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How is Competition Performing?
16
Long Range Planning Vol. 12
How
1s
June 1979
Competition Performing?
H. Kalff* Most companies operate with incidental information about their main competitors. In the planning stage of each company several people are involved all with some incidental knowledge but not necessary conclusive, overlapping or complementary. The author, however, has tried to make a comprehensive evaluation of the competitor not unlike a full scale evaluation plan of the organization indicating: apparent company strategy, strengths and weaknesses, in relation to the main business functions such as management, marketing, personnel, operations and finance. The elements are joined together in 15 dimensions that give an evaluation of some particular aspect of the competitor, thus making relevant his various strengths and weaknesses.
When our company offers our products or services to a group ofbuyers, it usually is not the only company in the market place that wants to stay in business. Measures of success can best be recorded in market share and net profits as evidenced in the annual accounts. This is valid both for one's own company as well as for the competitors. Every competitor has a company more or less like our company. Probably we, as a company, can learn from our competitors' performance. After all, in this dynamic society of ours, one has to stay 'up to date' in the various areas that touch the company and its working environment. This becomes even more important when decisions are to be taken to change course with corresponding consequences for the future market position and the financial results. Wrong decisions can lead to serious loss of prestige. Not only in the market place but in society at large. Nowadays, more than ever before, people outside the trading part of society hold rightly or wrongly that every company should function efficiently and responsibly.
What is Competitor Analysis? Competitor analysis is not picking up some incidental rum our about a competitor to keep in mind at a later date.
This could bias the facts as usually the facts are coloured by our opinion. We have a tendency to judge competitors' actions to be insignificant or inappropriate. Every company which plans to survive in the near or more distant future has to satisfy several norms in order to function properly in today's (and tomorrow's) societal structure where due to instant communication everyone is involved in everyone's business. Society insists on receiving more and more information about companies especially when they grow bigger. The purpose of competitor analysis is to judge the main duties and functions that are performed by a company. And both society and company tend to consider the same set of norms although the norm level may well differ. Consequently it is necessary to try to select these norms in an objective way and to see to it that we can measure the results. The added advantage is that we come to a nearly common base to compare various companies. Nearly common, because if one tries to compare data from other countries there are many inherent differences like: record keeping, bookkeeping and rates of exchange.
What are the Sources? Much information can be found in the official publications of the competitor involved. Every year a financial annual report is produced with extensive recording of the competitors' finances. Next to these, it becomes more and more customary to issue so-called 'social reports' covering the activities in the social field. Furthermore the press registers information about the competitor when certain milestones are reached. It may open a new depot, a new factory, a new sales office, launch a new product. Using this kind of information, say covering a period of 5 years, can be very helpful to give an insight in the strong and weak points of our competitor.
How to Operate? *The author is a senior marketing executive of a beverage company. Address of author is Vossenlaan 11,3951 AK MAARN, The Netherlands.
When preparing the competitor analysis it is important to get all available information in sequence. This will
How is Competition Performing? help to get an insight into trend developments. Preferably the study should have quantitative data: balance sheet, profit and loss account and cash flow data. If there are no hard quantitative facts available then one should try to obtain subjective qualitative data preferably from customers or as judged by the ultimate consumer. Special attention should be paid to events that have long term consequences like contracts, new factory sites, new products. It is a happy coincidence that time and again all companies must take action to counter increasing costs, especially labour costs. When no action is taken the profit or profit contribution readily diminishes. Profit is not a very popular concept these days. Yet today' s profit is essential for tomorrow's investment. Profit ought to be at a sufficiently high level to safeguard continuity of a company and thereby secure continuity of the employees working in that company. Many companies that go broke nowadays make profit but not enough.
The Most Important Duties of a Company Judgment of a competitor can best be done by studying the five main functions of a company. We prefer to select the following: (a) Overall function: management. (b) Specialist function: marketing, personnel, technology and finance.
Touchstones for Management The main functions of management are: (a) To satisfy customers/consumers with the company's products and services. (b) To maintain continuity of the company. (c) To make sufficient profit, long term. It is felt that when one selects the main functions, the
above mentioned are the most fundamental to industrial and service management, as no company can work without any of them. However one can debate whether more functions are necessary, e.g. use of staff specialists and consultants. If this function could easily be quantified and measured it is worth considering the addition of this function. When judging our competitors we have developed the following three touchstones for management:
17
So for our competitor analysis this is a qualitative data of the competitor. It is very likely that Within a time span of 5 years the management of the competitor has given more or less clear hints about: (a) Its action territory or markets. (b) Its activities. (c) Its wishes vis-a-vis the future. (d) Its expansion plans. (e) Its acquisition or merger plans.
(2) Motor Function This function pertains to every company that manufactures finished products or services with the help of people, machinery and raw materials. Moreover to maintain a positive social function these finished services have to be sold successfully to customers or the ultimate consumers. In this way the company produces or creates something new. Out of the proceeds co-workers can be paid. This is income for the co-workers and a certain welfare can be bought in exchange for this. Government -from local to worldwide-benefits as well as through direct and indirect taxation (usually both) and with these monies government can fulftll her duties to help those in need and to improve the societal structure by investment works in the infrastructure. Returning to the motor function of our competitor we have selected the added value per worker. This better than anything stands for the additional value of the new product/service produced. Meanwhile several companies have started to publicize this form of social accounting. In view of the fact that 'added value per worker' over several years is loaded with inflation, this has to be compensated for by, e.g. using a correction on the basis of the consumer price index. For the respective yearly data (consumer price index of the last year studied= 1), this is almost as good as if everything is recalculated in today' s money. This method is even more desirable when foreign competitors are involved and where very likely a different rate of inflation is valid. For multinationals we have assumed that the inflation of the countries where they operate have already been adjusted in the annual accounts.
(3) Management of Fixed Cost One of the most difficult functions of management is the control offixed cost. Fixed cost is to be understood as that part of expenditure that is reasonably independent from turnover. Long term every item can be considered variable cost. However in view of the function in personnel and in financing, we found a good reason to accept, personnel cost, interest on loans and depreciation (on replacement value) as fixed cost.
(1) Publicly Announced Policy
When management is performing very well there is a tendency for fixed cost to decrease as a percentage of turnover.
When management is knowledgeable about the company's social functions, it will have defined a more developed strategy and once it is more convinced of the strategy there is a tendency to publicize this, both inside and outside the company.
Comments In several countries mm1mum standards of financial accounting are laid down by law. For the time being, this leads to as many standards as one has countries.
18
Long Range Planning Vol. 12
June 1979
Sometimes regrouping of publicized data can give us the required information for our analysis. Sometimes not. It is, in this case, advised to construct simpler touchstones like: (a) Is the competitor issuing quarterly, semestrial or yearly figures? (b) To what extent is the trading area indicated by product and country and are targets put down? (e) What can we conclude about the dividend policy as it operated in the past years? (d) What is the quality of the company's image, i.e. how does customer/consumer appreciate the company?
Touchstone for Marketing These touchstones should reflect the marketing function in the company. Again we have selected the three most important ones:
(4) Marketshare Exten5ion In the short run marketing has to help solve the problem of ever increasing cost, which would result in less profit, if no action is taken. Raising prices is a universal solution but we insist on measuring how the action has resulted in the market place. No better norm than increased sales in relation to the market. And the better competitor will improve his share. And preferably this is measured in money rather than in volume as is sometimes practiced. Especially premium brands try to convince consumers to pay a bit extra for more consumer value whether real or imaginary. Also money is the universal yardstick and after all co-workers get wages in money in the majority of cases; government always.
(5) Complete Assortment If one overlooks the total market area it is possible to evaluate if the competition has important market positions in all the main segments, now and potential segments in the future. When this is not the case this can be calculated as a negative. The introduction of a new product will improve the last year's score.
(6) Improving the Company Results Marketing can combat the tendency for constantly increasing cost by changing one or more elements of the products or services offered. Ideally one looks for improved service at lower cost. By making use of new inventions, novel packaging means, a different set of raw materials, this is quite well possible. It goes without saying that in the end marketing should verify the improved product is so appreciated by the ultimate consumer. To measure results, again, the gross margin after advertising or marketing cost is the best judge if followed over several periods. If this information is not available it is advised to use the publicized net profit in relation to the competitor's turnover.
Comments In the marketing field it is not always possible to rely on these touchstones for lack of information; other possibilities can be mentioned like: (a) The selection ofgood potential markets can be judged by the fact that growth markets have been entered. With some reasonable marketing effort it is possible to maintain the market share which should lead to increased sales volume. (b) If a wide assortment is important the better competitor has ideally a product or service in any of the following life cycles: (i) starting position for renewed strategic positions; (ii) exponential growth product for improving market share rapidly, mostly at the expense of investment money; (iii) decreasing growth product both for strategic marketing position and also as profit spinner; (iv) decreasing marketing position mainly for profitmaking. (c) Universal availability for the ultimate consumer, if this can he established. (d) Again if sufficient market data are available, one can study the market position of the competitors' products in those trade channels that show a strong development themselves like, e.g. discounters, multiples, supermarkets or self service in less developed countries. This may well indicate a particular salesexpertise. (e) Low variable cost/turnover ratios can give an impression of the profit generating possibilities in a world of almost fixed personnel cost and depreciation on replacement value. (f) A more expensive way, but sensible, is to go into the market place with a qualitative check on competitors through a comparative image research.
Touchstone for Personnel Personnel is a highly important function, because people make the organization of a company tick. We have developed the following three touchstones.
(7) Turnover Increase per Co-worker Hitchhiking on a worldwide general trend, it is considered efficient to generate more turnover per coworkers. A 5-year trend can be made visible in this way. When comparing foreign companies care should be taken to introduce an inflation correction.
(8) Wage/ Turnover Rates The personnel manager may not he so visible in today' s business life. Yet after the production genius of100 years ago, the super salesman of 50 years ago, the marketing expert oflatter years, the personnel manager seems to he the coming man. His most important contribution is to combat increasing personnel costs by guiding young capable co-workers to higher classified jobs. This can be demonstrated by a relation between the total payroll, including social charges, and turnover. Five
How is Competition Performing? years' figures can, then, give a trend indication. Unfortunately this is a mixed indication as automation and mechanization influences this ratio as well.
(9) Organization We suggest a selection from several qualitative norms: (a) The democracy axis with as one extreme the oneman-show and at the other end democratic participation. (b) Another one could be: from feudal structure where decisions and information flow from top to bottom and at the other end: where co-workers are represented in the board of directors. (e) Strikes can be an indication about the quality of the personnel policy. Less extreme is absenteeism. (d) More or less sophisticated personnel policies as they become evident in: a manual for personnel affairs, opportunity for co-workers to buy shares in order to become interested in the company's welfare.
Touchstones for Technology In the technical world we have selected three touchstones which should reasonably represent the main functions that one can distinguish more clearly in the goods industry rather than in the increasing service industry. (10) Increase in Scale With a view to the long-term position it is of importance to know if scaling up involves economy of scale. If our competitors products are in this field then we establish a touchstone to what extent the average plant capacity is over the average of all the companies in this market. (11) Rationalization versus Expansion Increasing cost can be fought by rationalization. Apart from investment plans that indicate how much is spent on rationalization this is somewhat difficult to spot. Expansion on the other hand is usually more obvious as the press indicates plans for new plants, depots. Probably the most difficult to spot are technological improvements which may lead to shorter process times, improved products. An indicator of rationalization for larger corporations may well be the closure of smaller plants because of obsolescence.
19
(13) Return on Investment From a financial point of view the gaD:le is whether the company can get a better yield out of its investments in the course of time. This is best expressed by the net profit to investment ratio.
(14) Return on Assets Some companies have a pronounced view to relate profits to fixed assets and studies have shown that that may well show a different development. We consider it wise to include both ratios in the analysis rather than choose one. (15) Loan Capacity Growth is very much the objective of all companies. In order to extend the company, monies are needed. Bankers are usually more willing to supply this when shareholders equity-or capital and reserves-is roughly equal to long- and short-term debt. So consider this the 1 : 1 norm. Accepting this norm our competitor can be in a better position or not, to get money more readily.
Note. the 1:1 norm is very much a European norm: in the U.S.A. this may be considered excessively high. Alternative possibilities are investments and cashflow management which tend to be published more and more.
Conclusion From the above it is evident that in judging competitors three main data are supplied reflecting the five most important functions that can be distinguished in a company. It is tried to quantify as much as possible, even those areas where qualitative norms are more appropriate. Therefore facts and figures (see Figure 1). When we have lined up all the 15 touchstones over a period of 5 years, we try and evaluate the competitor by appreciating its performance on a scale of 1-10 or if preferred 1-100. The average of the 15 touchstones will give an overall impression. This could very well change for when next year a new recording of performances is added.
A preferred touchstone is the comparison of the competitors' products as seen by customers or consumers.
Where possible, all important competitors in the field of our own company should be evaluated on the same lines and for comparison's sake our company should be treated similarly.
Other touchstones could be: (a) Production quality as measured by export experience in the case of products which cannot be kept in first class condition. (b) Or alternatively standardization of products, or modern plant equipment.
Practical Notes Assuming a sufficiently similar method of accounting one can establish industry averages and give those competitors who do better higher marks.
(12) Quality a_{ Product
Touchstones for Finance Many touchstones had already financial implications but three typical financial touchstones have been selected for inclusion in the competitors' analysis.
When we are considering conglomerates, we may want to select only that division where straight competition is likely. This presupposes that divisional results are available in some detail. A yearly survey is advisable to keep track of our competitors.
20
Long Range Planning Vol. 12
June 1979 Competitor
IManagement I
Marketing
I I Technology I
Personnel
Finance
Raw Data Evaluation
•
Apparent Company Strateg-r Strengths Weaknesses
• • -'-
1Touchstones 1
IManagement I
Marketing
I Technology I
Personnel I
Finance
Competition Appraisal
,-Ranking Withl
Figure 1
'-~h~
The general lay out seems to be working well in the field of consumer goods. It is suggested that interested companies establish their own preferred set of touchstones.
Summary An empirical study has led to an evaluating system for competitors which covers the five main functions; general management, marketing, personnel, technology and finance. For every function three touchstones have been developed which could reflect strength and weakness not only in company terms but within a wider area of society. Next to the competitor itself industry and customers/consumers are involved as well. In order to clarify the above an example of an imaginary company is added.
Appendix The Touchstones Applied to an Imaginary Successful Competitor (Company XYZ) 1. Policy announced. The company has not pronounced its strategy nor its objectives nor its future plans. But it has explained its activities and pointed out the financial consequences. 2. Motor Junction. The company has a very good motor function for
-'
it has, after a reluctant start since 1972, produced much added value per workers with a quickened growth in the past year. The latter is even better than the industry average. 3. Management offixed costs has been o.k. The share of the fixed costs in the turnover has dropped slowly. Only 1974 showed a small backsliding. 4. Market share extension. In the combat against the increasing costs the marketing function has been well performed. At the cost of all competitors the market share has increased little by little, although 1974 showed a market drop to the lowest level during these 5 years. 5. Complete assortment. XYZ is only represented in one of the 4 markets, which characterize this trade. However, there are indications that XYZ is preparing an introduction. 6. Improvement ofcompany's results. The development of the net profit margin is far from favourable and even in 1973 and 1975 beneath the industry average. 7. The company has realized more turnover per co-worker and therefore performed well in increasing the turnover. 8. Wage/turnover rates. The company has continuously operated more efficiently with the exception of 1974. 9. Organization. The company has not made much progress in introducing democracy in the company. 10. Increase in scale. The production capacity remains 20 per cent under the industry average.
How is Competition Performing?
21
11. Rationalization versus expansion. No news about rationalization. However, it is announced that land has been bought for plant expansion.
14. Return on assets. The yield on the fixed assets has been at the industry average. Since 1972 it dropped considerably, because of the world crisis. 1976 showed recovery.
12. Quality of product. One of the two most important products is qualified well by customers; the other one is not sufficient in comparison with the market average. No problems with consumers, safety, environmental charges, scientific or emotional objections.
15. Loan capacity. The company could borrow money very easily, becauseitwasabovethe 1:1 norm with 1·21, higher than the industry average. Apparently the loan opportunity is over in 1976. Or money has been borrowed in agreement with plans.
13. Return on investment. The yield of the investments was good, that means above the industry average in 1972, but since then it has dropped to a lower level; albeit at the average industry level.
Total To keep the example simple an ordinary weighting has been applied, assuming the 15 touchstones have an equal weight.
"XYZ" An imaginary successful company 1972
1973
1974
1975
1976
Activities have been announced; strategy not . $970 $960 $980 17·1% 17·3% 17·3%
$1120 16·9%
$1350* 16·5%
Appreciation
Management Policy announced Motorfunction Fixed cost management
4 9 8
Marketing Market share extension Complete assortment Company result improvement
12·3% 12·1% 11·9% 12·5% 12·9% Only operating in 1 market, no product in the 3 substitute markets, indications of imminent product launch 2·1%
1·3%t
7 4
H%
1·6%t
1·9%
3
$8300 16·2%
$9600 15·5%
$10,300 15·3%
8 7 3
Personnel Sales per co-worker Wages/sales ratio Working procedure of organization
$7900 $7500 15·7% 16·0% One-man-show of founder
Technology Economy of scale Rationalization versus expansion Product quality
4 6 6
Plant capacity is 20% under industry average Area bought for plant extension Customers judge: 1 product o.k., 1 product not satisfactory
Finance Return on investment Return on assets Loan capacity
7·7% 10·9% 1·21*
6·0% 8·7% 1·09
4·8% 5·8% 1-19
Total
Note: Comparison with existing companies has originated in the readers' mind. *Better than industry average. tless than industry average.
4·9% 5·4% 1-18
5·2% 6·1% 1·02t
7 6 5 5·8
Long Range Planning Vol. 12
How
1s
June 1979
Competition Performing?
H. Kalff* Most companies operate with incidental information about their main competitors. In the planning stage of each company several people are involved all with some incidental knowledge but not necessary conclusive, overlapping or complementary. The author, however, has tried to make a comprehensive evaluation of the competitor not unlike a full scale evaluation plan of the organization indicating: apparent company strategy, strengths and weaknesses, in relation to the main business functions such as management, marketing, personnel, operations and finance. The elements are joined together in 15 dimensions that give an evaluation of some particular aspect of the competitor, thus making relevant his various strengths and weaknesses.
When our company offers our products or services to a group ofbuyers, it usually is not the only company in the market place that wants to stay in business. Measures of success can best be recorded in market share and net profits as evidenced in the annual accounts. This is valid both for one's own company as well as for the competitors. Every competitor has a company more or less like our company. Probably we, as a company, can learn from our competitors' performance. After all, in this dynamic society of ours, one has to stay 'up to date' in the various areas that touch the company and its working environment. This becomes even more important when decisions are to be taken to change course with corresponding consequences for the future market position and the financial results. Wrong decisions can lead to serious loss of prestige. Not only in the market place but in society at large. Nowadays, more than ever before, people outside the trading part of society hold rightly or wrongly that every company should function efficiently and responsibly.
What is Competitor Analysis? Competitor analysis is not picking up some incidental rum our about a competitor to keep in mind at a later date.
This could bias the facts as usually the facts are coloured by our opinion. We have a tendency to judge competitors' actions to be insignificant or inappropriate. Every company which plans to survive in the near or more distant future has to satisfy several norms in order to function properly in today's (and tomorrow's) societal structure where due to instant communication everyone is involved in everyone's business. Society insists on receiving more and more information about companies especially when they grow bigger. The purpose of competitor analysis is to judge the main duties and functions that are performed by a company. And both society and company tend to consider the same set of norms although the norm level may well differ. Consequently it is necessary to try to select these norms in an objective way and to see to it that we can measure the results. The added advantage is that we come to a nearly common base to compare various companies. Nearly common, because if one tries to compare data from other countries there are many inherent differences like: record keeping, bookkeeping and rates of exchange.
What are the Sources? Much information can be found in the official publications of the competitor involved. Every year a financial annual report is produced with extensive recording of the competitors' finances. Next to these, it becomes more and more customary to issue so-called 'social reports' covering the activities in the social field. Furthermore the press registers information about the competitor when certain milestones are reached. It may open a new depot, a new factory, a new sales office, launch a new product. Using this kind of information, say covering a period of 5 years, can be very helpful to give an insight in the strong and weak points of our competitor.
How to Operate? *The author is a senior marketing executive of a beverage company. Address of author is Vossenlaan 11,3951 AK MAARN, The Netherlands.
When preparing the competitor analysis it is important to get all available information in sequence. This will
How is Competition Performing? help to get an insight into trend developments. Preferably the study should have quantitative data: balance sheet, profit and loss account and cash flow data. If there are no hard quantitative facts available then one should try to obtain subjective qualitative data preferably from customers or as judged by the ultimate consumer. Special attention should be paid to events that have long term consequences like contracts, new factory sites, new products. It is a happy coincidence that time and again all companies must take action to counter increasing costs, especially labour costs. When no action is taken the profit or profit contribution readily diminishes. Profit is not a very popular concept these days. Yet today' s profit is essential for tomorrow's investment. Profit ought to be at a sufficiently high level to safeguard continuity of a company and thereby secure continuity of the employees working in that company. Many companies that go broke nowadays make profit but not enough.
The Most Important Duties of a Company Judgment of a competitor can best be done by studying the five main functions of a company. We prefer to select the following: (a) Overall function: management. (b) Specialist function: marketing, personnel, technology and finance.
Touchstones for Management The main functions of management are: (a) To satisfy customers/consumers with the company's products and services. (b) To maintain continuity of the company. (c) To make sufficient profit, long term. It is felt that when one selects the main functions, the
above mentioned are the most fundamental to industrial and service management, as no company can work without any of them. However one can debate whether more functions are necessary, e.g. use of staff specialists and consultants. If this function could easily be quantified and measured it is worth considering the addition of this function. When judging our competitors we have developed the following three touchstones for management:
17
So for our competitor analysis this is a qualitative data of the competitor. It is very likely that Within a time span of 5 years the management of the competitor has given more or less clear hints about: (a) Its action territory or markets. (b) Its activities. (c) Its wishes vis-a-vis the future. (d) Its expansion plans. (e) Its acquisition or merger plans.
(2) Motor Function This function pertains to every company that manufactures finished products or services with the help of people, machinery and raw materials. Moreover to maintain a positive social function these finished services have to be sold successfully to customers or the ultimate consumers. In this way the company produces or creates something new. Out of the proceeds co-workers can be paid. This is income for the co-workers and a certain welfare can be bought in exchange for this. Government -from local to worldwide-benefits as well as through direct and indirect taxation (usually both) and with these monies government can fulftll her duties to help those in need and to improve the societal structure by investment works in the infrastructure. Returning to the motor function of our competitor we have selected the added value per worker. This better than anything stands for the additional value of the new product/service produced. Meanwhile several companies have started to publicize this form of social accounting. In view of the fact that 'added value per worker' over several years is loaded with inflation, this has to be compensated for by, e.g. using a correction on the basis of the consumer price index. For the respective yearly data (consumer price index of the last year studied= 1), this is almost as good as if everything is recalculated in today' s money. This method is even more desirable when foreign competitors are involved and where very likely a different rate of inflation is valid. For multinationals we have assumed that the inflation of the countries where they operate have already been adjusted in the annual accounts.
(3) Management of Fixed Cost One of the most difficult functions of management is the control offixed cost. Fixed cost is to be understood as that part of expenditure that is reasonably independent from turnover. Long term every item can be considered variable cost. However in view of the function in personnel and in financing, we found a good reason to accept, personnel cost, interest on loans and depreciation (on replacement value) as fixed cost.
(1) Publicly Announced Policy
When management is performing very well there is a tendency for fixed cost to decrease as a percentage of turnover.
When management is knowledgeable about the company's social functions, it will have defined a more developed strategy and once it is more convinced of the strategy there is a tendency to publicize this, both inside and outside the company.
Comments In several countries mm1mum standards of financial accounting are laid down by law. For the time being, this leads to as many standards as one has countries.
18
Long Range Planning Vol. 12
June 1979
Sometimes regrouping of publicized data can give us the required information for our analysis. Sometimes not. It is, in this case, advised to construct simpler touchstones like: (a) Is the competitor issuing quarterly, semestrial or yearly figures? (b) To what extent is the trading area indicated by product and country and are targets put down? (e) What can we conclude about the dividend policy as it operated in the past years? (d) What is the quality of the company's image, i.e. how does customer/consumer appreciate the company?
Touchstone for Marketing These touchstones should reflect the marketing function in the company. Again we have selected the three most important ones:
(4) Marketshare Exten5ion In the short run marketing has to help solve the problem of ever increasing cost, which would result in less profit, if no action is taken. Raising prices is a universal solution but we insist on measuring how the action has resulted in the market place. No better norm than increased sales in relation to the market. And the better competitor will improve his share. And preferably this is measured in money rather than in volume as is sometimes practiced. Especially premium brands try to convince consumers to pay a bit extra for more consumer value whether real or imaginary. Also money is the universal yardstick and after all co-workers get wages in money in the majority of cases; government always.
(5) Complete Assortment If one overlooks the total market area it is possible to evaluate if the competition has important market positions in all the main segments, now and potential segments in the future. When this is not the case this can be calculated as a negative. The introduction of a new product will improve the last year's score.
(6) Improving the Company Results Marketing can combat the tendency for constantly increasing cost by changing one or more elements of the products or services offered. Ideally one looks for improved service at lower cost. By making use of new inventions, novel packaging means, a different set of raw materials, this is quite well possible. It goes without saying that in the end marketing should verify the improved product is so appreciated by the ultimate consumer. To measure results, again, the gross margin after advertising or marketing cost is the best judge if followed over several periods. If this information is not available it is advised to use the publicized net profit in relation to the competitor's turnover.
Comments In the marketing field it is not always possible to rely on these touchstones for lack of information; other possibilities can be mentioned like: (a) The selection ofgood potential markets can be judged by the fact that growth markets have been entered. With some reasonable marketing effort it is possible to maintain the market share which should lead to increased sales volume. (b) If a wide assortment is important the better competitor has ideally a product or service in any of the following life cycles: (i) starting position for renewed strategic positions; (ii) exponential growth product for improving market share rapidly, mostly at the expense of investment money; (iii) decreasing growth product both for strategic marketing position and also as profit spinner; (iv) decreasing marketing position mainly for profitmaking. (c) Universal availability for the ultimate consumer, if this can he established. (d) Again if sufficient market data are available, one can study the market position of the competitors' products in those trade channels that show a strong development themselves like, e.g. discounters, multiples, supermarkets or self service in less developed countries. This may well indicate a particular salesexpertise. (e) Low variable cost/turnover ratios can give an impression of the profit generating possibilities in a world of almost fixed personnel cost and depreciation on replacement value. (f) A more expensive way, but sensible, is to go into the market place with a qualitative check on competitors through a comparative image research.
Touchstone for Personnel Personnel is a highly important function, because people make the organization of a company tick. We have developed the following three touchstones.
(7) Turnover Increase per Co-worker Hitchhiking on a worldwide general trend, it is considered efficient to generate more turnover per coworkers. A 5-year trend can be made visible in this way. When comparing foreign companies care should be taken to introduce an inflation correction.
(8) Wage/ Turnover Rates The personnel manager may not he so visible in today' s business life. Yet after the production genius of100 years ago, the super salesman of 50 years ago, the marketing expert oflatter years, the personnel manager seems to he the coming man. His most important contribution is to combat increasing personnel costs by guiding young capable co-workers to higher classified jobs. This can be demonstrated by a relation between the total payroll, including social charges, and turnover. Five
How is Competition Performing? years' figures can, then, give a trend indication. Unfortunately this is a mixed indication as automation and mechanization influences this ratio as well.
(9) Organization We suggest a selection from several qualitative norms: (a) The democracy axis with as one extreme the oneman-show and at the other end democratic participation. (b) Another one could be: from feudal structure where decisions and information flow from top to bottom and at the other end: where co-workers are represented in the board of directors. (e) Strikes can be an indication about the quality of the personnel policy. Less extreme is absenteeism. (d) More or less sophisticated personnel policies as they become evident in: a manual for personnel affairs, opportunity for co-workers to buy shares in order to become interested in the company's welfare.
Touchstones for Technology In the technical world we have selected three touchstones which should reasonably represent the main functions that one can distinguish more clearly in the goods industry rather than in the increasing service industry. (10) Increase in Scale With a view to the long-term position it is of importance to know if scaling up involves economy of scale. If our competitors products are in this field then we establish a touchstone to what extent the average plant capacity is over the average of all the companies in this market. (11) Rationalization versus Expansion Increasing cost can be fought by rationalization. Apart from investment plans that indicate how much is spent on rationalization this is somewhat difficult to spot. Expansion on the other hand is usually more obvious as the press indicates plans for new plants, depots. Probably the most difficult to spot are technological improvements which may lead to shorter process times, improved products. An indicator of rationalization for larger corporations may well be the closure of smaller plants because of obsolescence.
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(13) Return on Investment From a financial point of view the gaD:le is whether the company can get a better yield out of its investments in the course of time. This is best expressed by the net profit to investment ratio.
(14) Return on Assets Some companies have a pronounced view to relate profits to fixed assets and studies have shown that that may well show a different development. We consider it wise to include both ratios in the analysis rather than choose one. (15) Loan Capacity Growth is very much the objective of all companies. In order to extend the company, monies are needed. Bankers are usually more willing to supply this when shareholders equity-or capital and reserves-is roughly equal to long- and short-term debt. So consider this the 1 : 1 norm. Accepting this norm our competitor can be in a better position or not, to get money more readily.
Note. the 1:1 norm is very much a European norm: in the U.S.A. this may be considered excessively high. Alternative possibilities are investments and cashflow management which tend to be published more and more.
Conclusion From the above it is evident that in judging competitors three main data are supplied reflecting the five most important functions that can be distinguished in a company. It is tried to quantify as much as possible, even those areas where qualitative norms are more appropriate. Therefore facts and figures (see Figure 1). When we have lined up all the 15 touchstones over a period of 5 years, we try and evaluate the competitor by appreciating its performance on a scale of 1-10 or if preferred 1-100. The average of the 15 touchstones will give an overall impression. This could very well change for when next year a new recording of performances is added.
A preferred touchstone is the comparison of the competitors' products as seen by customers or consumers.
Where possible, all important competitors in the field of our own company should be evaluated on the same lines and for comparison's sake our company should be treated similarly.
Other touchstones could be: (a) Production quality as measured by export experience in the case of products which cannot be kept in first class condition. (b) Or alternatively standardization of products, or modern plant equipment.
Practical Notes Assuming a sufficiently similar method of accounting one can establish industry averages and give those competitors who do better higher marks.
(12) Quality a_{ Product
Touchstones for Finance Many touchstones had already financial implications but three typical financial touchstones have been selected for inclusion in the competitors' analysis.
When we are considering conglomerates, we may want to select only that division where straight competition is likely. This presupposes that divisional results are available in some detail. A yearly survey is advisable to keep track of our competitors.
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Long Range Planning Vol. 12
June 1979 Competitor
IManagement I
Marketing
I I Technology I
Personnel
Finance
Raw Data Evaluation
•
Apparent Company Strateg-r Strengths Weaknesses
• • -'-
1Touchstones 1
IManagement I
Marketing
I Technology I
Personnel I
Finance
Competition Appraisal
,-Ranking Withl
Figure 1
'-~h~
The general lay out seems to be working well in the field of consumer goods. It is suggested that interested companies establish their own preferred set of touchstones.
Summary An empirical study has led to an evaluating system for competitors which covers the five main functions; general management, marketing, personnel, technology and finance. For every function three touchstones have been developed which could reflect strength and weakness not only in company terms but within a wider area of society. Next to the competitor itself industry and customers/consumers are involved as well. In order to clarify the above an example of an imaginary company is added.
Appendix The Touchstones Applied to an Imaginary Successful Competitor (Company XYZ) 1. Policy announced. The company has not pronounced its strategy nor its objectives nor its future plans. But it has explained its activities and pointed out the financial consequences. 2. Motor Junction. The company has a very good motor function for
-'
it has, after a reluctant start since 1972, produced much added value per workers with a quickened growth in the past year. The latter is even better than the industry average. 3. Management offixed costs has been o.k. The share of the fixed costs in the turnover has dropped slowly. Only 1974 showed a small backsliding. 4. Market share extension. In the combat against the increasing costs the marketing function has been well performed. At the cost of all competitors the market share has increased little by little, although 1974 showed a market drop to the lowest level during these 5 years. 5. Complete assortment. XYZ is only represented in one of the 4 markets, which characterize this trade. However, there are indications that XYZ is preparing an introduction. 6. Improvement ofcompany's results. The development of the net profit margin is far from favourable and even in 1973 and 1975 beneath the industry average. 7. The company has realized more turnover per co-worker and therefore performed well in increasing the turnover. 8. Wage/turnover rates. The company has continuously operated more efficiently with the exception of 1974. 9. Organization. The company has not made much progress in introducing democracy in the company. 10. Increase in scale. The production capacity remains 20 per cent under the industry average.
How is Competition Performing?
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11. Rationalization versus expansion. No news about rationalization. However, it is announced that land has been bought for plant expansion.
14. Return on assets. The yield on the fixed assets has been at the industry average. Since 1972 it dropped considerably, because of the world crisis. 1976 showed recovery.
12. Quality of product. One of the two most important products is qualified well by customers; the other one is not sufficient in comparison with the market average. No problems with consumers, safety, environmental charges, scientific or emotional objections.
15. Loan capacity. The company could borrow money very easily, becauseitwasabovethe 1:1 norm with 1·21, higher than the industry average. Apparently the loan opportunity is over in 1976. Or money has been borrowed in agreement with plans.
13. Return on investment. The yield of the investments was good, that means above the industry average in 1972, but since then it has dropped to a lower level; albeit at the average industry level.
Total To keep the example simple an ordinary weighting has been applied, assuming the 15 touchstones have an equal weight.
"XYZ" An imaginary successful company 1972
1973
1974
1975
1976
Activities have been announced; strategy not . $970 $960 $980 17·1% 17·3% 17·3%
$1120 16·9%
$1350* 16·5%
Appreciation
Management Policy announced Motorfunction Fixed cost management
4 9 8
Marketing Market share extension Complete assortment Company result improvement
12·3% 12·1% 11·9% 12·5% 12·9% Only operating in 1 market, no product in the 3 substitute markets, indications of imminent product launch 2·1%
1·3%t
7 4
H%
1·6%t
1·9%
3
$8300 16·2%
$9600 15·5%
$10,300 15·3%
8 7 3
Personnel Sales per co-worker Wages/sales ratio Working procedure of organization
$7900 $7500 15·7% 16·0% One-man-show of founder
Technology Economy of scale Rationalization versus expansion Product quality
4 6 6
Plant capacity is 20% under industry average Area bought for plant extension Customers judge: 1 product o.k., 1 product not satisfactory
Finance Return on investment Return on assets Loan capacity
7·7% 10·9% 1·21*
6·0% 8·7% 1·09
4·8% 5·8% 1-19
Total
Note: Comparison with existing companies has originated in the readers' mind. *Better than industry average. tless than industry average.
4·9% 5·4% 1-18
5·2% 6·1% 1·02t
7 6 5 5·8