The intensity of rivalry between existing competitors in a market or industry depends on a number of factors. It is important to be aware of these factors influencing intensity of competition, as it may influence the decision of entering a market or staying away of it.
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Relevance of the Factors influencing Intensity of Competition
Assessing the intensity of competition in an industry is the most important step in the 5 Forces of Porter Model Analysis. This model analyses the competitive structure in an industry. For that, it is of course highly relevant to reveal the intensity of rivalry. To do that, all factors influencing intensity of competition should be taken into consideration.
Concentration of the Industry
Clearly, a high number of competitors of equal size will lead to more intense rivalry. There will be less rivalry when a clear leader exists (at least 50 % larger than the second). Therefore, the degree of concentration in the industry must be assessed as one of the primary factors influencing intensity of competition in the industry.
Rate of Market Growth
The rate of market growth is another important factor. If market growth is high, competition will be less intense. Why? Because slow growth will usually tend to greater rivalry: the market is close to saturation at this stage, and no new customers are there to be attracted by competitors. Contrarily, if the market is still strongly growing, there is enough new space and untapped opportunities for competitors.
Structure of Costs
Structure of costs refers to the share of fixed costs, as opposed to variable costs in a given industry. This structure belongs to the important factors influencing intensity of competition because high fixed costs encourage price cutting to fill capacity. Consequently, competition will be more fierce.
Degree of Differentiation
Certainly, degree of differentiation has a strong influence on the intensity of competition. Commodity products encourage rivalry, because there are little opportunities to differentiate the firm’s offerings from those of competitors. Thus, competition is all about prices – fierce competition is the consequence. Highly differentiated products, on the other side, are hard to copy and associated with less intense rivalry.
Switching Costs
When customers switch their supplier, switching costs arise, in whatever form. It may even be that these costs are not even tangible – customers simply do not like to change. When switching costs are high because the product is specialized, the customer has invested a lot of resources in learning how to use the product or has made tailor-made investments. These may be worthless with other products and suppliers. Thus, rivalry is reduced. On the contrary, if customers do not have any switching costs, which is often the case for commodity products, intensity of competition is higher.
Exit Barriers
Among the factors influencing intensity of competition in an industry, also exit barriers play an important role. When competitors cannot easily exit the market, competition is intensified, of course. What barriers could exist making exiting difficult? For instance, the lack of opportunities elsewhere could be a decisive barrier to leaving the market. Also, high vertical integration (particularly referring to the dependence of suppliers, the firm, and distributors), emotional barriers or the high cost of closing down a plant can be factors influencing the intensity of competition, because exiting is more difficult.
