Competitive rivalry: drivers, examples and measures

Competitive rivalry is the intensity with which firms already in a market fight for the same customers, through price cuts, new products, advertising and service improvements. It is one of Michael Porter's five competitive forces, and the more intense it is, the less of the industry's profit the firms get to keep.

Porter's full name for it is "rivalry among existing competitors". The other four forces are the threat of new entrants, the threat of substitutes, and the bargaining power of buyers and of suppliers. The Porter's five forces template puts all five on one page.

What drives the intensity of rivalry

In "The Five Competitive Forces That Shape Strategy" (Harvard Business Review, January 2008), Porter says the intensity of rivalry is greatest when:

• Competitors are numerous or roughly equal in size and power. Without a clear leader, nobody can avoid poaching.
• Industry growth is slow. Growth then comes only from taking share.
• Exit barriers are high. Specialised assets or management's attachment to the business keep firms in the market even when they are earning low or negative returns.
• Rivals are highly committed, for reasons beyond profit, such as prestige or a parent company's wider aims.
• Firms cannot read each other's signals, because they are unfamiliar with one another or compete in different ways.

When competitive rivalry turns to price

Porter's sharpest point is about the basis of competition. Rivalry, he writes, "is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers." Price cuts are easy to see and easy to match, which invites retaliation.

He lists the conditions that make price competition likely:

• Products are nearly identical and switching costs are low. His example is years of airline price wars.
• Fixed costs are high and marginal costs low. Paper, aluminium, and delivery firms with fixed route networks.
• Capacity has to be added in large steps, which leads to recurring periods of overcapacity and price cutting.
• The product is perishable. Including services: an empty hotel room tonight can never be sold.

Rivalry on other dimensions, such as features, support, delivery time or brand, is less likely to erode profit because it raises the value customers get. And when rivals aim at different customer segments, Porter argues rivalry can be positive sum, raising average profitability and even growing the industry. His example is the US casino industry, where most competition went into new niches and locations rather than head-to-head price cuts.

An example

Say a town has four independent gyms of similar size, membership is flat, and each has a long lease on its building. That is several of Porter's conditions at once: rivals of equal size, slow growth and high exit barriers. Expect January price promotions from all four, membership deals that copy each other within weeks, and thin margins for everyone. This example is hypothetical.

Now suppose one gym converts to women-only small-group training and another to 24-hour budget access. Rivalry falls, because they are no longer fishing for the same members.

How to measure competitive rivalry in your market

Porter's drivers describe the structure. To see how intense the rivalry is right now, watch what rivals do. Six signals you can check from public sources:

Score each signal 1 (quiet), 2 (normal) or 3 (busy) once a month and add them up. The total runs from 6 to 18. The number itself means little; a score that climbs for three months running is a market heating up, and the signal that rose tells you where. Price signals deserve the most attention, for Porter's reason.

Tracking competitor website changes covers the pricing and landing page signals in detail.

What to do when rivalry intensifies

Do not follow it onto price. Matching cuts is how a price war starts, and it moves profit to customers without moving share much.

Compete on a different dimension. Service, speed, specialism or a segment rivals underserve.

Raise switching costs fairly, through onboarding, integrations or data that lives in your product. See switching costs.

Watch the entrance. Intense rivalry plus low barriers to entry is a hard combination: margins are thin and new rivals keep arriving. See the threat of new entrants.

Figo's Monday briefing reports new ads, pricing changes and new pages for each tracked competitor, which covers several of these signals without a monthly spreadsheet.