Porter's Five Forces: Rivalry Amongst Existing competitors

Rivalry Amongst Existing Competitors

• What to look for in IBISWorld:
  Check the "Competitive Landscape" and "Market Share Concentration" sections.

• Key questions to answer:

  • Are there many competitors?

  • Is the market dominated by a few big players?

  • Is industry growth slow (which increases rivalry)?

This force examines the competitive intensity within your industry. It considers factors like the number of competitors, market growth rate, and difficulty exiting the industry.

High rivalry often means more aggressive pricing and marketing, while low rivalry can lead to more stable profits.

1. Competitive Rivals

When we think of business competition, we think of rivals like Pepsi and Coke for soft drinks, Apple and Samsung for smartphones, Nike and Adidas for sneakers, and Ford and GM for autos. Some rivalries are so influential that consumers split almost culturally among those who have an iPhone or prefer Nike shoes. Thus, it's no accident that we also consider business competition chiefly a war among rivals.

Rivalries can lead to price wars, high-priced marketing battles, and races for slight advances that could mean a competitive advantage. These tactics can stimulate companies to make even better products but also erode profits and market stability.3

Several factors contribute to the intensity of competitive rivalry in an industry:

• The number of competitors: More competitors means a fiercer rivalry where each fights for scraps of market share.
• Industry growth: Competition is usually less dramatic because the market grows so fast that competitors have little need to fight for customers—think of the automobile industry of the early 20th century. Competition can be ferocious in a declining industry as firms fight for a larger piece of a shrinking pie, such as in the print media industry of today.
• Similarities in what's offered: Competition tends to be intense because customers can easily switch when goods and services are very similar. However, a unique offering or brand loyalty can reduce competitive rivalry. Apple (AAPL) comes to mind in tech goods, just as Rao's Italian sauces or King Arthur flour do in your supermarket aisles, each charging a higher price given whatever makes it unique.
• Exit barriers: When it's difficult or costly for companies to leave the industry due to specialized assets, contractual obligations, or emotional attachment, they may choose to stay and compete, even if the market's prospects grow dimmer. For instance, airlines have high costs which means that when airlines face a shrinking market—or even an unprofitable route—they can't retreat from the market quickly.
• Fixed costs: Porter notes that if an industry has high fixed costs, companies have a "strong temptation" to cut prices rather than slow production when demand slackens. Paper and aluminum manufacturing are two good examples that Porter mentions.1

  Harvard Business Review. "How Competitive Forces Shape Strategy." Pages 137-145 (Subscription required).