Incorporating ESG factors into your competitor analysis framework: The 2023 guide

A few decades ago, a Harvard Business School academic made a big impact on management thinking. His name was Michael Porter, and his book on competitive strategy has gone through many iterations since he published it, including application to entire nations. His book asked managers to address a full range of questions to be plugged into a competitor analysis framework. These included how to identify competitors, gather data about them and analyze the data, to what to do about it, in terms of competitive strategy – positioning, products, markets etc.

Much of what Porter and his disciples produced has become the norm for companies and students of management, although in many ways it is quite simplistic. For example, the idea that the three main competitive strategies – low cost, differentiation and focus – are alternatives has been exploded by many low cost internet-based businesses.

The importance of a strong competitive focus 

However, the core message, that successful business strategizing requires a strong competitive focus, and that this focus requires good knowledge and understanding of what competitors are doing, remains valid. However, there are three big differences between now and the time when Porter first wrote his book. 

The first is that the Internet has created an incredible level of transparency about what competitors are doing and about whether customers are happy with competitors or your products and services. This includes the work of companies such as Permutable, dedicated to taking transparency as far as possible through advanced database building and analysis.

The second is that regulators of all kinds, from financial, through to health and safety, require much more disclosure about companies, from their finances and plans through to how their products perform.

The third is that the liberalisation of employment markets, helped by the Internet, has increased labour mobility and the freedom with which knowledge-related workers can move from company to company, inevitably taking knowledge with them, whatever restrictions companies try to impose on this.

These differences apply to all a company’s stakeholders, whether customers, shareholders, employees, NGOs or governments, as the Crayon/SCIP report makes clear. However, the focus of competitive strategy and intelligence (and in particular of the competitive intelligence community) has so far remained largely on how decisions on products, prices, investment, markets, channels and the like create profit. 

Incorporating ESG in the competitive analysis framework

A question that is now being asked increasingly often is whether the lessons from competitive strategy and intelligence apply to ESG. In other words, should companies frame their ESG policies according to general recommendations and norms of ESG, particularly those laid down by international organisations, government or NGOs? Or should they take into account what their competitors are doing? Behind this lies another question. If it makes sense to apply the ideas of competitive intelligence and strategy to ESG, do they apply to the same set of competitors as as conceived in classic competitive strategy?

If the level of interest in competitive issues is anything to go by, the answer is yes. But unfortunately, the web dialogue focuses almost entirely on gathering competitive intelligence, not on how to use it to create a competitive ESG strategy, and nor really on what a competitive ESG strategy even is.

Classic competitive strategy vs ESG strategy

One difference between classic competitive strategy and competitive ESG strategy is that the interests of the different ESG stakeholders may diverge more than those of classic competitive stakeholders. To take a simple example, in classic competitive strategy, a product which is successful competitively is likely to be good for investors (it brings more profit), good for customers (it’s a good product, which works well and delivers what it promises), and employees (it sustains employment. Even here, however, if the product requires big investment and a lot of automation, what may be good for customers may not be good for the other two stakeholder types.

What this example shows is that before plunging into gathering lots of competitive ESG data, you need to resolve many issues, including the ones below.

Defining competitive ESG strategy

The first is what is meant by a competitive ESG strategy. This includes deciding who your competitors are and will be (for each of the components of ESG (i.e. E, S and G), and their sub-components (e.g. for S, diversity, employment conditions, supplier practices) and what is meant by succeeding relative to them.

Determining benefits of a successful competitive ESG strategy

The second is to determine what the benefits of a successful competitive ESG strategy are or might be – overall and for its different components.  This is in a way a sub-issue to the that of how ESG creates value, a topic which McKinsey has provided guidance on. The thinking of Morgan Stanley on the sustainability of competitive advantage should also be incorporated into this analysis, as should that of the relationship between corporate governance and competitive advantage of Deloitte. The benefits are of course not just profits, but also the perceptions of the many different types of stakeholder and whether success in this area will create the conditions under which you can achieve your other objectives more easily – from fulfilling a sense of purpose to making a profit.

Creating a framework for competitive ESG decisions 

The third is to create a competitive analysis framework for handling competitive ESG decisions, one that builds upon Porter’s ideas but also those mentioned above relating to value creation. These might include: 

– How are you going to make the decisions on what you do, whom you decide to compete with, over what period? How are you going to  prioritise – in general and over time – so that you have a basis for decision-making and managing the resources you may need to invest to achieve a strong competitive ESG position? 

– What approach to analysis will you use? How will the conclusions be tested? Who will be responsible for all this – in other words, what will be the governance for this area? Will it be left to a small department, or part of every department’s decision-making? 

– How will it be balanced against other objectives when incorporated into the general planning and implementation framework of the company? Of course, many of these issues apply to ESG decision-making in general, not just to competitive ESG strategy.

There are of course many other issues. Depending on the response to this article, we plan to write a series of blogs investigating how to approach competitive strategy in different areas of ESG. 

Please let us know what you think about this article and which areas you would like to see us cover.