Forces that shape competition:
The configuration of the five forces differs by industry. The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation.
1) Rivalry among existing competitors:
Rivalry competition is intensity because rivalry among existing competitors could include price discounting, new product introductions, advertising campaigns and service improvement.
The intensity of rivalry is greatest if:
There are many competitors or few but equal in size, power and in same situation.
Industry growth is slow.
Exit to barriers are high, if organization earns low or negative returns.
Rivals are highly committed to the business and have aspirations for leadership.
Firms can’t read each other’s signals because of competition between them.
The competition not only occur through intensity, but also can occur in price. As price competition transfers profits directly from an industry to its customers.
Price competition can occur if:
Rivals have similar products or services with few switching costs for buyers.
Capacity must be expanded in large increments to be efficient.
The product is unsold or perishable.
Finally, Competition can be occur on different dimensions, like price, product features, support services, delivery time and brand image
Same dimensions competition can occur if many competitors aims to meet the same needs or compete on the same attributes
2) The threat of substitutes:
A substitute performs the same or similar function as an industry’s product by different means.
Threats of substitutes is high if:
It offers an attractive price-performance trade-off to the industry’s product.
The buyer’s cost of switching to the substitutes is low.
3) Threat of new entrant:
new entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs and the rate of investment