Introduction
A competitive analysis is a critical component of any UK business plan, providing a structured overview of the market environment in which a new or existing venture operates. This process involves identifying direct and indirect competitors, evaluating their strengths and weaknesses, and defining a business's unique position within the marketplace. For UK entrepreneurs, investors, and business owners, a well-researched competitive analysis demonstrates market awareness and strategic thinking, which are essential for securing funding and developing effective growth strategies. The analysis typically covers competitor identification, market share estimation, barrier to entry assessment, and the articulation of a business's competitive advantage. This guide, based on established business planning methodologies, outlines the essential elements required to conduct a thorough competitive analysis for a UK-focused business plan.
What is a Competitive Analysis?
A competitive analysis is a form of market research that systematically identifies a business's competitors, analyses their strengths and weaknesses, examines the strategies they employ, and highlights what makes the business unique. It is a foundational exercise that must be conducted before finalising a business plan. The information gathered during market research, such as industry revenue figures, cost trends, and overall market size, forms the basis of this analysis. The purpose is to gain a clear understanding of the competitive landscape to develop strategies that secure a competitive advantage and improve the business's overall strategy. Without this analysis, it is difficult to comprehend what other businesses are doing to attract and retain customers in a target market.
Why is Competitive Analysis Important for a UK Business Plan?
Including a competitive analysis section in a UK business plan is vital for several reasons. Primarily, it demonstrates to potential investors, lenders, and stakeholders that the business owner understands the competitive environment in which they will operate. It shows that the business has identified its competitors and has formulated plans to address them. For entrepreneurs seeking to raise capital, a competitive analysis is often a mandatory requirement. Investors are particularly wary of entrepreneurs who claim to have no competition, as this can be perceived as a lack of market awareness or due diligence. A robust competitive analysis reassures investors that the business has a viable strategy to capture market share and succeed against established players.
Key Components of a Competitive Analysis
When constructing the competitive analysis section of a business plan, several key components should be included to provide a comprehensive picture.
Competitor Overview
The first step is to identify all relevant competitors, categorising them as direct or indirect. Direct competitors offer similar products or services to the same target audience. For example, in the UK soft drink industry, Pepsi and Coca-Cola are direct competitors. Similarly, in the athletic shoe market, Nike and Adidas are direct competitors. Indirect competitors, on the other hand, may offer different products that fulfil the same customer need or may target a different audience with a similar product. For instance, a fine dining restaurant in the UK may face indirect competition from fast-food chains, while a high-end spa could be indirectly competing with at-home spa products. A comprehensive overview should describe each competitor's products or services, their market position, and their primary target customers.
Direct and Indirect Competitors
Distinguishing between direct and indirect competitors is crucial for a nuanced analysis. Direct competitors are those who market the same product to the same audience. Indirect competitors may market the same product to a different audience or offer a different solution to the same problem. Understanding this distinction helps a business identify the full spectrum of competition it faces and uncover potential market opportunities. For example, a UK-based cinema chain competes directly with other cinema chains but indirectly with streaming services like Netflix, which offer a different but related entertainment experience.
Competitive Advantage
This section requires a business to articulate its unique value proposition. It involves analysing the strengths and weaknesses of each competitor and explaining how the business will differentiate itself. Key elements to cover include the business's unique value proposition, its pricing strategy, and its marketing approach. By understanding competitors' strengths and weaknesses, a business can position itself to exploit gaps in the market or offer a superior alternative. For instance, a business might identify that competitors in a particular sector have poor customer service and therefore decide to make exceptional service a core part of its competitive advantage.
Market Share
Estimating the market share of each competitor is an important analytical step. This involves researching the proportion of the total market sales that each competitor captures. The business plan should then explain how the new or growing business intends to gain market share. This strategy should be linked to specific actions, such as the sales strategy, customer acquisition tactics, and promotional efforts. For example, a plan might detail how a new product launch, supported by a targeted digital marketing campaign, is projected to capture a specific percentage of the market within the first two years.
Barriers to Entry
Identifying barriers to entry is essential for understanding the level of difficulty in entering the market. These are obstacles that make it challenging for new companies to start operating in a particular industry. Common barriers include high capital costs (e.g., the investment needed for manufacturing facilities), regulatory requirements (e.g., food safety standards or financial services regulations in the UK), and proprietary technology (e.g., patented processes or software). Understanding these barriers helps a business assess the threat of new entrants and justify its own market position.
The Process of Conducting a Competitive Analysis
A structured process is recommended to ensure a thorough and objective analysis. This typically involves several key steps.
Step 1: Define Your Target Market and Customer Personas
A competitive analysis must begin with a clear definition of the target market. These are the customers that all businesses in the sector are competing for, so understanding their needs, characteristics, and behaviours is fundamental. Creating customer personas—detailed profiles based on key themes, characteristics, and behaviours—can help businesses effectively target their messaging and strategies. In a B2C (business-to-consumer) market, where customers are highly varied, this step is particularly important to avoid a one-size-fits-all approach.
Step 2: Understand Your Own Market Position
Before analysing competitors, a business must first understand its own current position in the market. This provides a benchmark and clarifies what information needs to be gathered about competitors. Objective self-assessment can be achieved by engaging with current customers through interviews or surveys to understand their perceptions and needs. This internal perspective is crucial for accurately comparing strengths and weaknesses against competitors.
Step 3: Identify and Research Competitors
Once the target market and own position are clear, the next step is to identify all direct and indirect competitors. This involves researching their products, services, marketing strategies, customer reviews, and public financial information (where available). The goal is to gather data on their strengths and weaknesses relative to your own business. This research should be ongoing, as the competitive landscape can change rapidly.
Step 4: Analyse and Synthesise Findings
The gathered information must be organised and analysed to draw meaningful conclusions. This involves comparing competitors across key dimensions such as product features, pricing, quality, customer service, and brand reputation. The synthesis should lead to a clear understanding of where the business stands in the market landscape and identify opportunities for differentiation. For example, an analysis might reveal that while competitors have a strong presence on high streets, there is an underserved online segment for a particular product.
Conclusion
A competitive analysis is not merely a box-ticking exercise for a business plan but a strategic tool that provides deep insights into the market dynamics. For UK businesses, it is essential for demonstrating market understanding to investors and for developing robust strategies to achieve growth. By systematically identifying competitors, analysing their strategies, and defining a clear competitive advantage, businesses can position themselves for success. The process, though detailed, is manageable when approached in a structured manner, starting with a clear definition of the target market and culminating in a strategic plan to capture market share. Ultimately, a well-executed competitive analysis forms the bedrock of a credible and compelling business plan.