Entrepreneur: Competition – Entrepreneur Small Business Encyclopedia

It may be hard to believe, but competition is good for you. It
drives innovation, inspires perseverance and builds team spirit.
And that’s not all. Many times, the presence of competition
increases the market for everyone. For instance, when a Wal-Mart
goes up on the edge of a small town, not all local businesses get
hurt. Nearby restaurants, gas stations, jewelers and personal
service providers such as hair salons benefit from added traffic
and, often, higher sales than before.

Of course, competition isn’t all good. While using the presence
of threatening rivals to focus and motivate employees, you also
have to make sure your competitors aren’t going to steal your
customers. Meanwhile, you’ll be doing everything you can to grab
sales from your rivals. Step one in both of these processes is to
identify and know your competitors.

And not all businesses are your competitors. If you own a
bookstore, for instance, you don’t have to worry about the coffee
bar next door siphoning off your sales. Quite the reverse, in fact,
as book buyers may be lured by the scent of java, and coffee lovers
may wander over for some reading material to peruse as they sip.
Many other businesses are essentially irrelevant to your business.
If your motorcycle dealership sits adjacent to a day-care center,
the odds aren’t good that many of the day-care clientele–parents
or children–will turn out to be hot prospects for a bike.

Determining exactly who is your competition is pretty easy.
Companies that offer the same or similar products as you do may be
competitors. If their geographical market areas overlaps with yours
and their price points also resemble yours, it’s almost a certainty
they’re competitors. But you may also be in competition with
companies that offer products that are substitutes for yours. Look
at companies that sell accessories to your products–they may want
to begin offering a complete solution. In general, it’s safe to say
that anyone who sells anything that’s related to your offerings,
either as an accessory or a replacement, is an actual or potential
competitor.

You can develop your own competitive monitoring system by
tracking the flow of information about your business and your
market. The key question is “How do you make your money, and what
other profit opportunities exist in your field?”

Tracking information is largely a matter of networking. Talk to
vendors, customers, consultants and others who do business with
companies in and around your field to find out whether and when new
competitors are likely to pop up.

Also look in related product markets. These are the markets
whose participants are most likely to understand your customers’
needs. Companies whose products complement each other in this way
are more likely to become competitors than firms in unrelated
industries.

In addition, scan the value chain for your product or service.
Companies that occupy spots on your value chain often understand
your business and customers well enough to become rivals.

You should also suspect firms with related competencies.
Carefully scrutinize companies that have mastered technology
similar to yours, even if they appear to operate in distant
sectors. Competencies can also concern nontechnological skills such
as management of retail outlets, new product development or even
customer service.