Main factors that affect the intensity of firm rivalry in any industry.
Rivalry is the measure of the degree of competition between existing firms in any industry. The higher the degree of rivalry in any industry, the more difficult it is for the existing firms to grow higher profits. In recent years, the level of rivalry in most industries has grown driven by several factors including technological innovation and globalization. From the automobile to the ecommerce and smartphone industries, all of them are seeing higher rivalry between existing businesses. In several of these industries, entry of new firms has been made almost impossible due to the higher level of rivalry between existing firms. In such a situation, a key question that arises is which factors affect the intensity of rivalry in any industry. The effect of higher rivalry is that companies invest more in research and development as well as marketing and customer acquisition or retention. In this way, higher rivalry between the existing firms also drives operating costs higher for the existing players. Some of the most prominent factors that affect the intensity of rivalry between existing firms in an industry are as follows.
Prominent Factors affecting the intensity of Rivalry
Numerous or Equally Balanced Competitors:
A high level of competition is common across industries where there are too many companies like the smartphone, FMCG and automobile industries. Such industries where the number of companies has grown too many, it is common to see an intense rivalry between the firms. When there are several firms in an industry, it is common for a few of the businesses to believe that their actions will not elicit any response from their competitors. However, most of the time their competitors are aware of their actions and also respond to their actions in time. This is just one side of the picture because, on the other hand, there are some industries that have just a handful of firms but still see very strong rivalries. For example, the aircraft industry where two leading players are Airbus and Boeing but the industry is still remarkable for a strong rivalry between the two leading players. These two firms are of nearly equivalent size and nearly equal in terms of market influence. Due to their large and similar sized resource bases of these firms, they are often able to take vigorous actions and respond strongly to competitor actions.
Slower industry Growth:
When the market is growing and industry expanding, companies try to utilize resources to serve an expanding customer base effectively. Market growth reduces the pressure related to customer acquisition and companies do not need to invest a lot or try much to acquire customers from their competitors. However, competition takes an intense form in the no-growth or slow-growth markets. In the no growth or slow growth markets, companies are engaged in an intense battle to acquire customers from their competitors. The battle for market share grows intense as market growth stops or becomes slower. This is the case across several industries. For example, in the smartphone industry, Samsung, Apple, and Huawei are engaged in an intense battle to acquire market share from each other. Fierce competition in an industry can lead to instability which results in lower profits for the existing firms throughout the industry as is commonly seen in the commercial aircraft industry. Over the next several years, the market for commercial aircraft will see slow or no growth and that is bound to give rise to a more aggressive battle between Boeing and Airbus for market share. Both companies are investing in research and development to introduce new products as well as achieve higher differentiation across products and services. While Boeing is currently leading in the battle, neither of the two is the absolute winner in the game since while a company wins in one area, it loses in the other.
High fixed costs or higher storage costs:
When the fixed costs constitute a very large part of the total operating expenses of a company, it tries to utilize its productive capacity at its fullest. This allows the company to spread the operating costs across a larger output volume. When several firms try to maximize their productive capacity, it leads to excess capacity industry-wide. In order to reduce the inventory, firms offer discounts and rebates to the customers. However, often such practices end up intensifying competition. Such patterns can also be easily observed in industries where storage costs are higher. For example, in the case of the perishable products that lose their value rapidly, firms selling perishable products use pricing strategies to clear inventory faster.
Lack of differentiation or low switching costs:
When customers come across a differentiated product that satisfies their needs better, they purchase it repeatedly and loyally over time. Industries with a higher population of firms that have successfully differentiated their products see less rivalry and lower competition for individual businesses. However, rivalry grows intense when customers see products as commodities or products with fewer differentiated features and capabilities. In such a case, the buying decisions of customers are mainly based on the prices of products and to a lesser degree on the level of service.
The effect of switching costs on the intensity of rivalry is similar to that of differentiation. When switching costs are lower for customers, the firms find it easier to attract customers from their competitors by using lower pricing or improved services. On the other hand, higher switching costs insulate businesses partially from competition When the switching costs are high, the customers would remain loyal at least for the sake of the prices. In some cases however, despite higher switching costs, the level of competition is high. For example, in the aerospace industry, the switching costs are high but still, the rivalry between Boeing and Airbus is strong.
High Strategic Stakes:
When the strategic stakes are high or it is important for a business in the market to perform well, the intensity of rivalry is likely to be high. Take the example of Samsung. It has a diversified portfolio of products but it also targets a leadership position in the consumer electronics industry. However, this market is important for several other brands too like LG, Sony, Hitachi, and Panasonic. So, you can expect the rivalry between these brands to continue to intensify in the coming years too.
Strategic stakes can also be high in terms of geographic location. For example, the US is a key market for Japanese automakers like Honda and Toyota. However, the US is also a strategically important market for US-based brands. This has intensified the competition between the US-based brands and those operating globally.
High Exit Barriers:
High exit barriers can also drive the intensity of competitive rivalry higher. For example, some companies continue to operate in an industry even though the returns on their invested capital are low or negative. Firms that make this choice do so most likely because of very high exit barriers. The high exit barriers include economic, strategic, and emotional factors, and cause the companies to remain in an industry even when the business does not yield significant profits.