Understanding the Rivalry Among Competitors
This is Porter’s most enigmatic force in his Five Forces model, and what most people think of when talking about business strategy.
In essence, rivalry refers to the level of aggressiveness and hostility with which incumbents compete within a given market. The “rules of engagement” if you will.
Are incumbents aggressively investing in marketing? In new production capacity? Engaging in price wars? Continually introducing new products?
All these questions can help us build an idea of how protective of their businesses incumbents are, hence how tough the game will be for anyone trying to compete head-to-head with them.
The intensity of rivalry is different across industries and varies throughout the industry life cycle, but it tends to be higher in slow-growth industries with a high number of players, especially if the incumbents are of similar size.
There are other factors that may boost rivalry among players. For instance, if incumbents have high levels of idle capacity or high fixed costs in their value chains, or if they face large exit costs such as expensive specialized equipment, special licenses or patents that they would have to forgo if they left the industry.
Any of these factors could motivate incumbents to put up a fight and stay in operation for as long as they can rather than exiting the market and stranding those costs.
In highly competitive markets the best decision you can make is to find ways to avoid competition, something that’s most effectively done through differentiation.
You must find a particular market position where you can enjoy superior profitability and keep expanding your products and their ecosystems, to retain that position and remain ahead of nasty, bothersome and noisy competition.
This article has been extracted from Sun Wu’s book Strategy for Executives which can now be downloaded for free here.
Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press. Kindle Edition.
Magretta, Joan. Understanding Michael Porter: The Essential Guide to Competition and Strategy. Harvard Business Review Press. Kindle Edition.