Intensity of Rivalry

Definition

Intensity of rivalry refers to the degree of competition among existing firms within a particular industry. It is shaped by factors such as the number of competitors, industry growth, and product differentiation. A high intensity of rivalry can lead to price wars, increased marketing costs, and innovation as companies strive to outperform one another, affecting overall profitability within the industry.

5 Must Know Facts For Your Next Test

1. The intensity of rivalry can lead to aggressive marketing strategies, including discounts and promotions, as companies try to gain market share.
2. Industries with high fixed costs often experience greater intensity of rivalry since companies need to fill capacity to cover costs, driving them to compete more fiercely on price.
3. The presence of strong brand loyalty can lessen the intensity of rivalry, as established firms may retain customers despite competitive pressures from new entrants.
4. Innovation plays a key role in the intensity of rivalry; companies may invest heavily in research and development to differentiate their offerings from competitors.
5. Seasonal demand fluctuations can exacerbate rivalry as firms compete for limited sales during peak periods, leading to heightened competition and pricing pressures.

Review Questions

• How does the intensity of rivalry impact companies' strategies in a competitive market?
  • The intensity of rivalry compels companies to adopt various strategies to maintain or enhance their market position. In highly competitive markets, firms often resort to aggressive pricing, increased advertising, and product innovations to attract customers. This constant competition can lead to significant operational adjustments, as companies aim to differentiate themselves from rivals and ensure customer loyalty.
• Analyze how factors such as industry growth rate and number of competitors influence the intensity of rivalry within an industry.
  • In industries with slow growth rates, existing firms must compete more fiercely for market share, resulting in higher intensity of rivalry. When there are many competitors in the market, the competition escalates as each firm vies for the attention of consumers. Conversely, in fast-growing industries with fewer competitors, companies may focus on expanding their market presence rather than engaging in destructive rivalries.
• Evaluate the long-term effects of high intensity of rivalry on overall industry profitability and market dynamics.
  • High intensity of rivalry often leads to reduced profit margins for companies in the industry due to price wars and increased marketing expenditures. Over time, this environment can force weaker firms out of the market or lead to consolidation through mergers and acquisitions. Additionally, relentless competition can drive innovation and improvements in efficiency, which may ultimately benefit consumers but challenge established players' sustainability in the market.

Related terms

Competitive Advantage: The unique edge a company has over its competitors, allowing it to generate greater sales or margins and retain more customers.

Market Saturation: A situation in which a product has become widespread in a market, limiting growth opportunities and increasing competition among firms.

Porter’s Five Forces: A framework for analyzing the level of competition within an industry and business strategy development, consisting of five forces that shape competitive dynamics.