Porter’s Intensity of Rivalry Definition
The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each other’s profit potential. If rivalry is fierce, then competitors are trying to steal profit and market share from one another. As a result, this reduces profit potential for all firms within the industry. According to Porter’s 5 forces framework, the intensity of rivalry among firms is one of the main forces that shape the competitive structure of an industry.
Porter’s intensity of rivalry in an industry affects the competitive environment and influences the ability of existing firms to achieve profitability. For example, high intensity of rivalry means competitors are aggressively targeting each other’s markets and aggressively pricing products. This represents potential costs to all competitors within the industry.
High intensity of competitive rivalry can make an industry more competitive and thus decrease profit potential for the existing firms. In comparison, low intensity of competitive rivalry makes an industry less competitive. It also increases profit potential for the existing firms.
Conducting a competitor analysis can be overwhelming and confusing, but it doesn’t have to be. Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces.
[button link=”https://strategiccfo.com/external-analysis?utm_source=wiki&utm_medium=button%20cta” bg_color=”#eb6500″]Download The External Analysis Whitepaper[/button]
Porter’s Intensity of Rivalry Determining Factors
Several factors determine the intensity of competitive rivalry in an industry, whether it increases or decrease it.
Porter’s Rivalry Intensity Increased
If the industry consists of numerous competitors, then Porter rivalry will be more intense. Whereas if the competitors are of equal size or market share, then the intensity of rivalry will increase. The intensity of rivalry will be high if industry growth is slow. If the industry’s fixed costs are high, then competitive rivalry will be intense. Additionally, rivalry will be intense if the industry’s products are undifferentiated or are commodities. If brand loyalty is insignificant and consumer switching costs are low, then this will intensify industry rivalry. Industry rivalry will be intense if competitors are strategically diverse – which means that they position themselves differently from other competitors. Then an industry with excess production capacity will have greater rivalry among competitors. And finally, high exit barriers – costs or losses incurred as a result of ceasing operations – will cause intensity of rivalry among industry firms to increase.
Porter’s Rivalry Intensity Decreased
And of course, if the opposite is true for any of these factors, the intensity of Porter rivalry among competitors will be low. For example, the following indicates that the Porter intensity of rivalry among existing firms is low:
- A small number of firms in the industry
- A clear market leader
- Fast industry growth
- Low fixed costs
- Highly differentiated products
- Prevalent brand loyalties
- High consumer switching costs
- No excess production capacity
- Lack of strategic diversity among competitors
- Low exit barriers
Porter’s Intensity of Rivalry Analysis
When analyzing a given industry, all of the aforementioned factors regarding the intensity of competitive rivalry Porter placed among existing competitors may not apply. But some, if not many, then certainly will. And of the factors that do apply, some may indicate high intensity of rivalry and some may indicate low intensity of rivalry; however, the results will not always be straightforward. As a result, consider the nuances of the analysis and the particular circumstances of the given firm and industry when using the data to evaluate the competitive structure and profit potential of a market.
Intensity of Rivalry is High if…
If any of the following occurs, then intensity of rivalry is high.
- Competitors are numerous
- Industry growth is slow
- Fixed costs are high
- Competitors have equal size
- Products are undifferentiated
- Brand loyalty is insignificant
- Consumer switching costs are low
- Competitors have equal market share
- Competitors are strategically diverse
- There is excess production capacity
- Exit barriers are high
Intensity of Rivalry is Low if…
If any of the following occurs, then it may indicate that the intensity of rivalry is low.
- Competitors are few
- Unequal size among competitors
- Competitors have unequal market share
- Industry growth is fast
- Fixed costs are low
- Products are differentiated
- Brand loyalty is significant
- Consumer switching costs are high
- Competitors are not strategically diverse
- There is no excess production capacity
- Exit barriers are low
Porter’s Intensity of Rivalry Interpretation
When conducting Porter’s 5 forces industry analysis, low intensity of rivalry makes an industry more attractive and increases profit potential for the firms already competing within that industry. In comparison, high intensity of rivalry makes an industry less attractive and decreases profit potential for the firms already competing within that industry. The intensity of rivalry among existing firms is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework.
Start preparing your external analysis so you can react in realtime when the intensity of rivalry threatens your company. If you don’t loose out because of an external force, then download the free External Analysis whitepaper by clicking here.
[box]Strategic CFO Lab Member Extra
Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to maximize the value of your company.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
Sources on Porter’s Intensity of Rivalry
Harrison, Jeffrey S., Michael A. Hitt, Robert E. Hoskisson, R. Duane Ireland. (2008) “Competing for Advantage”, Thomson South-Western, United States, 2008.
Porter, M.E. (1979) “How competitive forces shape strategy”, Harvard Business Review, March/April 1979.
Porter, M.E. (1980) “Competitive Strategy”, The Free Press, New York, 1980.
Porter, M.E. (1985) “Competitive Advantage”, The Free Press, New York, 1985.