Designing for superior business performance

A guide for technology, creative and startup leaders

Choice 2: Where we play - threat of rivalry

In this chapter

  1. Overview of what is the profitability threat from rivalry

  2. Factors that elevate the threat or rivalry.

  3. Protecting against rivalry

  4. Overcoming rivalry threats

  5. Tools that can help build and sustain your understanding

Introduction

In an industry, most particularly a mature or declining industry, there are a finite number of buyers and finite revenue. Declining markets for example not only have limited buyers but declining numbers of them. For businesses remaining in a declining industry, rivalry will almost certainly increase. Given the finite buyers, a sale and profit of one business comes at the expense to the others. Each business, in an industry segment, will make moves to attract and win customers. These moves can include sales and promotions, better quality products or service, wider range of products / services, and lower prices. In response to these moves alternate companies will make countermoves to respond to these moves.

Rivalry threat

The more of these moves that occur and intensity of them tends to either
1. Lower revenue i.e., sales and promotions reduce the cost to the customer and reduces the amount of revenue for the same sales volume. That is if a business could sell 100 units at $10, but now sells 100 units at $7 it earns less revenue for that 100-unit volume.
2. Increase costs through increased quality, service, research, and development potentially at the same sale price, it can be difficult to pass on increased costs to the consumer when there is high price rivalry.
Lower revenue and/or increased costs reduces the profitability of the industry. Some industries (combination of industry and location) will have minimal rivalry. In the presence of minimum rivalry businesses in the industry generally play along with each nicely and avoid race to the bottom price wars and so forth. Other industries will have higher rivalry affecting the profitability of the industry. Rivalry of course is influenced by the threat of new entrants discussed next. Given a situation where rivalry is low and profits are therefore good, then new entrants will almost certainly eventually attempt to enter that market which in turn increases rivalry as new players aim to win their share of the industry

factors which affect the threat of rivalry including . 2. Standardization of products 3. Costs to buyers of switching to another product 4. Growth in demand for products 5. Levels of unused production capacity 6. High fixed costs and highly perishable products 7. The difficulty for firms of leaving the industry

Rivalry threat is influenced by the following factors.

  1. The number and size of competitors.

  2. Standardization across products.

  3. Buyers switching costs.

  4. Growth in demand.

  5. Levels of unused production capacity.

  6. High fixed costs.

  7. High barriers to exit the industry.

Review of rivalry threat factors

Most of these elements are somewhat intuitive, so you can review these factors briefly here before we move on creating and overcome buyer power factors.

Number and size of competitors

graph showing how unit costs are reduced as the quantity of product is increased

The more competitors there are in an industry, the more likely that one or more of them will take action to gain profits at the expense of others.
Fragmented versus consolidated industry

Fragmented industry
An industry with a lot of competitors of similar size is considered a fragmented industry. In a fragmented industry, it is difficult to keep track of the pricing and competitive moves of multiple players. Rivalry tends to be intense when there are a lot of competitors with similar access to competitive resources and other threats factors are present.
Consolidated industry
Consolidated Industries have far fewer competitors and tend to be dominated by a few large companies. These industries, usually experience much less rivalry. Smaller and new competitors frequently do not have the capability to respond to actions taken by large competitors. In usual operating mode, the few large competitors are more aware of each other and less likely to risk actions that may result in price wars.

Standardized or undifferentiated products

When products are standardized, or commodity-like, buyers are less loyal to a particular brand, and it is easier to convince them to switch brands. A driver may love and be loyal to their new Tesla automobile but have no affinity for which electric utility company supplies the power to recharge it. Utility companies tend to offer standardized services, therefore compete mostly on price. Industries with non-differentiated products e.g., nuts and bolts, plastics, commodities such as salt, sugar, wheat, corn are in industries likely subject to intense rivalry and should develop capabilities to compete on price.

Excess Unused Production Capacity

Unused production capacity is expensive. Businesses generally aim to produce at or near their full production capacity so that they can spread the fixed cost of labor, facilities, machinery, and other production cost across more units.
Sometimes, they may aim to produce more product than the market demands, to use their capacity completely. Once, more is produced or is available than is demanded in the market, then firms will often drop prices or risk having unsold product and excess cash tied up in inventory. This can apply to physical products but also professional services. In professional services having people not working with clients, can be unprofitable, so if in response to slow or stalled growth there are an excess of consultants versus demands, then consulting rates will likely drop to avoid the implications of non-engagement. Another example in the physical products is in the weakly differentiated automobile industry e.g., GMH, Ford, Toyota. During an economic downturn, or even as new models come out, automakers offer price cuts, provide rebates, and special sales incentives to buyers so that they don’t have significant unused production capacity or lots of inventory tide up in cash.
Compare this with Tesla and at various time Porsche where people are so delighted with the value proposition of these companies, they wait for the car to be produced and delivered. Hence, these businesses generate better cash flow as cars roll of the production line straight into the hands of buyers.

High Fixed Costs, Highly Perishable Products, High Storage Costs

Industries that produce or serve products in these three categories sometimes find themselves with a supply of products that must be sold quickly to avoid large losses.

Airlines, for example, operate with high fixed costs. Most of the cost of a flight is in the fixed costs such as the airplane, the fuel, and the pilot and flight crew. Given a flight is going to have few passengers, an airline may be tempted to discount steeply to fill as many seats as possible. The variable cost of an additional passenger is very little, so selling a seat for less enables it to recover its fixed costs.

Firms that sell highly perishable products, such as fruits or vegetables, face similar problems. As food nears the date when produce will spoil, grocery chains often steeply discount it rather than lose the sale completely.

Products with high storage costs exhibit the same characteristics. If firms have an oversupply and are forced to store the product, they may discount the price to avoid storage costs. In all three cases, steep discounting leads to increased rivalry as competitors are forced to respond with discounts of their own or be left with losses while others recoup their production.

Seasonal fashion products are also subject to rivalry when there is excess stock. End of season sales are frequent in the retail clothing industry. Given the change in season demand for the style of clothing diminishes. Businesses want to clear the stock as:
1. there is no guarantee the demand will return next season as new fashion trends and consumer tastes change,
2. avoid the impact of reduced cash flow on a business as a consequence of having cash tied up in unsold inventory

commodity products, lack differentiation and therefore price becomes the bargaining point

High exit barriers

In some industries, companies don’t exit even when they are not making a lot of money. Most often, they stay because they have made investments in specialized equipment that can’t be used in any other industry.

For example, a specialist robotic production line is very expensive and cannot be used in any industry. If the firm exits its’ industry, its production asset loses most of their value.

Another barrier to exit is labour or government agreements that make it difficult to close the business. Emotional ties to employees or a business can also support less than rational business decisions by leadership to stay in business.

As industry growth slows or declines, and more businesses decide to stay and fight it out due to difficulty exiting the industry, they will of course compete with more intensity driving down profitability.

Protecting against intense rivalry

See the next section - Being a disrupt or winner in high rivalry environments. The solution is the same for both

Being a disruptor or winner in high rivalry environments

Peter Theil co-founder of PayPal, Palantir Technologies, Founders Fund, and the first outside investor in Facebook has said ‘Competition is for Losers’. Being the disruptor in an industry with high rivalry requires a uniquely differentiated product that meets customer needs in ways the existing industry rivals cannot. It can be one of either

  1. Cost leadership - meaning your value propostion meets the needs of a market segment and capable of doing so at the lowest cost.

  2. Differentiation - meaning your value propostion meets the needs of a market segment in a unique and valuable way providing satisfaction or delight unavailable in other offerings. Thus at least of some segments of a market it has no rival.

  3. Both - meaning your value proposition meets the needs of a market segment in a unique and valuable way providing satisfaction or delight unavailable in other offerings and at the lowest cost.

Tesla’s electric vehicles are an example where for several years, Tesla has had no, then little but now emerging direct competition. An industry with high rivalry is almost certainly poorly differentiated (what W. Chan Kim and Renée Mauborgne in their book Blue Ocean Strategy would call a Red Ocean). Blue Ocean strategy identifies some contemporary examples of solutions that escaped High Rivalry in an industry and move to a Blue Ocean where rivalry is non-existent (at least for some time).

You will see more about these options during this guide. Particularly, when we progress to developing your unique value proposition.

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