Competitive analysis has a place in SEO without a doubt but I think it has dangers too. Your competitors may be outranking you but just analysing what they are doing and then copying can easily lead to copying their mistakes as well as what they are doing well. Especially in less competitive areas, it is perfectly possible to get quite a bit of the SEO wrong but still get a great ranking.
I certainly look at the competition but much prefer to follow my only strategies at least to begin with then look at the competition for further ideas once I have got the basics in place.
Competitive analysis can be very time consuming – another reason for spending time on getting the SEO fundamentals in place first – but there are lots of tools for speeding up the process. SEOmoz offers some excellent tools if you are a member but a very useful free tool is SERPS redux . It is a bookmarklet that simply sits on the bookmark’s toolbar ready for use when needed.
SERPS redux scrapes Google’s SERPS results to provide a list of URLs, titles and anchor text for the top sites. You can then just copy and paste into a spreadsheet ready for use. There are further tools that will automate the download process but I like to keep some of it manual, I find that just waiting those few seconds while it downloads etc helps me get a feel for what I am working with.
Dan Crtichlow has posted a very useful list of nifty SEO bookmarklets that can speed up some of the more repetitive SEO tasks.