What is the Intensity of Rivalry Within Porter’s Five Forces Model?

What is the intensity of rivalry within Porter’s five forces model?

This article asks what is the intensity of rivalry within Porter’s five forces model? We explain the intensity of rivalry, how to detect and analyse it within your industry.

Porter’s five forces model

Michael Porter argues that five forces influence competition and long term investments. The five forces are the:

• Threat of entry
• Bargaining power of suppliers
• Bargaining power of bias
• Intensity of rivalry
• Threat of substitution

It’s important that you be strategically positioned within your industry. Firstly, to defend yourself from these forces. And then go on the attack by manipulating them to your advantage. Perhaps the main force of Porter’s five forces is what is called the intensity of rivalry.

Intensity of rivalry

The final force to be aware of is how tough the competition is among existing companies within your industry. How much pressure do competitors put on one another to win more business? Watch out for the intensity of rivalry with pricing and advertising battles, new product introductions, and increased customer service. All of which quickly, certainly in the short term, reduces profit potential for everyone within the industry. The intensity of rivalry is one of the critical forces shaping your competitive industry structure.

So ideally, it is best to invest time and/or money into an industry with a low intensity of rivalry.

Few competitors

Several factors can lead to lower competition, concentrated to certain areas or few competitors in the market. You may prefer to see that a few players dominate the industry. Companies are then familiar with the hierarchy of the industry. And larger companies tend to be more consistent and sensible. Often, the smaller ones try something stupid, which can fail “big time” or be a spectacular success. The level of intensity of rivalry in your industry has one main effect. The ability for you and your competitors to achieve profitability.

High intensity of rivalry situation

In a high intensity of rivalry situation, you will be facing competitors aggressively targeting your market and with very competitive pricing. To a point where you wonder how they are making any profit at all. This situation costs everyone in the industry, including customers. Yes, they have lots of choices and great prices, but something has to give. Quality of product or customer service is the usual thing to suffer first.

Signs of high intensity

Brand loyal means nothing, and customers can move around your competitors without suffering from high switching costs. Your competitors position themselves differently from all other competitors. There is an excess production capacity, and it will cost a lot for a business to leave the industry. High exit barriers.

The intensity of rivalry will be intense if industry growth is slow and if fixed costs are predictable and high. If products and services are hard to differentiate or are commodities

Commodities

According to Investopedia, a commodity is a basic good used in commerce interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

Signs of high intensity of rivalry situation:

• Many competitors
• Slow industry growth
• High fixed costs
• Similar size competitors
• Competitors with equal market share
• Strategically diverse competitors
• Products are hard to undifferentiate
• Little or now brand loyalty
• Low customer switching costs
• Excess production capacity
• High exit barriers

Signs of low intensity

On the other hand, a low-intensity environment will make your industry so much less competitive. Profits will increase for you. Signs of a low-intensity climate include:

• Few competitors
• Competitors are not similar in size. Small and very big
• Some competitors have unequal market share
• Competitors not strategically diverse
• Fast industry growth
• Low fixed costs
• Differentiated products
• Significant brand loyalty is
• Low Exit barriers
• High customer switching costs
• Little or no excess production capacity

Most companies can fulfil their shareholder promises without having to wage price wars and lowing fixed costs.

Example low differentiation industry

For example, you may have just have built a new production plant that can manufacture a ten products day. You find the demand for the product stands at seven products per day. So you are making three more than you need. The difference in cost of producing these ten products and seven products is minimal. With this in mind, you may decide to cut your prices to sell 10 per day for a slight loss of profit. Usually, you will see this sort of behaviour in industries with low differentiation.

If your customers see your products as just a commodity, they will buy on price. Making the price very important and sensitive to market conditions. Think Oil and Gas and wheat producers and mining companies. Imagine trying to differentiate your barrel of oil on something other than price? Colour and taste are out of the window. Perhaps the source of the oil? You will be on a sticky wicket with that argument.

Many factors when analysing the industry

When analysing the industry, many factors of the intensity of competitive rivalry will not apply to you. But many will. Also, life has never been straightforward. Some may indicate the low intensity of rivalry. And others a high intensity of rivalry. When analysing, it’s essential to take current circumstances and the other information you have on your competitors and market.

Conclusion

What is the intensity of rivalry within Porter’s five forces model?

Put simply, Porter’s five forces industry analysis will show that low intensity of rivalry will make your industry more attractive. With a lot more potential for good profits for you and your competitors. The high intensity of rivalry makes your market sector less attractive, and you will experience lower profit potential.

This article asked what is the intensity of rivalry within Porter’s five forces model? It explained the intensity of rivalry, how to detect and analyse it. Hopeful, we have demonstrated that the intensity of rivalry among you and your competitors is one of the most important factors when analysing your industries structural environment using Porter’s five forces framework.