September 2007 (School for Startups)
A starting point to analysing the industry is to look at competitive rivalry. This term describes the intensity of competition between existing players (companies) in an industry If entry to an industry is easy then competitive rivalry will likely to be high.If it is easy for customers to move to substitute products for example from coke to water then again rivalry will be high.
Not all industries are equally competitive. Generally competitive rivalry will be high if:
- There is little differentiation between the products sold between customers. This reduces customers’ brand loyalty.
- Competitors are approximately the same size of each other. The internet may increase rivalry by making price comparisons easier and facilitating faster innovation and new product development.
- If the competitors all have similar strategies.
- It is costly to leave the industry hence they fight to just stay in (exit barriers). Examples of such high exit barriers include redundancy payments, penalty clauses or tax losses.
- Low market growth rates (growth of a particular company is possible only at the expense of a competitor)
- High “strategic stakes” are tied up in capital equipment, research or marketing
- High fixed or storage costs, which encourages fast turnover of inventory.
- When capacity can only be increased by large amounts. In this case companies will fight to protect their market share, or compete aggressively to increase it substantially.
High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry.