Competitive Rivalry | Porter’s Five Forces Model
The last of Porter’s five forces deals with firms competing within the industry and the extent to which they exert pressure on each other. This pressure leads to limits on the profit potential of these firms. In industries where there is fierce competitive rivalry to contend with, there are efforts to gain the most profit and market share from each other. This battle can end up decreasing the potential for profit for all of the companies.
In this article we will look at 1) an introduction to competitive rivalry, 2) the factors determining competitive rivalry, 3) analyzing the intensity of rivalry, 4) the consumer benefits of competitive rivalry, 5) the challenges and opportunities for companies in a competitive market, and 6) an example of Canon Inc.
The factor of competitive rivalry has significant impact on the competitive environment a company operates in because the degree of competitiveness has direct impact on the potential for profit that a company can expect. A highly competitive market may end up being detrimental to all companies involved, with lower profit margins and less ability to decide price points.
A highly competitive market may act as a barrier to entry for new companies considering joining the fray. Since the profit potential is not high, there may be less incentive to invest in the market. On the other hand, low competition may make the market attractive to potential new entrants.
Forms of Industry Rivalry
The competitive pressure in an industry may manifest itself through a number of different tactics. These can include competition based on price, advertising wars, new products, etc. The rivalry may gain traction when a company feels pushed by a competitor or identifies an opportunity to grow its share of the market. Whatever the reason, the actions of one company will have an impact on competitors. In turn, they will take action to retaliate against these actions. This has the potential of turning into a cycle which may end up harming the industry as a whole.
If the competition ends up being based on price, it can become very unstable and affect profit margins. On the other hand, advertising battles may end up raising the demand for a profit across the industry.
FACTORS DETERMINING COMPETITIVE RIVALRY
The structure and nature of an industry may determine the nature of the competitive rivalry that may exist in it. Some of the factors that may make an industry competitive include:
- Multiple Equal Competitors: If an industry has numerous competitors who all operate at an equal level of product or service quality, then there is a higher threat of competition. Companies may feel the need to engage in more aggressive activities to gain a higher share of the market If they do not enjoy any sort of clear advantage over competitors.
- Sluggish Growth within the Industry: If the industry does not enjoy a rapid growth rate, then the only way for a company to increase its market share is to take it away from a competitor. There is also a higher degree of protectiveness towards any existing share in the market, as once lost, it may be hard to regain.
- Higher Fixed Costs: If fixed costs within an industry are higher, then there may be more pressure to produce at full capacity in order to achieve economies of scale. In order to ensure that this stock is cleared, companies may guard their market share aggressively and also try to obtain more as well. In addition, to ensure that this stock is cleared, the company may have to sell at lower prices.
- Undifferentiated Product: If the main product of an industry is generic and there are no grounds to base differentiation on, then the products may be treated as a commodity. This means that consumer choice will be based on price and value for money. This will naturally lead to price based competition.
- Switching Costs: If there are little or no switching costs for a consumer then the industry may be more competitive. This happens often in undifferentiated industries or ones where the products are very similar in benefits, features and quality.
- Capacity Increases: If the need for economies of scale warrants an increase in production capacity, then there may be a brief disruption in the demand and supply of the market. This may result in overcapacity of products and price cutting to make sure products do not remain unsold.
- Diversity of Competition: If the industry is made of different types of companies who differ in their origins and strategies, then there may be diverse ways to do business. These alternate methods may change the nature of competition and the way of doing business.
- Strategic Focus: Often a company may have high stakes in ensuring that it stays in business over the long term. In this situation, the company may sacrifice short term profitability to ensure its long term presence in the market. These companies will focus foremost on maintaining and growing market share.
- Barriers to Exit: If there are barriers to exit within the industry, then companies with low profit and growth may also have to remain active. In these cases, there will be competitive pressure to stay relevant and earn profits by any means necessary. Some potential exit barriers may be the result of ownership of specialized assets, fixed costs of exit and governmental regulations.
ANALYZING INTENSITY OF RIVALRY
While trying to assess whether there are likely to be high competitive pressures within an industry, a company can ask the following questions:
- Are there numerous competing firms in the industry?
- Are these competitors generally of an equal size in their operations?
- Do these competitors have similar shares in the market?
- Is the industry growing slowly or rapidly?
- Are fixed costs low or high?
- Are products differentiated or generic?
- Are there any switching costs?
- Is brand loyalty an important factor?
- Does any company have more brand loyalty than others?
- Are competitors diverse in their operations and strategies?
- Is there unused production capacity?
- Is there over production?
- Are there any barriers to exit?
CONSUMER BENEFITS OF COMPETITIVE RIVALRY
Though potentially detrimental to the profit potential of an industry, high levels of competition can benefit the consumer in a number of ways. Competition is often sought after by regulators and consumers in order to create a strong and effective market. Through healthy competition, consumers can end up getting the best value for their money which they otherwise may not. Competition allows consumers a variety of choices in who provides the product or service that they are interested in.
Competition encourages companies to innovate, utilize production capacity, reduce costs and increase efficiency. If done right, competition can help foster a productive economy.
Potential Benefits of Competitive Markets
A competitive market offers many potential benefits including lower prices, economic growth, incentive to keep costs of production low, technological improvements and advancements, product variety, innovation, quality improvements, and the availability of more information allowing for more informed choices by consumers.
Three Main Benefits
Faced with competitors, companies will seek to innovate in order to differentiate themselves from others and gain more consumers as well as market share. This benefits consumers by providing more choices and better quality of goods and services. In extreme cases, these innovations may lead to changes in society and lifestyles. The invention of cars, cellphones and personal computers are examples of innovations with wide-ranging impact.
2. Lower Prices
When there are low switching costs and a variety of choices, there is always the chance of a consumer moving to a competitor. To avoid this, companies will make efforts to reduce costs of doing business and offer the best possible prices to the customer. Along with the drop in prices, companies will also make efforts to better understand unmet consumer needs and work towards developing products and features to meet these needs.
3. Economic Growth
Competition also drives economic growth. In the technology industry, advancements in smartphones have led to growth in several world economies.
CHALLENGES AND OPPORTUNITIES FOR COMPANIES IN COMPETITIVE MARKETS
A company can choose to treat competition as a positive factor and use it to build a better and stronger business. If there is more than enough market share available, then there is a chance of a company becoming complacent and take the customer for granted. Customer service, product quality and innovation may also suffer. Here are some ways in which competition can benefit the business.
- Better Customer Service: When faced with the threat of more competition, it is a good idea to evaluate and appreciate all customers and figure out the best way to serve their needs. With customer loyalty secured, it will be easier to retain customers if a stronger or more aggressive competitor comes around.
- Innovation: When a market is served by multiple similar companies selling similar products, then it becomes necessary to focus on innovation. Innovation allows a company to stay ahead of trends and continue to serve customers proactively.
- A Focus on Strengths and Weaknesses: When trying to manage competition, a company’s own strengths and weaknesses are highlighted. This helps focus on the things that are being done well and allows a company to continue to do them better.
- A Focus on Key Customers: If a competitor is after a company’s share of the market, it becomes necessary for the company to identify and retain those customers that make up a larger chunk of the business. This means that the right people are paid attention and better ways are devised to fulfill their needs.
- Threat Identification: In dealing with competitors, a company learns to keep a vigilant eye on any plans, strategies, new technology or products that a competitor may introduce to the market and become a possible problem.
- Business and Market Growth: Competitive rivalry in an industry come up with new and innovative ways to serve customers. There is more inventive solutions and original ideas leading to a more exciting and growing market.
- Solutions to Industry Wide Problems: With more players in the market, there are also more ideas and more support for common issues and their solutions. Companies can be in a better position to negotiate with common suppliers, or a strong regulatory body.
As expected, a highly competitive industry comes with its unique set of challenges. More competition can lead to marker saturation. This means that the supply in the market is either more than the demand or it is the same. A saturated market means both limited profits and limited growth.
- Higher Costs: The higher the competition, the more money needs to be spent on activities to make a company stand out in the crowd. This means more R&D costs, higher quality products, innovation, new products, and consistent relationship building with customers.
- Low Customer Growth: More competition means that there is no new demand for a product and that all customers are being served by either one company or the other. The revenue being earned remains consistent with little chance of increase or access to new business. This limited profit means limited growth potential for the company.
- High Pressure to Grow: With fewer customers to compete for, a company may need to look outward and find new markets to serve or new products to offer. This means researching potential business ideas and new markets.
- Product Irrelevance: With more competition there may be less of a demand for a particular product. In order to move this inventory, a company may have to mark down prices to ensure sales. Profit is lost in such cases.
EXAMPLE – CANON INC.
Canon is a multinational company that originated in Japan, with headquarters based in Ota, Tokyo. The company specializes primarily in manufacturing of imaging and optical products. This includes cameras, video cameras, photocopy machines, computer printers, and medical equipment.
In 1937, Precision Optical Instruments laboratory was created by a group of people in Tokyo. The first cameras produced by the company used Nikkor lenses, produced by the company that later became Nikon. The company has always been focused on innovation. Some of its achievements have included the development of Japan’s first indirect X-ray camera in 1940. In 1958, the company introduced a field zoom lens for television broadcasting. In 1959, it introduced the Reflex Zoom 8 which was the first movie camera with a zoom lens in the world. In 1964, Canon launched the first Japanese made 10 key calculator.
In the early 70s, the company launched a high end SLR camera and an FD lens range and the world’s first camera with an embedded micro-computer. In the 80s the company launched an inkjet printer and its Electro-Optical System or the EOS. In the 90s the company introduce the first camera with eye controlled AF and its first digital camera. The company launched its camcorder in the late 90s and an LCD projector in 2004.
Digital Camera Market
The company has manufactured and sold digital cameras since 1984. It launched the RC series and followed these with the PowerShot and Digital IXUS series’. Canon also introduced the EOS series of DSLRs which include both consumer and professional models.
With the increasing trend to use cellphone cameras, there has been a fall in compact camera sales. This has been felt by Canon as well, with operating profits in the first quarter of 2013 falling by 34 percent.
Competitive Rivalry in the Industry
Over the years, there have been significant competition in the camera business. The big three companies that enjoy the most profits are Canon, Nikon and Sony. Other major players have included Pentax, Olympus, Kodak, Samsung, Panasonic and Casio.
The market is mature and highly saturated. There is slow growth and high exit barriers. Since it is an industry that requires specialized expertise and assets as well as capital investments, it would not be easy for a company to leave the market. Each new product development is met and matched by competitors so that products by Nikon and Canon have little or no difference in their quality and features. Differentiation is based on brand loyalty alone.
The industry structure is such that the few major players are innovators while the others settle to follow and serve a smaller share of the market. Bigger companies have maintained longer term success by the ability to leverage their technology into similar complimentary products and markets. For example, the launch of video cameras, printers and copiers are a good diversification of business.
With the remaining market for compact cameras, there is little scope for brand loyalty as customers are focused on best value and quality for their money. Differentiation based on brand image is still stronger in the DSLR market as most buyers are professionals who value specific features and benefits.
In general, the competition in the market for digital cameras in extremely high, intense and aggressive. There needs to be a constant focus on the environment and competitor moves as well as consistent product development and technological innovation.