Which of the following is not one of the competitive forces in an industry environment in Porters model?

Awareness of these forces can help a company stake out a position in its industry that is less vulnerable to attack.

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Major contending forces, says this expert on business strategy, determine the state of competition in an industry: the threat of new entrants, the bargaining power of customers and of suppliers, the intense rivalry of competitors, and the threat of substitute services or products. Once the corporate strategist has assessed these forces, he can identify his own company’s strengths and weaknesses and act accordingly to put up the best defense against competitive assaults.

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The essence of strategy formulation is coping with competition. Yet it is easy to view competition too narrowly and too pessimistically. While one sometimes hears executives complaining to the contrary, intense competition in an industry is neither coincidence nor bad luck.

A version of this article appeared in the March–April 1979 issue of Harvard Business Review.

• Michael E. Porter is the Bishop William Lawrence University Professor at Harvard Business School. He has served as an adviser to governments and campaigns around the world on the advancement of social policy and economic policy, including Mitt Romney’s presidential campaign. His latest paper is The Role of Business in Society. He is an academic adviser to the Leadership Now Project.

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Industry rivalry—or rivalry among existing firms—is one of Porter’s five forces used to determine the intensity of competition in an industry. Other factors in this competitive analysis are:

• Barriers to entry
• Bargaining power of buyers
• Bargaining power of suppliers
• Threat of substitutes

Industry rivalry usually takes the form of jockeying for position using various tactics (for example, price competition, advertising battles, product introductions). This rivalry tends to increase in intensity when companies either feel competitive pressure or see an opportunity to improve their position.

In most industries, one company’s competitive moves will have a noticeable impact on the competition, who will then retaliate to counter those efforts. Companies are mutually dependent, so the pattern of action and reaction may harm all companies and the industry.

Some types of competition (for example, price competition) are very unstable and negatively influence industry profitability. Other tactics (for example, advertising battles) may positively influence the industry, as they increase demand or enhance product differentiation.

Structural factors affecting industry rivalry

A number of structural factors can affect industry rivalry:

Numerous or equally balanced competitors

When there are many competitors, some companies believe that they can make competitive moves without being noticed. When companies are relatively balanced in strength, they are more likely to engage in competitive battles and attack and retaliate as they strive for market leadership.

Slow industry growth

In a slow growth market, companies can only grow by capturing market share from each other, which leads to increased competition.

High fixed or storage costs

High fixed costs create pressure for all companies to fill capacity, thus leading to price cutting when there is excess capacity. High storage costs push companies to decrease prices to ensure sales.

Lack of differentiation or switching costs

When products are perceived as commodities, choice is often determined by price and service, which then leads to increased competition in price and service.

Capacity increased in large increments

When economies of scale require large increases in capacity, it causes disruptions in the industry supply/demand balance, which then leads to periods of overcapacity and price cutting.

Diverse competitors

Companies with diverse strategies, origins, personalities and relationships to parent companies (especially foreign competitors) also have different competitive goals and strategies than “typical” companies within the industry. Their diverse approaches to the market and unique competitive strategies can upset the status quo of doing business.

High strategic stakes

Companies with high stakes in achieving success may sacrifice profitability for expansion. Also, companies with high market share may feel threatened by competitors seeking to reduce their market share.

High exit barriers

Economic, strategic and emotional factors can prevent companies from leaving the industry, even when they are earning low or negative returns on investments. Major sources of exit barriers include:

• Specialized assets
• Fixed costs of exit
• Strategic interrelationships
• Emotional barriers
• Government and social restrictions

Read next: Bargaining Power of Buyers: Porter’s Five Forces Analysis

References

Porter, M. (1998). Competitive Strategy. New York: Free Press. pp. 17-23.

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