Competitive Rivalry Analysis
The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each other’s profit potential. If rivalry is fierce, competitors are trying to steal profit and market share from one another. This reduces profit potential for all firms within the industry. According to Porter’s five forces framework, the intensity of rivalry among firms is one of the main forces that shape the competitive structure of an industry.
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Porter’s intensity of rivalry in an industry affects the competitive environment and influences the ability to exist firms to achieve profitability. High intensity of rivalry means competitors are aggressively targeting each other’s markets and aggressively pricing products. This represents potential costs to all competitors within the industry.
Porter’s Intensity of Rivalry Determining Factors
Several factors determine the intensity of competitive rivalry in an industry. If the industry consists of numerous competitors, Porter’s rivalry will be more intense. If the competitors are of equal size or market share, the intensity of rivalry will increase. If industry growth is slow, the intensity of rivalry will be high. If the industry’s fixed costs are high, the competitive rivalry will be intense. If the industry’s products are undifferentiated or are commodities, the rivalry will be intense.
If brand loyalty is insignificant and consumer switching costs are low, this will intensify industry rivalry. If competitors are strategically diverse – they position themselves differently from other competitors – industry rivalry will be intense. An industry with excess production capacity will have greater rivalry among competitors. And finally, high exit barriers – costs or losses incurred as a result of ceasing operations – will cause the intensity of rivalry among industry firms to increase.
And of course, if the opposite is true for any of these factors, the intensity of Porter’s rivalry among competitors will be low. For example, a small number of firms in the industry, a clear market leader, fast industry growth, low fixed costs, highly differentiated products, prevalent brand loyalties, high consumer switching costs, no excess production capacity, lack of strategic diversity among competitors, and low exit barriers all indicate that the Porter intensity of rivalry among existing firms is low.
Porter’s Intensity of Rivalry Analysis
When analyzing a given industry, all of the aforementioned factors regarding the intensity of competitive rivalry Porter placed among existing competitors may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate the high intensity of rivalry and some may indicate the low intensity of rivalry.
The results will not always be straightforward. Therefore it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.
The intensity of rivalry is high if:
- Competitors are numerous
- Competitors have equal size
- Competitors have an equal market share
- Industry growth is slow
- Fixed costs are high
- Products are undifferentiated
- Brand loyalty is insignificant
- Consumer switching costs are low
- Competitors are strategically diverse
- There is excess production capacity
- Exit barriers are high
The intensity of rivalry is low if:
- Competitors are few
- Competitors have unequal size
- Competitors have unequal market share
- Industry growth is fast
- Fixed costs are low
- Products are differentiated
- Brand loyalty is significant
- Consumer switching costs are high
- Competitors are not strategically diverse
- There is no excess production capacity
- Exit barriers are low
Porter’s Intensity of Rivalry Interpretation
When conducting Porter’s five forces industry analysis, low intensity of rivalry makes an industry more attractive and increases the profit potential for the firms already competing within that industry, while the high intensity of rivalry makes an industry less attractive and decreases the profit potential for the firms already competing within that industry. The intensity of rivalry among existing firms is one of the factors to consider when analyzing the structural environment of an industry using Porter’s five forces framework.