The global marketplace is a fiercely competitive arena. Yet companies continue failing to conduct sophisticated ongoing analyses of their competitor's potential actions.

Most often, executives track competitors via news reports, industry groups, annual reports, market share data and pricing data. Far fewer obtain information from more complex sources such as reverse engineering of products or mystery shopping, according to a 2008 survey by the McKinsey Quarterly (subscription required).

In fact, a majority of executives who faced a competitor's innovation or pricing change said they found out about the move too late and were unable to respond before the change hit the market. An additional 20 percent didn't find out about a price change until it had been in the marketplace for at least one or two reporting cycles, the report said.

Nonetheless, executives say they're "quite happy with the results they obtain," McKinsey notes. Around 40 percent of all respondents, and nearly 50 percent of C-level execs, said that they would conduct their analysis of their competitor's moves the same way they have been.

Still, respondents said their competitors' moves "had the potential to cause a noticeable reduction in their earnings — an average of 7 percent." Although the threat to their bottom line is very much there, "any response tends to be rather slow," McKinsey Quarterly adds. "Indeed, 20 percent of those facing an innovation and 11 percent of those facing a price change say they are still planning a response."

And it isn't that the majority of companies are weighing a high number of options. Half the respondents asses only one or two options, and a mere 11 percent consider five or more, according to the report. Plus, companies don't look much further than two years ahead and half don't examine more than one round of counter-moves by any competitor.

In addition, businesses tend to go for the most obvious counteraction, the report says. Along with matching price changes and innovations, the other top responses were making intuition-based decisions and not responding directly at all.

Bill Conerly, an economist and business consultant who runs the Businomics Blog, says doing nothing is a perfectly viable response to a threat. Granted, he says that would "work very well for three to six months," in his post regarding how Starbucks could respond to McDonald's selling premium coffee drinks. Using the two companies as a vehicle for teaching corporate strategy, Conerly names other ways businesses could respond to threats:

• Find different ways to build customer loyalty through rewards or other incentives;
• Cut costs to maintain profits while sales are falling — though he does not recommend this strategy; or
• Request government regulation, if applicable.

Adding to McKinsey's results, Conerly also suggests cutting or increasing prices depending on the company's structure. If your business has a lower cost structure and you don't lose out by cutting prices, slash away. Otherwise, Conerly advises avoiding a price war.

Increasing prices, on the other hand, allows a company to differentiate its products by moving upmarket. The business will end up "ceding the price-sensitive customers," but "pulling more profit from the loyal customers," Conerly adds.

Other things to consider before changing prices are your products' strengths and weaknesses in comparison to your competitors, Linda Morton, marketing consultant and author, writes at StrategicMarketSegmentation.com. "If your product has the most strengths, you can price it on the high end. If your product offers few benefits compared to your competitors', your price needs to be on the low end."

However, many companies choose to go a more indirect route when it comes to responding to threats, according to McKinsey's findings. Rather than focusing on a direct response, executives instead focus on market share and earnings.

One strategy for increasing earnings and market share, or tapping into new markets, is by differentiating products. For many companies that are not only grappling with competition but also the current economy, finding a niche has been the key to staying in the race.

"The key to growing business in 2009 will be to aim high and diversify into more specialist components and niche markets," advises Electronics Weekly.

According to BusinessWeek and BDO Stoy Hayward, many U.S. and U.K. manufacturers have broadened product offerings as business began drying up. The BDO report reveals that 68 percent of U.K. manufacturers now offer services on the back of production activities, up from 50 percent in 2007. More than 61 percent also now manufacture for niche markets, up from 45 percent in 2004.

"They maintain their niche position by outsourcing the manufacture of non-core components and only manufacturing core products themselves," BDO notes. Manufacturers are also "using service offerings to increase revenue, offer greater value to customers and differentiate from competitors."

In the U.S., in New York at least, niche manufacturers are finding similar success. Even now, "as the broader economy is suffering, many of those manufacturers are proving surprisingly resilient," the New York Times reports city officials and economic analysts as having said. Niche manufacturers credit their small workforce and specialized products as the keys for staying strong in a weak market.

Alternatively, given the number of companies going bust nowadays, ambitious, well-positioned business owners have the opportunity to purchase rival businesses at low prices, Accountancy Age says. While the volume of mergers and acquisitions has fallen in recent months, volumes went up quarter by quarter until Q4 2008. Due to the steady rise in volumes from Q1-Q3, mergers and acquisitions may be more resilient in this downturn, according to another McKinsey Quarterly report.

As some businesses are looking to restructure, "others consider that now is precisely the right time to invest in distressed businesses, including those that have already gone into administration," because they can buy competitors at a bargain price, Accountancy Age adds.

Clearly, there's more than one way to address to competitors and their actions. How does your company respond?

Resources

How Companies Respond to Competitors: A McKinsey Global Survey (subscription required)
The McKinsey Quarterly, May 2008

Starbucks Strategy vs. McDonald's: 10 Possible Competitive Responses
by Bill Conerly
Businomics Blog, Jan. 7, 2008

The Effect of Competition on Pricing Strategy
by Linda Morton
StrategicMarketSegmentation.com, May 13, 2008

Can Eaton Outrun the Recession
by Matthew Boyle
BusinessWeek, Jan. 6, 2009

Distributors Go Niche in 2009
by Edmund Coady
Electronics Weekly, Dec. 15, 2008

In New York, No Crisis for Niche Manufacturers
Christine Haughney
The New York Times, Jan. 11, 2009

UK Manufacturers See Bottom Line Benefit from Focusing on Niche Manufacturing and Service Provision
BDO Stoy Hayward, 2008

Insolvency M&As: Cleared for Takeover
by Lesley Ainsworth
Accountancy Age, Jan. 29, 2009

What's Different about M&A in this Downturn? (subscription required)
Antonio Capaldo, David Cogman and Hannu Suonio
The McKinsey Quarterly, January 2009