Due Diligence -- Competitive Research & Analysis

The point of competitive analysis is to discover those factors for which the new venture and its products and services may have an advantage that it can exploit. Not surprisingly, every new venture has at least several significant competitors, so understanding competitors’ products and methods of executing marketing, sales, and distribution is an essential first step.

This article focuses on market research suitable for an early-stage company that has not received substantial funding.  This research can be undertaken at minimal expense and usually during founder due diligence.  Further, the research suggested herein can serve as useful information for marketing and sales planning that would accompany a fully-developed business plan.

CONDUCTING SECONDARY MARKET RESEARCH

Initially, the most useful source for developing competitor information is from public sources (e.g., secondary research[1]) related to the company’s area of business. A variety of sources are readily available; for example:

1. Newspapers, trade magazines, etc.
2. Internet sources and competitor websites[2]
3. Conferences and trade shows, including proceedings
4. Technical papers published by professional technical societies
5. US government sources (e.g., census data for demographics, economic reports, statistics from historical records, etc.)
6. Public company annual shareholder reports, which are free upon request from the company of interest
7. Dun & Bradstreet (D&B, DUNS number) for credit data
8. Standard Rate and Data Service (SRDS) for information related to lifestyles
9. Securities & Exchange Commission (SEC) for public companies[3]
10. Nielsen Designated Market Area (DMA) for TV viewership
11. Hoover’s (D&B company) for comprehensive data on most businesses (requires payment)

Another type of secondary research is often referred to as “reverse engineering,” in which competitors’ products are secured (legally, of course) and deconstructed to understand technology deployed, materials and processes likely used, and design details. Estimates of the costs of production can be made once deconstruction is accomplished. Those parts of a competitor’s product that may be protected by one or more patents should be identified and understood. By consulting with third-party contract manufacturers, one may find it possible to identify key members of the competitor’s supply chain and also further refine the estimated costs of production.

Some of this data will be useful in the marketing & sales plan (MSP) to simply provide background to a new venture’s markets of interest. But mostly, the focus of competitive research is on competitors and their products and how they are positioned in the market.

ANALYZING SECONDARY MARKET RESEARCH

Organizing the data collected consists simply of constructing tables of information, with the horizontal headings being an attribute and the vertical headings being competitor names. For examining product attributes, for instance, the horizontal headings could be (for the product), weight, size (volume), performance parameters, cost, and other features and benefits. The vertical headings would be known competitors along with the new venture’s name. Where the new venture’s product (or service) has an advantage, the appropriate cell can be marked (e.g., highlighted). Disadvantages can be marked in a different color. The advantages become essential to developing the unique competitive advantages (UCA) for the new venture, while the disadvantages must be studied intently to develop ways to mitigate their effects on consumer decisions. Mitigation may be accomplished by curing the deficiency, adjusting the price, designing an appropriate marketing message, etc.

Other tables can capture market information, such share of market, number of units sold, price per unit, etc., and can be constructed to reveal how each competitor participates in the market. In virtually all cases, a proper analysis will reveal how competitors have chosen to compete in the market. For instance, some will have gained significant and leading market shares by providing product lines that are low cost (and low performance), while others may have a market share that is smaller but based on providing products and brands that are more narrowly focused but with (presumed) higher performance and/or design characteristics. Understanding the data helps the entrepreneur understand how the market is segmented, at least prior to a new venture’s products being introduced into the market.

In situations where the new venture’s products don’t seem to have another competitor, it would be appropriate to list how customers in the market currently solve their problems and issues the new venture’s products and services are intended to solve. In other words, every company has a competitor and competitive solutions (products and services) that must be identified and understood.

USING SECONDARY MARKET RESEARCH FOR DETERMINING PRODUCT NEEDS

Generally, the more data collected and researched, the greater the ability to perform competitive analysis to determine how a new venture’s product fits within the overall market. Ideally, market niches will be discovered for which the new venture’s envisioned “new-technology” products have a unique competitive advantage (UCA) and can be sold. Competitive analysis is a fundamental aspect of the new venture’s corporate strategy and the MSP. It should naturally lead the entrepreneur to those products and attributes that will make the new venture offerings unique. Those unique attributes should result in the ability of the new venture to attract customers in the chosen target markets.

USING SECONDARY MARKET RESEARCH FOR DETERMINING PRODUCT PRICING

Product pricing is based upon the analysis of competitor pricing and an assessment of competitor product quality, share of mind with customers, potential performance issues with competitor products, etc. This market-product analysis should be conducted with rigor and presumably done by your marketing and sales team, even if that team is only you and your cofounder. Product pricing should be defined over a range of sales volumes. Obviously, the pricing of your company’s product(s) is constrained by the market and competitors within the market segment. Product pricing should be a number that investors will find difficult to discredit.

MARKET RESEARCH & ANALYSIS DOCUMENT

It would be perfectly appropriate and recommended to develop a separate supporting document called Market Research and Analysis, in which all the data related to the markets and competitors is collected and documented. This would be a totally factual document and not subject to interpretation by investors. Why? Because you want to be able to point to it and use it with investors to validate both product pricing and product sales volumes that exist within the markets segment(s) you expect to operate. This document need not be long or exhaustive, but it should be focused and referenced. Your credibility in front of investors is enhanced with the availability of such a document. You will use it to educate the investor further. Investors may conduct their own due diligence on the document to make sure your data is correct and reflective of the markets in which you wish to compete.

The SWOT analysis described in Chapter 2.5 of my book should be revisited and updated based on the new information discovered from competitive analysis and competitor research. Again, company strengths and weaknesses (internal factors) and opportunities and threats (external factors) should be reassessed. Strengths and weaknesses are easier to analyze and opportunities often seem obvious, but the discovery of even more opportunities should be anticipated.

DON’T FORGET TO UNDERSTAND THREATS

Of particular relevance, however, as they are often underappreciated, are threats. What will competitors do once the new venture enters the market place? What would happen if they lowered the price of their products in order to preserve market share and reduce the ability of the new venture to create profit and compete? How will the new venture respond? These are important questions, and the answers need to be developed at the earliest stages. One can readily appreciate that if the new venture’s response to a competitor price reduction is simply to do its own price reduction, then the effect on financial performance will likely be significant and thus affect the company’s value. It would be better to have developed an effective marketing strategy that creates customers who want only the new venture’s products. Issues such as this must be thought out and responses identified in the MSP.

 

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Rocky Richard Arnold provides strategic corporate and capital acquisition advice to early-stage companies founded by entrepreneurs wishing to successfully commercialize high-value-creation opportunities, ideas, and/or technologies. More information about Rocky can be found at www.rockyrichardarnold.com. His book, The Smart Entrepreneur: The book investors don’t want you to read, is available as paperback or Kindle ebook for purchase on Amazon at http://tinyurl.com/pv248qq. Financial software for use by startups can be purchased on Amazon at http://www.amazon.com/gp/product/B00K2KPSI2. He posts articles about entrepreneurship on his blog at http://thesmartentrepreneur.blogspot.com. Connect with Rocky on Twitter @Rocky_R_Arnold; Facebook at www.facebook.com/rocky.r.arnold; Google+ at www.google.com/+RockyArnold01.

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[1] Another type of market research, called primary research, consists of surveys, focus groups, interviews, etc. Primary research can be expensive; however, it may be appropriate in situations where it is desired to secure information about customer and user needs and anecdotal evidence of consumer acceptance in order to support sales projections.

[2] Competitor websites often have useful technical and product data.

[3] Public disclosures from public companies often contain excellent descriptions of markets, products, competitive positioning, market size, etc. Regular quarterly filings, called 10-Q, and annual reports, called 10-K, can be searched on the SEC website and databases.