Intensity of Rivalry Among Competitors

• Growth Rates. This aspect of competitive intensity is partially addressed in the economic filter, which addresses changes in market demand. The economic filter assesses alignment with market demand and impact. The focus here is on competition. For purposes of the SWAV, we need to isolate how the Strategic Alternatives will be affected by market growth rates. In high-growth industries, business performance can improve by keeping pace with the market. Assuming a company is growing as fast as its industry, it should increase in profits and size with the market. Shareholder value will be driven by a firm's membership in the industry. A slowgrowth environment will force its players to focus on market share and efficiency to enhance shareholder value. The key to growth is to take market share from other competitors, or to buy market share by acquisition. The only way to increase sales faster than the industry is to get your competitors' business. Increase in profits will come from doing things more efficiently.

• Product Type. If the product is a commodity, the industry players will compete on price. The major characteristic of a commodity-driven marketplace is that product functions and features of equal quality can be delivered by the majority of the competitors in the marketplace. Brand, customer service, and customer loyalty are not major factors in the buying decision. Oil, steel, and agriculture can be categorized as commodity industries. This fuels more intense competition and tends to reduce the number of competitors. Markets that have complex products generate rivalry through differentiating product features and functions. Biotechnology is an example of an industry where products are highly differentiated.

• The Nature of the Players. The nature of the market players is a function of their comparative size, demographics, and strategy. Markets containing players of the same size tend to have more intense competition. The absence of a dominant player fuels intensity. Companies take more risks because of the limited impact of competitor responses on their business. Intensity wanes as dominant players emerge. Smaller firms may fear that retaliation by big players will put them out of business.

  Market player strategy has an important role in competitive rivalry. If the success of a company is defined by its accomplishment in a particular industry, competition will intensify. This creates a "succeed at all costs" mentality. This strategy may be destructive when large companies are vying for market position.

• Fixed/Storage Cost Levels. High fixed costs increase competitive rivalry, usually in the form of price wars. This is caused by the push to fill existing capacity and to break even. The marketplace has a "ratchet-like" response to increased capacity (Exhibit 5-2). When capacity is added in large increments (i.e., businesses build large plants), competition tends to intensify. Capacity spikes lead to sharp price drops as businesses push to fill excess capacity. After the industry has reached an equilibrium point, intensity diminishes. This competitive lull will be interrupted by the next addition of a large increment of capacity.

  Exhibit 5-2: Relationship between competitive rivalry and capacity.

  

• Exit Barriers. The steeper the exit barrier, the more intense the level of competition. If the cost of leaving a market is formidable, then firms tend to stay in the business. This may relate to selling special use assets, union contracts, or synergies with other operating divisions. Back to the example above, if a company has a significant investment in plants, they have created a barrier to exit. The barriers relate to sale of the plant and redeployment of workers and the time involved in liquidation, among other things.