Researching a Company's Competitive Position

Financial statements describe economic results, while competitive research helps investigate some of the business forces that may contribute to those results.

Strong historical numbers do not guarantee that the competitive position remains strong.

A competitive advantage is an attribute or combination of attributes that may allow a company to compete more effectively than rivals.

Examples may include:

• Brand strength
• Switching costs
• Network effects
• Cost advantages
• Scale
• Intellectual property
• Distribution
• Customer relationships
• Specialized expertise

These must be investigated rather than assumed.

Having a good product does not automatically create a durable competitive advantage.

Competitors may imitate products, lower prices, improve technology, or develop alternatives.

Before researching competition, understand:

• What the company sells
• Who buys it
• How the company makes money
• Major revenue sources
• Major cost drivers
• Geographic markets
• Distribution channels

Determine the markets or industries in which the company actually competes.

Do not rely only on broad sector labels; a company's real competitive arena is often narrower or different from its official classification.

Competitors can be located using:

• 10-K filings
• Company investor materials
• Competitor filings
• Industry publications
• Earnings calls
• Reputable market research

Many 10-K filings discuss:

• Competitive conditions
• Major competitors
• Price competition
• Product differentiation
• Technological change
• Barriers to entry

As covered in Lesson 4, the Business section of the 10-K is a primary source for this research.

A direct competitor offers a similar product or service to similar customers.

An indirect competitor solves the same customer problem differently.

Hypothetical example: two companies selling similar accounting software to small businesses are direct competitors; a spreadsheet tool that customers use to accomplish the same task is an indirect competitor.

Organize competitor research in a structured comparison rather than relying on impressions.

The Competitive Position Research Dashboard below provides a framework. Not every metric will be available or comparable for every company.

Market share measures a company's sales relative to the total sales of its market.

Market Share = Company Sales in the Market ÷ Total Market Sales × 100

Hypothetical example: Company sales = $2 billion. Total market sales = $20 billion. Market Share = $2B ÷ $20B × 100 = 10%.

Estimates can vary depending on how the market is defined.

Gaining market share can be meaningful but must be investigated. Possible reasons include:

• Stronger products
• Better pricing
• Acquisitions
• Competitor weakness
• Geographic expansion
• Temporary promotions

Declining share deserves investigation but is not automatically proof of a failing company.

A company may deliberately exit unprofitable segments, or the market itself may be changing.

Brand reputation may influence:

• Customer preference
• Pricing
• Repeat purchases
• Distribution
• Customer acquisition

Do not treat brand recognition alone as proof of competitive strength.

Pricing power is the ability to raise prices without causing unacceptable loss of customers or demand.

Pricing power should be investigated through actual results, not assumed from reputation.

Look for:

• Price increases
• Unit volume changes
• Customer retention
• Gross margins
• Competitor pricing
• Management commentary

Hypothetical example: A company raises average prices by 8%.

Scenario A: Unit volume declines 1%.

Scenario B: Unit volume declines 15%.

Scenario A may provide stronger evidence of pricing power than Scenario B, because customers largely stayed despite the higher price. Both scenarios still require additional research into margins, competitors, and customer behavior.

Strong or stable gross margins may provide clues about pricing and cost position.

But margins alone do not prove a moat.

Operating margins can help compare business efficiency and competitive economics across companies.

The Fundamental Analysis course covers margin analysis in depth; this lesson connects those measurements to competitive research.

Consistently strong return on invested capital (ROIC) can be useful when researching competitive economics, because it measures how effectively the company turns invested capital into profit.

Do not establish an arbitrary ROIC threshold; compare trends and competitors instead.

Businesses earning unusually attractive returns may attract competitors.

Researchers should therefore ask what prevents competitors from taking those returns away.

Barriers to entry are obstacles that make it difficult for new competitors to enter a market. Possible examples:

• High capital requirements
• Regulation
• Patents
• Distribution
• Specialized knowledge
• Scale
• Customer relationships
• Network effects

Lower costs may come from:

• Scale
• Purchasing power
• Manufacturing efficiency
• Logistics
• Technology
• Favorable sourcing

Economies of scale means that per-unit costs can decline as a company produces or sells more, because fixed costs are spread across more units.

Hypothetical example: A company with $10 million of fixed costs producing 1 million units carries $10 of fixed cost per unit. If it produces 2 million units with the same fixed costs, the fixed cost per unit falls to $5.

Customers may remain with a supplier when changing providers is costly, risky, disruptive, or time-consuming. Examples:

• Software migration
• Retraining
• Data conversion
• Operational disruption
• Integration costs

Switching costs may not appear as a line item. Researchers can look for:

• Retention
• Renewal rates
• Churn
• Contract duration
• Customer comments
• Implementation complexity

Retention may help evaluate competitive position because keeping customers can be evidence that the company continues to serve them effectively.

Customer Retention Rate = (Customers at End of Period − New Customers Added) ÷ Customers at Beginning of Period × 100

Limitations apply when companies do not disclose comparable customer data.

Dependence on a small number of customers can weaken bargaining power or increase risk.

As covered in Lesson 4, significant customer concentrations are often disclosed in the 10-K.

Suppliers can affect a company's competitive economics. Research:

• Sole-source suppliers
• Commodity exposure
• Supplier concentration
• Long-term agreements
• Alternative sources

Access to stores, distributors, logistics networks, sales forces, or digital platforms may matter.

A product competitors cannot easily get in front of customers faces a real obstacle, regardless of its quality.

A network effect exists when a product or service may become more useful as more participants use it.

User growth alone is not proof of a network effect; investigate whether each additional participant actually makes the service more valuable to the others.

Intellectual property can include:

• Patents
• Trademarks
• Copyrights
• Trade secrets
• Proprietary technology

The existence of patents does not automatically establish durable protection.

R&D can help a company innovate and maintain its position.

High R&D spending alone does not prove successful innovation; investigate what the spending has produced.

Researchers can investigate:

• Product launches
• Product improvements
• Adoption
• Replacement cycles
• Competitor launches
• Obsolete products

Regulation may create barriers to entry while simultaneously creating costs and risks for existing companies.

A regulated position is not automatically an advantage or a disadvantage; it is context requiring investigation.

Possible advantages involving geography include:

• Local scale
• Distribution
• Licenses
• Supplier networks
• Customer relationships

Do not assume geographic dominance is permanent.

Competitive advantages can weaken over time. Possible erosion from:

• New technology
• New competitors
• Regulation
• Customer preferences
• Lower-cost alternatives
• Management mistakes
• Changing distribution
• Commoditization

A historical competitive advantage is not evidence that the advantage will continue indefinitely.

Business disruption means a new technology or business model can change how customers solve a problem.

Disruption should be investigated as a business development, not treated as a sensational headline.

Products can become less differentiated over time, causing customers to focus more heavily on price.

Commoditization can pressure margins because price becomes the main basis of competition.

As covered in Lesson 5, management's statements should later be compared with reported results.

Management says: “Our brand is strengthening.” Research: Are volumes, retention, margins, or market share supporting that statement?

Management says: “We have strong pricing power.” Research: What happened to volume after price increases?

The table below organizes common competitive claims, the evidence that could support them, the evidence that could contradict them, and the questions to ask.

Competitive position should be studied over multiple years.

This connects to the five-year perspective established throughout Sage Trading Suite education: one year is a snapshot; multiple years provide context.

The warning-signs box below lists developments that deserve investigation when researching competitive position.

As covered in the Understanding Valuation course, a strong business may still trade at a valuation that requires careful investigation.

Likewise, a low stock price does not prove competitive weakness or strength.

As covered in the 52-Week-Low Research course, a 52-week low is a price-location measurement, not a conclusion about value.

When a fundamentally qualified company trades near its own 52-week low, investigate whether the decline is related to temporary market concerns or deterioration in the company's competitive position.

Do not assume either explanation.

Stock Sage's fundamental qualification rules require Positive EPS in at least 4 of the previous 5 years and Total Assets greater than Total Liabilities in each of the previous 5 years.

These are first-stage qualification rules. They do not prove competitive strength, future earnings growth, undervaluation, management quality, or investment suitability.

Stock Sage can help identify fundamentally qualified companies trading near their own 52-week lows. The researcher must then investigate the business, valuation, market concerns, management, and competitive position.

The workflow below organizes competitive research into a repeatable sequence, followed by a checklist of the questions this lesson teaches you to answer.

1. 1Understand the business model.
2. 2Identify the company's markets.
3. 3Identify direct and indirect competitors.
4. 4Read competition disclosures.
5. 5Compare financial economics with competitors.
6. 6Investigate market-share trends.
7. 7Investigate pricing power.
8. 8Research customer retention and switching costs.
9. 9Examine cost, scale, distribution, and network advantages.
10. 10Compare management's claims with evidence.
11. 11Investigate threats to the competitive position.
12. 12Reevaluate the evidence over time.