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Porter Five Forces - Competitive Analysis

Industry Rivalry

 

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Introduction to Industry Rivalry

The rivalry amongst existing firms analysis will help you to understand the risk that your competitors may compete for market position and if their competitive tactics are likely to be effective.

You will find that your competitors may compete for market position using tactics such as;

    • price competition,
    • advertising,
    • increased customer service, or
    • through offering longer warrantee periods

Read on to discover how likely it is that your competitors will use these tactics and successfully lure your customers away.

 

Analyzing Industry Rivalry

To analyze industry rivalry in your industry, you will need to consider the following factors,

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Analysis Criteria
Description

Industry Growth Rate

Refers to the overall growth rate of your industry

When your industry is in a growth phase there will be room for all businesses in your industry to grow, as a result there will be a low risk of competitor rivalry.

As your industry matures and demand flattens or even goes into decline, the only way for one business to grow is at the expense on another, (win / loose), this often results in a greater risk of industry rivalry.

High Fixed Cost

Refers to the proportion of the total industry costs that are fixed verse variable cost

If the fixed cost is a high proportion of the total costs for the industry then each competitor will need to maintain volume, which can drive higher competitor rivalry.

Alternatively, if fixed costs are only a small portion of total costs then the industry can reduce supply when demand drops, reducing the risk of competitive rivalry.

Intermittent Over Capacity
 

 

Refers products whose demand is less than supply for relatively short periods

Intermittent over capacity exists in industries that have the same capacity all year and supply to a seasonal demand, or in industries where supply can only be increased in large lumps, such as adding an extra shift to a car manufacturing plant.

During the periods of over capacity (too much supply) in the industry there is likely to be increased competitor rivalry.

Product Differences

 

Refers to your ability to differentiate your product based on tangible product differences

If your customers perceive that your products or services are different to those of your competitors and your customer values that difference, then you have some protection from competitor rivalry. 

If your customer perceives that your products/services are essentially the same as others in your industry then competitor rivalry is more likely.

Brand Identity

 

Refers to the customers perception of the strength of the brands in your industry

The stronger the customers brand preference the lower the risk of competitive rivalry.

Switching Costs

 

Refers to the cost incurred by customers of your industry to switch their source of supply

The lower the switching costs the easier it will be for customers to change suppliers and the higher the risk of competitor rivalry.

Informational Complexity

 

Refers to the how easy or hard it is to understanding your products.

The easier it is to understand products in your industry the higher the risk of competitive rivalry.

Concentration and balance

 

Refers to the number of competitors in your industry and the degree to which they are satisfied with their market position

If your industry has only a few competitors who are all happy with their market share then the risk of competitor rivalry is low.

Alternatively, if there are a lot of competitors or any one competitor is not happy with their position in the market then the risk of competitor rivalry is higher.

Industry Commitment 

 

Refers to the diversity or the competitors in your industry

If your industry consists of businesses that only compete in your industry then they are likely to be more committed to your industry and will remain in the industry even if results are poor, increasing the risk of competitor rivalry.

However, if your industry includes divisions of major global conglomerates then they maybe less willing to incur consecutive years of losses, which reduces the risk of competitor rivalry.
 

Exit Barriers

Refers to the ease with which your competitors can exit your industry.

If there are high barriers preventing a firm from exiting an industry it is likely that they will be prepared to operate at a marginal profit or loss and your should expect high competitor rivalry.

An example maybe a firm has a large investment in capital say plant and equipment, unless there is a buyer for the plant and equipment they may need to remain in your industry even if it is not profitable.

 

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Sample Porter Five Forces Template, Analysis of Industry Rivalry

Analysis Criteria

Risk Rating

High

Medium

Low

Industry Growth Rate

 

 

 

High Fixed Cost

 

 

 

Intermittent Over Capacity

 

 

 

Product Differences

 

 

 

Brand Identity

 

 

 

Switching Costs

 

 

 

Informational Complexity

 

 

 

Concentration and balance

 

 

 

Industry Commitment 

 

 

 

Exit Barriers

 

 

 

Overall Risk Rating

 

 
 

 

 

 
 

Alternative Template for Industry Rivalry

The following free strategic planning template can be used to determine if each of the factors that affect the threat of new entrants has a positive or negative risk.
You can then give an overall rating for this force.

Industry Rivalry

Comments

Rating

Industry Growth Rate

 

 

High Fixed Cost

 

 

Intermittent Over Capacity

 

 

Product Differences

 

 

Brand Identity

 

 

Switching Costs

 

 

Informational Complexity

 

 

Concentration and balance

 

 

Industry Commitment 

 

 

Exit Barriers

 

 

The threat of new entrants overall rating

 

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After completing your Analysis

After completing your analysis you should transfer the key highlights to your SWOT analysis. Generally, you only need to add high level commentary to your SWOT.

Given that Porters five forces is an industry analysis technique you will only need to update the opportunities and threats in your SWOT analysis.

Why not take 5 minutes to learn how to use all of Porters Five Forces to ensure you can analyze and understand the nature of competition in your industry.

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