What are the factors affecting the intensity of rivalry in the industry in which your company is competing?

By Chron Contributor Updated June 02, 2021

Renowned business management expert and Harvard professor Michael Porter discussed a number of critical factors that impact competitive intensity and rivalry within industries in presenting his famous Five Forces model of competition. In his model, Porter discussed factors that impact the number of companies that compete within an industry. He also noted those factors that affect rivalry and competitive intensity.

Among Michael Porter's factors that affect competitive intensity, Porter mentions a few cost-related factors. These include high fixed costs, high storage costs and low switching costs. When companies invest significantly in fixed costs, they generally compete mightily to sell enough products to cover those costs. High costs of storage prompt companies to compete to make sales quickly. When customers have free mobility to change providers it forces more intense competitive rivalry, as explained by QuickMBA.

One of the more obvious reasons for high competitive intensity within an industry is more companies competing. And, the more limited the market available, the more intensely those companies have to compete. Porter noted that especially in industries where the market has been largely glutted, companies realize they must compete intensely for those customers that are in the market.

Mind Tools recommends keeping a close eye on competitors and what they're doing as a benchmark for pricing and promotional strategies. In a competitive market, you must work hard to build brand loyalty and a reputation for great customer service because your competitors will work hard to steal customers. You may wish to consider lowering your prices and using aggressive advertising strategies, including online promotions.

The level of possible product or service differentiation is another important competitive intensity factor in an industry. The harder it is for companies to differentiate themselves, the more intensely companies have to market and sell and compete to capture customers for their solutions that have similar substitutes. This causes many companies to consider added value opportunities or other ways to entice customers to their business. Porter does indicate that diversity among providers with regard to the makeup of their companies and strategies can lead to more rivalry. Find a way to set yourself apart from the herd by promoting distinctive product feaures or excellent customer service, for example.

The ease with which companies can enter or exit an industry also affects the level of competition. Porter notes that high barriers of startups or exiting an industry ramp up the rivalry. For example, you have less to worry about if potential rivals would have a difficult time building a clientele, meeting regulations or obtaining funding to launch a business similar to the one that you have spent years developing.

If companies find it more difficult to leave than to stay and compete, they are more likely to make the investment and commitment necessary to optimize their potential within the industry. By contrast. in industries where exit is simpler, many companies may simply opt out. Competitors may relocate instead of fighting intensely for business in a saturated market, for example.

Michael E. Porter identified the intensity of competitive rivalry or the competition in a particular industry or market as one of the Five Forces that shape the competitive environment. Note that the other four forces are the threat of new entrants, the threat of substitutes, the bargaining power of buyers, and bargaining powers of suppliers.

He defined this force as the extent to which businesses or firms in a particular industry or market put pressure on one another to limit the profit or earning potential of each other. The intensity of competition or competitive rivalry intensity depends on a number of factors. Each can provide useful insights as regards the overall competitive environment.

Understanding and Defining Rivalry Intensity: The Factors Influencing the Intensity of Competitive Rivalry in an Industry or Market

Firm Concentration and Market Size

One of the main factors influencing the intensity of competitive rivalry is the size of the industry or the entire market. This size is determined by the quantity and quality of firms operating within the same industry or the total revenues generated from the same market.

Large industries or markets have intense rivalries. This is particularly true if there is a high number of businesses of equal size catering to the same market. Some notable examples include the consumer electronics industry and the smartphone market.

Note that there will be less rivalry when there a clear leader exists or if there are only a handful of businesses leading an industry or market relative to the total number of players. It is essential to assess not only the quantity of the firms but also their quality.

The Rate at Which the Market Grows

Similar to industry and market size, the rate of market growth can also determine the intensity of rivalries among competitors. The rivalry is less intense if the rate of market growth is high because it remains attractive to existing players and new entrants.

A slow market growth rate is typically characterized by intense rivalry because it is indicative of market saturation. Existing firms would be focusing not only on tapping a new but limited customer base but also on retaining their respective market shares.

Level of Market Entry and Exit Barriers

Another factor that influences the intensity of competitive rivalry is the ease of entering or exiting the market. A low barrier to entry can promote market growth and decrease the intensity of competition but would eventually result in market saturation.

Remember that saturated markets tend to have intense rivalries. On the other hand, a high entry barrier is indicative of intense industry competition because of the presence of established and dominant firms that compete for a sizeable market.

Low exit barriers decrease the intensity of rivalry. High exit barriers increase the competition. Businesses are compelled to commit more to maximize the profit potential of a particular market if it is more difficult to leave than to stay and compete.

Differentiation Potential of Products

The harder it is for businesses to differentiate themselves and their goods or services, the more they have to market and sell, thereby resulting in a more intense competition within that particular market. Commodity products are prime examples.

Note that highly differentiated products are hard to imitate. Specific categories or classes of products that are easy to differentiate or hard to copy are prevalent in markets with less intense rivalries because they either appeal to niches or increase entry barriers.

Level of Marketing Activities and Expenses

Marketing activities and expenditures also collectively represent another factor influencing the intensity of competitive rivalry in a particular industry. Note that marketing involves all strategies and activities needed to promote the sales of products.

Industries with several firms that exert efforts and resources on marketing are characterized by high levels of competition. A prime example is the food and beverage industry dominated by multinational companies that spend a bulk of their revenues on advertising.

High levels of marketing activities and expenditures are essentially indicative of intense rivalry because they tell business owners and analysts that there are firms that spend resources to target and secure a portion of the market or retain and expand their market shares.

Significance of Loyalty to a Firm or Brand

The intensity of rivalry is high if loyalty to a company or firm is insignificant. This also means that the intensity of competition or rivalry is low if there is a significant and prominent level of firm or brand loyalty in a particular industry or market.

A significant number of consumers relative to market size loyal to a single firm or brand translates to industry and market leadership. There is less rivalry because a single firm remains dominant. Note that this situation is rare nowadays.