Academic journal article Journal of Managerial Issues

Competitive Analysis: Do Managers Accurately Compare Their Firms to Competitors?

Academic journal article Journal of Managerial Issues

Competitive Analysis: Do Managers Accurately Compare Their Firms to Competitors?

Article excerpt

Analysis of one's competitors has long been a staple of firms' competitive preparation. Much has been written about why and how competitive analysis should be performed (Fuld, 1985; Porter, 1980). For instance, in order to select appropriate strategies, firms frequently perform analyses of their competitors' strengths, weaknesses, opportunities, and threats (SWOT). Due to the relational nature of the SWOT analysis, competitors' capabilities must be determined in order to compare them against the strengths and weaknesses of the focal firm.

Although many different competitive analysis tools exist, and there is wide variance in their use among firms (Cartwright et al, 1995), it is assumed in some of the major strategic theories that competitors know each other fairly well. Two significant views in the strategy field presume that firms actively engage in competitive analysis in order to understand how their own firm matches up against its competitors. As one significant strategic view, Institutional Theory suggests that firms become more similar over time provided they are in the same organizational field (Giddens, 1979). In contrast, the resource-based view (RBV) of the firm claims that firms look for some way to be unique in order to gain a competitive advantage (Barney, 1986, 1991). Institutional Theory and the RBV both assume that firms are able to grasp the similarities and differences between themselves and their competitors. For firms to become more similar to or more different from their competitors, they must accurately discern the specif ic areas in which they are already similar to and different from their competitors. For instance, Institutional Theory presumes that firms come to know one another through competitive and social interactions, membership in common industry associations, professional networks, and the hiring of employees from other firms in the same industry (DiMaggio and Powell, 1991; Scott, 1991). Although the Resource-based view (RBV) of the firm does not make all the same claims as to how firms get to know one another, the implication is that through normal competition and competitive analysis, firms increase their understanding of their competitors. This study aims to ascertain how well direct competitors know each other, and whether competitors of the same type are more apt to know each other better than competitors of a different type know each other.

Below, we discuss the importance of judging the competitive similarities and differences between firms and their competitors when firms perform competitive analysis and formulate strategies. Next, we discuss the presumed accuracy of competitor perceptions of similarities and differences, as suggested by Institutional Theory and the RBV. Then, we explain why perceptions of similarities and differences among competitors are more likely to be shared when the competing firms are of similar types. This is followed by a description of the empirical investigation of the preceding issues and an explanation of the results. The last section presents the limitations of the investigation and discusses the implications of the findings.

Competitive Similarities and Differences

The environment in which a firm operates influences the perceptions of managers of firms within that environment (Fombrun and Zajac, 1987; Giddens, 1979). This influence occurs as managers process the information contained in the environment in order to make decisions and guide their firms (Porac et al., 1989). Thus, the actions that firms engage in are a result of managerial interpretations of the environment (Thomas et al., 1993). Researchers have suggested that managerial interpretations can, at times, result in shared mental models within industries as competitors simultaneously observe and interpret the same environment (Porac and Thomas, 1990). However, the extent to which interpretations are shared by managers in competing firms may be influenced by the amount of objective information that is available (Chen, 1996). …

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