Competitive Intelligence: How to Calculate the Future Competitive Index for a Market Sector - dummies

# Competitive Intelligence: How to Calculate the Future Competitive Index for a Market Sector

When you’re playing king of the mountain, you need the competitive intelligence to know where you stand in relation to the other players so you can formulate a strategy for beating them.

If your top three competitors introduce new products every 24 months, you know that you need to develop new products along the same timeline or faster to remain competitive. To gauge just how competitive your competitors will be, calculate the competitive index for the market sector you’re focusing on.

The competitive index reflects a composite measurement of your company’s competition in the areas of aggressiveness in marketing and innovation.

## How to obtain ratings and calculate the competitive index

The future competitive index looks at two aspects of marketing — advertising and sales — and two aspects of innovation — R&D (research and development) and new product introduction.

You and others rate how aggressive you predict the competition as a whole will be in each of those four categories in the months and years to come on a scale of 1 to 5 (1 = passive, 5 = highly aggressive). Here’s how to collect information and calculate the index:

1. Find out internal management’s view by recruiting 10 to 20 individuals (not senior executives) who work in different areas of your organization to rate your organization and its competitors on the four factors listed.

If you don’t have 10 people, get input from as many as you can.

2. Gather information from external sources (publications) and assign ratings based on your research.

3. If you have the budget and time, get some expert opinions.

Consult experts and expert panels to see how they would rate your organization and its competitors.

4. Summarize (average) the ratings of marketing aggressiveness from each group and record the results on a chart.

Credit: Illustration courtesy of Jim Underwood
5. Summarize (average) the ratings of innovation aggressiveness from each group and record the results on a chart.

Credit: Illustration courtesy of Jim Underwood
6. Combine your results into a single chart.

Note that the chart tracks three views: Internal view (what people inside your organization think), publications view (what your research tells you), and experts view (the collective opinion of any experts or expert panels you consulted). The chart includes a legend that breaks down the scores for these three views.

Credit: Illustration courtesy of Jim Underwood
7. Based on the three ratings, choose a rating that you think most accurately represents how the sector scores in each of the four areas listed and mark your ratings on the chart.

Internal management’s view is usually the least accurate, because it usually suffers from blind spots and bias. The view you derive from publications is probably more accurate, and expert views are usually the most accurate. However, accuracy varies according to your sources.

Credit: Illustration courtesy of Jim Underwood
8. Create a chart that shows only your final estimate of the most accurate view of the competition’s future marketing and innovation ratings.

Credit: Illustration courtesy of Jim Underwood
9. Calculate the average for marketing and the average for innovation.

In this example, the future competitor marketing index is 3.9, and the future competitive innovation index is 4.3.

10. Average the two indexes from Step 7 to determine the future competitive index.

In this example, the competitive index is 4.1. (3.9 + 4.3 = 8.2 ÷ 2 = 4.1)

## How to examine the implications of a market sector’s competitive index

The future competitive index calculated above serves as a benchmark or baseline that offers insight into just how competitive the sector is and what an organization needs to do to survive and thrive in such a competitive environment.

Benchmark Implications
0–1.99 This level of competition rarely occurs. An index in this range
generally indicates that the firm is competing in a highly
monopolistic sector. At that level, the demand for the product
generally exceeds the existing supply.
2.0–2.99 Generally, competitor moves are predictable, and change is slow
enough that a follower strategy, as well as benchmarking of
products, works fairly well.
3.0–3.99 As the competitive index passes 3.0, the environment becomes
much more competitive, and the velocity of change accelerates. As
the index approaches 3.99, complexity rises, and the level of
predictability becomes very low.
4.0–5.0 At this level, product commoditization occurs and attempts to
differentiate from the competition begin to fail; the only
competitive differentiator is price. The industry usually has more
competitors than product demand requires, which usually results in
industry consolidation. Expect vertical integration to occur
because competition at this level usually results in extreme
pressure on profits.
How to use marketing and innovation indexes to inform strategic
decisions

By carefully examining marketing and innovation ratings for a market sector, you can tell where your competitors will be allocating their resources and where you need to step up your efforts. Note the following in the chart above:

• The sector as a whole will invest fairly aggressively in sales (3.8) and advertising (4.1).

• The sector’s emphasis on research and development is fairly high at about 3.8.

• The competition’s new product introduction appears to be extremely high at 4.8. At this level, competitor product innovation may have a significant impact on shortening the product life cycles in the sector.

So what does all this mean to your organization?

• The future competitor marketing index of 3.9 indicates that you have some room to achieve a momentary advantage in this area. By increasing your efforts and expenditures in sales and advertising, you may be able to increase market share.

• The sector’s emphasis on R&D (3.8) means that you should probably monitor your own R&D spending and be prepared to increase it to at least the baseline level for competitors in this sector.

• Because new product introduction is likely to be aggressive, you need to watch for sector disruption in the future. This high index could pose a significant threat to your company if you don’t keep up the pace.