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Measuring the competitiveness of a business

Measuring the competitiveness of a business

by Jim Riley

We’ve seen that competitiveness is about advantages that enable a business to outperform its competitors. But, can competitiveness be measured and, if so, how?

The extent to which a firm is more competitive, or at least as competitive, as other firms can be measured in several ways.

Traditionally, the main measures of competitiveness are in financial or marketing terms. For example, a competitive business might be expected to achieve one or more of the following:

•              A higher growth rate (sales, revenues) than competitors and the market as a whole

•              Higher-than average net profit margin (compared with others in the same industry)

•              Better than average returns on investment (e.g. ROCE, ROI) – again, compared with competitors

•              A high (and perhaps leading) market share – measured in either value or volume terms. The leading firms in a market usually enjoy a significant proportion of the available revenues or customer demand, unless the market is highly fragmented.

•              The strongest brand reputation in the market – e.g. brand awareness

•              A clearly defined unique selling point (“USP”) that enables the business to differentiate its product or service in the eyes of customers

•              Significant access to, or control of, distribution channels in the market (e.g. products or brands that are widely stocked or demanded by intermediaries who provide distribution to the final consumers)

The above measures of competitiveness are pretty easy to measure. Widely available financial information makes it easy to see which firms are achieving the highest profits in an industry (certainly those of any significant size) and which products and brands have the highest market share or growth rate. Indeed, there are whole industries devoted to measuring these kinds of things and then selling the information to firms in each industry!

So, for example, evidence that a business or brand that is increasing its market share or has a significantly higher net profit margin than its competitors would suggest that the business is competitive.  Similarly, evidence of a substantial or sustained decline in market share or profits (compared with the competition) is a clear warning sign of a business that is uncompetitive.

However, there are many other measures of competitiveness – which link directly to the other functional areas of the business. These can sometimes be harder to measure (or to find publicly-available data), but they are still very significant.

For example, a highly competitive business may enjoy the following advantages compared other firms:

•              Better quality – e.g. reliability, product features, performance

•              Better customer service – e.g. after-sales support, customer information, handling of problems & complaints

•              Higher than average customer loyalty (remember than in most markets, the most profitable customers are existing, loyal customers)

•              Better than average efficiency – e.g. being able to produce at a lower unit cost than most other competitors, either though better productivity or economies of scale

•              Faster and more effective decision-making and communication – e.g. with employees involved in customer-facing roles empowered to handle customer issues or able to pass on key market information to managerial decision-makers.

•              A more motivated and loyal workforce – which in turn should benefit productivity, efficiency, quality, customer service etc.

[Note: whilst quality and customer service are often addressed in the operations side of business specifications, they are a fundamental part of the “product” – so also vital in terms of marketing strategy]

The key point to remember is that the concept of competitiveness affects all aspects of a business’ activities – it is not just about being better at marketing.

Indeed, some potential sources of improved marketing competitiveness (e.g. being able to offer lower prices than competitors) are directly linked to other functional areas (e.g. having better productivity than the competition).

 

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