The Five Forces of the Porter Model: The Degree of Rivalry

Porter's five forces analysis model considers factors existing outside the industry that has an influence on the characteristics of the competition inside the industry. The model is based on the premise that a competitive environment is produced by the interaction of the five forces acting on the business, each in its own unique manner. In this article one of the five forces namely the degree of rivalry will be discussed.

The Five Forces

The five forces model is based on the premise that a successful market strategy should exploit the opportunities and mitigate threats in the organizations macro environment. The success of a competitive strategy is normally based on a clear understanding of the industry composition and the manner in which it responds to change. The first of the five forces that will be discussed is the degree of rivalry in the industry.

Degree of Rivalry

When analyzing this force the strength, energy and intensity of rivalry between current companies present in an industry should be evaluated. If there are a high degree of competition and active marketing pressure it will result in a downward pressure on prices and thus on profit margins. This in turn will negatively affect the profitability of every company in the industry sector.

The factors that influence the degree of rivalry include the existence of exit barriers in the industry. Where it is difficult to exit an industry the players will vigorously fight to stay competitive as exit may not be a viable alternative. Other factors that have a profound impact on the industry rivalry include the industry concentration, the costing structure and the cost to switch to alternative products. The more difficult this is, the higher the industry rivalry will be. If the industry products have limited or no differentiating features and brand identity have not be established or the diversity of the rivals are limited the degree of rivalry will be significant. Another factor that influences the degree of rivalry is the growth rate of the industry. In industries that have a negative or low rate of growth the rivalry will be mush more severe than in industries with a high growth rate. The same will happen during intermittent periods of over capacity in an industry or in industries where major corporations have strong corporate stakes.

Conclusion

In summary, competition between existing industry participants will probable be high when the particular industry have many players of about the same size and they all have similar strategies. The situation will be the same in industries where there is little participant differentiation and the products are largely indistinguishable. Under industry conditions where there is a lot of price based competition and market growth that is only possible at the expense of competitors.

This article is followed by another article with the title "The Five Forces of the Porter Model: Supplier's Power" by the same author.

© Carl Marx