There are many factors, both internal and external, that can impact a company’s success in the marketplace. Competitive rivalry is an external force that has some advantages and some disadvantages for organizations in that specific field. It’s useful to understand what competitive rivalry is and how it can affect your business success. In this article, we explain what competitive rivalry is, describe the different forms of competitive rivalry, list the factors that determine competitive rivalry, highlight the pros and cons of competitive rivalry and detail how to use competitive rivalry to your advantage with an example.

What is competitive rivalry?

Competitive rivalry is the measurement or intensity of competition between companies in the same field or industry. Some competitive rivalry is often healthy for all businesses involved, as it encourages product and service innovation and discourages unnecessary price increases for customers. However, excessive competitive rivalry can pose challenges to some companies.

Forms of industry rivalry

Competitive rivalry, or industry rivalry, can take a variety of forms, depending on the resources available to the businesses involved in the competition. A few of the most common forms of industry rivalry include:

  • Price: One of the easiest ways to increase your company’s perceived value in a competitive market is through lowering your prices to undercut competitors.

  • Advertising: Increased or innovative advertising can draw more customers to your business and away from competitors.

  • Product or service differentiation: Innovating your product or service to be better than the competition can also maximize your market share.

    What factors determine competitive rivalry?

    Competitive rivalries exist for a number of reasons. These factors can influence the existence and intensity of a competitive rivalry:

    Market saturation

    Markets that have a substantial number of businesses offering similar products or services have a higher likelihood of encountering competitive rivalries than those with fewer direct competitors. Companies facing this type of competitive rivalry often feel compelled to spend time and money demonstrating their uniqueness to consumers.

    Slow market growth

    In a slowly growing market, there’s increased competition over the few available consumers, regardless of market saturation. Often, in this situation, the only way to gain new customers is to find ways to get consumers to switch from a competitor to you.

    High overhead

    Some industries have higher overhead, or fixed costs, than others. In markets where overhead is costly, companies must set higher price points to accommodate their fixed costs, leading to increases in other methods for gaining market share aside from pricing.

    Lack of differentiation

    Some industries have little product or service differentiation from one company to the next. A lack of differentiation can increase the chances a consumer will select a product based purely on price or availability rather than brand loyalty, leading to competitive rivalry.

    Low switching costs

    There are industries and fields in which switching from one product or company to another takes very little time or money. In these industries, competitive rivalry is often high because consumers have little reason to remain loyal to one company over another.

    Supply and demand

    Changes to consumer demand or supply availability can impact an industry’s overall competitive rivalry. Often, in cases of supply and demand shift, the increase in competitive rivalry is short-lived.

    Business diversity

    Some industries have multiple options for marketing, pricing and selling their products of services. Diversity in any of these areas can increase competitive rivalry, since some strategies might be more effective than others when increasing market share.

    Strategic planning

    Strategic planning, like focusing on long-term growth and development over short-term profit increases, can affect competitive rivalry by shifting the focus of the market.

    Exit barriers

    It’s more difficult to leave some industries than others, resulting in businesses taking drastic measures to remain profitable rather than to find a way to exit the market, leading to an increase in competitive rivalry.

    Pros and cons of competitive rivalry

    Competitive rivalry can offer advantages and disadvantages to the companies involved. Consider a few of the primary benefits and obstacles competitive rivalry can present:

    Pros of competitive rivalry

    Competitive rivalries can motivate your company to make positive changes and improve your profitability. Consider a few of the opportunities competitive rivalry presents:

    • Improved customer service: Improving your business’s customer service offerings is an easy and practical way to increase customer loyalty.

    • Higher innovation: You’ll find new ways to innovate and demonstrate your creativity when faced with a saturated marketplace.

    • Regular self-assessment: In order to stay relevant to customers and continue improving market share, you’ll likely spend more time identifying your strengths and weaknesses.

    • Increased customer focus: You’ll likely improve your customer outreach and focus to gain more customers than your competitors.

    • Growth in the market: Competition encourages everyone in the industry to find alternative ways to do business and grow the field overall.

    • Identifying industry solutions: The more competitors there are in the market, the more group negotiating and regulating power the whole industry has.

    Cons of competitive rivalry

    Sometimes, competitive rivalry can present challenges to the companies involved. Be aware of these common disadvantages to prepare for and neutralize them before they negatively impact your business operations:

    • Increased costs: When the market is saturated with companies selling similar products or services, the need to spend money on advertising and differentiation often increases.

    • Fewer customers: The more options a customer has, the fewer individuals each company has access to.

    • Development pressure: Since a saturated, highly competitive marketplace has fewer customers to cater to, you may need to find ways to expand your operation and engage a new demographic to stay profitable.

    • Decreased market share: Manufacturing too many products in a saturated market can lead to forced discounts and other profit loss measures to keep commodities from stagnating on a shelf or in a warehouse.

    Tips for optimizing competitive rivalry

    You can use competitive rivalry as a catalyst for positive business changes. Consider these tips to maximize the impact of competitive rivalry in your sector:

    • Know the competition: Regularly review your competitors’ products, services, marketing and pricing, particularly in instances where there’s little product or service differentiation. Knowing what others in the industry are doing can help you create a unique selling proposition for customers.

    • Perform a SWOT analysis: Use a SWOT, or strengths, weaknesses, opportunities and threats analysis to see how you can differentiate your company from others in the industry.

    • Find your value proposition: Identify the unique elements of your business that you can highlight for customers.

    • Consider development options: Look for growth and development opportunities to increase your market share and separate your organization from others in the sector.