “wrong”—it simply represents, for better or worse, how the brand is perceived. The challenge for management is to use the map, and knowledge of internal strengths and weaknesses, to plan the appropriate strategic response. Both SWOT analysis and market mapping allow a company to better understand itself, its market, and, most importantly, the competition. Equally, being aware of weaknesses can help avoid costly strategic mistakes, such as producing overly ambitious products or making an entry into a crowded market position. An appreciation of the opportunities and threats of the market, and the relative and shifting positions of competing products, is essential to long-term successful strategic planning. To plan where you are going, it helps to know where you are—and where your competitors are too. ■
Albert Humphrey
Born in 1926, Albert Humphrey was educated at the University of Illinois, US, and at the Massachusetts Institute of Technology (MIT), where he gained a master’s degree in Chemical Engineering. He later went on to earn an MBA from Harvard University. While working with the Stanford Research Institute (now SRI International) between 1960 and 1970, Humphrey came up with the Stakeholder Concept, which has since been used by business leaders and politicians. He also undertook research to identify why corporate planning failed, by holding interviews with more than 5,000 executives at over 1,100 companies. As a result of the findings, he invented SOFT analysis: “what is good in the present is Satisfactory, good in the future is an Opportunity; bad in the present is a Fault, and bad in the future is a Threat.” Fault was later softened to the more acceptable Weaknesses, and Satisfactory became Strengths. The now-ubiquitous acronym SWOT was born.
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