Identifying your direct competitors is important before you finalize your decision about which business category and market segment to compete in. It is vital to the success of a new or existing business because it reduces risk, time, required resources, and expense.
For example, a new salty snack chip product may have a unique taste, texture, appearance and health benefits. But effectively competing with every salty snack (both direct competitors like salty chips and indirect competitors like popcorn, salty nuts, etc.) in a $14 billion product category is difficult, even for a large, successful snack food company like Frito-Lay. If the competition is too strong, it's going to be extremely difficult for a newcomer to break in.
It may be more profitable to carefully target a specific segment of a category where the odds of success are greatest! Even the tortilla chip segment of the salty snack category is over $3 billion in size. Perhaps "healthy multi-grain snacks" would be a more manageable segment of the salty snack category at around $200 million?
Even established businesses need to periodically reevaluate their direction in relation to competition. For example, we know of a local appliance chain with a very long history and a strong base of loyal customers that had recently built a brand-new "superstore" showcase at great expense. Although business was very strong, the chain decided to shut down when it learned that two national chains were planning to enter the local market in the coming year. The local chain realized it wouldn't be able to win a price war and decided to quit while it was ahead.
Selling at lower prices is a time-honored way of dealing with competitors, though it presents special problems for small businesses.