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Feeling the force of industry rivalry in assessing competition

There is a competitive streak in all of us to some degree. It is undoubtedly stronger in some than in others, but it definitely exists. The presence of competition in a work or sporting context brings the best out of some people. Indeed, it is often the biggest measure of someone’s ability to see how they respond to adversity and the threat of competition from rivals. Those at the very top of their professions tend to be able to raise their game at a time when they need it most.

Some competition is healthy, for it provides an impetus for companies; teams and individuals to perform that just would not be there if there was nothing at stake. Rivalry between firms exists across all industries because they acknowledge the threat that they pose to each other in establishing market share. It is what keeps businesses on their toes and the desire to be better than the competition is what drives business strategy. But too much competition and the market can quickly become saturated, which leads to reduced profit potential for companies in the same industry.

But what makes one industry more or less competitive than another and how is it measured? Industry rivalry is one of the five forces that Michael Porter, a renowned professor from Harvard University, uses to determine the intensity of competition in an industry. Other contributory factors in his analysis are the barriers obstructing entry to a market, the bargaining power of buyers, the bargaining power of suppliers and the threat posed by substitutes.

Looking at industry rivalry in isolation, it tends to manifest itself in the shape of two or more firms jostling for position by using various tactics, such as undercutting on price, advertising battles and product promotions. The intensity of this rivalry usually increases when the businesses involved either feel competitive pressure or see an opportunity to improve their position.

In most industries, the competitive moves made by one company have a noticeable impact on their rivals, who then initiate competitive moves of their own to counter-balance their effect. This tit-for-tat exchange bears the hallmarks of a Cold War arms race, with both companies playing a power game in a bid not to lose face. Porter argues that the existence of mutual dependence and the knock-on pattern of action and reaction may in fact harm all the competing companies and the industry itself. Some types of competition, for example, price competition, are very unstable and have a negative impact on industry profitability. Other measures, for example, advertising battles may have a positive influence, as they increase demand or make consumers aware of product differentiation.

Porter goes on to highlight a number of structural factors that affect industry rivalry:

Slow Industry Growth

The presence of numerous competitors leads some companies to instigate competitive moves in the belief that market congestion will allow them to go unnoticed. When companies are relatively balanced in strength, they are more likely to wage competitive wars and launch counter-offensives in their quest to attain the status of market leader.

Slow Industry Growth

In a market that is experiencing slow growth, the only way companies can achieve growth is be aggressively going after market share occupied by their rivals, which facilitates a cycle of increased competition.

High Fixed or Storage Costs

High fixed costs create pressure for all companies to fill capacity, which inevitably leads to a surplus and subsequent price cutting. High storage costs also force companies to lower prices in a bid to ensure sales.

Lack of Differentiation or Switching Costs

Where the product is a commodity, price and service are the major factors influencing choice. This leads to increased competition in price and service.

Capacity Increased in Large Increments

When economies of scale require large increases in capacity, it disrupts the industry supply/demand balance leading to periods of overcapacity and price cutting.

Diverse Competitors

Company diversity leads to the emergence of players with different competitive goals and strategies than their more traditional counterparts. This alternative way of doing things can alter the business climate in an industry.

High Strategic Stakes

Profitability may be sacrificed for expansion by those companies with high stakes in achieving success. Companies with high market share may also feel threatened by competitors looking to eat into this.

High Exit Barriers

Economic, strategic and emotional constraints may prevent companies from leaving an industry, even when they are seeing low or negative returns on investments.

Industry rivalry is clearly a fundamental component in gauging the level of competition within an industry. It will always be there, the trick would appear to be responding effectively to it and minimising any negative influences that may threaten to knock your project off course.