It means basically reviewing your competitor's website for quality, design, content, backlinks, etc. and after a thorough analysis of the things noticed, you can follow suite with your website's online campaign.
you perform a through analysis of your competitor how they represent the business, how they perform marketing, how they make money etc etc.
I feel that SEOELITE software is best for competitor site analysis. It gives you the information of what competitor has done to better SERPS for you to follow the same.
You want to see a competitor's site situation? The seoquake with firefox plugin, you can see a lot of website information