Industry rivalry and competition: Porter’s five forces
Industry rivalry—or rivalry among existing firms—is one of Porter’s five forces used to determine the intensity of competition in an industry. Other factors in this competitive analysis are:
Industry rivalry usually takes the form of jockeying for position using various tactics (for example, price competition, advertising battles, product introductions). This rivalry tends to increase in intensity when companies either feel competitive pressure or see an opportunity to improve their position.
In most industries, one company’s competitive moves will have a noticeable impact on the competition, who will then retaliate to counter those efforts. Companies are mutually dependent, so the pattern of action and reaction may harm all companies and the industry.
Some types of competition (for example, price competition) are very unstable and negatively influence industry profitability. Other tactics (for example, advertising battles) may positively influence the industry, as they increase demand or enhance product differentiation.
Structural factors affecting industry rivalry
A number of structural factors can affect industry rivalry:
Numerous or equally balanced competitors
When there are many competitors, some companies believe that they can make competitive moves without being noticed. When companies are relatively balanced in strength, they are more likely to engage in competitive battles and attack and retaliate as they strive for market leadership.
Slow industry growth
In a slow growth market, companies can only grow by capturing market share from each other, which leads to increased competition.
High fixed or storage costs
High fixed costs create pressure for all companies to fill capacity, thus leading to price cutting when there is excess capacity. High storage costs push companies to decrease prices to ensure sales.
Lack of differentiation or switching costs
When products are perceived as commodities, choice is often determined by price and service, which then leads to increased competition in price and service.
Capacity increased in large increments
When economies of scale require large increases in capacity, it causes disruptions in the industry supply/demand balance, which then leads to periods of overcapacity and price cutting.
Companies with diverse strategies, origins, personalities and relationships to parent companies (especially foreign competitors) also have different competitive goals and strategies than “typical” companies within the industry. Their diverse approaches to the market and unique competitive strategies can upset the status quo of doing business.
High strategic stakes
Companies with high stakes in achieving success may sacrifice profitability for expansion. Also, companies with high market share may feel threatened by competitors seeking to reduce their market share.
High exit barriers
Economic, strategic and emotional factors can prevent companies from leaving the industry, even when they are earning low or negative returns on investments. Major sources of exit barriers include:
- Specialized assets
- Fixed costs of exit
- Strategic interrelationships
- Emotional barriers
- Government and social restrictions
Porter, M. (1998). Competitive Strategy. New York: Free Press. pp. 17-23.