Competitor analysis: the

missing link in strategy

William E. Rothschild

No top manager would deny that a competitor focus is an

essential element in developing corporate strategy in today's
cut and thrust for larger shares of often diminishing markets.
Yet although many companies go through the motions of
keeping an eye on competitor moves, the real message behind
the data they collect is all too often missed. In this article a
GE strategist suggests what questions to ask ahout
competitors, how to ohtain the answers and how to interpret
those answers to the best strategic advantage.
Over the past two decades, American companies have experienced
dramatic changes in their domestic competitiye enyironment. Small
specialist competitors have exited or been swallowed up by larger
multi-industry companies - resulting in often stronger, financially
solvent, but more unpredictable competition. Foreign and multinational competitors have taken aim at the critical and more
profitable US markets, which are easier to penetrate and pivotal to
worldwide success, while building and maintaining in their own
home markets barriers to the entry of US companies. This foreign
invasion has taken many forms, including importing, acquiring US
companies, and building US plants. The results have been staggering; in some industries, few or no US manufacturers haye surywed.
But competitiye change hasn't been limited merely to new configurations of traditional competitors. It has also included a considerable number of new companies and complete substitution by
new types of products. The recent digital watch inyasion of the
analog dial watch market is a case in point: electronics and integrated circuit manufacturers haye taken share and position from
the traditional watchmakers.
THE McKINSEY QUARTERLY

Neglected task
All these facts are well known to readers of the business press. Yet
competitor analysis has remained a largely neglected managerial
task. Far too little emphasis has been placed on answering such
:>asic questions as:
" Who is the competition now and who will it be in the future?
" What are the key competitors' strategies, objectives and goals?
How important is a specific market to the competitors and are
they committed enough to continue to invest?
What unique strengths do the competitors have?
Do they haye any weaknesses that make them vulneral)le?
What changes are likely in the competitors' future strategies?
What are the implications of competitors' strategies on the
market, the industry and one's own company?
On the surface these questions appear to be logical and straightforward. Yet; the answers are usually lacking, for a variety of
reasons:
Overconfidence. Many managers who lead profitable businesses tend
to be overconfident. Because of their past success in winning the
competitive battle, they begin to believe either that the competitor
S inept or that they are superior.
<(

Confusion. Some business managers are simply confused. They are

confused about how to obtain competitive intelligence or what to
do with it. Some companies, although they subscribe to clipping
seryices or have elaborate systems to distribute data, never really
see or understand the competitor's strategy or its implications.
Other companies employ analysts or consultants to write extensive
competitor reports, yet never use these analyses (which admittedly
olten lack insight) to determine how the competitor may affect the
industry m general or themselyes m particular. Competitor analysis
IS of strategic yalue only if it highlights the implications and
enables management to formulate or reyiew its own strategies.

Concern. A third cause of ineffectiye competitor review is fear that

the company will be forced to employ illegal or unethical tactics to
obtain the data it seeks. This concern is completely unwarranted:
the strategic data required to make effective analyses are available
from legal, ethical and relatively convenient sources. The desire to
tell the world and influence investors usually leads competitors to
broadcast their investment priorities and strategy in a variety of
ways.
Another concern that sidetracks management from competitor
review is that intelligence will be misinterpreted, resulting in
wrong decisions. Of course, this is a risk in any analysis or planning
- data can be misinterpreted, and misinterpretation can lead to
failure. But a leader must assume some calculated risk.
Who are they?
Now let us return to our list of basic questions. The first to consider
is deceptively simple: Who is the competition now? Who will it be
fiye years from now?
Covering all possibilities. Competition for your customers' discretionary and nondiscretionary dollars comes in many shapes and
forms; there are many ways to satisfy the customers' needs and
wants in the areas you serve. So we are led to the further questions:
''What is the customer buying?" and "What are all the ways the
customer can be satisfied in achieving this need or want?" If a
consumer wants entertainment and you are in the television
market, you should consider all the forms of entertainment on
which a consumer might choose to spend his money: radio, stereo,
home movies, hobbies, games, in-home sports, and so on. (The true
scope of competition here was painfully learned by radio console
manufacturers when television entered the scene.)
Industry profile. A second way to examine competition is to draw
up a demographic profile of the competition in your industry.
Industries dominated by small single-industry specialists or small
regional producers differ significantly from those dominated or led
by multi-industry companies, and these, in turn, are different from
those controlled by multinational or foreign companies. It makes
sense to use these classifications to profile the competitors. For
instance, some companies will be dedicated to the industry and thus
can be classified as ''single industry." Others will have businesses
in many industries and thus haye the option of using one to pay for
growth in others. Oyerlaying this classification, the competitors

THE McKINSEY QUARTERLY

How the competition changes

Company
type

Marketfocus
US

Single-industry

A
B

c;
Multi-industry

D
E
F
G
H

Foreign

MNC

Conglomerate

F'reseni

Single-industry

Multi-industry

Conglomerate

us;

Foreign

C&L
1

E
F
G

MNC

O&K

H&J

Foreign

MNC

us
A

Single-industry

C&L
Multi-industry

D&K

H&J

E
Conglomerate

AUTUMN 1979

45

should be classified as domestically focused, participating abroad

on a selective or opportunistic basis: foreign focused; or multinational worldwide. Combining these two assessments of company
type and market focus provides a graphic display that can be used
to describe the competitive position in the industry in the past and
the present and to anticipate likely changes in the future.
Exhibit I shows the changes that have occurred oyer the past fiye
years and that may take place oyer the next fiye-year period in one
industry. Fiye years ago, this industry included a number of singleindustry specialists (companies A to D) that accounted for approximately 50 percent of the market; the other major participants were
diyisions of larger multi-industry companies (E to H); m addition,
the Japanese were beginning to make their moye, with two companies (I and J) leading the way. Today, only one competitor
remains in the single-industry category, and eyen this competitor
is under attack and could be forced to merge or sell out to another
company. A number of the companies baye been acquired or haye
merged into Japanese and European companies. Thus, the competitiye game in this industry has significantly changed and may
continue to do so, with the possibility that two companies will exit
completely in the next few years.
Change of role. A third yiew of competitors focuses on potential
changes by reviewing the total system of interactions from supply
to user. Could any of the participants in the system expand their
role and become competitors? The suppliers of components or
materials, for instance, may decide to integrate forward and
compete with you - or distributors may decide to integrate backward. For example, when Ford announced that it was discontinuing
the manufacture of Philco appliances, Philco distributors were left
empty-handed. Since the other major producers already had independent wholesalers, or sold direct, they were faced with a
choice - get a new product line or quit. They decided they would
band together, form a buying pool, and obtain a private label line,
reintroducing the defunct Crosley brand which they will haye built
to their specification by other manufacturers: Rockwell/Admiral
will proyide the refrigerator line, Revco freezers: Hardwick, gas
and electric ranges; McGraw-Edison, air conditioners. Backward
integration has offered these wholesalers a chanc-e to suryiye and
compete effectiyely against the national brands; of course, only
time can tell whether this strategy will bo successful.
In much the same way, customers may also elect to become their
own suppliers in the manner of Ford and General Motors, who

46

THE McKINSEY QUARTERLY

acquired component manufacturers and became competitors in the

components field.
What are they up to?
Having established the identity of the major competitors, the next
question to ask is: What are the major competitors' investment
priorities and objectives? A listing or graphic display of the
competition and major competitors isn't sufficient. It is important
to understand their total corporate situation and intentions, a task
that will yary in complexity depending on whether a competitor is
a specialist, diyersified, domestic, or worldwide in scope. In essence,
we wish to know the competitors' total financial situation, determine whether they haye profitable and balanced portfolios, and
identify any serious problems they may have and the opportunities
they are trying to pursue.
Single-industry specialists are the easiest to evaluate since they
are dedicated to one industry. Often they are ''niche"-oriented and
distinguish themselves by innoyation, quality, or dependability.
Further, they are often led by an aggressive, strong-willed, even
autocratic entrepreneur which may be both a strength and a
limitation.
Multi-industry diversified companies have a variety of business
options. Each business should have its own investment and corporate purpose, and it is important to understand each one.
It IS useful to ascertain how a competitor describes each of its
businesses in order to determine the balance and viability of its total
portfolio. Is the competitor trying to grow in too many segments
simultaneously? Does it haye a sufficient number of earnings and
cash generators? Will tbe total achieve desired results? Multimdustry c-ompanies rarely have management depth sufficient to
lead all their businesses effectively and, therefore, often appoint
managers who are unaware of the industry's peculiarities or
subtleties; this may lead to wrong decisions and reduced profitability all round.
Location or market focus can also change emphasis and objectives.
Foreign ('ompetitors may be influenced, positively or negatively, bv
their own governments. Governments may require that competitors
reduce profitability to increase employment levels or to maintain
the balance of trade. They may bar a competitor from obtaining
supplies in low-cost areas. On the asset side, they may subsidize

AUTUMN 1979

profits through low-cost government loans, tax concessions, or

infiated profits on government projects.
The objectives and investment priorities of multinational companies are even more difficult for an American domestic company
to comprehend. Multinational companies may sacrifice profits in
one country to penetrate or gain position while using profits from
another country to support this aggressiveness. They have the
ability to work with governments, select the least costly source of
supply, and even negotiate favorable trade concessions.
Industry commitment
Next, you should consider how important your industry is to the
competitor and what its strategic purpose is. It is essential to assess
a competitor's overall goals, but you should try to pinpoint your
competitor's purpose in your own industry. Its commitment may be
based on rational judgments or on emotions. On the rational side,
it may be the anticipation of growth, strong customer needs, or
some unique product or market strength - i.e., your industry may
be important to the competitor's future growth, earnings performance, or cash-flow position. A rational basis is normally to be
preferred, since the competitor's behavior is most likely to be
consistent and logical. For example, if the competitor is depending
on your industry to finance its other ventures, then it will fight
hard to protect this cash-flow position.
Often, however, emotions play a significant part in decision making. The competitor's commitment may be based on such shallow
reasons as: "The CEO grew up in the industry and is emotionally
attached to it," 'The business is the core from which the total
corporation grew," or "The industry is considered glamorous and
exciting." Investments are consequently made that are unjustified
or even detrimental - such as adding capacity when there is already
overcapacity, introducing new expensive modifications prematurely, or cutting prices to gain share in a declining market.
Key strengths and resources
The next area of concern is: What are the competitor's relative
strengths and limitations? Can they support its investment
strategies? These are deceptively simple questions. Many managers
believe they know their own resources and have a good grasp of
those of their competitors. This is rarely the case. It requires an
assessment of the competitor's resources in light of the strategy it
has chosen to pursue.
,
4o

THE McKINSEY QUARTERLY

If the competitor wishes to gain share by innovation, does it have

the proper skills to do the job? These will be different from those
required to hold position, maximizing earnings via a low-cost
position. Thus one must look at critical resources required by a
competitor and ask if it can obtain what is required in both
quantity and timing.
The major resource areas that should be assessed for each competitor are management, innovation, financing, production and
marketing.
Management. Who are the key leaders and decision makers? How
quickly can decisions be made? Is the management team knowledgeable or experienced in the industry? Are they risk takers? Is
there depth in the management ranks?
The answers to these questions will reveal managerial skills,
flexibilities, values and longevity, thus enabling you to determine
the competitor's managerial fit with the strategy it is pursuing. If
the strategy requires flexihility and rapid decision making, but the
management team is risk-ayerse, slow and deliberate, the competitor vail have a major problem in executing its desired strategy.
If the strategy is aimed at maximizing cash flow by a slow harvest,
but the management is aggressive and growth-oriented, then there
is a serious mismatch that may be unresolvable,
Innovation. Assessment here must identify the driving forces hehind the competitor's innoyation record. It is not unusual to find a
few key individuals as the driving forces behind innovation or to
find the entire compj^ny's success built upon a few key patents. In
svich a case, the competitor's ability to continue this track
record must be determined. Financing of innovation should also be
studied to find out where the financing came from and how consistent it has been.
Does the competitor pride itself on its innovation ability? If so, it
may haye a difficult, if not impossible, job of accepting or implementing the role of follower. If a strategy requires applied
research or "quick-follow" skills but the competitor has traditionally focused on basic research and is unable to follow rapidly,
tben this may signal a major limitation.
Financing. This reyiew should include the traditional assessments
of debt to equity, liquidity ratios, credit availability and costs, as
well as an understanding of financial objectives and constraints.

AUTUMN 1979

49

Here one must attempt to understand the competitor's ability to

generate financing both internally and externally at the right time
and in sufficient quantity. If a strategy requires large but cyclical
volumes of cash and the competitor isn't able to obtain them, the
strategy won't be successful. If a competitor wants to increase its
worldwide sales but isn't able to provide long-term, low-cost
financing, its results will be disappointing.
Production. This requires an evaluation of efficiency, cost reduction, and capacity and supply situations, along with an understanding of the competitor's total resources for production - human and
material. Some useful questions to probe are:
1! Does the competitor manufacture in a high- or low-cost labor
area?
1! Is its plant and equipment efficient?
T Is its flexibility or response to market demands inhibited by too
much integration, capital intensity, or overdependence on one
technology?
T How sensitive is its break-even to capacity utilization?
\ How skilled is it in maintaining quality?
II How is it affected by

OSHA

and EEO regulations?

Marketing. How do the competitor's marketing abilities compare

to the requirements imposed by its strategy or market? Some strategies require the ability to anticipate and/or create customer needs,
while others are more dependent on providing pre- and post-sale
service. If the key skills aren't available, the competitor will have
less than optimal results. Marketing skills, like any other resource,
must be carefully nurtured and preserved and thus require consistent financing.
Exhibit 11 provides a checklist to help in assessing these critical
resources.
Sources of data
Many managers agree on the need to evaluate and anticipate
changes in competitors' abilities, but seem to be at a loss on where
to look for the information, [t isn't that much of a mystery. Ba.sic-

'yUK WcKlMSEY QUAKTEIiLY

'hi!

Checklist for competitor resource analysis '

Management

Innovation

Financing

Key people
Objectives and
priorities
Values
Reward
systems

Technical
resources
Concepts
Patents and
copyrighls
Technological
sophistication
Technical
integration

Long-term

Decision
making
Location
Type
Speed
Planning
Type
Emphasis
Time span

Staffing
Longevity and
turnover
Experience
Replacemern:
policies

Organization

Centralization
Functions
Use of staff

Production

Physical
resources
Capacity
Plant
Short term
Size
Line of credit
Location
Type of debt
-Age
Cost of debt
Equipment
-Automation
Liquidity
-Maintenance
Human
Flexibility
resources
Cash flow
Processes
Key people and Days of receivables Uniqueness
skills
Inventory turnover
Flexibility
Use of external
Accounting
Degree of
technical groups
practices
integration
Funding
Total
Percentage o'
sates
Consistency
overtime
Internally
generated
Governmentsupplied

Debt/equity ratio
Cost of debt

Human
resources
Key people and
skills
Turnover

Systems
Budgeting
Forecasting
Controlling

Human
resources
Key people and
skills
Workforce
-Skills mix
Unions
Turnover

Marketing
Sales force
Skills
Size
Type
Location

Distribution
network
Research
Skills
Type
Service and
sales policies
Advertising
Skills
Type
Human
resources
Key peopleand

skills
Turnover
Funding
Total
Consistency
overtime
Percentage
of sales
Reward systems

nllriHi'd t ? ' ' " " " V ^ " " ' " ^ ^'^l''^'' f businesses (sizes, priorities, importance to company) and resources
provided by parent company. \f foreign, examine national priorities of home country, degree of government
ownership, supports, incentives, hom<;-market environment.
government

ally, there are three sources of "secondary" data: what the competitors say about themselves; what others say about them- and
what your own people have observed in monitoring their activities.
Competitors provide data about their strategy and resources in
advertising, promotional materials, speeches, personnel changes
and want ads. They also provide information to the government and
investors through reports, prospectuses, testimony and required
documentation.
In addition, outsiders write and speak about the competitors This
includes books, articles, case histories, product evaluations testimony m trials and special industry studies. All these sources can
be evaluated and embellished by your own management and professionals m sales, manufacturing, finance and engineering

AUTUMN 1979
51

Sources of competitor information

Public
Advertising
What
competitors Promotional
materials
say about
tfiemselves Pressreleases
Speeches
Books
Articles
Personnel changes
Want ads

Trade professionals

Government

Investors

Manuals
Technical papers
Licenses
Patents
Courses
Seminars

SEC reports
FIC
Testimony
Lawsuits
Antitrust

Annual meetings
Annual reports
Prospectuses
Stock/bond
issues

Suppliers/vendors
What others Books
Articles
Trade press
say about
Case studies
Industry study
them
Consultants
Customers
N ewspaper reporters Subcontractors
Environmental
groups
Consumergroups
Unions
"Who's Who"
Recruiting firms

Security analyst
Lawsuits
Antitrust
reports
State/federal Industry studies
agencies
Creditreports
National plans
Government
programs

The key is to develop a profile of competitors, test for validity and

identify areas of agreement and disagreement. It is surprising just
how much is known and what can be deduced from competitors'
actions. Exhibit III outlines these sources of data.
Implications of change
Another question that must be considered is: What could cause
a change in competitors' priorities, strategies or resources? Any
significant change in the external ''macro" environment (hke
government, society, or the economy) or in the internal "micro"
environment can cause a change in competitive behavior. Likewise,
the acquisition of a company may strengthen or weaken it (in
some cases, the merger is so disruptive that it causes the competitor actually to lose strength). At other times, a competitor
changes when a new chief executive officer takes over. It is always
important to look at the line of succession and determine if the next
in line will follow the same game plan. If an outsider obtains control you can count on change. Another key change agent is the
disruption of priorities - such as a new venture causing red ink or
requiring extensive management attention.
Finally what will be the effect of all the competitors on the industry 'market, and your strategy? Most managers stop their
evaluations too soon. Tbey analyze one, two, even three com-

52

THE McKINSEY QUARTERLY

petitors but, because they fail to interrelate their assessments, they

never see the consequences of one competitor interacting with
another.
The importance of this composite picture is seen in the case of one
industry segment, a high break-even business requiring high
capacity utilization. Four of the five competitors were aiming to
grow and the leader had vowed to hold its position, so a tough battle
was expected and a lot of red ink was likely to flow. Two of the
companies were planning to add capacity, which could mean there
w^ould be excess capacity. Investment was likely to be heavy,
ranging from $90 million to $250 million over five years. The
combination of aggression, possible excess capacity and high
capital investments meant the going would be expensive.
The final step is to determine how the competitors can affect your
company and the worth of your strategy. If a company expects to
compete in the segment just described but doesn't wish to expend
heavily on capacity, then it must learn to specialize, or risk
extinction.
As an aid in determining and reviewing strategy, competitor
analysis is increasing in complexity and importance. If it is to have
the influence it deserves, top managers must insist on a disciplined,
comprehensive and strategically focused effort to assess each
major competitor and the total interaction between competitors
and the corporation.

Wdlutin K. Jiothsrhild is matiagef-ofstf;ileL':y intr^r;Uionin Gcncrol

EU'cinc's Coi'por'atc [Manning and Dcvclopnient Operation. This
ailick' is ivprintfd h\ special permission of th[' author nnd publisluT from the rJuiy \^HUV o\'Management Rcvicir. Copyright i i979
b*' tlie American Alanai^emcnt Associations.

AUTUMN 1979

53