Traditional competitive analysis can be helpful for businesses that truly understand their customers’ needs, but that approach is inadequate and possibly dangerous for companies that don’t.

Many companies think they need a competitive analysis when what they really need is both a customer analysis and a competitive analysis.

Here’s how to do both in a single process to get superior results.

A good competitive analysis is a scouting report of the competitive landscape that a company must navigate to be successful. As such, it should always include an evaluation of your own firm’s strengths and weaknesses as well as those of top competitors.

Many people think obtaining competitive data is similar to gaining military intelligence. In some ways that is certainly true, but the big difference is that in capitalism we are “fighting” to earn the business of customers. In war, there are no customers and the objective is to destroy the enemy. Perhaps this explains why competitive analyses at many companies are heavy on information about competitors and very light on information about customer needs.

Control issue

Ironically, companies that focus primarily on beating the competition often find themselves outflanked because, in reality, the customer is in control of the game, not the competition.

Peter Drucker said, “The purpose of a business to find and keep a customer.” Accordingly, the primary objective of any business should be to understand what target customers are trying to accomplish with its offerings and how these customers measure success. Then, within this framework and understanding of your target customers’ needs, you can determine your competitive strengths and weaknesses from the customers’ point of view.

Many people have heard former Harvard Business School professor Theodore Levitt’s famous quote: “People don’t want to buy a quarter-inch drill; they want a quarter-inch hole.” Most people smile in acknowledgment of its clarity and truth. But very few people understand the implications it has for capturing customer needs, establishing competitive advantage, and making innovation and growth a predictable business process.

The lessons from this Levitt quote are:

• Customer needs are separate and distinct from solutions.
• Customers can tell us what they want when we focus on what they want to accomplish rather than on product or service specifications.
• A comprehensive set of customer needs can be captured directly from target customers by a skilled interviewer.

Heart of customer analysis

Once customer needs have been determined, they can be rated by importance. This is extremely helpful for the allocation of resources. Every growth strategy works better — whether it’s through innovation, better branding, competitive advantage, delivering experiences customers love, etc. — when you know what is important to customers, and what is not. This is the heart of a good customer analysis that, unfortunately, many companies lack.

To establish a competitive advantage, you must also determine the strengths and weaknesses of your firm compared to your rivals. The best way to determine a firm’s competitive strengths and weaknesses is to have its customers rate how satisfied they are on each important need.

Both importance and satisfaction ratings can be obtained from a statistically valid sample of target customers (your customers and your competitor’s customers) to provide “a killer” competitive analysis. This data will enable you to compare how well you and your rivals are satisfying the target customers’ most important needs. You’ll see exactly where you deliver superior value, where rivals do, and what you have to do to gain parity or leapfrog them.

Additionally, you will see where your target customers have important needs that no company is satisfying. These are opportunities for differentiation, innovation, and growth. This type of competitive analysis can change the game.