Marijuana’s legalization in many states, whether for medical, recreational use, or both is creating numerous business opportunities. As more and more individuals and companies look to enter these new emerging industries the need to stake out a distinctive, competitive position becomes more and more crucial to success. An important part of crafting a successful strategy is to understand the competition and then create new and unique goods and services that create a sustainable advantage for a new enterprise.
The buzz words in management studies for this sort of research are Competitor Analysis, and this is a popular topic on the internet and in academic journals. A great deal of commentary on this topic, though, is based on or influenced by the work of Michael Porter. This is a summary of Porter’s framework for competitor analysis, based on his 1980 book, Competitive Strategy.
Competitor analysis has four diagnostic components: goals, strategy, assumptions, and capabilities. As part of a general competitive sense, companies develop a general understanding of their competitor’s strategy and capabilities, the latter usually thought of in terms of strengths and weaknesses. So one of the key objectives of competitor analysis is to dig into what drives the behavior of a competitor, their goals and their assumptions about the market and industry. However this examination cuts both ways, as it is also useful, strategically, to understand what a competitor might learn from about your own company.
Porter devotes considerable attention to competitor analysis and market signals, a related topic, in his book on Competitive Strategy, devoting full chapters to each area. This analysis should concern both actual and potential competitors, and include the exercise of attempting to predict possible mergers and acquisitions. Porter suggests a series of diagnostic questions for three of the four components, with strategy addressed more directly in the books opening chapters.
The issue of goals concerns some basis issues in crafting strategy for a company, familiar items such as mission, vision, values and objectives. Other important subjects include organizational structure, control and incentive systems, accounting systems, the managers, degree of unanimity, the composition of the board of directors, contractual commitments, and regulatory and/or social constraints. Another dimension, to all of these issues, is whether or not the competitor has a parent company and how this relationship affects their behavior. For example, what is this competitor’s role in a larger portfolio of business units? How is this firm positioned in the overall market?
One of the core concerns is to isolate the assumptions guiding market activity. Assumptions fall into two categories, those about individual firms and those about the industry. A key question here is whether such assumptions reveal blind spots which provide opportunities for competitive moves that will escape immediate detection or response. Important areas to investigate concern how existing firms sees their strengths and weaknesses, their strong emotional or historical identification with particular products, cultural or regional factors that affect their perception of events, organizational values that affect how they view events, how they view future demand, what they believe about the future of their competitors, whether or not the subscribe to conventional wisdom, and the influence of their current strategy and the degree it filters events in a way that affects the firm’s objectivity. The history of a firm is an important indicator in examining many of these factors, as is the background of their key managers. Their resumes, articles, speeches, and the consulting firms they utilize all provide important clues to understanding assumptions, and corporate goals as well.
Another key component concerns the ability to initiate or react to strategic moves. Here Porter returns to the issue of strengths and weaknesses in response to the five forces with which he is famously associated. All industries are defined, by Porter, in terms of five forces that attack a firm’s profitability. These forces are barriers to new entrants, the threat of substitute products, the intensity of the rivalry between competitors, the leverage of suppliers of key commodities, and the leverage of consumers. In some industries one or two of these forces dominant, in that they produce the biggest threats to preserving profits. For example, a key supplier sees high profits and raises their price to increase their profits at the expense of their customer’s profits. Strategy is a way to protect profits from the dominant forces in the industry. If the biggest threat is that customers have lots of choices of where to buy a product, a good strategy may be to create unique products and/or enhance customer service. What’s important here is to realize that firms don’t compete by being the best at what they do, they compete by providing unique products and services. Any firm can rely on best practices, while important they do not supply a competitive advantage.
A SWOT analysis is an important method of assessing a firm’s strengths, weaknesses, opportunities, and threats when it comes to profitable operations. Porter’s five forces framework provides a foundation for this sort of assessment; it determines why a strength is a strength, for example, and why an opportunity is an opportunity. This provide context for identifying key abilities, in both your company and in your competitors.
Competitor analysis involves understanding key abilities. The list of key abilities Porter highlights includes products, dealers, marketing, operations, engineering, overall costs, financial strength, organization, managerial ability, and corporate portfolio. Additional issues include core capabilities, ability to grow, quick response capability, ability to adapt to changed, and staying power.
These topics, along with an understanding of strategy, provide a formidable research challenge. Given this background information, competitor analysis consists of three analytic exercises. What offensive moves might a competitor initiate? What is there defensive capability? What is the best battleground for fighting with competitors? These questions not only form the basis for competitor analysis; they also provide a means to conduct industry forecasting.
Porter concludes his presentation by underscoring the need for what he refers to as a “Competitor Intelligence System.” For most established industries modern research resources provide enhanced capabilities for accessing relevant information for competitor analysis, far more advanced and efficient than when Porter first created this framework. For new industries such as those associated with marijuana’s legalization, this is a tougher process to conduct. Trade shows, industry associations, and the Cannabis Cup expositions presented by High Times are all important resources for learning about the competition.
Competitor analysis is a valuable tool to help entrepreneurs find their place and successfully compete in the new marijuana legalization industry.